Question

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes

Answer 1

Answer: $75

Step-by-step explanation:

It should be noted that the convertible bond was bought less than 30 days after the loss was realized, therefore, sale of the stock will have to fall under wash sale rule i.e when securities are sold at a loss by the investors and repurchased by them before or after 30 days after the Securities has been sold, then the loss will not be allowed by the IRS.

Since there is a conversion price of $40, then the bond will be converted into:

= 1000/40

= 25 shares of KLP common stock.

Therefore, only ($100 - $25) = $75 will be declared as a loss