Question

Two years ago, Adrian purchased 100 shares of stock in X Corp. for $10,000. On December 30, 2018, Adrian sells the 100 shares for $6,000

i.   Assuming Adrian has no other capital gains or losses, how much of the loss is Adrian able to deduct on her year 2018 tax return? State the reason.

[3 Marks]

ii. Assume the same facts as in part (a), except that on January 20, 2019, Adrian purchases another 100 shares of X Corp. stock for $8,000. How much loss from the sale on December 30, 2018, is deductible on Adrian’s 2018 tax return? What basis does Adrian take in the stock purchased on January 20, 2019?

[4 Marks]

Answer 1

Adrian purchased the stock of X Co. two years ago and sold on December 30,2018. So, the loss on sale is long-term capital loss (For stock sold within one year, capital gain/loss is considered short-term gain/loss and if the stock is sold after one year of purchase, the gain/loss is considered long-term capital gain/loss).

Ans.i. Purchase price(Cost basis) of stock = $10,000

Sale price = $6,000

Capital Loss = $10,000 - $6,000 = $4,000

However, as per Internal Revenue Service, $3,000 capital loss can be deducted in the tax year in which the capital loss has occurred,i.e,2018. Remaining loss can be carried forward to be set off in the future tax year.

Ans.ii. As per IRS ‘wash sale rule’ in case an investment is sold at a loss and re-purchased within 30 days, you cannot claim capital loss on the sale. However, the loss can be added to the cost basis of re-purchased investment.

Here, the 100 shares of X Co. were sold on December 30,2018 at a loss of $4,000 and re-purchased on January 20,2019 for $8,000 (within 30 days), so no loss is deductible in the tax year 2018, and the cost basis of stock purchased on January 20,2019 = $8,000+$4,000 = $12,000.