In this video, we walk through 5 REG practice questions demonstrating how to calculate the basis of stock acquired through a wash sale. These questions are from REG content area 3 on the AICPA CPA exam blueprints: Taxation of Property Transactions.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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How to Calculate the Basis of Stock Acquired Through a Wash Sale
Calculating the tax basis of stock acquired through a wash sale involves understanding the wash sale rule and its implications on your tax obligations. The wash sale rule comes into play when you sell a stock at a loss and then repurchase the same stock, or one substantially identical, within a 30-day period before or after the sale. When this happens, the loss from the sale cannot be claimed for tax purposes. Instead, the disallowed loss is added to the cost basis of the repurchased stock, which adjusts its tax basis. This rule is designed to prevent taxpayers from claiming tax deductions for losses on securities that they still effectively own.
Here’s how to calculate the tax basis of stock acquired through a wash sale:
Step 1: Identify a Wash Sale
- A wash sale occurs if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale.
Step 2: Calculate the Disallowed Loss
- If you have a wash sale, the loss on the sale is disallowed for tax purposes. This is the amount you cannot deduct from your taxes.
Step 3: Adjust the Cost Basis of the Repurchased Stock
- Add the disallowed loss to the cost basis of the repurchased stock. This new cost basis will be used to determine the gain or loss when the repurchased stock is eventually sold.
Step 4: Adjust the Holding Period
- The holding period of the repurchased stock includes the holding period of the stock sold in a wash sale. This could affect whether future gains are classified as long-term or short-term.
Example Calculation
Suppose you bought 100 shares of XYZ stock at $50 per share ($5,000 total). Later, you sold these shares at $40 per share, totaling $4,000, resulting in a loss of $1,000. Within 30 days of this sale, you repurchase 100 shares of XYZ stock at $45 per share ($4,500 total).
- Identify the Wash Sale: You sold shares at a loss and repurchased shares in the same company within 30 days, triggering the wash sale rule.
- Calculate the Disallowed Loss: The loss of $1,000 on the sale is disallowed for tax purposes because of the wash sale rule.
- Adjust the Cost Basis of the Repurchased Stock:
- Original purchase price of the repurchased shares: $4,500
- Add the disallowed loss: $1,000
- New cost basis: $4,500 + $1,000 = $5,500
- Result: The cost basis of your repurchased XYZ stock is now $5,500 instead of $4,500. When you eventually sell these shares, the gain or loss will be calculated based on this adjusted cost basis.
This calculation ensures that the tax benefit of the loss is not entirely lost but is deferred until the repurchased stock is sold. By adjusting the cost basis of the repurchased stock, the wash sale rule aims to prevent taxpayers from benefiting from a tax deduction for a loss without substantially altering their position in the security.
