[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.

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!!

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[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

[Topsya]

@h0wdyus

I am so glad you pointed my attention on this bad debts concept, because you are absolutely right and I am absolutely wrong and MY TEST IS ON TUESDAY and I really should know this by now!

Here is what Wiley says:

A BUSINESS bad debt

(a) Deductible against ordinary income (toward AGI)

(b) Deduction allowed for partial worthlessness

(c) Business bad debts must be deducted under the specific charge-off method (the reserve method generally cannot be used).

(4) A NONBUSINESS bad debt (not incurred in trade or business) can only be deducted

(a) If totally worthless

(b) As a short-term capital loss

NONBUSINESS bad debt is a SHORT TERM CAPITAL LOSS!

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

[Topsya]

@h0wdyus

I am so glad you pointed my attention on this bad debts concept, because you are absolutely right and I am absolutely wrong and MY TEST IS ON TUESDAY and I really should know this by now!

Here is what Wiley says:

A BUSINESS bad debt

(a) Deductible against ordinary income (toward AGI)

(b) Deduction allowed for partial worthlessness

(c) Business bad debts must be deducted under the specific charge-off method (the reserve method generally cannot be used).

(4) A NONBUSINESS bad debt (not incurred in trade or business) can only be deducted

(a) If totally worthless

(b) As a short-term capital loss

NONBUSINESS bad debt is a SHORT TERM CAPITAL LOSS!

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

[Lindrobe]

@highlightnumb, worthless stock and Section 1244 worthless stock are different in that:

*Section 1244 stock is qualified small business stock (less than $1 million in capitalization)

*Section 1244 stock that is deemed worthless can be treated as ordinary income to $50k or $100k for joint filers

*Non-Section 1244 worthless stock is treated as ST or LT capital losses depending on how long the stock was held (always treated as sold on last day of year in which stock became worthless (e.g. if deemed worthless on June 3, 2013, in measuring for ST or LT, use 12/31/13 as last day of measurement)).

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"

[Lindrobe]

@highlightnumb, worthless stock and Section 1244 worthless stock are different in that:

*Section 1244 stock is qualified small business stock (less than $1 million in capitalization)

*Section 1244 stock that is deemed worthless can be treated as ordinary income to $50k or $100k for joint filers

*Non-Section 1244 worthless stock is treated as ST or LT capital losses depending on how long the stock was held (always treated as sold on last day of year in which stock became worthless (e.g. if deemed worthless on June 3, 2013, in measuring for ST or LT, use 12/31/13 as last day of measurement)).

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"

[h0wdyus]

Good stuff Lindrobe and Topsay. Good luck to both of you for the exam.

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

FROM NJ

[h0wdyus]

Good stuff Lindrobe and Topsay. Good luck to both of you for the exam.

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

FROM NJ

[Lindrobe]

Good luck to you too, howdyus!

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"

[Lindrobe]

Good luck to you too, howdyus!

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"

[Topsya]

Thank you thank you thank you!

Good luck to all of us!!!

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

[Topsya]

Thank you thank you thank you!

Good luck to all of us!!!

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

[highlightnumb]

Perfect Lindrobe. Yeah this is making sense. So basically if the section 1244 loss amounted to 60k then 50k can be deducted as ordinary income and the excess 10k loss can offset capital gains but only 3k max in the current year and the rest (7k) carry forward until exhausted. In this particular question the section 1244 loss was only 10k so therefore it just offsets ordinary income. Am I on track here?

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]

Perfect Lindrobe. Yeah this is making sense. So basically if the section 1244 loss amounted to 60k then 50k can be deducted as ordinary income and the excess 10k loss can offset capital gains but only 3k max in the current year and the rest (7k) carry forward until exhausted. In this particular question the section 1244 loss was only 10k so therefore it just offsets ordinary income. Am I on track here?

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

[Lindrobe]

Good morning, highlightnumb. You are getting at it early today. Where are you from?

You are exactly right on your example above.

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"

[Lindrobe]

Good morning, highlightnumb. You are getting at it early today. Where are you from?

You are exactly right on your example above.

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"

[Author]

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