Final answer:
The wash-sale rule prevents the recognition of losses on the sale of an asset if a 'substantially identical' asset is bought within 30 days before or after. Mort's loss is disallowed due to the rule, resulting in an adjusted basis of $4,800 for the new shares. If bought after the 30-day window, the loss would be recognized, with no basis adjustment.
Step-by-step explanation:
Mort owns 500 shares of Pear, Inc. stock with an adjusted basis of $22,000. On July 28, 2016, he sells 100 shares for $3,000. On August 16, 2016, he rebuys 100 shares for $3,400. Usually, the loss on the sale of an asset can be used to offset capital gains for tax purposes. However, because Mort bought identical shares within 30 days of the sale, the wash-sale rule applies. This IRS rule disallows a loss deduction from a sale if a 'substantially identical' asset is purchased within 30 days before or after the sale. Therefore, Mort's realized loss of $1,400 on the July 28 sale is not recognized for tax purposes.
Because of the wash-sale rule, Mort's basis in the new 100 shares is adjusted to the sum of the purchase price plus the disallowed loss: $3,400 (cost) + $1,400 (unrecognized loss) = $4,800. If Mort purchased the 100 shares on December 27, 2016, instead of on August 16, 2016, more than 30 days would have passed since the sale, and the wash-sale rule would not apply. Therefore, the loss of $1,400 would be recognized, and the basis of the new 100 shares would simply be their purchase cost of $3,400.