question archive Three years ago, Adrian purchased 255 shares of stock in X Corp

Three years ago, Adrian purchased 255 shares of stock in X Corp

Subject:AccountingPrice:4.89 Bought3

Three years ago, Adrian purchased 255 shares of stock in X Corp. for $42,330. On December 30 of year 4, Adrian sells the 255 shares for $37,230. (Leave no answers blank. Enter zero if applicable. Loss amounts should be indicated with a minus sign.)
a. Assuming Adrian has no other capital gains or losses, how much of the loss is Adrian able to deduct on her year 4 tax return?
b. Assuming Adrian has no other capital gains or losses, except that on January 20 of year 5, Adrian purchases 255 shares of X Corp. stock for $37,230. How much loss from the sale on December 30 of year 4 is deductible on Adrian's year 4 tax return? What basis does Adrian take in the stock purchased on January 20 of year 5?

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Part a : Adrian can deduct a total of $3,000 as capital loss against his ordinary income.

Part b : There will be no capital loss that could be deductible on his 4th year tax return and basis of Adrian in stock purchased on year 5 will be $42,330.

Part a :

Capital loss (long-term) = Selling value of shares - Purchase value of shares

= $37,230 - $42,330

= ($5,100)

The net long term capital loss for Adrian will be $5,100 but, he can offset only $3,000 against the capital loss in his ordinary income and the remaining amount i.e. $2,100 would be carried forward to next year. $3,000 is the prescribed capital loss offset limit for a particular year against the ordinary income.

Therefore, Adrian can deduct a total of $3,000 as capital loss against his ordinary income.

 

Part b :

Adrian had made the purchase of same security on Jan 20, Year 5 i.e. before 31 days limit as per wash sale rule. As per wash sale rule, an investor can purchase the same security that was sold in order to offset the loss on the returns but for this, the investor must wait for atleast 31 days. If the investor purchase the security before 31 days than in such circumstances the capital loss would be disallowed. Adrian over here violated the wash sales rule and hence, his capital loss would also be disallowed.

Therefore, there will be no capital loss that could be deductible on his 4th year tax return.

 

We can compute the basis of Adrian in purchase on year 5 as follows :

Basis = Purchase amount for new shares + Capital loss

= $37,230 + $5,100

= $42,330

Therefore, the basis of Adrian in stock purchased on year 5 will be $42,330.

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