Vertical,Inc. ,has a 2010 net § 1231 gain of $67,000 and had a $22,000 net § 1231 loss in 2009.For 2010,Vertical's net § 1231 gain is treated as:

Question

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Net § 1231 gains and losses are treated as either long-term capital gains or ordinary gains/losses depending on the taxpayer's overall net § 1231 gain or loss in a given year. Since Vertical had a net § 1231 loss in 2009, its net § 1231 gain in 2010 will be treated as long-term capital gain to the extent of the prior loss ($22,000) and any remaining gain will be treated as ordinary income. Therefore, $45,000 of the $67,000 net § 1231 gain will be treated as long-term capital gain and the remaining $22,000 will be treated as ordinary gain. Choice A is incorrect because it assumes that the entire net § 1231 gain is long-term capital gain, which is not the case when there is a prior year net § 1231 loss. Choice B is incorrect because it implies that all § 1231 gains are ordinary income, which is not the case. Choice D is incorrect because it assumes that the entire net § 1231 gain is capital gain, without distinguishing between long-term and short-term gains.