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Memo: Capital Gain Transactions

Mr. Adams is asking if he will be required to pay capital gains taxes. Attached is a copy of his information regarding his family and his income. Prepare a memo to Mr. Adams explaining what capital gains and losses are, what the requirements are for reporting capital gains and losses, and detailing whether or not he will be required to pay capital gains taxes.


Solution Preview

The following two items are the only two capital transactions.

1. During the year, James sold 200 shares of Finnigan, Inc.'s stock, which he purchased on 6/1/04 for $2,000 and sold on 8/1/2007 for $2,554. The gain is long term in the amount of (2554 - 2000) $554.

2. On 1/1/2007, James sold a computer that he purchased on 6/1/2003. The purchase price was $4,500, and the depreciation allowed was $3,722. He sold the computer for $500. This is section 1245 property. The computer has a basis of $4500 - 3722 = 778. It was sold for $500 and therefore the taxpayer has a reportable loss of $278. The loss is not a capital loss, but an ordinary loss because it is Sec 1245 property.

Now the memo:

I wanted to explain the concepts of capital gain or ...

Solution Summary

In a 402 word memo, the nature of capital gain transactions are explained in general, and the specifics of Mr. Adam's particular transactions are calculated. The gain or loss is disclosed including information about how the depreciation was handled in the transaction.