Question

Daniel is considering selling two stocks that have not fared well over recent years. A friend recently informed Daniel that one of his stocks has a special designation, which allows him to treat a loss up to $50,000 on this stock as an ordinary loss rather than the typical capital loss. Daniel figures that he has a loss of $60,000 on each stock. If Daniel’s marginal tax rate is 35 percent and he has $120,000 of other capital gains (taxed at 15 percent), what is the tax savings from the special tax treatment?

Answer 1

The tax savings from the special tax treatment on the stock can be calculated as follows:

Capital loss on the first stock: $60,000 * 35% = $21,000

Ordinary loss on the second stock: $50,000 * 35% = $17,500

Total capital loss: $21,000 + $17,500 = $38,500

Capital gains tax on other gains: $120,000 * 15% = $18,000

Total tax without special treatment: $38,500 + $18,000 = $56,500

Total tax with special treatment: $18,000 = $18,000

Tax savings: $56,500 - $18,000 = $38,500

So the tax savings from the special tax treatment is $38,500.