Question

Daniel is considering selling two stocks that have not fared well over recent years. A friend recently informed Daniel that one of his stocks has a special designation, which allows him to treat a loss up to $46,000 on this stock as an ordinary loss rather than the typical capital loss. Daniel figures that he has a loss of $55,200 on each stock. If Daniel’s marginal tax rate is 35 percent and he has $110,400 of other capital gains (taxed at 15 percent), what is the tax savings from the special tax treatment?

Answer 1

		Special Stock	Normal Stock	Explanation
1	Loss	$       (55,200)	$        (55,200)	Given in problem
2	Ordinary tax Savings	16100	n/a	$46,000 limit x 35% MTR
3	Capital loss tax Savings	1380	8280	Special stock - $9,200
				remaining loss x 15% capital
				rate
				Normal Stock - $55,200 x
				15% capital rate
4	Total tax savings	17480	8280	Sum of 2 and 3
	Additional savings on special	9200		Difference in 4 between
	stock			special and normal stock