Rule: A loss on a wash sale is disallowed for tax purposes. A wash sale exists when a security is sold for a loss and is repurchased within 30 days before or after the sale. Choice "A" is correct. A wash sale exists in this case, but only a partial wash sale. Unfortunately, the dollar amounts for the recognized loss and wash sale (disallowed) loss are the same in this question (so the illustration can become somewhat confusing). Let's use 20X1 and 20X2 for illustration. On 4/1/X1, Sands purchased 100s of Eastern stock for $18,000 ($180/share). On 2/1/X2, Sands sold 50s of the stock for $7,000 ($140/share), creating a realized loss of $2,000 (50s * ($140 - $180)). Now, if Sands had stopped there, it would have also had a recognized loss of $2,000. However, on 2/16/X2 Sands repurchased half of the shares it had sold at a loss (25s/50s), and this was within the 30-day period indicated in the rule (above). Thus, half of the realized loss is not recognizable in year 2, and it becomes part of the basis of the 25s of Eastern stock owned by Sands [note that the 50s not initially sold by Sands has a basis of $180/share, or $9,000]. The calculation follows:
2/1/X2 | Sell 50s | $7,000 |
|
| Basis 50s | (9,000) | [$180 × 50=$9,000, from the initial purchase] |
| Realized Loss | $(2,000) | [$40/share loss] |
|
|
|
|
2/16/X2 | Purchase 25s | $3,750 | [Repurchased within 30 days of loss sale] |
| Add: Wash Sale Loss | 1,000 | [($140 - $180) × 25s=$1,000] |
| Resulting Basis of 25s | $4,750 |
|
Result: Sands owns 75s of Eastern stock. The first 50 shares (those that were not sold on 2/1/X2) has a basis of $9,000 in total ($180/share), and the 25 shares repurchased on 2/16/X2 has a basis of $4,750 ($190/share), the purchase price of the 25s plus the disallowed loss as a result of the wash sale rule. Choice "d" is incorrect. Sands is allowed to recognize a loss on the shares it did not repurchase. The total loss on the 50 shares sold is $2,000, but Sands only repurchased 25 shares, so 50% of the $2,000 realized loss (or $1,000) is recognized by Sands in the year sold.
Choice "b" is incorrect. Sands is allowed to recognize a loss on the shares it did not repurchase. The total loss on the 50 shares sold is $2,000, but Sands only repurchased 25 shares, so 50% of the $2,000 realized loss (or $1,000) is recognized by Sands in the year sold. [Sands sold only 50% of the stock it initially purchased. Then, it repurchased 50% of the amount it sold.]
Choice "c" is incorrect. A wash sale exists in this situation. The entire $2,000 realized loss is not able to be recognized in the year sold because 25s of the 50s sold were repurchased in year 2. Only $1,000 of the realized loss is recognized in the year of sale. The remaining $1,000 loss is a wash sale loss that becomes part of basis (as shown above).
