Anyone know why the worthless loss is 5000 instead of 10,000?
Individual Lark's year 2 brokerage account statement listed the following capital gains and losses from the sale of stock investments:
Short-term capital gain $ 6,000
Long-term capital gain 14,000
Short-term capital loss 4,000
Long-term capital loss 8,000
In addition, two stock investments became worthless in year 2. Public Company X stock was purchased in December, year 1, for $5,000, and formal notification was received by Lark on July, year 2, that it was worthless. Private company Section 1244 stock was issued to Lark for $10,000 in January, year 1, and was determined to be worthless in December, year 2. What is Lark's year 2 net capital gain or loss before any capital loss limitation?
A. $2,000 net capital loss.
B. $3,000 net capital gain.
C. $7,000 net capital loss.
D. $8,000 net capital gain.
B. 3000. The Section 1244 loss is an ordinary loss so it is not included in the computation of the net capital gain or loss. The worthless stock of Company X results in a $5,000 long-term capital loss because worthless securities are deemed to become worthless on the last day of the tax year (December 31, Year 2). Lark has a net short-term capital gain of $2,000 ($6,000 STCG − $4,000 STCL). There is a net long-term capital gain of $1,000 ($14,000 LTCG − $8.000 LTCL − $5,000 LTCL). Thus, his total net capital gain is $3,000 ($2,000 + $1,000). Note that only the LTCG is eligible to be taxed at preferential rates.
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