Correct Answer: $3,000
the correct answer is $3,000. when a taxpayer experiences a net short-term capital loss, such as the $15,000 in this scenario, the internal revenue code (irc) permits a maximum annual deduction of $3,000 against the taxpayer's other income. this limit applies irrespective of the amount of total net short-term capital loss incurred during the year.
capital losses are classified based on the duration the asset was held before being sold. short-term capital losses result from selling assets held for one year or less. contrastingly, long-term capital losses arise from assets held for more than one year. here, we are dealing with a short-term loss.
if the short-term capital loss exceeds the $3,000 deduction limit, the excess loss can be carried forward to subsequent tax years. in this case, after taking the $3,000 deduction this year, the taxpayer can carry forward the remaining $12,000 to offset future income. this carryforward is used first to offset any future capital gains, and if the gains are still insufficient to absorb the loss, up to $3,000 can be deducted annually from other types of income until the loss is fully utilized.
therefore, in the current tax year, the taxpayer can only declare a loss of $3,000, taking advantage of the stipulated annual deduction limit for net short-term capital losses. the remaining loss will continue to provide potential tax relief in future years, depending on the taxpayer’s financial and investment circumstances.
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