ExpertEasy1 markMultiple Choice
CPA · Question 22 · Area 2: Financial Planning
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?
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:
A.
Deductible in Year 1.
B.
Deductible in Year 2.
C.
Disallowed and added to the basis of the new stock.
D.
Permanently disallowed.
How to approach this question
1. Identify Wash Sale: Sale at loss + Purchase of identical stock within +/- 30 days.<br/>2. Timeline: Dec 20 to Jan 10 is < 30 days.<br/>3. Consequence: Loss is disallowed.<br/>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
C
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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