Question

Help! I need help understanding how to arrive at the correct solution. I will also need an explanation to have clarity. I would greatly appreciate it.

Lefty completes the following capital asset transactions. By how much does Lefty’s AGI increase as a result of these gains/losses?

Long-term gain $10,000

Short-term gain 4,000

Short-term loss 25,000

Answer 1

Long Term Gain	$10,000
Net Long Term Gain		$10,000
Short Term Gain	$4,000
Short Term Loss	-$25,000
Net Long Term Loss		-$21,000
Overall Net Capital Loss		-$11,000
Amount deductible against other income this year:		$3,000
Amount of capital loss carried over to next year		$8,000

As per IRS, Losses on investments are first used to offset capital gains of the same type. So short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.

If there is an overall net capital loss for the year, one can deduct up to $3,000 of that loss against other kinds of income. Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income.

Thus, in this case,Lefty's AGI will decrease by $3000 as a result of these gains/losses.