Help! Reg – Worthless stock/Securities

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    Topic
  • January 22, 2019 at 6:08 pm #2176855
    watermelon
    Participant

    On February 1, year 1, a taxpayer purchased an option to buy 1,000 shares of XYZ Co. for $200 per share. The taxpayer purchased the option for $50,000, which was to remain in effect for six months. The market declined, and the taxpayer let the option lapse on August 1, year 1. The taxpayer would report which of the following as a capital loss on the year 1 income tax return?a. $50,000 short term.
    b. $150,000 long term.
    c. $200,000 short term.
    d. $50,000 Long term.

    answer is a.

    I understand since the option was not exercised, it became worthless and the loss was the cost of 50,000. What I am confused is that does the $3,000 max deduction still apply to worthless stock/securities? since the answer is a, i assume individual can recognize the whole cost as capital loss? can anyone help me with this please?

Viewing 6 replies - 1 through 6 (of 6 total)
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  • January 22, 2019 at 10:31 pm #2177134
    laslow
    Participant

    I am not a tax man but since they haven't replied to you I will give you my view as a trader. This sounds like it would be off setting other unmentioned gains but at the end of the day he is an individual so if I was doing my taxes I would only take the 3k loss. I'm sure one of the tax guys will show up and verify or dispute this.

    January 22, 2019 at 11:44 pm #2177188
    Adam
    Participant

    its a short term loss..netted against short/long term capital gains then subjext to the 3k limit

    January 22, 2019 at 11:51 pm #2177200
    watermelon
    Participant

    thank you @Laslow @Adam! if it's subject to the 3K limit, why the answer is still to report $50K short term loss other then $3K short term loss. i guess that's what I was confused about.

    January 23, 2019 at 5:33 pm #2178421
    TheoneinDenver
    Participant

    I agree with your assessment-but you are reading to much into it.

    It doesn't say deduct-you can only deduct 3k but the total is 50k short term-he just can't deduct all of it.

    I haven't taken the CPA exam but I get that you can't read into it. I just think they want to make sure you understand that it's a short term loss as it's under a year and a day.

    I've taken the EA exam and they would ask a similar question but it would be-what is the maximum Joe Smith can deduct per year and for how long?

    January 24, 2019 at 2:00 am #2178871
    watermelon
    Participant

    @TheoneinDenver You got me! I just wanted to make sure I understand the 3K deduction rule and I overthink it! Thank you!

    January 24, 2019 at 9:33 am #2179102
    TheoneinDenver
    Participant

    Yep-you are good-

    I see for REG the questions are vague but enough for someone to start questioning themselves.

    You got this!

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Viewing 6 replies - 1 through 6 (of 6 total)
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