Question

On October 6, 2019, Walter purchased § 1244 stock in Brass Corporation for $8,000. On December 31, 2019, the stock was worth $9,500. On August 21, 2020, Walter was notified that the stock was worthless. How should he report this item on his 2019 and 2020 tax returns?

a.2019—$1,500 short-term capital gain; 2020—$8,000 ordinary loss
b.2019—$1,500 short-term capital loss; 2020—$8,000 short-term capital loss
c.2019—$0; 2020—$8,000 ordinary loss
d.2019—$1,500 long-term capital loss; 2020—$8,000 ordinary loss
e.2019—$0; 2020—$8,000 long-term capital loss

Answer 1

For his 2019 tax return, Walter does not report any gain or loss because the increase in stock value was not realized. On his 2020 tax return, Walter can report an ordinary loss of $8,000, thanks to the provision under Section 1244 of the Internal Revenue Code.

Step-by-step explanation:

On October 6, 2019, Walter purchased § 1244 stock in Brass Corporation for $8,000. On December 31, 2019, the stock was worth $9,500, and on August 21, 2020, Walter was notified that the stock was worthless. For Walter's 2019 tax return, he does not report any gain or loss because he didn't sell or dispose of the stock that year; the stock's market value increase is not realized for tax purposes. On his 2020 tax return, Walter should report an ordinary loss of $8,000, which is the amount he paid for the stock. This is because, under Section 1244 of the Internal Revenue Code, a loss on small business stock can be treated as an ordinary loss up to $50,000 for individuals or $100,000 for married couples filing jointly, rather than as a capital loss, which is subject to stricter limitations.