Transcript Property Transactions: Determination of Basis and Gains

CCH Federal Taxation
Basic Principles
Chapter 10
Property Transactions:
Determination of Basis and
Gains and Losses
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Chapter 10 Exhibits
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
General Rule for Any Type of Disposition
Seller's Amount Realized
Adjusted Basis
Cost of Improvements
Holding Period—General Rules
Lump-Sum Purchases of Several
Properties
Selling Taxable Stock Dividends
Selling Identical, Nontaxable Stock
Dividends
Selling Nonidentical, Nontaxable Stock
Dividends
Selling Nontaxable Stock Rights Less
Than 15% FMV Original Stock
Chapter 10, Exhibit Contents
11. Selling Nontaxable Stock Rights 
15% FMV Original Stock
12. Exercising Stock Rights—Tax
Treatment for New Stock
13. Selling Gifts by Donees
14. Selling Property by Related Parties
15. Selling Personal-Use Conversions
16. Selling Inherited Property
17. Selling Common Stock
18. Wash Sales—General Rules
19. Wash Sales—Example
CCH Federal Taxation Basic Principles
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General Rule for Any Type of Disposition
–
=
Amount realized (i.e., fair market value of all consideration
received)
Adjusted basis of all consideration given
Realized gain or loss (i.e., economic accession to or reduction of
wealth)
or

Recognized (i.e., taxable) gain or loss
Deferred (i.e., postponed) gain or loss
or
Exempt (i.e., tax-free) gain or disallowed loss
Chapter 10, Exhibit 1
CCH Federal Taxation Basic Principles
3 of 51
Seller's Amount Realized
Cash received
+
+
Fair market value (FMV) of property received
FMV of services received
+
–
Liabilities of seller assumed by buyer (i.e., seller’s “debt relief”)
Selling expenses (includes brokerage, advertising, and legal fees paid
by seller)
Amount realized
=
Chapter 10, Exhibit 2
CCH Federal Taxation Basic Principles
4 of 51
Adjusted Basis
Cost (or other adjusted basis) on date of acquisition
+
Cost of improvements
+
Buying expenses, including commissions, legal, title search, surveys
and appraisal fees paid at date of original purchase
Amount of loan assumption (does NOT include new financing at
original purchase date!)
+
_
–
–
Depreciation (allowable depreciation reduces basis, even if not
taken)
Insurance proceeds received on partial destruction casualties
Deductible loss on partial destruction casualties
+
Capital gain on partial destruction casualties
=
Adjusted basis
Chapter 10, Exhibit 3
CCH Federal Taxation Basic Principles
5 of 51
Cost of Improvements
Repair and Maintenance Deductions vs. Capital Expenditures
Tax Treatment
Repair and Maintenance
Deductible Unless Personal Use
Capitalized
Roofing
Patching leaks
Adding new roof
Wiring
Mending
Major replacement
Plumbing
Replacing segments
Replacing systems
Plastering
Filling cracks
Installation, renovation, and
remodeling
Paving and
resurfacing
Patching potholes
Initial paving, major
resurfacing
Fire damage
Cleanup, removal, and temporary
facilities
Modernization incident to
restoring former facilities
Land clearing
Ordinary maintenance, bushhogging
Preparing building site for
construction
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Chapter 10, Exhibit 4
CCH Federal Taxation Basic Principles
Holding Period—General Rules
Holding Period Beginning Date. The holding period of property usually
begins on the DAY AFTER the acquisition date.
Exceptions to the “Day After” Rule. With the six types of property
below, holding period begins on the DAY OF acquisition, NOT the day
after acquisition.
1. Gifts if basis is determined using FMV
2. Nontaxable stock rights if basis is determined under the
allocation method
3. Taxable stock rights
4. Short sales against the box with a tainted holding period
5. Conversions with conversion fees
6. Taxable conversions
Chapter 10, Exhibit 5a
CCH Federal Taxation Basic Principles
7 of 51
Holding Period—General Rules
Holding Period Computation by Months. Generally, holding period is
computed by calendar months and fractions thereof, rather than by
days (IT 3985, CB 1949-2 51).
Example: A taxpayer buys an asset on December 2 and sells it on June
2 of the next year. Since the holding period begins on December 3, the
day after acquisition, the asset is held for exactly 6 months (i.e., from
December 3 to June 2). The actual number of days held, 182 days if the
year is a nonleap year, is irrelevant. (L Anderson, TC Memo. 1974-49,
aff’d on this point (CA-9) 1975.)
Chapter 10, Exhibit 5b
CCH Federal Taxation Basic Principles
8 of 51
Holding Period—General Rules
Examples Illustrating the General Rule for Computing Holding Period
Actual Days Held
Holding Period
Acquisition
Date
Sale Date
Beginning
Date
Ending Date
(Generally
Irrelevant for Tax
Purposes)
Holding Period
for Tax Purposes
Dec. 31,
2002
Jan. 31,
2003
Jan. 1,
2003
Jan. 31,
2003
31
1 mo.
Shortterm
Jan. 30,
2003
March 1,
2003
Jan. 31,
2003
March 1,
2003
30
1 mo.,
1 day
Shortterm
March 3,
2002
March 3,
2003
March 4,
2002
March 3,
2003
365
12 mos.
Shortterm
March 3,
2002
March 4,
2003
March 4,
2002
March 4,
2003
366
12 mos.,
1 day
Longterm
Chapter 10, Exhibit 5c
CCH Federal Taxation Basic Principles
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Holding Period—General Rules
Exceptions to Holding Period Computed by Months.
Exceptions for when the holding period is computed in days,
instead of months include:

Property tax allocations. (Also, recall that the buyer gets
the property tax allocation on the closing date.)

Interest computations on loans with maturities in days.
Loan maturity is stated in the number of days not the number
of months or years (e.g., interest on a 180-day loan is based
on the number of days held; interest on a 6-month loan or a
2-year loan is based on the number of months held).
Chapter 10, Exhibit 5d
CCH Federal Taxation Basic Principles
10 of 51
Lump-Sum Purchases of Several Properties
General Rule. Allocate total cost according to the relative fair market
value of each property.
Example
FACTS: A buyer pays a seller a lump-sum amount of $800,000 for land
tracts A, B, and C valued at $200,000, $300,000, and $500,000
respectively. ($1,000,000 is the total value of the three tracts.)
QUESTION: What is the buyer’s basis in the three tracts?
SOLUTION:
A: $160,000 ($800,000 x [$200,000  $1,000,000])
B: $240,000 ($800,000 x [$300,000  $1,000,000])
C: $400,000 ($800,000 x [$500,000  $1,000,000])
Chapter 10, Exhibit 6
CCH Federal Taxation Basic Principles
11 of 51
Selling Taxable Stock Dividends—Rules
Upon receipt. Stock dividends are taxable as ordinary
income at their fair market value (FMV).
Upon sale. The basis of taxable stock dividends is their fair
market value. Their holding period begins on the day
AFTER receipt (i.e., consistent with the general rule for
holding period).
Chapter 10, Exhibit 7a
CCH Federal Taxation Basic Principles
12 of 51
Selling Taxable Stock Dividends—Example
FACTS:
 1,000 shares of common stock are purchased for $12,000 on March 31, 2003.
 On September 30, 2003, the shareholder receives a 20% taxable common stock
dividend; the FMV is $20 per share.
 On June 30, 2004, the 200 new dividend shares are sold for $30 per share.
QUESTION: Determine the tax treatment for the receipt and sale of the stock dividends.
SOLUTION:
March 31, 2003, receipt: the $4,000 stock dividend is taxable income
$20 per share x (1,000 shares x 20%)
June 30, 2004, sale: $2,000 short-term capital gain
$6,000 sales proceeds – $4,000 basis of new shares
(The beginning holding period date is October 1, 2003, the DAY
AFTER receipt of the stock dividend. A June 30, 2004, sale results in
a short-term holding period.)
Chapter 10, Exhibit 7b
CCH Federal Taxation Basic Principles
13 of 51
Selling Identical, Nontaxable Stock Dividends—Rules
Upon receipt. Stock dividends are not taxable.
Upon sale. Allocate old basis over original and new shares
using the following formula:
Basis per share = old basis (number of original shares +
number of new shares)
(Holding period of original and new shares begins on
DAY AFTER original acquisition.)
Chapter 10, Exhibit 8a
CCH Federal Taxation Basic Principles
14 of 51
Selling Identical, Nontaxable Stock Dividends—Example
FACTS:
1. 1,000 shares of common stock are purchased for $12,000 on March 31, 2003.
2. On September 30, 2003, the shareholder receives a 20% nontaxable common stock
dividend.
3. On June 30, 2004, the 200 new dividend shares are sold for $30 per share.
QUESTION: Determine the tax treatment for the receipt and sale of the stock
dividends.
SOLUTION:
March 31, 2003, receipt: The stock dividends are not taxable.
June 30, 2004, sale: $4,000 long-term capital gain ($6,000 – $2,000).
$2,000 basis of new shares = $10 per share x 200 new shares, where
$10 per share = [$12,000 ÷ (1,000 old shares + 200 new shares)];
(The beginning holding period date is April 1, 2003, the DAY AFTER
receipt of the original stock. A June 30, 2004, sale results
in a long-term holding period.)
Chapter 10, Exhibit 8b
CCH Federal Taxation Basic Principles
15 of 51
Selling Nonidentical, Nontaxable Stock Dividends—
Rules
Upon receipt. Stock dividends are not taxable.
Upon sale. Allocate the original common stock basis
between the number of original common stock shares and the
number of new preferred stock shares using relative FMVs as
of the date of receipt. The holding period of the original
common stock does not change (i.e., it begins on the DAY
AFTER original acquisition). The holding period of the new
preferred stock shares begins on the day after receipt.
Chapter 10, Exhibit 9a
CCH Federal Taxation Basic Principles
16 of 51
Selling Nonidentical, Nontaxable Stock Dividends—
Example
FACTS:
1. March 31, 2003: 1,000 shares of common stock are purchased for $12,000.
2. September 30, 2003: a 10% preferred stock dividend is issued when the FMV of the common
stock and preferred stock shares is $16 and $80 respectively.
3. June 30, 2004: the 1,000 common stock shares and 100 new preferred stock shares are sold for
$20 per share and $100 per share respectively.
QUESTION: Determine the tax treatment for the receipt and sale of the stock.
Chapter 10, Exhibit 9b
CCH Federal Taxation Basic Principles
17 of 51
Selling Nonidentical, Nontaxable Stock Dividends—
Example
SOLUTION:
March 31, 2003, receipt: The stock dividends are not taxable.
June 30, 2004, sale of common stock: $14,000 long-term capital gain
$14,000 capital gain = ($20,000 sales price – $8,000 adjusted basis)
$8,000 adjusted basis = $12,000 x [1,000 common stock shares x $16 per share] ÷ [$16,000 +
(100 preferred stock shares x $80 per share)]
Long-term holding period: The beginning holding period date is April 1, 2003, the DAY
AFTER receipt of the original stock. A June 30, 2004, sale results in a long-term holding
period.
June 30, 2004, sale of preferred stock: $6,000 short-term capital gain
$6,000 capital gain = $10,000 sales price – $4,000 adjusted basis)
$4,000 adjusted basis = $12,000 x [100 preferred stock shares x $80 per share] ÷ [$16,000 +
$8,000]
 Short-term holding period: The beginning holding period date is October 1, 2003, the DAY
AFTER receipt of the preferred stock dividends. A June 30, 2004, sale results in a short-term
holding period.
Chapter 10, Exhibit 9c
CCH Federal Taxation Basic Principles
18 of 51
Selling Nontaxable Stock Rights Less Than 15%
FMV Original Stock—Rules
Basis of the stock rights = 0, but the taxpayer may elect to
special allocation rules as if 15%.
Holding period of nontaxable stock rights is same as the
holding period of the original stock.
Chapter 10, Exhibit 10a
CCH Federal Taxation Basic Principles
19 of 51
Selling Nontaxable Stock Rights Less Than 15%
FMV Original Stock—Example
FACTS:
1. On March 31, 2003, Frost purchased 100 common stock shares at $88 per share.
2. On September 30, 2003, Frost received 100 nontaxable stock rights.
3. Each common stock and stock right is worth $100 and $10 respectively on
June 30, 2003.
4. One stock right enables Frost to purchase common stock share for $90.
QUESTIONS:
Determine (a) the adjusted basis of the new stock rights and the original common
stock shares; and (b) the holding period beginning date of the new stock rights and
original common stock shares.
Chapter 10, Exhibit 10b
CCH Federal Taxation Basic Principles
20 of 51
Selling Nontaxable Stock Rights Less Than 15%
FMV Original Stock—Example
SOLUTION to (a):
Adjusted basis of new stock rights: $0, since their value is < 15% FMV of
common stock [100 stock rights x $10 FMV per share] < [15% x (100 common
stock shares x $100 FMV per share)];
Adjusted basis of original common stock shares: $8,800 (i.e., no change).
SOLUTION to (b):
Holding period of the stock rights and original common stock shares begins on
April 1, 2003.
Chapter 10, Exhibit 10c
CCH Federal Taxation Basic Principles
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Selling Nontaxable Stock Rights  15% FMV Original
Stock
Basis of stock rights =
original basis of common stock x
Basis of common stock =
original basis of common stock x
FMV stock rights
(FMV stock rights + FMV of common stock)
FMV of common stock
(FMV stock rights + FMV of common stock)
Holding period of nontaxable stock rights is same as the holding period of the original stock.
Chapter 10, Exhibit 11a
CCH Federal Taxation Basic Principles
22 of 51
Selling Nontaxable Stock Rights  15% FMV Original
Stock—Example
FACTS:
 On March 31, 2003, Frost purchased 100 common stock shares at $88 per share.
 On September 30, 2003, Frost received 100 nontaxable stock rights.
 Each common stock and stock right is worth $100 and $20 on September 30, 2003.
 One stock right enables Frost to purchase 1 common stock share for $90.
QUESTIONS: Determine (a) the adjusted basis of the new stock rights and the original
common stock shares; and (b) the holding period of the new stock rights if sold on
June 30, 2004.
Chapter 10, Exhibit 11b
CCH Federal Taxation Basic Principles
23 of 51
Selling Nontaxable Stock Rights  15% FMV Original
Stock—Example
SOLUTION to (a):
Basis of stock rights: $1,467 or $14.67 per stock right.
$1,467 = (100 common stock shares x $88 per share) x 100 stock rights x $20 per right
$2,000 + $10,000
SOLUTION to (b):
Basis of common stock: $7,333 or $73.33 per share of stock.
$7,333 =
(100 common stock shares x $88 per share) x 100 common stock shares x $100 per share
($2,000 + $10,000)
Holding period of nontaxable stock rights is long-term (i.e., from April 1, 2003 to
June 30, 2004).
Chapter 10, Exhibit 11c
CCH Federal Taxation Basic Principles
24 of 51
Exercising Stock Rights—
Tax Treatment for New Stock
New Stock
Basis
Taxable Stock Rights
FMV of rights
when received
+
Exercise price
Beginning Holding Begins “on” date of
Period
exercise
Chapter 10, Exhibit 12a
Nontaxable Stock Rights
Adjusted basis of
rights, if any
+
Exercise price
Begins “on” date of
exercise
CCH Federal Taxation Basic Principles
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Exercising Stock Rights—Example
FACTS:
 On September 30, 2003, a taxpayer receives at no cost 100 stock rights valued at $3
per share.
 The stock rights enable the taxpayer to purchase common stock at $15 per share.
 On June 30, 2004, the stock payer exchanges 100 stock rights plus the $1,500 exercise
price for 100 shares of common stock.
QUESTION: What is the tax treatment for the new stock if the stock rights are (a)
taxable upon receipt; and (b) nontaxable on receipt?
New Stock
Basis
Taxable Stock Rights
$18 per share
Nontaxable Stock Rights
$15 per share
($3 FMV of rights when received + $15 ($0 cost of rights when received + $15
exercise price)
exercise price)
Beginning Holding June 30, 2004, the date of
Period
exercise
Chapter 10, Exhibit 12b
June 30, 2004, the date of
exercise
CCH Federal Taxation Basic Principles
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Selling Gifts by Donees
Gift Sales. When a donor gives a donee a gift, the value of the
gift is excluded from the donee’s income. When the donee
later sells the gift property to third party, special rules govern
the determination of the donee’s basis for computing gain or
loss.
Chapter 10, Exhibit 13a
CCH Federal Taxation Basic Principles
27 of 51
Selling Gifts by Donees
Gift Tax. The gift tax can be described as an estate tax for the
living. It is a transfer tax, not an income tax, and is
computed using estate tax rates. For large gifts of cash or
other property, the donor (NOT the donee) may be required
to pay a gift tax and all or a portion of the gift tax may be
added to the donee’s basis.
Chapter 10, Exhibit 13b
CCH Federal Taxation Basic Principles
28 of 51
Selling Gifts by Donees
Donee's Adjusted Basis (AB)
Donee's Holding Period (HP)
“Gain” basis
Same as donor's AB.
“Loss” basis
Lesser of:
If donor's basis is used,
 Donor's basis or
HP = donor's HP.
 FMV at gift date (but use
If FMV is used,
GAIN basis for depreciation.). HP begins ON gift date.
“No gain or
loss” basis
For depreciation, use GAIN
basis.
Same as donor's HP.
Same HP for GAIN basis.
Gift tax rule. When a donee assumes a donor's basis, the basis includes:
[Gift tax paid by donor x (FMV at gift date - Donor's basis at gift date)] ÷ FMV
at gift date
Chapter 10, Exhibit 13c
CCH Federal Taxation Basic Principles
29 of 51
Selling Gifts by Donees—Example
FACTS:
On June 30, 1984, the donor acquires land for $25.
On February 28, 2001, the donor gifts the land to the donee.
Assumption 1: On December 31, 2005, donee sells the land for $32; the
FMV on February 28, 2001, is $35.
Assumption 2: On December 31, 2005, donee sells the land for $24; the
FMV on February 28, 2001, is $35.
Assumption 3: On December 31, 2005, donee sells the land for $20; the
FMV on February 28, 2001, is $22.
Assumption 4: On December 31, 2005, donee sells the land for $23; the
FMV on February 28, 2001, is $22.
Chapter 10, Exhibit 13d
CCH Federal Taxation Basic Principles
30 of 51
Selling Gifts by Donees—Example
SOLUTION:
Assumption 1 Assumption 2
Assumption 3
Assumption 4
Amount realized
$32
$24
$20
$23
Donee's basis for
sale
$25
$25  $25
$25  $22
$25  $22  $25
Realized gain or
loss
$7
($1)  ($1)
($5)  ($2)
($2)  $1  $0
HP beginning
date
7/1/84
7/1/84
2/28/01
7/1/84
Basis for
depreciation
$25
$25
$25
$25
(Note the similarity of gain/loss computations with related party transactions and personal-use
conversions.)
Chapter 10, Exhibit 13e
CCH Federal Taxation Basic Principles
31 of 51
Selling Property by Related Parties
Related-party Sales. When a related party sells to a second
related party at a loss, the related-party loss (but not the gain)
is disallowed, regardless of the reasonableness of the amount.
When the second related party later sells the property to an
unrelated third party, special rules govern the determination of
the second related party’s gain or loss.
Chapter 10, Exhibit 14a
CCH Federal Taxation Basic Principles
32 of 51
Selling Property by Related Parties
Definition of Related Parties.
The following are considered related parties:
 Half-blood relatives (e.g., same mother but different father)
 Ancestral descendants (e.g., parent, grandparent, great-grandparent)
 Entities with common owners owning more than 50% of the entities
 Lineal descendants (e.g., child, grandchild, great-grandchild)
 Owner of more than 50% of a corporation is related to the corporation
 Spouse
 Siblings
(Note that aunts, uncles, and cousins are not included in the definition of related parties.)
Chapter 10, Exhibit 14b
CCH Federal Taxation Basic Principles
33 of 51
Selling Personal-Use Conversions
Personal-use Conversions. A “personal-use conversion” is a
property that has changed in function from personal use to
business or investment use (e.g., a principal residence
converted into a rental house or into business offices).
Special rules must be applied to determine the basis and
holding period of a personal-use conversion when it is sold.
These rules are intended to prevent a taxpayer from converting
a personal-use property that has declined in value, to business
(or investment) use and then selling the property to recognize a
business or capital loss. (Recall that personal-use losses are
generally not deductible.)
Chapter 10, Exhibit 15a
CCH Federal Taxation Basic Principles
34 of 51
Selling Personal-Use Conversions
Adjusted Basis (AB)
Holding Period (HP)
“Gain” basis
AB at conversion date less
accumulated depreciation (but use
LOSS basis for depreciation.)
HP begins on day AFTER
conversion.
“Loss” basis
Lesser of
 AB at conversion date less
accumulated depreciation* or
 FMVat conversion date
HP begins on day AFTER
conversion.
“No gain or
loss” basis
For depreciation, use lesser of
 AB at conversion date or
 FMVat conversion date
HP begins on day AFTER
conversion.
* Accumulated depreciation is determined from the conversion date to the sale date.
Chapter 10, Exhibit 15b
CCH Federal Taxation Basic Principles
35 of 51
Personal-Use Conversions—Example
FACTS:
On June 30, 1984, a lawyer buys a house for $30.
On February 28, 2001, the lawyer converts the house to law offices.
Accumulated depreciation from February 28, 2001, to the date of the sale is $5.
Assumption 1: On December 31, 2005, lawyer sells the house for $32; the FMV on
February 28, 2001, is $35.
Assumption 2: On December 31, 2005, lawyer sells the house for $24; the FMV on
February 28, 2001, is $35.
Assumption 3: On December 31, 2005, lawyer sells the house for $20; the FMV on
February 28, 2001, is $22.
Assumption 4: On December 31, 2005, lawyer sells the house for $23; the FMV on
February 28, 2001, is $22.
Chapter 10, Exhibit 15c
CCH Federal Taxation Basic Principles
36 of 51
Personal-Use Conversions—Example
SOLUTION:
Assumption 1
Assumption 2
Assumption 3
Assumption 4
Amount
realized
$32
$24
$20
$23
Converter's
basis for sale
$25 (= $30 – $5) $25  $25
$25  $22
$25  $22  $25
Realized gain
or loss
$7
($1)  ($1)
($5)  ($2)
($2)  $1 $0
HP beginning
date
3/1/01
3/1/01
3/1/01
3/1/01
Basis for
depreciation
$30
$30
$22
$22
(Note the similarity of gain/loss computations with gift sales and related party
transactions.)
Chapter 10, Exhibit 15d
CCH Federal Taxation Basic Principles
37 of 51
Selling Inherited Property
Heir's basis = “Step-up” or “step-down” basis using FMV of property as
of either:
1. Date of death or
2. If elected by executor (not heir), the earlier of:
a. 6 months after date of death or
b. Date received by heir if before 6 months.
The FMV at the 6-month date may not be greater than the value at the
date of death.
Chapter 10, Exhibit 16a
CCH Federal Taxation Basic Principles
38 of 51
Selling Inherited Property
Holding period = ALWAYS long-term, even if held by heir
for 1 day and then sold.
Special rule. If a donee wills “appreciated” property back
to donor and dies within 1 year of receipt from donor, then
the donor/heir's basis is the donee/decedent's BASIS as of
the date of death (i.e., the original basis), NOT the FMV at
date of death.
Chapter 10, Exhibit 16b
CCH Federal Taxation Basic Principles
39 of 51
Selling Common Stock
Three methods may be used to determine basis:
Specific identification may be used if the certificate
numbers can be identified. (With this method, taxpayers
may select specific shares based on FIFO, LIFO, highest
basis, lowest basis, etc. Average cost is also available if
the shares were bought and sold through a broker or
agent.)
Chapter 10, Exhibit 17a
CCH Federal Taxation Basic Principles
40 of 51
Selling Common Stock
First-In, First-Out may be used if specific shares cannot be
identified. (However, average cost is also available if the
shares were bought and sold through a broker or agent.)
Chapter 10, Exhibit 17b
CCH Federal Taxation Basic Principles
41 of 51
Selling Common Stock
Average cost may be used if the shares were bought and
sold through a broker or agent. (Specific identification is
also allowed if the shares are bought and sold through a
broker or agent, provided that the certificate numbers can
be identified.)
Chapter 10, Exhibit 17c
CCH Federal Taxation Basic Principles
42 of 51
Wash Sales—General Rules
Purpose. To prevent investors from avoiding taxes by
selling at a loss, then buying back identical shares.
Definition. A wash sale is a sale of shares that:
 Realizes a LOSS, and
 Where substantially IDENTICAL SHARES are
BOUGHT within 30 days BEFORE or AFTER
the date of sale (i.e., a 61-day period.)
Chapter 10, Exhibit 18a
CCH Federal Taxation Basic Principles
43 of 51
Wash Sales—General Rules
The following shares are NOT affected by the wash sale
rules:
1. Gifts
2. Nontaxable stock dividends
3. Stock rights
4. Others not covered in this course: warrants, equity
options, and Code Sec. 1256 contracts
Chapter 10, Exhibit 18b
CCH Federal Taxation Basic Principles
44 of 51
Wash Sales—General Rules
Basis of new shares =
Cost of new shares
+
Postponed loss from wash sale of old shares
Chapter 10, Exhibit 18c
CCH Federal Taxation Basic Principles
45 of 51
Wash Sales—General Rules
Holding period. The holding period of new shares
begins on the DAY AFTER the date the sold shares
were first acquired.
Chapter 10, Exhibit 18d
CCH Federal Taxation Basic Principles
46 of 51
Wash Sales—Example
FACTS:
On January 1, 1999, 100 ABC shares are purchased for $200 per share.
On December 10, 2003, 50 ABC shares are sold for $160 per share.
On December 20, 2003, 10 ABC shares are purchased for $140 per
share.
QUESTIONS:
(a) Is the December 10, 2003, sale a “wash sale”?
(b) If so, how much loss is postponed? How much is recognized?
(c) Determine the basis of the December 20, 2003, shares.
(d) Determine when the holding period of the December 20, 2003,
shares begins.
Chapter 10, Exhibit 19a
CCH Federal Taxation Basic Principles
47 of 51
Wash Sales—Example
SOLUTION to (a):
Yes, this is a wash sale because two events occurred:
1. The December 10, 2003, sale resulted in a ($2,000) realized
loss: ($160 x 50 shares) – ($200 x 50 shares)
2. Identical shares were purchased within 30 days of the sale
(i.e., the 10 ABC shares bought on December 20, 2003)
Chapter 10, Exhibit 19b
CCH Federal Taxation Basic Principles
48 of 51
Wash Sales—Example
SOLUTION to (b):
Loss postponed: ($400); Loss recognized: ($1,600)
Only that portion of loss attributable to the wash sale is postponed as
shown below:
Portion attributable to wash sale: ($400) postponed loss
[10 shares/50 shares x (2,000) = (400)]
Portion NOT attributable to wash sale: ($1,600) recognized loss
[40 shares/50 shares x (2,000) = (1,600)]
Chapter 10, Exhibit 19c
CCH Federal Taxation Basic Principles
49 of 51
Wash Sales—Example
SOLUTION to (c):
Basis of December 20, 2003, shares: $1,800
$1,400 [10 shares bought on December 20, 2003 x $140 cost per share]
+ 400 [Postponed loss on December 10, 2003 wash sale, computed
= $1,800 at (b)]
Chapter 10, Exhibit 19d
CCH Federal Taxation Basic Principles
50 of 51
Wash Sales—Example
SOLUTION to (d):
Beginning holding period of the December 20, 2003 shares:
January 2, 1999 (i.e., the holding period “tacks on” to the holding
period of the original shares)
What if 60 shares had been purchased on December 20, 2003?
a. 100% wash sale on December 10, 2003.
b. 100% of the ($2,000) realized loss would be postponed.
c. Basis in 50 new shares would be $9,000 [(50 x $140) + $2,000
postponed loss].
Basis in 10 new shares would be $1,400 [10 x $140].
d. Holding period of 50 new shares would begin on January 2, 1999
(i.e., holding period tacks on to holding period of original shares).
Holding period of 10 new shares would begin on December 21, 2003.
Chapter 10, Exhibit 19e
CCH Federal Taxation Basic Principles
51 of 51