[TheAccountant]

Can someone explain to me why the $5k of worthless stock from Public Company X is not getting treated as an ordinary loss just like the other worthless stock?

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. $7,000 net capital loss.

b. $2,000 net capital loss.

c. $3,000 net capital gain.

d. $8,000 net capital gain.

Explanation

Choice “c” is correct. First, the long-term capital gain of $14,000 is netted with the long-term capital loss of $8,000. This results in a net long-term capital gain of $6,000. Next, the short-term capital gain of $6,000 is netted with the short-term capital loss of $4,000. This results in a net short-term capital gain of $2,000. Now add the net long-term capital gain of $6,000 and the net short-term capital gain of $2,000 to arrive at a net capital gain of $8,000. This amount is reduced by the $5,000 worthless stock. So the final net capital gain is $3,000. Note that the Section 1244 loss of $10,000 does not affect this calculation because it is an ordinary loss and not a capital loss.

Choices “b”, “a”, and “d” are incorrect per the above explanation.

[TaxGod]

Worthless stock is treated the same as capital loss unless its 1244 small business stock. Only reason small business stock can offset ordinary income is because it's a specific code section where the government is providing incentives for starting your own business. That make sense? Honestly I think it is a bad question. Never should a question expect you to just know a code section like that. I have 2 years tax experience, and i still looked up § 1244.

AUD: 02/28/15 - 89
FAR: 05/29/15 - 80
BEC: 08/03/15 - 81
REG: 08/27/15 - 76

[TheAccountant]

So worthless stock is treated as stock and only 1244 can be ordinary up to 50k?

[TaxGod]

You got it!

AUD: 02/28/15 - 89
FAR: 05/29/15 - 80
BEC: 08/03/15 - 81
REG: 08/27/15 - 76

[Author]

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