A taxpayer sells stock for a loss of $5,000 on May 1. On May 15, the taxpayer purchases substantially identical stock. Which of the following statements correctly describes the tax treatment of the loss?

Answer options:

The loss is recognized in the current year.

The loss is permanently disallowed.

The loss is disallowed and added to the basis of the new stock.

The loss is suspended and can only be used against future gains from the same stock.

How to approach this question

Identify Wash Sale (Buy within 30 days +/- of Sale). Result: Loss disallowed, Basis of new stock increased.

Full Answer

C.The loss is disallowed and added to the basis of the new stock.✓ Correct

Under IRC §1091 (Wash Sales), if substantially identical stock is purchased within 30 days before or after the sale, the loss is disallowed. The disallowed loss is added to the basis of the replacement stock.

Common mistakes

Thinking the loss is lost forever.

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