losses are applied to the limit first even if they were incurred after the long-term losses. Any long-term carryovers are placed in the 28 percent basket in the following year.EXAMPLE 12.30 Greg Grove has a net STCL of $2,000 and a net LTCL of $5,500 during 2013. The net STCL is used up first dollar for dollar to give a $2,000 deduction. Then the net LTCL is used up to get the remaining $1,000 deduction for a total $3,000 deduction. This leaves $4,500 LTCL to be carried over to 2014. In 2014, this $4,500 LTCL carryover is treated as if it were a LTCL incurred during 2014 and is placed in the 28 percent basket.EXAMPLE 12.31 Michelle Martin has a net STCL of $4,000 and a net LTCL of $2,000 in 2013. The STCL is used up first for a $3,000 deduction and $1,000 STCL is carried over to 2014. The net LTCL of $2,000 is also carried over to 2014. In
2014, she has a STCG of $600 and a LTCG of $1,200. In 2014, the STCL carryover of $1,000 is offset against the STCG of $600 to get a net STCL of $400. The LTCL carryover of $2,000 is offset against the LTCG of $1,200 for a net LTCL of $800. For 2014, Michelle is allowed a deduction of $1,200 ($400 + $800).¶12,401 CORPORATE TAXPAYERS DISTINGUISHEDThe capital gain and loss treatment of corporate taxpayers differs from that of individual taxpayers in four ways.1. The corporation is not allowed any special advantage for net capital gains (i.e., the excess of net LTCG over net STCL). Instead, corporate capital gains are taxed at regular corporate tax rates, with the maximum tax rate of 35 percent.2. The corporation is not allowed a deduction in the current year for a net overall capital loss position. Capital losses for corporations are allowed only to the extent of the capital gains.3. A net overall capital loss can still be used by a corporation. It is carried back three years and carried forward five years against capital gains.4. Corporate carrybacks and carryovers are treated as short-term.Special Provisions for Certain Investments¶12,501 NONBUSINESS BAD DEBTSNonbusiness bad debts are debts that are not related to the taxpayer’s trade or business. They are treated as a short-term capital loss in the year of worthlessness, regardless of how long they were outstanding. The debts must be completely worthless. Code Sec. 166(d)(1); Reg. §1.166-5(a)(2). However, a taxpayer has a totally worthless bad debt when none of what is still owed can be collected, even though the taxpayer may have collected some of the debt in the past. Only a bona fide debt qualifies for deduction as a bad debt. A bona fide debt is a debt that arises from a debtor-creditor relationship based on a valid and enforceable obligation to pay a sum of money. Reg. §1.166-1(c).EXAMPLE 12.32 In 2011, Beth Burrow loaned $7,000 to her friend Nancy Newburg. In 2013, Nancy declared bankruptcy, with the result that the debt is totally worthless. Beth may deduct the $7,000 loss as a short-term capital loss. If she has no other capital gains or losses, she deducts $3,000 in 2013 and carries the remaining $4,000 to 2014.
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- The American, Capital gains tax in the United States