Question

Darlene owns 500 shares of Sandmayor, Inc., common stock that she purchased several years ago for $20,500. During the current year, the Sandmayor stock declines in value. Darlene decides to sell the stock to realize the tax loss. On December 17, she sells the 500 shares for $12,000. Her investment adviser tells her she thinks the Sandmayor stock probably will begin to increase in value next year. On this advice, Darlene purchases 600 shares of Sandmayor common stock on January 10 of the next year for $15,000. The adviser turns out to be right—Darlene sells the 600 shares in May for $22,600.

Complete the bulleted statements below that explain the tax effect of the sales on Darlene's taxable income in each year. Do not round intermediate per share amounts, but round final answers to the nearest dollar.

• The December 17 sale results in a (realized or recognized) loss of $____________. However, the loss cannot be (realized or recognized) as it is considered a (Long term capital loss or wash sale) because the shares were repurchased (30 or 60 or 90 days).
• The (allowed or disallowed) loss (is added or reduces) the basis of the shares purchased on January 10, making the total basis of these shares $___________.
• The sale in May of 600 shares results in a $__________ (long term or short term or wash sale) loss and a (long term or short term or wash sale) gain of $__________.

Answer 1

Determine deductible loss
Particulars	Amount ($)
Amount relaized	12000
Less: Basis	-20500
Realized loss	-8500
Disallowed loss - wash sale	8500
Deductible loss	0
Determine the basis of share
Basis in share	500 wash sale shares	100 new shares
Jan 10 purchase (25 per share)	12500	2500
Add: Disallowed loss	8500	0
Basis	21000	2500
=21000+2500 = 23,500
Determe the realized and recognized gain (loss).
Particulars	500 wash sale shares	100 new shares
Amount realized (36.67 per share)	18335	3667
Less: Basis	-21000	-2500
Realized and recognized gain (loss)	-2665	1167