Question

An individual taxpayer reported the following net long-term capital gains and losses:

The amount of capital gain that the individual taxpayer should report in Year 3 is

Year Gain (loss)
1 ($5,000)
2 1,000
3 4,000

1) $0
2) $1,000
3) $3,000
4) $4,000

Answer 1

The net long-term capital gain that the individual taxpayer should report in Year 3 is $0, as the $4,000 gain for that year is completely offset by the carried forward net loss from previous years.

Step-by-step explanation:

The question asks about how to report net long-term capital gains and losses for an individual taxpayer over a three-year period. In the provided scenario, the taxpayer has a loss of $5,000 in Year 1, a gain of $1,000 in Year 2, and a gain of $4,000 in Year 3. To determine the reportable capital gain in Year 3, we need to account for the capital loss from Year 1. As per basic concepts of taxation, the taxpayer is allowed to use the capital loss to offset any capital gains in the following years.

For the years in consideration:

• Year 1: ($5,000) (loss)
• Year 2: $1,000 (gain)
• Year 3: $4,000 (gain)

Firstly, the loss from Year 1 can offset the gain in Year 2, leaving a net loss of $4,000 to be carried forward. In Year 3, the taxpayer has a gain of $4,000. This gain can completely offset the carried forward loss, netting to $0 taxable long-term capital gain. Therefore, the individual taxpayer should report $0 in Year 3. Answer option 1) is correct.