Question

After netting all of his short-term and long-term capital gains and losses, Sam has a net short-term capital loss and a net long-term capital gain/ Can he net the ST capital loss and LT capital gain against each other? Why or why not?

Also, Sam purchased equipment for use in his business for $60,000 back in 2014. He has taken $37,500 of regular MACRS depreciation. Sam then sells the equipment in 2017 for $28,500. What is the amount and character of Sam's gain or loss?

Please cite the applicable IRS code section(s) to support your answer. (USA)

Answer 1

a) Yes, Sam can set off Net Short Term Capital Loss against Long term Capital Gain. As per Section 1212 of 26 U.S.C if a taxpayer realizes both capital gains and capital losses in the same year, the losses offset (cancel out) the gains. The amount remaining after offsetting is the net gain or net loss used in the calculation of taxable gains.

For individuals, a net loss can be claimed as a tax deduction against ordinary income, up to $3,000 per year ($1,500 in the case of a married individual filing separately). Any remaining net loss can be carried over and applied against gains in future years. However, losses from the sale of personal property, including a residence, do not qualify for this treatment"

b) The amount for Gain would be 6,000 and it would be Ordinary Income as per 1014 of 26 USC which states that If the business then sells the asset for a gain (that is, for more than its adjusted cost basis), this part of the gain is called depreciation recapture. When selling certain real estate, it may be treated as capital gain. When selling equipment, however, depreciation recapture is generally taxed as ordinary income, not capital gain. Further, when selling some kinds of assets, none of the gain qualifies as capital gain.