Unit 8 SIMs

3. On January 2, 2019, Dylan inherited two vans upon his father's death. At the date of his death, Dylan's father had a basis of $23,000 in the vans, and the fair value of the vans was $25,200. Dylan used the vans in his business throughout the year, claiming $3,400 of depreciation, the maximum amount allowable, for 2019. Dylan did not use an alternative valuation method.

$21,800. The decedent's basis in the inherited property is the FMV of the property at the date of death, if the alternative valuation date is not selected. Also, basis must be reduced by the larger of the amount of depreciation allowed or allowable.

4. Patent worth $360,000 acquired by GH Corp. in the purchase of LM Corp. in 2015 for new genetically modified seeds.

$24,000. Acquired intangible assets may be amortized over 15 years using the straight-line method. The calculation is $360,000 ÷ 15 years = $24,000.

On March 30, 2017, Frank and his wife Susan each bought 1,000 shares of Wolf Corporation stock at $12 per share. Two years later, the stock price started to drop. On April 15, 2019, Susan sold all her 1,000 shares at $11 per share and Frank sold 500 shares at $11 per share. Half a month later, on April 30, 2019, the stock price dropped to $10 per share and Frank bought 1,500 shares at the market price. 4. What is the holding period of the stock Frank purchased on April 30, 2019?

2 years and 1 month. The holding period includes that of the originally purchased stock, which is from March 30, 2017, to April 30, 2019, 2 years and 1 month.

5. Andie sold a building from her business in Year 1. She received equipment with a FMV of $125,000, $50,000 cash, and relief from the $200,000 remaining on the building's mortgage. The building had an adjusted basis of $300,000. Andie also assumed the remaining $50,000 balance on the note payable related to the equipment she received.

$25,000 gain. Realized gain is equal to the amount realized upon the sale of the property minus the adjusted basis of the property on the date of the sale. The amount realized includes money received, FMV of other property received, and liability relief, but it is reduced by any liabilities assumed ($50,000 cash + $125,000 FMV equipment + $200,000 liability relief - $300,000 AB of building - $50,000 liability assumed).

3. Nathan's mother gave him a Civil War figurine appraised at $65,000 on March 14, Year 10. Gift tax of $19,000 was paid on the transfer. His mother purchased the figurine in an auction in Year 2 for $26,000. Nathan sold it for $70,000 cash on September 1, Year 10.

$29,180 gain. Realized gain is equal to the amount realized upon the sale of the property ($70,000) minus the adjusted basis of the property ($40,820) on the date of the sale. The adjusted basis of property acquired by gift is equal to the donor's basis ($26,000) plus any amount of gift tax attributable to appreciation ($14,820): 19K x [(65K-26K)/(65K-15K)]

Gains and Losses: 1. Sale of 1,000 shares of XYZ common stock purchased on 10/15/18 for $20,000 and sold on 2/15/19 for $23,000.

$3,000; Short-term capital gain. Taxpayer realized $23,000 on the sale when he had a $20,000 cost basis in the stock. Thus, he realized and recognized a gain of $3,000. The stock was a capital asset. Gain from the sale or exchange of a capital asset held for less than 1 year is short-term capital gain.

11. Lawrence performed bookkeeping services for Sue worth $3,000. As payment, Sue gave Lawrence an antique lamp worth $3,200.

$3,200. If property is received as compensation for services, the basis is the FMV of the property received.

8. Sold 450 shares of Z Corp. stock at $40 per share. Green received the 450 shares from his aunt's estate as a bequest. The fair market value of the stock at the date of his aunt's death was $32 per share and did not change in the subsequent year. His aunt originally purchased the stock for $20 per share.

$3,600. Basis in inherited property is the FMV on the date of death or 6 months after if the executor elects the alternate valuation date for the estate tax return. We are not told that the alternate valuation date was elected; therefore, Green's basis in the inherited stock was $32 per share, or $14,400. Green later sold the shares for $40 per share, or $18,000. Green has a recognized gain of $3,600 ($18,000 amount realized - $14,400). NOTE: Remember that inherited property is excluded from the gross income of the recipient at the time of receipt.

10. Jeff purchased equipment to use in his business. The purchase price was $32,000, delivery charges were $800, sales tax was $1,800, and maintenance costs were $3,500.

$34,600. Basis includes the stated purchase price, closing costs (including sales tax), miscellaneous costs (including delivery charges), and major improvements. Maintenance costs do not materially increase the property's value and are not included in the basis of the property.

8. Crafty Corporation purchased real property for $350,000. A year later, Crafty had to pay a $15,000 assessment to the city where the property was located for converting the street into a pedestrian greenway, increasing the property's value.

$365,000. Taxes assessed for local benefit that tend to increase the value of real property are added to the property's adjusted basis. Thus, the adjusted basis would be the original purchase price of the property plus the taxes paid.

9. Sold 1,225 shares of ABC Corp. stock at $9 per share. Green purchased 600 shares several years ago at $30 per share. Three years ago, when the stock price was $21, there was a 2-for-1 stock split. Two years ago, when the stock price was $25, there was a 3-for-2 stock split. No other shares were sold by Green prior to Year 2.

$(1,225). The basis of stock acquired in a nontaxable distribution, such as a stock split, is allocated a portion of the basis of the stock upon which the distribution was made. If the new and old shares are identical, the old basis is simply divided among the new total of shares. Green's original basis in the shares was $30 per share, or $18,000 (600 × $30). When the 2-for-1 stock split occurred, Green's shares doubled to 1,200 (600 × 2 ÷ 1), while the basis stayed at $18,000. Each share had a basis of $15 ($18,000 ÷ 1,200). The 3-for-2 stock split caused Green's shares to increase to 1,800 (1,200 × 3 ÷ 2), while the basis stayed at $18,000. Each share had a basis of $10 ($18,000 ÷ 1,800). The stock price at the time of the stock splits is a distractor, as it does not affect the basis. Green's amount realized is $11,025 (1,225 × $9). His basis in those shares is $10 per share (as calculated above), or $12,250. Therefore, Green has a loss of $1,225 ($11,025 - $12,250).

10. Sold 500 shares of XYZ Corp. stock at $20 per share. Green purchased these shares 2 years prior at $22 per share. Three weeks subsequent to the sale, Green purchased 100 shares of XYZ stock at $18 per share.

$(800). A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. Part of this transaction qualifies as a wash sale since Green purchased 100 shares of XYZ Corp stock 3 weeks prior to the sale of the 500 shares of XYZ Corp. stock. The loss attributed to these 100 shares will not be recognized; 20% (100 shares ÷ 500 shares) of the loss is disallowed. The total realized loss is $1,000 ($10,000 - 11,000). Therefore, $200 ($1000 realized loss × 20%) is disallowed. $800 of the realized loss is recognized.

6. Sold 200 shares of X Corp. stock at $14 per share. Green received the 200 shares as a gift from his brother 3 years ago, when the shares had a fair market value of $10 per share. Green's brother purchased the stock for $16 per share.

$0. Since the FMV of the stock is less than Green's brother's basis at the date of the gift, Green has a dual basis for the property. If the property is later transferred for more than FMV but for less than the donor's basis at the date of the gift, no gain (loss) is recognized. Green sold the property for $14, which is more than the FMV of $10 but less than his brother's basis of $16 at the date of the gift. Therefore, Green recognizes $0 gain or loss. NOTE: Remember that the IRC excludes from the gross income of the recipient the value of property acquired by gift. Green does not recognize the gift as income when received by his brother.

Capital Gains and Losses - Wash Sales: On March 30, 2017, Frank and his wife Susan each bought 1,000 shares of Wolf Corporation stock at $12 per share. Two years later, the stock price started to drop. On April 15, 2019, Susan sold all her 1,000 shares at $11 per share and Frank sold 500 shares at $11 per share. Half a month later, on April 30, 2019, the stock price dropped to $10 per share and Frank bought 1,500 shares at the market price. 1. What is the loss recognized by Susan on her sale of Wolf stock on April 15, 2019?

$0. The sale of stock on April 15, 2019, is treated as a wash sale. In a wash sale, spouses are treated as one person. A loss realized on a wash sale of stock is not recognized. A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. The disallowed loss on the April 15, 2019, sale is $1,500 [1,500 shares × ($12 - $11)].

On March 30, 2017, Frank and his wife Susan each bought 1,000 shares of Wolf Corporation stock at $12 per share. Two years later, the stock price started to drop. On April 15, 2019, Susan sold all her 1,000 shares at $11 per share and Frank sold 500 shares at $11 per share. Half a month later, on April 30, 2019, the stock price dropped to $10 per share and Frank bought 1,500 shares at the market price. 2. What is the loss recognized by Frank on his sale of Wolf stock on April 15, 2019?

$0. The sale of stock on April 15, 2019, is treated as a wash sale. In a wash sale, spouses are treated as one person. A loss realized on a wash sale of stock is not recognized. A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. The disallowed loss on the April 15, 2019, sale is $1,500 [1,500 shares × ($12 - $11)].

3. Sale of van purchased on 1/25/18 for $10,000 and sold on 6/03/19 for $9,000.

$1,000; Long-term capital loss. Taxpayer realized $9,000 on the sale when he had a $10,000 cost basis in the van. Thus, he realized a loss of $1,000. The van was personal-use property, not depreciable. Thus, it was a capital asset. Loss from the sale or exchange of a capital asset held for more than 1 year is long-term capital loss.

7. Sold 200 shares of Y Corp. stock at $22 per share. Green received the 200 shares as a gift from his brother 3 years ago, when the shares had a fair market value of $26 per share. Green's brother purchased the stock for $16 per share.

$1,200. Property acquired as a gift generally retains the rollover cost basis it had in the hands of the donor at the time of the gift, unless the FMV is lower than the basis. Since Green's brother's basis in the stock was lower than the FMV at the time of the gift, Green takes a rollover basis in the stock of $16 per share, or $3,200. Green later sold the shares for $22 per share, or $4,400. Green's recognized gain is, thus, equal to $1,200 ($4,400 - $3,200). NOTE: Remember that the IRC excludes from the gross income of the recipient the value of property acquired by gift. Green does not recognize the gift as income when he received it from his brother.

2. Katherine acquired an office building to use in her business. The purchase price was $1,200,000, which she paid for with $200,000 cash and a $1,000,000 note payable. She also paid $12,000 to rent the building from the previous owner until the deal closed and $8,600 in attorney fees.

$1,208,600. The basis of a property is its original purchase cost, including any debt that is used to purchase the property. Also included are amounts paid in connection with the acquisition of the property. Attorney fees are generally classified as amounts paid in connection with the acquisition of property, but rent payments during the closing period are expenditures related to using the property, not its acquisition.

11. Sold 1,600 shares of BX Corp. stock at $4 per share. Green received these shares as a gift from his sister 4 years ago. The fair market value of the shares at the date of the gift was $7 per share. Green's sister inherited this stock from her stepmother's estate. At the date of her death, 7 years ago, the fair market value of this stock was $3 per share. The stepmother purchased this stock for $1 per share 10 years prior to her death.

$1,600. When his sister inherited the stock, her basis in the stock was the FMV at the date of her stepmother's death, which was $3 per share. When Green received these shares as a gift from his sister, the FMV was $7 per share. As per the general rule, Green receives a rollover basis in the shares since the FMV was higher than the stock at the date of the gift. Therefore, Green's basis in the shares is $3. Green's recognized gain is thus equal to $1,600 ($6,400 amount realized - $4,800 basis).

6. Robin performed yard maintenance for Lauren worth $800. As payment, Lauren gave Robin some antique baseball cards worth $1,700.

$1,700. If property is received as compensation for services, the basis is the FMV of the property received.

Calculate Adjusted Basis: 1. Peete, Inc., purchased machinery to be used for the production of their inventory. The purchase price was $97,000, appraisal fees were $1,100, maintenance costs were $5,400, and sales tax was $4,400.

$102,500. Basis includes the stated purchase price, closing costs (including sales tax), miscellaneous costs (including appraisal fees), and major improvements. Maintenance costs do not materially increase the property's value and are not included in the basis of the property.

6. Machinery with a 7-year recovery period purchased from an unrelated party June 1, 2019, for $142,000. Taxpayer elects to deduct the maximum amount and has $100,000 of taxable income.

$106,000. Under Sec. 179, taxpayers may elect to deduct up to $1,020,000 of the cost of Sec. 179 property purchased during the year. However, the deduction cannot exceed taxable income, i.e., $100,000. A MACRS deduction is allowed for the remaining balance of $42,000 purchase price. MACRS calls for the 200%-declining-balance method and half-year convention. MACRS equals $6,000 [$42,000 × (100% ÷ 7 years × 200%-declining-balance method × .5 half-year convention)]. The total deduction is $106,000 ($100,000 Sec. 179 + $6,000 MACRS).

2. On May 10, Year 1, Simon received a gift of income-producing real estate from his grandfather. His grandfather's basis in the property was $120,000 and the FMV at the date of the gift was $108,000. In October Year 1, Simon decided to sell the property for $95,000.

$13,000 loss. If the FMV of the property received at the date of the gift ($108,000) is less than the donor's adjusted basis ($120,000), the property has a dual basis for computing gain or loss. When computing a loss at a later date, use the FMV of the property at the date of the gift ($108,000 - $95,000 = loss amount).

12. Sold 2,000 shares of TWX Corp. stock at $8 per share. Green received 4,000 shares of TWX in a tax-free transaction for 2,000 shares of WTX Corp. stock he purchased in the prior year for $2 per share.

$14,000. In a tax-free transaction, the basis of property received is the same as the basis of the property given up. Green gave up 2,000 shares with a basis of $2 each, or a total basis of $4,000, for 4,000 shares of TWX. Therefore, Green had a basis in the TWX stock of $1 each (4000 shares ÷ $4,000 basis of property given up). Green later sold 2,000 shares of TWX stock at $8 per share for a total amount realized of $16,000. Green's recognized gain is thus equal to $14,000 ($16,000 amount realized - $2,000 basis).

2. Sale of 2,000 shares of ABC common stock purchased on 3/23/19 for $125,000 and sold on 12/31/19 for $139,000.

$14,000; Short-term capital gain. Taxpayer realized $139,000 on the sale when he had a $125,000 cost basis in the stock. Thus, he realized and recognized a gain of $14,000. The stock was a capital asset. Gain from the sale or exchange of a capital asset held for less than 1 year is short-term capital gain.

On March 30, 2017, Frank and his wife Susan each bought 1,000 shares of Wolf Corporation stock at $12 per share. Two years later, the stock price started to drop. On April 15, 2019, Susan sold all her 1,000 shares at $11 per share and Frank sold 500 shares at $11 per share. Half a month later, on April 30, 2019, the stock price dropped to $10 per share and Frank bought 1,500 shares at the market price. 3. What is Frank's basis in the Wolf stock he purchased on April 30, 2019?

$16,500. Basis in the stock Frank purchased on April 30, 2019, is $16,500 (1,500 shares purchased × $10 + $1,500 disallowed loss from prior sale).

5. JK, Inc., purchased 5-year property on April 15, 2019, for $88,000.

$17,600. Property purchased after 1987 is depreciated using MACRS. MACRS calls for the 200%-declining-balance method and half-year convention. MACRS equals $17,600 [$88,000 × (100% ÷ 5 years × 200%-declining-balance method × .5 half-year convention)].

Calculate Gain or Loss 1. RGB Partnership bought 300 shares of a listed corporation's stock for $45 a share in Year 1. Three years later, RGB sold the stock for $16,000.

$2,500 gain. Realized gain is equal to the amount realized upon the sale of the property minus the adjusted basis of the property on the date of the sale.

9. On January 3, 2019, Matt inherited three computers upon his father's death. At the date of his death, Matt's father had a basis of $4,000 in the computers, and the fair value of the computers was $3,500. Matt used the computers in his business throughout the year, claiming $700 of depreciation, the maximum amount allowable, for 2019. Matt did not use an alternative valuation method.

$2,800. The decedent's basis in the inherited property is the FMV of the property at the date of death, if the alternative valuation date is not selected. Also, basis must be reduced by the larger of the amount of depreciation allowed or allowable.

Calculate Accumulated Depreciation: 1. Warehouse purchased by AB Corporation for $780,000 in 2011 to store inventory.

$20,000. Nonresidential real estate is depreciated using the straight-line method and mid-month convention over a 39-year life. The MACRS depreciation deduction for this nonresidential property (39 years), Years 2-39, is $20,000 ($780,000 ÷ 39 years).

4. Will is a painter who uses a van in his business. His brother Bill uses a truck in his handyman business. They decided to exchange vehicles. Will's van has an adjusted basis of $6,500 and a FMV of $8,000. The adjusted basis of Bill's truck is $12,000 and the FMV is $14,500. Determine the amount of gain or loss, if any, realized by Bill only.

$4,000 loss. Realized loss is equal to the FMV of property received minus the AB of the property given ($8,000 FMV received - $12,000 AB given). In addition, because this is an exchange between related parties, Bill will not recognize any loss at this time. The future sale of the property by Bill will be reduced by the previously unrecognized loss if the sale results in a gain. If the subsequent sale results in a loss, the previous loss is ignored (i.e., not added upon the new loss).

7. Delilah gave her son Charles a gold watch that had been in the family for years. At the date of the gift, Delilah's basis in the watch was $4,000, and the fair market value of the watch was $7,000. No gift taxes were paid.

$4,000. When a gift is made, the basis in the hands of the recipient is equal to the adjusted basis of the donor at the time of the gift, increased by any gift tax paid attributable to appreciation.

5. $45,000 of insurance recovery received from a 5-year-old building that was destroyed in a fire. The building was used in a business, had a FMV of $65,000, and an adjusted basis of $50,000.​

$5,000; Ordinary loss. Section 1033 nonrecognition does not apply to losses. The amount of the casualty loss is the adjusted basis, net of amounts recovered, e.g., insurance proceeds. Thus, taxpayer recognizes a loss of $5,000 ($50,000 adjusted basis - $45,000 recovery). Section 1231 property is depreciable or real property used in a trade or business and held for more than 1 year, and nonpersonal capital assets held for more than 1 year and involuntarily converted. If there is a net loss for the year from involuntary conversion of property, including by fire, used in the trade or business or capital assets held long-term for investment or in connection with a trade or business, the loss is treated as an ordinary loss. If so, even if the involuntarily converted properties are otherwise Sec. 1231 property, the gains and losses are not included further in Sec. 1231 computations.

3. EF, Inc., purchased office furniture in January 2019 for $15,000 and computers in December 2019 for $42,000.

$5,850. Computers have a useful life of 5 years, and office furniture has a useful life of 7 years. Both properties should be depreciated using 200% declining balance. When property purchases in the fourth quarter exceed 40% of the total property purchases for the year, the mid-quarter convention should be used for all property purchased during the year. $15,000×(200% ÷ 7)×87.5%=$3,750 $42,000×(200% ÷ 5)×12.5%=$2,100 Total depreciation: $5,850

4. Sale of land purchased on 06/30/03 for $110,000 and sold on 7/04/19 for $169,000.

$59,000; Long-term capital gain. The amount realized was $169,000. Vacant land is not depreciable, so its basis was the $110,000 cost. Thus, there is a $59,000 gain ($169,000 - $110,000). The vacant land is personal-use property held as a capital asset. Since the property was held for over 12 months and sold after May 5, 2003, it is included in the 15% basket.

12. Mr. Blonde acquired a building to use in his business. The purchase price was $650,000, which he paid for by assuming the remaining $500,000 on the seller's mortgage and with $150,000 cash. He also paid $5,000 in attorney fees, $7,600 for a flood insurance policy, and $1,600 in title fees.

$656,600. The basis of a property is its original purchase cost, including any debt to which the property is subject. Also included are amounts paid in connection with the acquisition of the property. Attorney and title fees are generally classified as amounts paid in connection with the acquisition of property, but flood insurance is an expenditure related to using the property, not its acquisition.

2. New machinery purchased by CD, Inc., from an unrelated party on May 21, 2019, for $76,000. CD elects to deduct the maximum amount and has $210,000 in taxable income. Note that Sec. 179 election has been made.

$76,000. A taxpayer may elect to deduct all or part of the cost of Sec. 179 property acquired during the year. For 2019, the deduction may be for no more than either $1,020,000 minus the excess of Sec. 179 costs for the year over $2,550,000 or taxable income from the active conduct of any trade or business during the tax year. Taxable income is $210,000, allowing the entire cost to be deducted.

5. Adam Samuel Corporation purchased real property for $740,000. A year later, Adam Samuel had to pay $31,000 in taxes to the city where the property was located for the city's plan to refurbish the neighborhood, resulting in an increase in value.

$771,000. Taxes assessed for local benefit that tend to increase the value of real property are added to the property's adjusted basis. Thus, the adjusted basis would be the original purchase price of the property plus the taxes paid.

4. Beatrice received some antique jewelry as a gift from her mother. At the date of the gift, the fair market value of the jewelry was $10,000 and Beatrice's mother's basis in the jewelry was $9,800. No gift taxes were paid.

$9,800. When a gift is made, the basis in the hands of the recipient is equal to the adjusted basis of the donor at the time of the gift, increased by any gift tax paid attributable to appreciation.

On January 10, 2019, Joe gave his wife, Dale, a diamond necklace with a fair market value of $11,000. Joe received the necklace in 2018 as part of an inheritance when the basis was $5,000 and the fair market value was $8,500. No gift tax was paid. Dale sold the necklace on December 10, 2019, for $14,200.

2019 gift amount subject to tax: $0. Transfers to spouses are reduced first by the annual exclusion ($15,000 for 2019), and then any remaining amount is eliminated by the marital deduction. The diamond necklace did not exceed the $15,000 exclusion amount for gifts. Thus, the diamond necklace will not be subject to a gift tax. 2019 gain (loss): $5,700. When Joe inherited the necklace, his basis in the necklace becomes the fair market value (FMV) ($8,500). The donee's (Dale's) basis in property acquired by gift is the donor's (Joe's) basis of $8,500, increased for any gift tax paid ($0) attributable to appreciation. Therefore, when Dale sells the necklace, she will have to recognize a gain. The amount of gain is $5,700 ($14,200 sale price - $8,500 donee's basis).

On May 1, 2019, Johann gave Jeff 1,000 shares of stock when the shares were valued at $16 per share. Johann's basis was $22,000. No gift tax was paid. On May 15, 2019, Jeff sold 400 shares for $13 per share.

2019 gift amount subject to tax: $1,000. Johann gave Jeff 1,000 shares of stock when the FMV was $16 per share, for a total value of $16,000. The taxable amount is $1,000 ($16,000 FMV of the shares - $15,000 annual exclusion). 2019 gain (loss): $(1,200). Because the FMV on the date of gift ($16) is less than the donor's basis ($22), and the property is later transferred at a loss (sold for $13 per share), the FMV ($16) at the date of the gift is used as the donee's basis. On May 15, Jeff sold 400 shares for $13 per share and will recognize a loss of $1,200 [(400 shares × $13) - (400 shares × $16)].

On March 15, 2019, Todd gave Sara property with a fair market value of $200,000 when the adjusted basis was $160,000. Upon transfer, Todd paid $66,600 of gift tax related to the gift. Sara later sold the property on November 11, 2019, for $250,000.

2019 gift amount subject to tax: $185,000. The property given to Sara by Todd has a fair market value of $200,000, which exceeds the $15,000 exclusion amount for gifts. Therefore, $185,000 ($200,000 FMV - $15,000 annual exclusion) of the property will be subject to the gift tax. 2019 gain (loss): $75,600. The donee's basis in property acquired by gift is the donor's basis, increased for any gift tax paid attributable to appreciation. The donee's basis ($160,000) is increased by $14,400 {$66,600 gift tax paid × [($200,000 FMV at time of gift - $160,000 donor's basis) ÷ ($200,000 FMV at time of gift - $15,000 annual exclusion)]}. Therefore, the recognized gain on the sale is $75,600 [$250,000 - ($160,000 + $14,400)].

On February 15, 2019, Ruby gave Mark land valued at $90,000. Ruby's adjusted basis in the property was $80,000. No gift tax was paid. On December 22, 2019, Mark sold the property for $115,000.

2019 gift amount subject to tax: $75,000. The land given to Mark by Ruby has a fair market value of $90,000, which exceeds the $15,000 exclusion amount for gifts. Therefore, $75,000 ($90,000 FMV of the land - $15,000) will be subject to the gift tax. 2019 gain (loss): $35,000. The donee's basis in property acquired by gift is the donor's basis ($80,000), increased for any gift tax paid ($0) attributable to appreciation. Therefore, when Mark sells the land, he will have to recognize a gain of $35,000 ($115,000 sale price - $80,000 donee's basis).

Wash Sale Rules: JP undertook the following share transactions: On January 1, Year 1, JP purchased 30 shares of Micron Co. for $5 per share. On June 30, Year 2, JP sold all 30 shares of Micron Co. for $3 per share. On July 15, Year 2, JP purchased 20 shares of Micron Co. for $2 per share. On July 17, Year 2, JP sold 20 shares of Micron Co. for $2.50 per share. On August 22, Year 2, JP purchased 50 shares of Micron Co. for $3.75 per share.

Wash Sale (7 Gradable Items) June 30, Year 2: Basis in shares: $150. When a taxpayer acquires stock, the taxpayer's basis in the stock is initial cost. Because JP purchased 30 shares of Micron Co. for $5 per share, JP's basis in shares is $150 ($5 × 30 shares). Realized gain (loss): $(60). Because JP sold shares at a lower price than the cost, JP realized a loss of $60 [30 shares × ($3 - $5)]. Recognized gain (loss): $(20). A current loss realized on a wash sale of securities is not recognized. A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. JP sold 30 shares at a loss on June 30, Year 2, and repurchased 20 shares within 30 days on July 15, Year 2. Thus, 20 shares are considered wash sales, and the realized loss for the 20 shares are disallowed. Because JP had a realized loss of $60 for 30 shares, realized loss per share equals $2 ($60 ÷ 30 shares). Disallowed loss for 20 shares is $40 ($2 × 20 shares). Subtracting the disallowed loss of $40 from the realized loss of $60, JP recognized a loss of $20 on June 30, Year 2. July 17, Year 2: Basis in shares: $80. To calculate the basis, the disallowed loss is added to the basis of the stock purchased in the wash sale. JP purchased 20 shares for $2 per share in the wash sale and has a disallowed loss of $40. Thus, JP's basis is $80 [($2 × 20 shares) + $40 disallowed loss)]. Realized gain (loss): $(30). JP sold 20 shares for 2.5 per share. Thus, JP realized a loss of $30 [($2.5 × 20 shares) - $80 basis]. Recognized gain (loss): $(30). JP recognized a loss of $30. August 22, Year 2: Basis in shares: $188. Because JP purchased 50 shares for $3.75 per share, JP's basis on August 22, Year 2, is $188 ($3.75 × 50 shares).