Assume James purchased 1000 shares Microsoft Inc. stock on Jan. 12, 2004 for $28,000. On May 12, 2005 he sells

Question

Assume James purchased 1000 shares Microsoft Inc. stock on Jan. 12, 2004 for $28,000. On May 12, 2005 he sells it for $25,000. On June 1, 2005 he buys back 700 shares of Microsoft stock for $15,000. Discuss and explain the tax ramifications to James on his 2005 federal Income Tax return.




Assume he also purchased 100 shares of IBM on May 13, 2005 for $8,000 and sold it for $14,000 on October 12, 2005. How does this transaction combine with the first transaction?

Answer 1

See the attached reference to 1040 schedule D instructions. The 700 shares of MSFT he bought back is considered a "wash" sale, since the buyback took place less Than 30 days from the sale. There is a section on "Wash Sales" in these instructions. Just do what it says. The IBM transaction is a short term gain to be entered on 1040 schedule D part I. All of these transactions are entered on 1040 Schedule D. Just work through the instructions

Answer 2

This sounds like a homework question. I will answer for federal only. First off, both of these sales occurred less than 2 years after the purchase so James is going to get hosed on any gains he made because they are short term. The good news is that James has a loss of $3,000 on Microsoft that he can use to offset the gain of $6k on IBM. A passive loss (ie, a loss obtained from anything other than actual work) cannot be used to offset non-passive income, so having the gain and loss in the same period works to James' advantage. Although, I do believe there is some minimum amount of passive loss an individual can take even if he has no passive income, but I don't quite recall- I haven't done taxes in years. The purchase of 700 shares on Microsoft is a separate transaction and has no tax ramifications this year.

Answer 3

A loss on the sale of 300 shares of Microsoft will be allowed on your tax return. The loss on the additional 700 shares will not be allowed because you purchased 700 shares of the same stock within a period that begins 30 days before and ends 30 days after the sale. This is called a wash sale and the loss adjusts your basis in the 700 shares you purchased on June 1st.
The IBM sale results in a short term gain. The loss on the 300 shares can be used against this gain thereby reducing the short term gain subject to tax.

Answer 4

Mr. CPA: I think you forgot about the wash sale rules. The same stock was repurchased within 30 days of incurring the loss. If applicable, the loss is not deductible and it would be added to the basis of the subsequent repurchase.

Answer 5

see above re first transaction. max of three,000 is ideal. despite the indisputable fact that, carryover is infinite. the 2d transaction has no outcomes on a tax go back because there's no cognizance journey.