Taxation
Below is a table with four different scenarios for a taxpayer who opts to sell several different types of stock throughout the year. Assume that all ordinary income for the taxpayer is taxed at a flat tax rate of 22%. In contrast, his long-term capital gains tax rate is 15%. His only income outside the transactions with the stock is $100,000 or ordinary income from his salary. (Assume the tax year is 2020).
Scenario 1 | Scenario 2 | Scenario 3 | Scenario 4 | |
ST capital gain | $4,000 | $4,000 | $4,000 | |
ST capital loss | $7,000 | $7,000 | $10,000 | |
LT capital gain | $9,000 | $9,000 | $9,000 | |
LT capital loss | $5,000 | $5,000 | $5,000 |
a. What is the total amount of taxes saved during the current year because of the capital losses in Scenario 1?
b. What is the additional amount of tax due the taxpayer must pay in total this year because of the capital gains in Scenario 2?
c. What is the total change in tax due for the taxpayer because of the gains and losses in Scenario 3?
d. What is the total change in tax due for the taxpayer because of the gains and losses in Scenario 4?
Homework Answers
In scene 1
Income other than shares $ 100000
Less:
Short-term cash loss of $7000
Long-term capital loss of $5000
Total income $ 88,000
Tax implications
Non-stock income tax ($100,000 * 22%) $22,000
Less: Total income after offsetting losses ($88000 * 22%) ($19360)
Save tax $ 2640
Case 2
General income tax ($100,000 * 22%) $22,000
Short-term capital gains tax ($4000 * 22%) $880
Long-term capital gains tax ($9000 * 15%) $1350
Total tax payable $ 24230
Less: general income tax $22,000
Additional taxes due to capital gains $ 2230
Case 3
General income tax ($100,000 * 22%) $22,000
Long-term capital gains tax (($9000-5000) * 15%) $600
Less: Tax savings due to short-term capital losses
($7000-$4000) * 22% ($660)
Total tax payable $ 21940
General income tax $ 22,000
Therefore, a capital tax of $60 is saved
Case 4
General income tax ($100,000 * 22%) $22,000
Long-term capital gains tax (($9000-$5000) * 15%) $600
Less: Tax savings due to short-term capital losses
($10000-$4000)*22%$(1320)
Total tax payable $ 21,280
General income tax $22000
Therefore, due to capital loss, tax savings of $720
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