Question

On February 20, 2020, Lonnie purchased stock in Alloy Corporation (the stock is not small business stock) for $1,000. On May 1, 2021, the stock became worthless. During 2021, Lonnie also had an $8,000 loss on § 1244 small business stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain. How should Lonnie treat these items on his 2021 tax return?

Answer 1

Lonnie should treat the worthless stock as a capital loss, deduct the $8,000 loss on the § 1244 small business stock as an ordinary loss, deduct the $9,000 loss on the nonbusiness bad debt as an ordinary loss, and report the $5,000 long-term capital gain on Schedule D of his tax return.

Step-by-step explanation:

Lonnie should treat these items on his 2021 tax return as follows:

1. The worthless stock should be reported as a capital loss. Lonnie can deduct the loss up to $3,000 against other income and carry forward any remaining loss to future years.
2. The $8,000 loss on § 1244 small business stock should be reported as an ordinary loss. This loss can be deducted against other ordinary income on Lonnie's tax return.
3. The $9,000 loss on a nonbusiness bad debt should also be reported as an ordinary loss. This loss can be deducted against other ordinary income on Lonnie's tax return.
4. The $5,000 long-term capital gain should be reported on Schedule D of Lonnie's tax return and taxed at the applicable capital gains tax rate.