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REG Practice Questions: Calculating the Basis of Stock Acquired Through a Wash Sale
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on calculating the basis of stock acquired through a wash sale. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-practice-questions-explained-calculate-the-basis-of-stock-acquired-through-a-wash-sale/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 0:00 Intro 00:43 Question 1: Calculating the how much of a loss is deductible after a wash sale 03:56 Question 2: Calculating a disallowable loss from a wash sale 05:57 Question 3: Calculate the holding period of new stock purchased after a wash sale 08:59 Question 4: Wash sale rules between spouses 11:15 Question 5: Calculating partial allowable losses after a wash sale 14:34 Pillar Topics
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Hi, I'm Logan, and in today's video, we're going to be covering how to calculate the tax
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basis of stock acquired through a wash sale. If this is the first thing you're seeing from us
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our approach is focusing on the questions first to learn from the material. So that's what we're
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going to be doing today. We're going to be jumping into some questions to learn how to calculate
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the tax bases of stock acquired through a wash sale. If you want to learn more about our strategies
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be sure to go to superfastcpa.com or go to the link in the description. It'll be like this
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and we have a free webinar there that teaches the six key ingredients to passing the CPA exam
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One more thing about this video, I will only be covering five questions in this video
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but Superfast CPA members will be able to access the full video that has 10 questions
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All right, with that all said, let's go ahead and dive into the questions. Okay, question one
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Emily had the following transactions with Vertex Inc. Common Stock during the year
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February 10th, purchased 400 shares at $40 each. April 17th sold 400 shares at $35 each. May 10th, purchased 300 shares at $33 each, and December 1st
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sold 200 shares at $30 each. So what is Emily's deductible capital loss? All right, so, you know
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we're jumping into this. We don't know anything about wash sales necessarily. So take a second
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make sure you understand what this question is asking, maybe even pause the video. And when you're
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ready, go ahead and come back and we will look at the answer. All right. So the answer is 2100. So let's
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learn why. To determine Emily's deductible capital loss, the wash sale rule must be considered
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The wash sale rule, this allows a capital loss deduction for stock or security sold at a loss
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if identical or substantially identical stock or securities are purchased within 30 days before
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or after the sale. Okay, so that's interesting. So it's 30 days before or after. The loss from
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April 17th is calculated as foreign shares times the $5 loss per share. So that's a $2,000 loss and that makes
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since Emily repurchased 300 shares within 30, within less than 30 days after the sale
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the loss on these 300 shares is disallowed under the wash sale rule. The loss for these shares is adjusted to the basis of the new shares
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Okay, so the loss on the remaining 100 shares is $500 because these are the 100 shares that
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were not disallowed. The loss on these 100 shares was allowed, so $500 was allowed
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And then for the sale here, there was a $1,600 loss. But you'll notice here that the basis for this is now different
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So let's go ahead and read why or what happened. The adjusted basis is the original purchase price, which is the plus the disallowed loss per share due to the wash sale
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And we know that it was $5 per share that was disallowed for the shares that were disallowed
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So we add that to this original price. So $33 plus the $5, and that equals $38
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So the total deductible capital loss considering the adjusted April loss and the December
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loss is the $500 that was allowed after the wash sale and then the $1,600 from the
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December loss. So the total is $2,100. So let's kind of look at that a little bit more again
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So again, I feel like this makes sense. You know, see, she bought back 300 of the shares that she sold within 30 days
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So 300 of them were disallowed or the loss from them was disallowed
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Only 100 of the shares here had an allowable loss. So that's why there was 500 there
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But you also take the disallowed loss share, so the $5 loss from each of the shares
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and you add that to the basis for the next sale. And you add that to the basis for the next sale to determine what that loss was
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So it kind of carries over. So that's just the beginning. You know, you might not still fully understand what's going on
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But as you'll see throughout the rest of these questions, questions that we're going to do. It builds on each other and by the end of even just doing
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five questions or 10 questions, you'll know a lot more about wash sales. So let's go ahead and
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go to the next question. Okay, here's the next question. During the current fiscal year, a taxpayer
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recorded the following transactions for Blue Enterprises Inc. July 20th, 500 shares were purchased at
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per share August 15th 500 shares were purchased at per share September 5th 500 shares sold at per share And then the question is the
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the 500 shares sold on September 5th had been acquired on July 20th
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Okay, so it's just clarifying there that these ones that were sold were these ones
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not these ones. What is the maximum amount, if any, that the taxpayer can deduct in the current year
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Okay, so we already learned that wash sales have to do with
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purchasing similar stock 30 days before or after. So this is definitely within 30 days
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You know, these aren't, these, you know, July and September aren't, but this August is 30 days
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within 30 days of the September date. So just based off that, there is going to be a wash sale
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and maybe all of it will be disallowed. Let's learn from it. So maybe pause the video just to make
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sure you know what's going on and then come back and we'll look at the answer. Okay
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The sale of Blue Enterprise's stock on September 5th constitutes a wash sale
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Okay, so we were right about that. The stock was sold at a loss, so $25, less $45, and that makes sense, a $20 loss between the 25 and the 45
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And identical stock was bought within 30 days before or after, which is this August 15th
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So the deduction of the $10,000 loss is all disallowed because the same amount of shares, 500 shares, was purchased within 30 days
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and the rest of the choices are incorrect because they're saying that there is a portion of it that is still deductible
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But we know that all of it was disallowed because the same amount of shares was purchased 30 days, within 30 days prior to this sale right here
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All right, that's pretty straight. That was a little bit more straightforward. Now, let's go on to the next question and see if we can learn some more
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Okay, here's the next question. On June 15th, 2022, Linda and her husband, Gary, each purchased 600 shares of Falcon Enterprises stock at $14
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per share. Okay, so there's two people involved here. A year later, the stock price started to decline
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On July 10th, 2024, Linda sold all of her 600 shares at $12 per share, realizing a loss
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Gary held onto his shares. However, since, sensing a further decline, Gary decided to sell
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$300 of his shares at $11 per share on July 20th, 2024. To take advantage of the low price
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Linda purchased 400 shares at $10 per share on August 5th, 2024, which is within 30 days of Gary's sale
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And that's nice that we put that in. And that's nice that's in there
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We know that it's within 30 days easily. Calculating the holding period for the 400 shares
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So we need to calculate the holding period for the 400 shares Linda purchased on August 5th, 2024
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Okay. So, okay. So this is asking a completely different question. We're not trying to figure out what is disallowed, what the loss is necessarily
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We might still have to calculate that. But we're trying to figure out the holding period for Linda's purchased shares on August 5th
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So go ahead and pause, read through this, see if you can kind of guess what might happen
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and when you're ready, we'll come back and look at the answers. And look at the answers
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Okay. So out of these, C is the correct answer. The holding period for 300 of the 400 shares
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begins on June 15th because of the wash sale involving Gary shares, and the remaining 100 shares
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begins on August 5th. Okay, so let's read why. So it looks like it was partial. The wash sale rule
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applies when stock is sold at a loss. Okay, so we know that. In this case, Linda's purchase of 400 shares
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is within 30 days of Gary's sale of 300 shares, triggering the wash sale rule. According to IRS
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guidelines, the disallowed loss from a wash sale is added to the cost basis of the new stock
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and the holding period of the new stock includes the holding period of the stock sold. Okay
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so it takes on the holding period of, or it adds the holding period of the wash sale stock that
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affected it. So let's take a look at how that affects it. So for 300 of the 400 shares
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she purchased on August 5th, they're affected by his wash sale right here on July 20th
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The holding period of these 300 shares would include Gary's original holding period
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which started on June 15th, 2022. And we know that because they both purchased these
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shares back in June 15 For the remaining 100 shares Linda purchased these shares are not affected by the wash sale because again it didn there was only 300 because they exceed the amount Gary sold Therefore their holding period begins on August 5 2024
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The date Linda purchased them. So, that's why C is the correct answer
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Because for the 300 that were affected by his wash sale, take on his holding period, which was June 15th
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And then for the remaining that weren't affected by the wash sale, they still just have the August 5th, 2024 holding period
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date. Okay. Not only do wash sales affect losses, but they can also affect the holding period
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So that's another good thing that we learned there. All right, let's go to the next question
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In December year one, Jamie sold 250 shares of CloudNet Corp at a loss of $12 per share
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Two weeks later in January year two, Jamie's spouse, Chris, purchased 250 shares of CloudNet Corp for $30 per share
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So, of course, considering the wash sale rule, how should Jamie report this loss on their year one tax return
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because, you know, they're married. And they're, so it's assuming here that they're filing jointly
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Okay. So we already know that spouses affect each other. In fact, it kind of seems like they're treated as the same person when it comes to
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wash sale rules. So definitely within the 30 days, because it was only two weeks later, he purchased
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similar shares. So that's definitely going to affect this loss that Jamie would have had
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And it is the same amount of shares. So it's probably all going to be disallowed. So let's go ahead and take a look at it
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When you're ready, you know, if you needed to pause, That's great. And now let's go ahead and look at the answer. Okay, so yep, we were right. Zero of it is
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deductible. Oh, and then, but it does adjust the basis. So let's, so let's learn a little bit more about that
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Jamie's calculated loss is 12 times 250, so $3,000 loss. However, because Chris, Jamie's spouse purchased identical
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shares within 30 days after Jamie's sale, but in the next tax year, the loss is disallowed for
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year one under the wash sale rule. So even though it's in different tax years, it does affect it
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because it's within the 30 days. The loss must be added to the basis of the shares Chris purchased
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effectively deferring the loss to potentially reduce any gain or increase any loss when those shares are sold
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Okay, so this $3,000 loss that was disallowed would be added to the basis for Chris's stocks that he or shares that he purchased
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So we can kind of look at that really quick. So $250 times $30
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Let's hurry and do that math right here. So his basis would have been $7,500
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Now we have to add this disallowed loss to his basis. So from what we've learned so far, his basis should be the $7,500 plus, oh, whoops, his basis
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should be the $7,500 plus the $3,000 that was disallowed. Didn't ask for that, but I think that's what it's trying to get at here
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All right, let's go on to the next question. And here's the next question. And here's the next question. In the current tax year, Michael conducted several transactions involving
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the shares of XYZ Corporation as follows. So on February 1st, he purchased 300 shares at $30 per share
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He sold these 300 shares on July 15th at $27 per share. On August 5th, within 30 days of the sale
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he repurchased 150 shares at $28 per share. And finally, on November 25th, Michael sold 150 shares at $26 per share
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So assuming no other transactions, what's his deductible capital loss for the tax year
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Okay, so this is similar to what we've done before. So let's take, so let's think about this for just a second
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So he would have had a loss of $3 times $300. So that's $900
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So he would have had a loss of $900 per share. But these were purchased within 30 days of that sale
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So probably half of that loss is not going to be deductible, probably about $450 of it
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And then we know that. whatever that the disallowed loss is probably going to be added to the basis later on
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So that's a few things to think about before we jump in. Pause the video if you need to
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Maybe even at this point since we're five questions in, try to figure out the solution
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for yourself. Then when you ready come back and we look at the answer All right let look at the answer So Okay So to arrive at the correct answer we need to apply the wash sale rule Yep we know that
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In this case, Michael's repurchase of 150 shares within 30 days of the sale triggers the wash
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rule for those shares. Okay, so let's break that down. So just like I was saying, yep
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there would have been a $900 loss. However, since Michael repurchased 150 shares within 30 days
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not all of that is immediately deductible. So half of it is not deductible
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or half of it is disallowed. And then obviously nothing immediately happens right there on August 5th
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And then for the loss on the December 25th sale, there would have been a $600 loss. But we need to
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change the basis, if you remember, because it's not only the original purchase price
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but you also, because it's not only the original purchase price, but you also add the
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disallowed loss to it, which the disallowed loss would have been $3 from the 150 shares that
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had a disallowed loss on them. So $28, let's let, you know, let's just read through that
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However, the basis of these shares needs to be adjusted due to the disallowed loss from the wash sale. So adjusted basis is the $28 purchase price, right
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Mentioned right there. Plus the $3 of disallowed loss. So that adds up to $31 per share
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So now the deductible loss for this sale on November 25th is 150 shares multiplied by $31
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adjusted basis instead of the $28 purchase price. less the $26 sales price, and that comes out to $750
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So the total deductible capital loss for the tax year is $450, and so that's the half that
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was allowed from the wash sale, and then $750 from the November sale
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And the $750 was, it was originally $600, but it was affected by the wash sale previously
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and that disallowed loss basis had to be added to the sale on November 25th to decide what
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that loss would have been. So yeah, that makes sense why it would be $1,200. Before we move on
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let's do one more part of the process, and that's making pillar topics. If you're unfamiliar
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with what pillar topics are, again, this is a part of the super fast CPA strategy. Because we're
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going through the questions as our main learning tool, we try to pick out the main things that we're
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supposed to be learning. You know, the main two or three things or the main two or three pillar topics
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that we're supposed to be learning from these questions so that we can kind of note that we're
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that and take that forward and add that to our toolkit to pass the exam
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Okay, so let's go ahead and make the pillar topics. So first thing that we learned, wash sale rules apply if there is a loss on a sale, and within 30
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days before or after, and I think that could be something that could be, that could catch you
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is it could also be before, not just after. Within 30 days before or after, can, oh wait, there is a purchase of similar or identical stock
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Yeah, so that's when it applies. This can disallow some of the loss or all
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This can also affect the folding period of future purchases, and it can also affect the folding period of, oh, whoops, affect the basis of future purchases
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and sales. Okay, so, you know, and again, pillar topics doesn't have to be super in-depth, or it can be
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if you want, if you want to make it really detailed, but the idea is to kind of just pull out
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the basic topics, the basic concepts that you were supposed to learn from doing those questions
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All right. I'm going to stop right there. As a reminder, in this video, we're only doing five questions
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but in the full video that members have access to, I will do 10 questions. If you liked this video
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make sure to comment, to like, to share with anybody you know who is going through the CPA exams
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Just as a reminder, we have a free webinar training on superfastcpa.com, and again, that's in the
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description, where we teach the six key ingredients to passing the CPA exam
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You on the lookout for more videos like this from us, and we'll see you in the next one
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