What is the treatment of Verway, Inc.'s $55,000 net § 1231 gain in 2021 if a lookback loss of $62,000 existed in 2020?

The treatment of Verway, Inc.'s net § 1231 gain requires understanding of the lookback rules associated with § 1231 assets. When a taxpayer has a net § 1231 gain in one year and previously recognized a § 1231 loss in a prior year, the lookback rule comes into play. This rule’s aim is to prevent taxpayers from benefiting from a gain in the current year by ensuring that it is offset by losses carried over from prior years.

In this case, Verway, Inc. has a $55,000 net § 1231 gain for 2021 while also having a lookback loss of $62,000 from 2020. According to the lookback provisions, the net gain in 2021 must first be used to offset the previous § 1231 loss. Since the 2020 loss exceeds the current gain, the entire gain is treated not as a capital gain, but as an ordinary loss.

This means that the full $55,000 gain in 2021 is recast in the tax treatment category of ordinary income due to its relationship with the lookback loss. Essentially, such treatment ensures that the prior losses are effectively utilized to negate the current net §