Troy Is Not a Very Astute Investor

question 77

Essay

Troy is not a very astute investor.He has a knack for investing in losing stocks.In his latest investment move, he has realized a loss of about $40,000 (original basis of $50,000; current fair market value of $10,000)in High Tech, Inc.The good news is that unlike prior years, he actually has $45,000 of gains that he can use to offset the loss.Troy is considering either selling the High Tech, Inc.stock to his sister, Louise, or on the stock market.Which should he choose and why? Please explain why the IRS may treat the two transactions differently.

---

Definitions:

Shareholders

Individuals or entities that own shares in a corporation, thus having partial ownership and potentially receiving dividends from profits.

Subchapter S

A section of the Internal Revenue Code that provides for a special tax status for qualifying small businesses, allowing income to be taxed at the shareholder level and not at the corporate level.

Net Capital Loss

This occurs when the total capital losses from investments exceed the total capital gains, which can sometimes be used to offset other types of income for tax purposes.

Ordinary Income

This refers to any income earned through work, interest, dividends, or rental income, subject to standard tax rates.