Question

Which of the following types of transactions results in capital losses that are deductible for tax purposes?

1) Sales to related parties
2) Wash sales
3) Sales of personal-use assets
4) Theft of capital assets

Answer 1

For tax purposes, deductible capital losses can arise from the theft of capital assets. Sales to related parties, wash sales, and sales of personal-use assets generally do not result in deductible capital losses.The correct option is 4.

Step-by-step explanation:

The question pertains to the deductibility of capital losses for tax purposes for specific types of transactions. To answer which transactions result in deductible capital losses:

• Sales to related parties generally do not result in deductible losses due to the potential for tax-avoidance schemes through transferring assets within controlled groups.
• Wash sales are also not deductible as they involve the sale of an investment security at a loss and the repurchase of the same or substantially identical security within 30 days before or after the sale. The IRS prohibits deducting these losses to prevent taxpayers from claiming artificial losses.
• Sales of personal-use assets usually result in capital losses that are not deductible because these assets are not held for investment purposes.
• Theft of capital assets does lead to a deductible loss, as the loss is considered a casualty loss and, as such, can be deductible if certain conditions are met.

Therefore, the correct option for deductible capital losses for tax purposes is theft of capital assets.