On December 1, Allison reviews her investment portfolio and finds out that she h
ID: 2543677 • Letter: O
Question
On December 1, Allison reviews her investment portfolio and finds out that she has had a very profitable year. To offset some of her gains, Allison sells 100 shares of Little Bear Corporation for $10,000. She purchased those shares for $15,000 two years earlier. On December 25 of the same year, Allison reads a newspaper article indicating that the price of Little Bear Corporation is expected to increase substantially. Second-guessing the wisdom of selling her previous shares of Little Bear stock, she purchases 100 shares of Little Bear Corporation for $8,000. What are the tax consequences to Allison this year?
A $5,000 realized, but not recognized loss.
An $8,000 realized and recognized loss.
A $5,000 realized and recognized loss.
A $7,000 realized, but not recognized loss.
A.A $5,000 realized, but not recognized loss.
B.An $8,000 realized and recognized loss.
C.A $5,000 realized and recognized loss.
D.A $7,000 realized, but not recognized loss.
Explanation / Answer
Answer
A $5,000 realized, but not recognized loss.
Reason: This option is correct because of applicablity of Wash Sale Rule .This rules is in Section1091 Internal Revenue Service (IRS). A wash sale is a sale of a security (for example stocks, bonds, options, etc.) at a loss and repurchasing the same or substantially identical security within 30 days before or after this sale.
"Section1091 Internal Revenue Service (IRS) Wash sale regulations" protect against an investor who holds an unrealized loss and wants to make claim as a tax deduction within the current tax year. The same security is then repurchased in the hope that it will recover its previous value, which would become taxable only in some future tax year.
So here the realized loss is = $15,000 -$ 10,000 =$ 5,000
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