In 2018, Jenny, a single taxpayer, had a $15,000 net short-term capital loss and taxable income...

In 2018, Jenny, a single taxpayer, had a $15,000 net short-term capital loss and taxable income of $120,000. In 2019, Jenny has an $18,000 long-term capital gain on one transaction and no other capital gain or loss transactions. Which of the statements below is correct?

a.    Jenny has a 2019 $18,000 net capital gain.
b.    Jenny has a 2019 $9,000 net capital loss.
c.    Jenny has a 2019 $9,000 net capital gain.
d.    Jenny has a 2019 $3,000 capital loss deduction.
e.    Jenny has a 2019 $6,000 net capital gain.

Expert Solution

Ans: The correct option is (e) Jenny has a 2019 $6000 net capital gain.

Explanation:

As per IRS, a capital loss can be set off against a capital gain and not from other taxable income. Long term capital losses can be set off against Long term Capital gain only. Short term Capital loss can be set off against both Long term and Short term income. So, if a Taxpayer whose status is Single or who are married filing jointly, incurs a Short term capital loss and has not capital gain then he or shey is allwe to deduct a $3000 loss a year from ordinary Income to reduce the tax liability asthe ordinary income are taxed at the same rate as short tem capital gain. The limit for married filing separately is $1500 a year. And if the amount of capital loss exceeds the threshold limit of $3000 or $1500 )for married filing separately) , the excess will be carrie forward to the next year to set off from future gains.

Here, Jenny is a Single Tax payer and in 2018, she incurred a capital loss of $15000 and a taxable income other than capital gain of $120000. Her threshold limit is $3000 which she can dedcuct from her ordinary income and carry forward the excess to the next year. In 2018, she will deduct $3000 from the ordinary income of $12000 and carry forward the excess i.e., $12000 ($15000 - $3000) to 2019. In 2019, she had a Long term capital gain of $18000, she will deduct the carried forward losses of $12000 from the gain of $18000 and her Net capital gain will be $6000 ($18000 - $12000).

In 2018:

Ordinary Taxable Income	$120000
Less: Short term capital loss (Annual limit $3000)	($3000)
Balance short term capital loss to be carried forward ($15000-$3000)	$12000

In 2019:

Long Term Capital gain	$18000
Less: Carried forward short term capital loss	($12000)
Net capital gain	$6000

ekkarill92 answered 2 years ago

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