Which statement best describes net Section 1231 gains and losses for the year?

Which statement best describes net Section 1231 gains and losses for the year?

• A. Net 1231 gains are treated as ordinary income.
• B. Net 1231 losses are treated as ordinary losses.
• C. All 1231 gains and losses are treated as capital gains and losses.
• D. 1231 losses are never deductible.

Answer: (B)

Net Section 1231 results are taxed based on whether the year ends in a net loss or a net gain. If losses exceed gains, the net loss is treated as an ordinary loss that can offset ordinary income. If gains exceed losses, the net gain is treated as a long-term capital gain (with an additional lookback rule for any prior unrecaptured 1231 losses). The essential point is that net losses qualify as ordinary losses, making that description the correct one for the year’s net result.

Net Section 1231 results are taxed based on whether the year ends in a net loss or a net gain. If losses exceed gains, the net loss is treated as an ordinary loss that can offset ordinary income. If gains exceed losses, the net gain is treated as a long-term capital gain (with an additional lookback rule for any prior unrecaptured 1231 losses). The essential point is that net losses qualify as ordinary losses, making that description the correct one for the year’s net result.