Question

1. During the tax year 2013, Chris had the following capital gains and losses.

• $5,000 loss from the sale of shares of Big Box, Inc. that he bought in February 2013 and sold on the last day of the year
• $6,000 loss from the sale of Microstrategy stock that he purchased in December 2008
• a $10,000 unrecaptured Section 1250 gain from the sale of real estate
• a gain of $4,000 from the sale of collectibles that he had owned since 1994

Describe the netting process.

Answer 1

Netting off process for the above mentioned transactions is as follows :

1. Unrecaptured Section 1250 gain from sale of real estate of $10,000 cannot be set-off from the capital losses from sale of shares of Big Box Inc or Microstrategy stock as Section 1250 sale of real estate gain can only be set-off by 1231 depreciable capital assets losses. Since we are given no such information, capital gains tax @25% is payable on full amount of 10,000$.

2. Gain of 4,000$ from sale of collectibles is a long term capital gain which can be set-off from either short term capital loss of 5000$ from sale of Big Box Inc or long-term capital loss of Microstrategy stock of 6,000$.

Basic rules used for answering the above netting process :

1. Short-term capital loss can be set-off against both short term or long term capital gain.

2. Long-term capital loss can only be set-off against long-term capital gains.

3. Section 1250 gain can be set off from 1231 capital asset (deprecoiable assets) losses.