Daniel is considering selling two stocks that have not fared well over recent ye

Question

Daniel is considering selling two stocks that have not fared well over recent years. A friend recently informed Daniel that one of his stocks has a special designation, which allows him to treat a loss up to $50,000 on this stock as an ordinary loss rather than the typical capital loss. Daniel figures that he has a loss of $60,000 on each stock. If Daniel's marginal tax rate is 35 percent and he has $120,000 of other capital gains (taxed at 15 percent), what is the tax savings from the special tax treatment?

Explanation / Answer

If Daniel sells both stocks, he will generate tax savings as follows: Special Normal Explanation stock stock (1) Loss ($60,000) ($60,000) Given in problem (2) Ordinary tax 17,500 n/a $50,000 limit x 35% MTR savings (3) Capital loss tax 1,500 9,000 Special stock: $10,000 savings remaining loss x 15% capital rate Normal stock: $60,000 x 15% capital rate (4) Total tax savings $19,000 $9,000 Sum of (2) and (3) Additional savings on $10,000 Difference in (4) between special stock special stock and normal stock

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