Question

Tariq sold certain U.S. Government bonds and State of Oregon bonds at a loss to offset short-term capital gain from a previous transaction. He felt that the U.S. Government and State of Oregon bonds were "good" investments, so he repurchased identical securities within one week. Do these transactions constitute wash sales? If the bond sales resulted in the recognition of gain (rather than loss), would the wash sale provisions prevent the gains from being recognized?

A) Yes, these transactions constitute wash sales, and the provisions would prevent the recognition of gains.
B) No, these transactions do not constitute wash sales, and the provisions would allow the recognition of gains.
C) Yes, these transactions constitute wash sales, but the provisions do not prevent the recognition of gains.
D) No, these transactions do not constitute wash sales, and the provisions would prevent the recognition of gains.

Answer 1

The transactions described in the question do not constitute wash sales. If the bond sales resulted in a gain instead of a loss, the gains would be recognized and not prevented by the wash sale provisions.

Step-by-step explanation:

The transactions described in the question do not constitute wash sales. Wash sales occur when an investor sells a security at a loss and repurchases the same or a substantially identical security within 30 days before or after the sale. In this case, Tariq sold the bonds at a loss and repurchased identical securities within one week. However, wash sale rules specifically apply to stocks and securities, not to bonds. Therefore, these transactions do not fall under the definition of wash sales.

If the bond sales resulted in the recognition of gain instead of a loss, the wash sale provisions would not prevent the gains from being recognized. Wash sale rules are designed to disallow the recognition of losses, not gains. So, if Tariq had made a profit instead of a loss from the bond sales, he would be able to recognize and report the gains for tax purposes.