Daniel has losses of $50,400 on each of two stocks and can claim an ordinary loss of up to $42,000 on one stock due to a special designation. This allows him to deduct the loss at his 35% marginal tax rate instead of the typical 15% capital gains rate. The tax savings from this special treatment is $8,400.

1. Daniel is considering selling two stocks that have not fared well over recent years. A friend
recently informed Daniel that one of his stocks has a special designation, which allows him to
treat a loss up to $42,000 on this stock as an ordinary loss rather than the typical capital loss.
Daniel figures that he has a loss of $50,400 on each stock. If Daniel’s marginal tax rate is 35
percent and he has $100,800 of other capital gains (taxed at 15 percent), what is the tax savings
from the special tax treatment?
Daniel is considering selling two stocks that have not fared well over recent years. A friend
recently informed Daniel that one of his stocks has a special designation, which allows him to
treat a loss up to $42,000 on this stock as an ordinary loss rather than the typical capital loss.
Daniel figures that he has a loss of $50,400 on each stock. If Daniel’s marginal tax rate is 35
percent and he has $100,800 of other capital gains (taxed at 15 percent), what is the tax savings
from the special tax treatment?
Solution
Tax savings due to special treatment = 42,000 (.35 - .15)
= 42,000 *.20
= $ 8,400