Vertical, Inc., has a 2018 net § 1231 gain of $67,000 and had a $22,000 net § 1231 loss in 2017. For 2018, Vertical's net § 1231 gain is treated as:
A) $45,000 long-term capital gain and $22,000 ordinary loss.
B) $67,000 ordinary gain.
C) $45,000 long-term capital gain and $22,000 ordinary gain.
D) $67,000 capital gain.
E) None of the above.

Question

Quizplus · Accepted Answer

Vertical Inc.'s net § 1231 gain of $67,000 is treated as both long-term capital gain and ordinary gain. First, we need to offset the previous year's net § 1231 loss of $22,000 against the current year's gain. This leaves a net § 1231 gain of $45,000.

The portion of the gain that comes from the sale of long-term assets is treated as long-term capital gain, while the remaining portion is treated as ordinary gain. We don't have specific information about the length of time that Vertical Inc. held the assets being sold, so we can't determine the exact split between long-term and ordinary gain. However, we do know that at least $45,000 of the gain is long-term (because that's the amount remaining after offsetting the previous year's loss).

Therefore, the best choice is C: $45,000 long-term capital gain and $22,000 ordinary gain.