Question

Becky Bell owned common stock in a corporation that she purchased two years ago for $25,000. On June 6, 2018, Becky sold the stock for its $11,000 fair market value to her son, Max Monroe. On December 19, 2018, Max sells the stock to an unrelated party for its $13,000 fair market value. How much gain or loss will Becky and Max recognize on their respective income tax returns for 2018?

Answer 1

Gain/Loss to be recognized by Becky Bell is calculated as follows:

Sale Consideration : $11,000

Less: Cost of acquisition of common stock : ($25,000)

Long Term Capital Loss : $ 14,000

In this case because Becky has sold the stock to her son at the fair market value it is the correct consideration. If the sale price would have been lower than the Fair Market Value then It would not be considered the sale price for the calculation of gain or loss. and the fair market value of the securities would be taken as the sale consideration. There is no concept of transfer to relative applicable because transaction is carried out at fair market value.

The capital loss is considered long term because in case of shares and securities if these are sold after holding for a period of one year the loss or gain arising out of sale is termed as Long term Gain or loss.No benefit of indexation is available in this case.

Gain/Loss By Max Monroe is calculated as follows:

Sale Consideration : $13,000

Less: Cost of acquisition   : $11,000

Short Term Capital Gain   : $2,000

Max Monroe will Recognize Short term capital gain of $ 2,000 .It is short term because held for less than one year i.e.6 months and 13 days