Question

In Year 1, Gardner used funds earmarked for use in Gardner's business to make a personal loan to Carson. In Year 3, Carson declared bankruptcy, having paid off only $500 of the loan at that time. In Year 1, Gardner purchased equipment for use in Gardner's business. In Year 3, Gardner sold the equipment at a $5,000 loss. In January of Year 3, Gardner received shares of stock as a gift from Smith; the shares had been purchased by Smith in Year 1. In November of Year 3, Gardner sold the property for a $5,000 gain.Which of the above transactions will Gardner report as long-term capital gains or losses for Year 3?I. The bad debt write-offII. The sale of equipmentIII. The sale of shares

Answer 1

III. The sale of shares

Step-by-step explanation:

Since the shares were given as a gift, Gardner's basis will be the same as Smith's basis (3 years), therefore any gain must be reported as a long term capital gain.

The loan to Carson classifies as a non-business bad debt which must be reported as a short term capital loss, not a long term capital loss.

Losses or gains on sale or disposal or assets are classified as ordinary losses or gains, not capital gains.