Question

Matthew sold four stocks this year. he is in the 32% tax bracket. the following is a summary of these transactions: gain of $2,000 on his investment in company a, which he held for two years loss of $1,000 on his investment in company b, which he held for 18 months loss of $5,000 on his investment in company c, which he held for six months gain of $500 on his investment in company d, which he held for 10 months calculate matthew's net capital gain (loss) and determine how it will be taxed.

a) $3,500 net short-term capital loss. $3,000 can be written off against ordinary income and $500 is carried forward as a short-term capital loss.
b) $1,000 short-term gain and $4,500 long-term loss. this nets to $3,500 long-term gain.
c) net long-term capital gain of $1,000 and $4,500 of short term capital loss. $4,500 is written off against ordinary income and $1,000 is treated as a long-term capital gain.
d) $3,500 net short-term capital loss. this entire loss can be written off against ordinary income.

Answer 1

Matthew has a $3,500 net short-term capital loss. $3,000 of this loss can be deducted against his ordinary income, and the remaining $500 will be carried forward as a short-term loss.

Step-by-step explanation:

To calculate Matthew's net capital gain or loss for the year, we must first categorize the gains and losses by how long the stocks were held. A gain or loss is considered long-term if the asset was held for more than one year, and short-term if held for one year or less. Using this information, we categorize Matthew's transactions accordingly:

• Gain of $2,000 on Company A: long-term
• Loss of $1,000 on Company B: long-term
• Loss of $5,000 on Company C: short-term
• Gain of $500 on Company D: short-term

Next, we combine the long-term transactions and the short-term transactions separately:

• Long-term net: $2,000 (gain) - $1,000 (loss) = $1,000 (net gain)
• Short-term net: $500 (gain) - $5,000 (loss) = $4,500 (net loss)

Now we combine them into one figure:

Net capital gain/loss: $1,000 (long-term gain) - $4,500 (short-term loss) = $3,500 (net short-term loss)

Matthew is in the 32% tax bracket and can use up to $3,000 of net capital losses against his ordinary income in the current tax year. The remaining $500 is carried forward as a short-term capital loss to future tax years. Therefore, Matthew's final answer is that he has a $3,500 net short-term capital loss, of which $3,000 can be written off against ordinary income and $500 is carried forward.