Here are two questions on capital losses incurred in the current year. The figur

Question

Here are two questions on capital losses incurred in the current year. The figure taxable income given in column A reflects a single taxpayer's taxable income for each of two years without regard to his capital gains and losses. Note that in computing gross income (as adjusted) on the return no gains will be included, since capital losses exceed capital gains and the 1211(b) excess amount will be a reduction (see note 4, supra). For each year separately, without regard to computations for other years, determine the amount of the taxpayer's capital loss that is allowed as a deduction from ordinary income under 1211(b)(1) or (2) and the amount and character of his capital loss carryover, if any, under 1212(b).

Explanation / Answer

In case of sigle individual, the deduction of capital loss from the sale and exchange of capital asset is limited to the capital gain from the sale or exchange of that asset plus lower of i) $3000 ii) capital losses available

So, the adjustable capital losses are as follows:

In the first year, after adjusting the LTCL from STCG, balance LTCl are 4000-1600 = 2400

LTCl to be adjusted from ordinary income is lower of:

i) 3000 or ii) 2400

i.e. 2400

In the second, total losses are STCL $2000 and LTCL $8000

As tax payer will take the higher benefit. So LTCL losses will be firstly adjusted.

So the losses to be adjusted from ordinary income is lower of:

i) 3000 ii) $8000 i.e.$3000

So the balance losses to be carried forward will be :

STCL: $2000

LTCL : $8000-$3000 = $5000

Particular First year second year STCG 2600 2000 Less: STCL 1000 4000 STCG/(STCL) 1600 (2000) LTCG 2000 2000 Less: LTCL 6000 10000 LTCL 4000 8000

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