Question

A customer is short 100 shares of PDQ stock at $62 per share. The stock goes up to $67 and the customer covers the position. If, 30 days later, the customer decides to re-establish this short position when the market for PDQ is $65, what will the sale proceeds be

Answer 1

$60 per share

Step-by-step explanation:

Given the transaction above, the customer intend to take a loss and then reestablish the position.

Thus, going by "wash sale" rule, the loss deduction is disallowed in a situation where by the position is reestablished within 30 days of the date the loss was generated.

Hence, In this case the customer initially sold short the stock at $62. The stock was later repurchased at $67, for a $5 loss per share which equate to $500 loss on 100 shares.

Again, the customer sold short another 100 shares exactly 30 days later at $65 (to avoid the "wash sale" rule, the position cannot be reestablished until the 31st day). This made the $500 loss to be disallowed.

At this point, the $5 per share loss will be deducted from the sale proceeds of $65, for a new sale proceeds of $60.

Hence, this ensures the taking of the loss until this short position is covered.