Question

Ms. Crocker bought 1,000 shares of EMO Corporation stock for $10,000 on January 20, Year 1. On December 28, Year 3 she sold all 1,000 shares of EMO stock for $9,000. Based on a hot tip from her friend, she bought 1,000 shares of EMO stock on January 15, Year 4 for $7,000. What is Ms. Crocker's recognized loss on her Year 3 sale and what is her basis in her 1,000 shares purchased in Year 4?

A. $0 LTCL and $7,000 basis
B. $0 LTCL and $8,000 basis
C. $1,000 LTCL and $7,000 basis
D. $1,000 LTCL and $8,000 basis
E. None of the aboveq

Answer 1

Ms. Crocker's recognized loss on her Year 3 sale is $0 due to the wash sale rule, and her basis for the 1,000 shares purchased in Year 4 is $8,000.

Step-by-step explanation:

The question deals with the recognition of capital losses and determining the basis in stocks after transactions involving the buying and selling of shares. Initially, Ms. Crocker bought shares worth $10,000 and sold them for $9,000, incurring a loss of $1,000. According to the tax rule known as the wash sale rule, if an investor repurchases the same or a substantially identical stock within 30 days before or after selling it at a loss, the loss cannot be claimed for tax purposes.

Since Ms. Crocker bought the same number of EMO Corporation shares within less than 30 days after she sold them at a loss, the loss from the Year 3 sale cannot be recognized for tax purposes, and the basis of her Year 4 purchase must be adjusted. Hence, her recognized loss is $0, and her basis for the Year 4 purchase is her actual cost plus the disallowed loss, which is $7,000 + $1,000 = $8,000.