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 $64,000 on this stock as an ordinary loss rather than the typical capital loss. Daniel figures that he has a loss of $76,800 on each stock. If Daniel’s marginal tax rate is 35 percent and he has $153,600 of other capital gains (taxed at 15 percent), what is the tax savings from the special tax treatment?

Answer 1

* If the loss of $64,000 is treated as ordinary loss (special treatment) then it can be set off from ordinary income which have tax rate @ 35%. However if it is treated as a capital loss then it can be set off against capital gains which have tax rate @ 15%. Hence the tax savings from special tax treatment is as below:
a) Tax saving if it is set off from income having tax rate @ 35%	=$64,000*35%	$22,400
b) Tax saving if it is set off from income having tax rate @ 15%	=$64,000*15%	$9,600
c) Tax saving from special tax treatment	[a-b]	$12,800