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Topic
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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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