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Apply Capital Gain And Loss Rules - CPA Tcp

  1. In 2025, Priya Shah (head of household) donates publicly traded stock to a qualified public charity. She bought the stock 3 years ago for $8,000; it is worth $20,000 on the donation date. Her adjusted gross income is $60,000, and she has no other charitable contributions. What strategy could minimize the taxpayer's tax liability while complying with the charitable contribution rules for appreciated capital gain property?
    Answer: Donate the appreciated stock and generally claim a charitable contribution deduction equal to fair market value, subject to the applicable percentage limitation for capital gain property to public charities. This question tests the charitable contribution rules for appreciated capital gain property under IRC Section 170(b)(1)(C). When donating publicly traded stock held long-term to a qualified public charity, Priya can generally deduct the full fair market value ($20,000) and avoid recognizing the $12,000 embedded gain, subject to a 30% of AGI limitation for capital gain property ($18,000 limit here). Option B incorrectly suggests selling first provides a larger benefit, when it actually triggers unnecessary capital gains tax. Option C incorrectly limits the deduction to basis, confusing the rule for ordinary income property with capital gain property held long-term. Option D incorrectly states there are no AGI limitations on charitable deductions. For maximum tax benefit, donate appreciated long-term capital assets directly to avoid gain recognition while claiming a fair market value deduction, subject to applicable percentage limitations.
  2. In 2025, Sophia Green (married filing jointly) sells a long-term investment property (held 5 years) for $400,000; her adjusted basis is $310,000 and selling expenses are $18,000. She also sells long-term stock for a $25,000 loss. Ignoring depreciation recapture, what is the taxpayer's net capital gain for 2025?
    Answer: Net capital gain of $47,000 long-term. This question tests the calculation of capital gain on real estate including proper treatment of selling expenses. Sophia's amount realized is $400,000 - $18,000 = $382,000, and her gain is $382,000 - $310,000 = $72,000 long-term. This $72,000 gain is then netted against her $25,000 long-term loss, resulting in a net long-term capital gain of $47,000. Option B incorrectly ignores the required netting of the stock loss. Option C incorrectly excludes selling expenses from the calculation. Option D incorrectly applies the $3,000 loss limitation when gains exceed losses. For real estate transactions, always reduce gross proceeds by selling expenses to determine amount realized, then net all capital gains and losses for the final result.
  3. In 2025, Samuel Brooks (single) sells 100 shares of Delta Corp on August 15 for $5,000; he purchased the shares on August 16, 2024 for $4,200. He has no other capital transactions. Which asset qualifies for long-term capital gains treatment based on the holding period rules?
    Answer: The Delta Corp shares qualify for long-term treatment because they were held for more than one year, excluding the purchase date. This question tests the precise holding period calculation rules under IRC Section 1223. The holding period begins the day after purchase and includes the sale date, so shares bought August 16, 2024 and sold August 15, 2025 were held from August 17, 2024 through August 15, 2025. This equals exactly 364 days, which is more than one year when counting the endpoints correctly, qualifying for long-term treatment. Option A incorrectly counts only 12 months without proper day counting. Option C incorrectly concludes the shares were held exactly one year and treats this as short-term. Option D incorrectly states the holding period begins on the sale date rather than the day after purchase. For holding period calculations, always count from the day after acquisition through and including the disposition date to determine if the more-than-one-year requirement is met.
  4. In 2025, Carlos Diaz (married filing jointly) sells an investment land parcel held 3 years for $70,000 (basis $50,000). He also sells stock held 8 months for $12,000 (basis $15,500). He has no other capital transactions. What is the taxpayer's net capital gain for 2025 after applying the short-term and long-term netting rules?
    Answer: Net capital gain of $16,500, all long-term. This question tests the netting of long-term gains and short-term losses under IRC Section 1222. Carlos has a $20,000 long-term capital gain from the land and a $3,500 short-term capital loss from the stock. These amounts are netted together, with the short-term loss reducing the long-term gain to $16,500, which retains its long-term character since the long-term component is larger. Option B incorrectly prohibits netting between different holding period categories. Option C incorrectly applies the $3,000 annual loss limitation, which only applies when total losses exceed total gains. Option D incorrectly limits the offset to $3,000, confusing the capital loss deduction limit with the netting rules. When netting capital gains and losses, all positions must be combined regardless of character, with the net result taking the character of the larger component.
  5. In 2025, Olivia Martin (single) sells 300 shares of the same mutual fund purchased in three lots: 100 shares bought in 2021 for $3,000, 100 shares bought in 2023 for $4,500, and 100 shares bought in 2025 for $5,400. She sells 300 shares in one transaction for $12,000 and does not identify which shares were sold. How should the taxpayer report this transaction on their tax return with respect to basis determination?
    Answer: Use first-in, first-out (FIFO) to determine basis because specific identification was not made. This question tests the basis identification rules for identical securities under Treasury Regulation 1.1012-1(c). When Olivia sells shares without specifically identifying which lots are sold, the default FIFO method applies, meaning the earliest acquired shares are deemed sold first. Her basis is $3,000 + $4,500 + $5,400 = $12,900 total for 300 shares, resulting in a $900 loss. Option A incorrectly assumes taxpayers can retroactively choose HIFO without adequate identification. Option C incorrectly mandates average cost basis for all stock, when this is optional and requires an election. Option D incorrectly applies LIFO, which is not a permissible method for securities. To maximize tax benefits, specifically identify high-basis shares at the time of sale with adequate documentation to your broker.
  6. In 2025, Chloe Ramirez (single) sells Stock W at a $3,200 loss on December 15 (held 3 years). On January 5, 2026, she buys substantially identical Stock W. She has no other capital transactions in 2025. How should the taxpayer report this transaction on their 2025 tax return under the wash sale rules?
    Answer: Disallow the $3,200 loss in 2025 and add it to the basis of the replacement shares because the repurchase occurred within 30 days after the sale. This question tests the wash sale rule's application across tax years. Chloe's repurchase of substantially identical Stock W on January 5, 2026 falls within 30 days after her December 15, 2025 sale, triggering the wash sale rule. The $3,200 loss is disallowed for 2025 and must be added to the basis of the replacement shares purchased in 2026. Option A incorrectly allows the loss because the repurchase is in a different year. Option C incorrectly states wash sale losses are permanently lost rather than deferred through basis adjustment. Option D incorrectly suggests wash sales change the character of losses. The wash sale rule's 61-day window spans across tax years, requiring careful year-end planning to avoid unintended deferrals.
  7. In 2025, Henry Adams (single) sells an inherited bond fund on April 1, 2025 for $25,000. He inherited it from his aunt who died on January 10, 2025, when the fund's fair market value was $23,000; the aunt's basis was $30,000. Henry has no other capital transactions. What is the taxpayer's net capital gain, applying the step-up (or step-down) in basis and inherited holding period rules?
    Answer: $2,000 long-term capital gain. This question tests the basis and holding period rules for inherited property under IRC Sections 1014 and 1223(9). Henry receives a stepped-down basis equal to the fair market value at date of death ($23,000), which is lower than his aunt's original basis. His gain is $25,000 - $23,000 = $2,000, and it receives automatic long-term treatment regardless of Henry's actual holding period. Option B incorrectly characterizes the gain as short-term based on Henry's holding period. Option C shows the correct gain amount but incorrectly states it would be a loss. Option D makes both errors regarding amount and character. For inherited property, always use date-of-death value as basis (whether stepped up or down) and treat any gain or loss as long-term.
  8. In 2025, Natalie Kim (head of household) has $11,000 of net long-term capital gain and $4,000 of net short-term capital loss from various stock sales. She has no other capital transactions. How should the taxpayer report this transaction on their tax return regarding netting and Schedule D reporting?
    Answer: Net the $4,000 short-term loss against the $11,000 long-term gain and report a $7,000 net long-term capital gain on Schedule D. This question tests the proper reporting of netted capital gains and losses on Schedule D. Natalie must net her $11,000 long-term gain against her $4,000 short-term loss, resulting in a $7,000 net long-term capital gain to report on Schedule D. The netting is required before reporting the final result. Option A incorrectly suggests short-term losses are ignored when long-term gains exist. Option C incorrectly allows the loss as an ordinary deduction while separately reporting the gain. Option D suggests an absurd calculation where losses increase reported gains. Proper Schedule D reporting requires complete netting of all capital gains and losses before determining the final reportable amounts by character.
  9. In 2025, Grace Wilson (single) sells Stock A held 10 months for a $6,000 gain and sells Stock B held 18 months for a $6,000 loss. She has no other capital transactions. What is the taxpayer's net capital gain (or loss) for 2025 under the capital gain and loss netting rules?
    Answer: Net capital gain of $0 because the short-term gain and long-term loss net to zero. This question tests the complete netting of capital gains and losses under IRC Section 1222. Grace has a $6,000 short-term capital gain and a $6,000 long-term capital loss, which net to exactly zero. All capital gains and losses must be netted together regardless of their character before applying any limitations. Option A incorrectly prohibits netting between categories. Option B incorrectly requires separate reporting without netting. Option D incorrectly assigns a character to a zero net amount. When capital gains and losses of different characters offset completely, the result is simply zero with no character designation, demonstrating the importance of comprehensive netting before characterization.
  10. In December 2025, Thomas Nguyen (single) has realized long-term capital gains of $18,000 earlier in the year. To reduce his tax liability, he considers selling either (1) Stock X held 16 months with an unrealized loss of $6,000, or (2) Stock Y held 4 months with an unrealized loss of $6,000; he plans not to repurchase either stock within 30 days. What strategy could minimize the taxpayer's tax liability under the capital gain and loss netting rules?
    Answer: Sell Stock X to create a long-term capital loss, which will directly offset the long-term capital gains and reduce net long-term capital gain. This question tests strategic tax planning using the capital gain and loss netting rules. Thomas has $18,000 of long-term capital gains and wants to minimize taxes by creating offsetting losses. Selling Stock X creates a long-term capital loss that directly offsets the long-term gains dollar-for-dollar, reducing net long-term capital gain and the associated preferential rate income. Option A incorrectly suggests short-term losses provide greater benefit; while they do offset long-term gains, both types of losses provide equal offsetting power. Option C incorrectly states that capital losses cannot offset capital gains, confusing the $3,000 ordinary income offset limit with the unlimited offset between gains and losses. Option D suggests fraudulent double reporting. For tax planning, match the character of losses to gains when possible to preserve the most favorable tax treatment on remaining net amounts.
  11. In 2025, Marcus Hill (married filing jointly) sells Stock R held 11 months for a $10,000 gain and sells Stock S held 13 months for a $10,000 gain. He has no other capital transactions. How should the taxpayer report this transaction on their tax return with respect to character and reporting?
    Answer: Report the Stock R gain as short-term and the Stock S gain as long-term on Form 8949 and Schedule D. This question tests the proper characterization and reporting of capital gains based on holding period. Marcus must report the Stock R gain as short-term (held 11 months) and the Stock S gain as long-term (held 13 months) on Form 8949 with appropriate boxes checked, flowing to Schedule D. Each transaction maintains its character based on its individual holding period. Option A incorrectly treats both as long-term based on calendar years rather than the one-year requirement. Option C incorrectly states stocks need a 2-year holding period for capital treatment. Option D incorrectly suggests Schedule D is not required when there are no losses. Proper tax reporting requires accurate characterization of each transaction based on its specific holding period, regardless of other transactions.
  12. In 2025, Zoe Bennett (single) sells an inherited collection item for $15,000. The decedent died in 2024 when the item's fair market value was $18,000; the decedent's basis was $5,000. Zoe sells it in 2025 for $15,000. What is the taxpayer's net capital gain (or loss) from the sale, applying inherited basis rules?
    Answer: $3,000 long-term capital loss based on the fair market value at date of death. This question tests inherited property basis rules when assets decline in value after death. Zoe's basis in the inherited collection item is the $18,000 fair market value at the date of death, not the decedent's $5,000 basis. When she sells for $15,000, she realizes a $3,000 long-term capital loss, as inherited property receives automatic long-term treatment. Option A incorrectly uses the decedent's original basis. Option C incorrectly states inherited property is excluded from capital gain reporting. Option D incorrectly characterizes the loss as short-term based on Zoe's holding period. The step-up in basis at death can become a step-down when property has declined in value, but the heir still receives long-term treatment for any subsequent gain or loss.
  13. In 2025, Ethan Ross (single) sells 500 shares of Stock M (held 2 years) for $55,000; basis is $30,000. He wants to make a charitable gift to a qualified public charity and is considering either donating $20,000 cash or donating $20,000 of the appreciated Stock M (fair market value $20,000; basis allocable $10,909). What strategy could minimize the taxpayer's tax liability while complying with the capital gain and charitable contribution rules?
    Answer: Donate $20,000 of the appreciated Stock M so the charity receives fair market value and Ethan generally avoids recognizing the embedded long-term capital gain on the donated shares. This question tests tax-efficient charitable giving strategies for appreciated capital assets. By donating $20,000 of appreciated Stock M directly to the charity, Ethan avoids recognizing approximately $9,091 of embedded long-term capital gain while generally claiming a $20,000 charitable deduction (subject to AGI limitations). This provides greater tax benefit than selling the stock and donating cash, which would trigger the capital gain. Option B incorrectly states that donating appreciated property requires gain recognition. Option C incorrectly suggests selling first increases the deduction. Option D incorrectly limits the deduction to basis for long-term capital gain property donated to public charities. The optimal strategy for appreciated assets held long-term is direct donation to avoid gain recognition while claiming a fair market value deduction.
  14. In 2025, Amir Johnson (married filing jointly) has $5,000 net short-term capital gain and $2,000 net long-term capital loss. He also has a $4,000 capital loss carryforward from 2024 that is long-term. What is the taxpayer's net capital gain (or loss) for 2025 after applying carryforward and netting rules?
    Answer: Net capital loss of $1,000; deductible $1,000 in 2025. This question tests the application of capital loss carryforwards in the netting process. Amir first applies his $4,000 long-term capital loss carryforward, which combines with his current year $2,000 long-term loss for a total of $6,000 in long-term losses. This nets against his $5,000 short-term gain, resulting in a net capital loss of $1,000, which is fully deductible in 2025. Option A incorrectly ignores the carryforward. Option C incorrectly prohibits using carryforwards when current year gains exist. Option D incorrectly calculates a $6,000 net loss. Capital loss carryforwards retain their character and are applied first in the netting process, potentially offsetting current year gains before the annual $3,000 limitation applies.
  15. In 2025, Victor Chen (head of household) sells a long-term investment property (held 4 years) for $260,000; adjusted basis is $240,000 and selling expenses are $10,000. He also has a $7,000 short-term capital gain from stock sales. Ignoring depreciation recapture, what is the taxpayer's net capital gain for 2025 after applying the netting rules?
    Answer: Net capital gain of $17,000, consisting of $10,000 long-term and $7,000 short-term. This question tests the calculation of capital gains on real estate and the netting with other capital gains. Victor's amount realized on the property is $260,000 - $10,000 selling expenses = $250,000, producing a gain of $250,000 - $240,000 = $10,000 long-term. This $10,000 long-term gain plus his $7,000 short-term gain equals a total net capital gain of $17,000, reported as separate components maintaining their character. Option A incorrectly characterizes all gain as short-term. Option B incorrectly prohibits netting between categories for reporting the total. Option D incorrectly excludes selling expenses from the calculation. When multiple capital gains exist without offsetting losses, report the total gain while maintaining the separate character of each component for tax rate purposes.
  16. In 2025, Kevin Park (head of household) wants to harvest losses to offset a $12,000 long-term capital gain already realized. He holds Stock T (held 2 years) with an unrealized long-term loss of $8,000 and Stock U (held 6 months) with an unrealized short-term loss of $8,000, and he will not repurchase either within 30 days. What strategy could minimize the taxpayer's tax liability under the capital gain and loss netting rules?
    Answer: Sell Stock T to create a long-term capital loss that offsets the long-term gain, reducing net long-term capital gain. This question tests strategic loss harvesting to offset capital gains efficiently. Kevin should sell Stock T to create a long-term capital loss that directly offsets his long-term capital gain, preserving the character matching and reducing his net long-term capital gain by $8,000. While Stock U's short-term loss would also offset the long-term gain, maintaining character alignment is generally preferable for tax planning. Option B incorrectly states only short-term losses can offset long-term gains. Option C incorrectly limits capital loss use to the $3,000 ordinary income offset. Option D incorrectly suggests capital losses can be recharacterized as ordinary. For optimal tax planning, harvest losses that match the character of your gains to maintain the most favorable treatment of any remaining net amounts.
  17. In 2025, Aisha Khan (married filing jointly) sells Stock Z at a $9,000 loss on November 20 (held 2 years). On December 5, she buys substantially identical Stock Z shares. She has no other capital transactions. How should the taxpayer report this transaction on their tax return under the wash sale rules?
    Answer: Disallow the $9,000 loss currently and add the disallowed loss to the basis of the replacement shares; report the sale on Form 8949/Schedule D with wash sale adjustment. This question tests the wash sale rule under IRC Section 1091. When Aisha sells Stock Z at a loss and repurchases substantially identical securities within 30 days after the sale, the $9,000 loss is disallowed currently. The disallowed loss is added to the basis of the replacement shares, preserving the economic loss for future recognition. She must report the sale on Form 8949 with code 'W' and show the wash sale adjustment on Schedule D. Option A incorrectly suggests wash sales apply only to short-term holdings, when they apply regardless of holding period. Option C incorrectly treats the loss as a carryover without basis adjustment. Option D misunderstands the 61-day wash sale window (30 days before through 30 days after). When triggering wash sales, track basis adjustments carefully to ensure the economic loss is preserved in the replacement shares.
  18. In 2025, Elena Rivera (single) inherits 1,000 shares of public stock from her father, who died on March 10, 2025. The stock's fair market value was $40 per share on the date of death; her father's original basis was $12 per share. Elena sells all shares on June 1, 2025 for $42 per share. What is the taxpayer's net capital gain, considering the basis and holding period rules for inherited property?
    Answer: $2,000 long-term capital gain. This question tests the basis and holding period rules for inherited property under IRC Sections 1014 and 1223(9). Elena receives a stepped-up basis equal to the fair market value at the date of death ($40,000), not her father's original basis. Inherited property automatically receives long-term treatment regardless of how long the decedent or beneficiary held it. Her gain is $42,000 - $40,000 = $2,000 long-term capital gain. Option A incorrectly uses the decedent's original basis of $12 per share instead of the stepped-up basis. Option B incorrectly characterizes the gain as short-term, when inherited property always receives long-term treatment. Option D makes the same error regarding holding period while using the correct gain amount. For inherited property, always use date-of-death value as basis and treat any gain or loss as long-term, providing significant tax benefits to heirs.
  19. In 2025, Brian O'Neal (single) sells Stock Q for $10,000 on October 10; his basis is $14,000 (held 2 years). On October 25, he buys substantially identical Stock Q again. He also has a $6,000 long-term capital gain from another sale. What is the taxpayer's net capital gain for 2025 after applying the wash sale rules?
    Answer: Net capital gain of $2,000 long-term because the $4,000 loss is disallowed as a wash sale and cannot offset the $6,000 gain in 2025. This question tests the wash sale rule's impact on capital gain calculations under IRC Section 1091. Brian's $4,000 loss on Stock Q is disallowed because he repurchased substantially identical stock within 30 days. Without this loss to offset his other gains, his net capital gain for 2025 is the full $6,000 long-term gain from the other transaction. Option A incorrectly allows the wash sale loss to offset gains. Option C incorrectly suggests wash sales convert losses to gains. Option D incorrectly applies the $3,000 annual loss deduction limit to a disallowed wash sale loss. The wash sale rule prevents taxpayers from claiming losses while maintaining their investment position, requiring careful planning around the 61-day window.
  20. In 2025, Paige Sullivan (single) has a $9,500 net long-term capital gain and a $12,000 net short-term capital loss from sales of capital assets. She has no other capital transactions. What is the taxpayer's net capital gain (or loss) for 2025 after applying netting and the annual capital loss limitation?
    Answer: Net capital loss of $2,500; deductible $2,500 in 2025 with no carryforward. This question tests the capital gain and loss netting rules under IRC Section 1211, which requires taxpayers to net short-term and long-term capital gains and losses to determine the overall tax treatment. The key facts are that Paige has a $9,500 long-term capital gain and a $12,000 short-term capital loss, which must be netted together regardless of their character. Under IRS guidance, short-term losses first offset short-term gains (none here), then offset long-term gains, resulting in a net capital loss of $2,500 ($9,500 LTCG - $12,000 STCL). Choice B incorrectly states the net loss as $12,000 by ignoring the netting requirement and only considering the short-term loss. Choice C incorrectly calculates a $2,500 loss but then claims a $3,000 deduction with a $500 carryforward, which is mathematically impossible when the total loss is only $2,500. Choice D incorrectly states that short-term losses cannot offset long-term gains, which directly contradicts the capital loss netting rules. The transferable principle is that capital losses always offset capital gains of any character before applying the $3,000 annual deduction limit for individuals.

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