A taxpayer sells stock for a loss of $5,000 on December 20, Year 1. On January 10, Year 2 (21 days later), the taxpayer purchases substantially identical stock. How is the loss treated?

Answer options:

Deductible in Year 1.

Deductible in Year 2.

Disallowed and added to the basis of the new stock.

Permanently disallowed.

How to approach this question

1. Identify Wash Sale: Sale at loss + Purchase of identical stock within +/- 30 days. 2. Timeline: Dec 20 to Jan 10 is < 30 days. 3. Consequence: Loss is disallowed. 4. Adjustment: Disallowed loss is added to the basis of the replacement stock.

Full Answer

C.Disallowed and added to the basis of the new stock.✓ Correct

This is a wash sale because the taxpayer bought substantially identical stock within 30 days of the sale. The $5,000 loss is disallowed in Year 1 and added to the basis of the new stock purchased in Year 2.

Common mistakes

Thinking the loss is deductible in the year of repurchase.

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