Question

5. C purchase XYZ Company stock several years ago for $50,000. Unfortunately, the stock had declined in value. Therefore, C decided to sell the stock on December 15, 2020 for $35,000, incurring a loss of ($15,000). C had other gains of $40,000 in 2020 and felt he would like to offset those gains with the loss on XYZ Company stock. However, after reading some very favorable news about XYZ Company in early January, 2021, C decided to buy back XYZ Company stock. So on January 8, 2021 C bought back the stock for $36,000.

a. How much of the loss may C deduct on his 2020 return?

b. What is C’s basis in the XYZ Company stock that was purchased on January 8, 2021?

Answer 1

Answer-

Concept -

Wash Sale Loss - Wash Sale Occurs when the Taxpayer sells stock at a LOSS while purchasing identical stock within 30 days before or after Sale.

Loss in Wash Sale Transaction is not deductible, but is added to the BASIS of Repurchased Stock.

Solution 1.

C can't deduct any loss on his 2020 return regarding sell of stock on December 15, 2020 as same Stock is buy back on January 8 2021 that is within 30 Days of Sell of identical Stock. This is termed as Wash Sale.

As Discussed above Loss incurred on wash Sale can't be deducted on Tax Return.

So, C deduction for Loss regarding Sell of Stock will be $ 0.

Solution 2.

C's basis in XYZ Company Stock that was Purchased on January 8, 2021 will be $ 51,000.

In case of Wash Sale Transaction that is Sold Shares are Repurchased within 30 Days of Sell the basis of Repurchased Shares will be increased by Loss incurred on Wash Sale Transaction

So, In Given Case, Loss of $ 15,000 (Given) is incurred on Sell of Stock the same will be added to Purchase Price of Repurchased Stock to arrive at Basis of Repurchased Stock.

So, Basis of Repurchased Stock = Purchased Price (+) Loss incurred on Wash Sale Transaction.

$ 36,000 (Given) + $ 15,000 (Given)

$ 51,000.

So, C's basis in XYZ Company Stock that was Purchased on January 8 2021 will be $ 51,000.