Question

In the "General Procedure for § 1231 Computation: Step 2. § 1231 Netting," if the gains exceed the losses, what happens to the net gain?

1) It is offset by the "lookback" nonrecaptured § 1231 losses.
2) It is added to the "lookback" nonrecaptured § 1231 losses.
3) It is ignored and not accounted for.
4) It is carried forward to the next tax year.

Answer 1

In the § 1231 netting process, if gains exceed losses, the net gain is offset by the 'lookback' nonrecaptured § 1231 losses.

Step-by-step explanation:

In the context of the General Procedure for § 1231 Computation: Step 2. § 1231 Netting, when gains exceed losses, the net gain is treated in the following manner: it is offset by the lookback nonrecaptured § 1231 losses. This means the net § 1231 gain for the year is reduced by any nonrecaptured net § 1231 losses from the previous five years. These prior losses are used to counterbalance the current year's gains, which may affect the taxable amount. Should the losses exceed the gains in the lookback period, the excess loss is considered when computing the net § 1231 gain or loss for the current year.