Capital Gains and Losses Flashcards
Sheila purchases $186,400 of newly issued Gingo Corporation bonds for $167,760. The bonds have original issue discount (OID) of $18,640. After Sheila amortized $8,388 of OID and held the bonds for four years, she sold the bonds for $177,080. What is the amount and character of her gain or loss?
Calculation:
Bond Value (at resale)
$167,760 purchase price + 8,388 amortized discount $176,148
Gain/Loss on Sale
$177,080 resale price - 176,148 bond value at resale = $932 capital gain
Olivia wants to buy some vacant land for investment purposes. She cannot afford the full purchase price. Instead, Olivia pays the landowner $49,700 to obtain an option to buy the land for $994,000 anytime in the next four years. Fourteen months after purchasing the option, Olivia sells the option for $62,125. What is the amount and character of Olivia’s gain or loss?
Calculation:
$62,125 selling price of option - 49,700 purchase price of option = $12,425 capital gain
The option to buy contract was held for more than 12-months, therefore this is a long-term capital gain of $12,425.
Shen purchased corporate stock for $100,250 on April 10, 2019. On July 14, 2021, when the stock was worth $60,150, Shen died and his son, Mijo, inherited the stock. Mijo sold the stock for $70,175 on November 12, 2021. What is the amount and character of Mijo’s gain or loss?
Calculation:
$70,175 selling price - 60,150 value of stock on the date of inheritance = $10,025 capital gain
Because the stock was inherited, the time that the stock was in possession by the original owner is considered in addition to the time held by the inheritor. Therefore, the corporate stock was held for more than one year, so Mijo has a $10,025 long-term capital gain.
Coline has the following capital gain and loss transactions for 2021.
- 6,500 short-term capital gain
- (2,730) short-term capital loss
- 7,800 long-term capital gain (28%)
- 2,600 long-term capital gain (15%)
- (13,650) long-term capital loss (28%)
After the capital gain and loss netting process, what is the amount and character of Coline’s gain or loss?
Calculation:
Net short-term capital gain/(loss)
$6,500 - 2,730 = $3,770 net short-term capital gain
Net long-term capital gain/(loss)
$7,800 + 2,600 - 13,650 = ($3,250) net long-term capital loss
Net capital gain/(loss)
$3,770 net short-term capital gain - 3,250 net long-term capital loss = $520 net short-term capital gain
Dennis sells short 50 shares of ARC stock at $240 per share on January 15, 2021. He buys 100 shares of ARC stock on April 1, 2021, at $300 per share. On May 2, 2021, he closes the short sale by delivering 50 of the shares purchased on April 1. a. What are the amount and nature of the loss upon closing the short sale?
Calculation:
(50 shares sold X $240 share price) - (100 shares purchase X $300 share price) + (50 shares sold X $300 share price) = ($3,000) short-term capital loss
Dennis sells short 50 shares of ARC stock at $240 per share on January 15, 2021. He buys 100 shares of ARC stock on April 1, 2021, at $300 per share. On May 2, 2021, he closes the short sale by delivering 50 of the shares purchased on April 1. When does the holding period for the remaining shares begin?
The holding period for the remaining shares begins on May 2nd.
Dennis sells short 50 shares of ARC stock at $240 per share on January 15, 2021. He buys 100 shares of ARC stock on April 1, 2021, at $300 per share. On May 2, 2021, he closes the short sale by delivering 50 of the shares purchased on April 1. If Dennis sells (at $330 per share) the remaining 50 shares on January 20, 2022, what will be the nature of his gain or loss?
Calculation:
50 shares sold X $330 share price = $16,500 selling price
50 shares purchase X $300 share price = $15,000 cost
$16,500 selling price - 15,000 purchase cost = $1,500 short-term capital gain
Lena is a sole proprietor. In April of this year, she sold equipment purchased four years ago for $53,200 with an adjusted basis of $31,920 for $35,112. Later in the year, Lena sold another piece of equipment purchased two years ago with an adjusted basis of $15,960 for $10,374. What are the tax consequences of these tax transactions?
Lena has an ordinary gain of $3,192 from the sale of the first equipment.
Lena has a § 1231 loss of $5,586 from the sale of the second piece of equipment.
Calculation:
Equipment A
$35,112 selling price - 31,920 adjusted basis = $3,192 gain
Equipment B
$10,374 selling price - 15,960 adjusted basis = ($5,586) loss
Note: Because depreciable property and real property used in business are not capital assets, the recognized gains from the disposition of this property would appear to be ordinary income rather than capital gain. Due to § 1231, however, net gain from the disposition of this property is sometimes treated as a long-term capital gain. The Code contains two major recapture provisions, § § 1245 and 1250. These provisions cause gain to be treated initially as ordinary gain.
Renata Corporation purchased equipment in 2019 for $309,400 and has taken $139,230 of regular MACRS depreciation. Renata Corporation sells the equipment in 2021 for $185,640. What is the amount and character of Renata’s gain or loss?
Renata Corporation has a gain of $15,470 of which $15,470 is treated as ordinary income due to § 1245 recapture.
Calculation:
$185,640 selling price - (309,400 purchase cost - 139,230 MACRS depreciation)= $15,470 gain
Note: The Code contains two major recapture provisions—§ 1245 and § 1250. These provisions cause gain to be treated initially as ordinary gain (income). Thus, what may appear to be a § 1231 gain is ordinary gain instead. These recapture provisions may also cause a gain on a nonpersonal use casualty to be initially ordinary gain rather than casualty gain.
Jacob purchased business equipment for $153,900 in 2018 and has taken $92,340 of regular MACRS depreciation. Jacob sells the equipment in 2021 for $69,255.
What is the amount and character of Jacob’s gain or loss?
Jacob has § 1245 gain of $7,695 and § 1231 gain of $0.
Calculation:
$69,255 selling price - (153,900 purchase cost - 92,340 MACRS depreciation) = $7,695 § 1245 gain
The total amount of the gain is captured under § 1245, therefore the § 1231 gain is zero.
Note: The Code contains two major recapture provisions—§ 1245 and § 1250. These provisions cause gain to be treated initially as ordinary gain (income). Thus, what may appear to be a § 1231 gain is ordinary gain instead. These recapture provisions may also cause a gain on a nonpersonal use casualty to be initially ordinary gain rather than casualty gain.
An apartment building was acquired in 2012. The depreciation taken on the building was $151,460, and the building was sold for a $45,438 gain. What is the maximum amount of 25% gain?
Calculation:
The lessor of depreciation or gain on sale, which in this scenario is the $45,438 gain on sale
Note: Unrecaptured § 1250 gain is some or all of the § 1231 gain that is treated as long-term capital gain and relates to a sale of depreciable real estate.
Enzo is a single taxpayer with the following gains and losses for 2021:
- $7,700 short-term capital loss.
- $84,700 long-term capital gain from sale of stock.
- $46,200 § 1231 gain that is all unrecaptured § 1250 gain.
What is the amount and character of Enzo’s gain or loss?
Enzo’s net _ is $_ and his potential unrecaptured § 1250 gain that is subject to the 25% tax rate is $_.
Calculation:
$84,700 + 46,200 - 7,700 = $123,200 long-term capital gain
$46,200 - 7,700 = $38,500 § 1250 gain subject to 25% tax
Note: It is important to know what assets are defined as § 1250 property because even when there is no additional depreciation, the gain from such property may be subject to a special 25 percent tax rate.
The tax law requires that capital gains and losses be separated from other types of gains and losses. Among the reasons for this treatment are:
a. Net capital loss is deductible only up to $3,000 per year for individual taxpayers.
b. Short-term capital losses are not deductible.
c. “Long-term capital gains may be taxed at a lower rate than ordinary gains” and “Net capital loss is deductible only up to $3,000 per year for individual taxpayers.”
d. Long-term capital gains may be taxed at a lower rate than ordinary gains.
C
A business taxpayer sells inventory for $80,000. The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year. The taxpayer has:
a. No gain or loss
b. An ordinary gain
c. Sold a long-term capital asset
d. Sold a short-term capital asset
B
A worthless security had a holding period of six months when it became worthless on December 10, 2021. The investor who had owned the security had a basis of $20,000 for it. Which of the following statements is correct?
a. The investor has a nondeductible loss of $20,000
b. The investor has a long-term capital loss of $20,000
c. The investor has a short-term capital loss of $20,000
d. The investor has a short-term capital gain of $20,000
C
