[highlightnumb]

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?

Answer:

Choice “a” 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.

My Confusion:

I understand the whole netting Longterm and Short term capital but i dont understand why the $5,000 of worthless can be used to offset the net capital gain of $8,000 and not the section 1244 loss of $10,000. I thought section 1244 is worthless stock? Seems contradicting but i know I’m overlooking a concept. Your help will be appreciated. Thanks.

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[Lindrobe]

The loss on the worthless 1244 stock is treated as ordinary loss, so since it is ordinary, it is not netted with the other losses that are all capital in nature.

Does that makes sense to you?

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[Lindrobe]

The loss on the worthless 1244 stock is treated as ordinary loss, so since it is ordinary, it is not netted with the other losses that are all capital in nature.

Does that makes sense to you?

FAR 12/3/14, 87
AUD 2/3/14, 90
BEC 4/1/14, 88
REG 5/27/14, 94

Licensed CPA, Indiana

"Successful people do things that unsuccessful people don't want to do"

[highlightnumb]

Oh ok got it Lindrobe. The question is explicitly saying one investment is just normal worthless stock and the other stock investment is section 1244 worthless stock which can only reduce ordinary income. So are worthless stock and section 1244 worthless stock two different things?

FAR. Feb 2014 76
REG. Jan 2015 79 half way there!!
BEC. Feb 2015 79 thank you God!!
AUD. Apr 20, 2015 and will be done. Hold that thought 65, 7/14/15 85!
Ok where was I? Oh thats right now I'm Done!!!!!!!!!
Ethics 92!!

"You down wit SEC?, yeah you know me!!!"

Cali Candidate

All Becker Materials, Wiley Test Bank, Ninja audio, Ninja MCQ, Ninja Notes

[highlightnumb]

Oh ok got it Lindrobe. The question is explicitly saying one investment is just normal worthless stock and the other stock investment is section 1244 worthless stock which can only reduce ordinary income. So are worthless stock and section 1244 worthless stock two different things?

FAR. Feb 2014 76
REG. Jan 2015 79 half way there!!
BEC. Feb 2015 79 thank you God!!
AUD. Apr 20, 2015 and will be done. Hold that thought 65, 7/14/15 85!
Ok where was I? Oh thats right now I'm Done!!!!!!!!!
Ethics 92!!

"You down wit SEC?, yeah you know me!!!"

Cali Candidate

All Becker Materials, Wiley Test Bank, Ninja audio, Ninja MCQ, Ninja Notes

[Topsya]

Here is an interesting question:

is worthless stock treated as Long Term or short Term Capital Loss?

I wanna say Short Term, but not sure…..

AUD - 90
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[Topsya]

Here is an interesting question:

is worthless stock treated as Long Term or short Term Capital Loss?

I wanna say Short Term, but not sure…..

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[h0wdyus]

Worthless securities generally receive capital loss treatment as if sold on the last day of the taxable year they become worthless.

However if the loss is incurred by a corporation on its investment in an affiliated corporation ( 80% or more ownership) , the loss is generally treated as ordinary. Wiley question 30 from Transactions in Property module 36

FAR - 81 29th Aug 2013
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Using Yager

FROM NJ

[h0wdyus]

Worthless securities generally receive capital loss treatment as if sold on the last day of the taxable year they become worthless.

However if the loss is incurred by a corporation on its investment in an affiliated corporation ( 80% or more ownership) , the loss is generally treated as ordinary. Wiley question 30 from Transactions in Property module 36

FAR - 81 29th Aug 2013
AUD - 84
REG - 82
BEC - 89 29th Aug 2014
Using Yager

FROM NJ

[Topsya]

but is it short term or long term loss?

AUD - 90
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[Topsya]

but is it short term or long term loss?

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[h0wdyus]

It will depend on if you held them for more than 12 months or not. If less than 12 months it is short term.

The end of the year in which the stock becomes worthless is basically treated as the sale date of the worthless stock.

Date of purchase to the end of the year will determine the Long or the Short story. 🙂

I hope I got this right.

FAR - 81 29th Aug 2013
AUD - 84
REG - 82
BEC - 89 29th Aug 2014
Using Yager

FROM NJ

[h0wdyus]

It will depend on if you held them for more than 12 months or not. If less than 12 months it is short term.

The end of the year in which the stock becomes worthless is basically treated as the sale date of the worthless stock.

Date of purchase to the end of the year will determine the Long or the Short story. 🙂

I hope I got this right.

FAR - 81 29th Aug 2013
AUD - 84
REG - 82
BEC - 89 29th Aug 2014
Using Yager

FROM NJ

[Topsya]

Hmmm….. well, ok

I just remember that, for example, Business Bad Debt is ALWAYS a Short Term Cap Asset, no matter how long you held it. I though maybe same rule applies here. I guess not

Thanks!

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Topsya]

Hmmm….. well, ok

I just remember that, for example, Business Bad Debt is ALWAYS a Short Term Cap Asset, no matter how long you held it. I though maybe same rule applies here. I guess not

Thanks!

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[h0wdyus]

@topsya

Business bad Debt. hmmm. I thought only accrual basis tax payers can deduction business bad debt. Since cash basis tax payers only recognize income when received there is no business bad debt.

I also read somewhere that personal bad debt are treated Short Term capital loss for individuals. It has to be totally worthless.

Can you please elaborate on what you mentioned above. Maybe I missed something here. This Tax piece is driving me crazy.. too much to remember.

FAR - 81 29th Aug 2013
AUD - 84
REG - 82
BEC - 89 29th Aug 2014
Using Yager

FROM NJ

[Author]

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