Question

For 2019, Lucy, a surviving spouse, had taxable income of $120,000, excluding capital transactions. In 2019, Lucy’s capital transactions were as follows:

	Short-term	Long-term 28 percent basket	Long-term 0/15/20 percent basket
Gains	10,000	20,000	2,000
Losses	(13,000)	(24,000)	(0)

In addition, Lucy had a ($2,200) short-term capital loss carryover and a ($1,000) long-term capital loss carryover, both from 2018. Compute Lucy’s capital loss deduction in 2019 and the amount and character of any capital loss carryover to 2020.

Answer 1

Capital Gain Netting: *Short Term gain is treated as ordinary income.

Basket #1 – STCG, STCL, ST Carry Forward (Ordinary Rate)

Basket #2 – Collectibles, (G/L stock/small company), LT capital loss carry over (28% Rate)

Basket #3 – 1250 Gain (25% Rate) Up to total DEPP taken but not to exceed recognized gain

Basket #4 – LTCG, LTCL, Unrecaptured 1231 LT Gain/Loss (0/15/20% Rate)

LT Capital loss carry over- Indefinite, ST loss used first

Maximum Deduction= $3,000 Per year

Year 2019	Short-term	Long-term 28 percent basket	Long-term 0/15/20 percent basket
Gains	10,000	20,000	2,000
Losses	-13,000	-24,000	0
Net	-3,000	-4,000	2,000

Capital Loss Deduction in 2019 = MIN(3000+4000-2000, 3000) = = MIN(5000, 3000) = $3000

Since we're limited to $3,000 per year in net capital losses that we can deduct from our other income in a particular year, hence Capital Loss Deduction in 2019 = $3000. Also, If we have both short-term and long-term losses, our short-term losses are used first against your allowable capital loss deduction. This means that the Capital Loss Deduction of $3000 is from short-term losses.

Then, Capital Loss carryforward from year 2019 to year 2020 = $2000 (Long-term)

Cumulative Capital Loss Carryover to 2020:

	Short-term	Long-term
Capital loss carryforward from 2018	-2200	-1000
Capital loss carryforward in 2019		-2000
Capital loss carryforward to 2020	-2200	-3000