A taxpayer sells 100 shares of TechCo stock for a loss of $5,000 on December 15, Year 1. On January 5, Year 2, the taxpayer purchases 100 shares of TechCo stock. What is the tax treatment of the loss in Year 1?

Answer options:

Deductible as a capital loss in Year 1.

Permanently disallowed.

Disallowed in Year 1 and added to the basis of the new shares.

Deductible in Year 2.

How to approach this question

Identify the Wash Sale (purchase within 30 days of sale). Loss is disallowed and added to basis of replacement stock.

Full Answer

C.Disallowed in Year 1 and added to the basis of the new shares.✓ Correct

IRC §1091. A wash sale occurs if substantially identical stock is bought within 30 days. The loss is disallowed and added to the basis of the replacement stock.

Common mistakes

Thinking the loss is permanently lost or deductible in the year of repurchase automatically.

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