Question

Sergio owns 200 shares of palm Corporation common stock, purchase during the prior year: 100 shares on July 5th, for $9,000; and 100 shares on October 15th, for $12,000. When Sergio cells 50 shares for $8,000 on July 18th of the current year, he does not identify the particular share sold. Determine the amount and character of the gain.

Answer 1

Sergio would recognize a capital gain of $3,500 from the sale of 50 shares of Palm Corporation stock using the first-in, first-out (FIFO) method. The cost basis is calculated based on the purchase price of the oldest shares, with the 50 shares originally bought at $90 per share.

Step-by-step explanation:

When Sergio sells 50 shares of Palm Corporation stock and does not identify which particular shares he sold, the IRS requires the use of the first-in, first-out (FIFO) accounting method. This means the first shares purchased are the first ones considered sold. In this case, the first 100 shares were purchased on July 5th for $9,000, which amounts to $90 per share. The sale on July 18th was for 50 shares at $8,000 in total, which amounts to $160 per share.

To calculate the capital gain, you subtract the cost basis of the 50 shares from the sale proceeds:

Sale Proceeds: $8,000
Cost Basis (50 shares × $90/share): $4,500
Capital Gain: $8,000 - $4,500 = $3,500

The amount of capital gain for Sergio is $3,500, and this would be a short-term capital gain if he held the shares for less than a year, or a long-term capital gain if he held them for more than a year.