Question

On September 3, 2017, Willie purchased § 1244 stock in Brass Corporation for $6,000. On December 31, 2017, the stock was worth $8,500. On August 15, 2018, Willie was notified that the stock was worthless. How should Willie report this item on his 2017 and 2018 tax returns?

a. 2017—$2,500 short-term capital loss; 2018—$8,500 short-term capital loss
b. 2017—$0; 2018—$6,000 ordinary loss
c. 2017—$0; 2018—$6,000 long-term capital loss
d. 2017—$2,500 short-term capital gain; 2018—$3,800 ordinary loss
e. None of these choices are correct.

Answer 1

Willie should report a $2,500 short-term capital loss on his 2017 tax return and an $8,500 short-term capital loss on his 2018 tax return.

Step-by-step explanation:

In 2017, Willie purchased § 1244 stock in Brass Corporation for $6,000. On December 31, 2017, the stock was worth $8,500. However, in 2018, Willie was notified that the stock was worthless. The treatment for the loss on worthless stock depends on whether it is classified as a capital loss or an ordinary loss.

If Willie qualifies for § 1244 stock treatment and reports the stock as a capital loss, he would report a short-term capital loss of $2,500 on his 2017 tax return and report the remaining $6,000 as an ordinary loss on his 2018 tax return.

Therefore, the correct answer is:

a. 2017—$2,500 short-term capital loss; 2018—$8,500 short-term capital loss