A wash sale occurs when the same securities are purchased 30 days before or after the sale. If a loss results, all or part of the loss is disallowed. If an equal or greater number of the same securities that were sold are purchased, the entire loss is disallowed. If fewer shares are purchased than were sold, part of the loss is disallowed. The disallowed loss is added to the basis of the securities purchased. Read more at https://www.taxreturn247.com.au/
Example 1-total loss disallowed.
On February 15, 2013, Joe sold 200 shares of Microsoft for $7,000 that he purchased on July 15, 2010 for $8,500. On March 10, 2013, he purchased 300 shares for $13,500. Joe’s has a $1,500 long-term loss ($8,500 – $7,000) on the sale. But, since he purchased more shares than he sold within 30 days of the sale, the $1,500 loss is disallowed. The basis of the new shares will be $15,000. ($13,500 + $1,500). The basis per share will be $50 ($15,000/300) and his holding period begins on March 10.
Example 2-partial loss disallowed
On February 15, 2013, Joe sold 200 shares of Microsoft for $7,000 that he purchased on July 15, 2010 for $8,500. On March 10, 2013, he purchased 150 shares for $7,500. The loss disallowed is the ratio of new shares purchased to the number sold multiplied times the loss. In this case, the loss disallowed is 150/200 x $1,500 = $1,125. The basis of the new securities will be $8,625. ($7,500 + $1,125). The basis per share will be $ 58,750 ($8,625/150) and his holding period begins on March 10.
Sale of Gifts
When a taxpayer sells securities that were received as a gift, the gain or loss and holding period depends on whether they were sold for more or less than the donor’s basis (cost or other basis, plus the gift tax paid). The gift tax adjustment depends on the donor’s acquisition date. If the shares gifted were acquired by the donor between 9/2/58 and 12/31/76, the entire amount of gift tax is added to the donor’s basis. If the shares gifted were acquired by the donor after 12/31/76, a portion of the gift tax is added to the donor’s basis. The amount added is the gift tax paid multiplied by the ratio of the donor’s appreciation in value (value at date of gift less cost) divided by the value at date of the gift, less the annual gift tax exclusion-$13,000 for 2012. The gift tax adjustment applies regardless of a gain or loss on the sale.
If the donor realizes a gain (sales price is more than the donor’s basis), the donee’s basis will be the donor’s basis. The donee’s holding period will be the donor’s holding period (from date of acquisition to date of gift) plus the time held by donee. If the donor realizes a loss (sales price is less than the donor’s basis), the donee’s basis for determining the allowable loss, is the lesser of the fair value of the securities at the date of the gift or the donor’s basis. The reason for using the value at the date of the gift, if it is less than the donor’s basis, is that the donee should not benefit (a greater loss) for a decline in value not suffered by the donee (the donor suffered the loss in value while holding the securities).
The holding period of the securities sold by the donee depends on whether the donor’s basis or value at date of the gift is used for the donee’s basis. If the donor’s basis is used, the holding period begins on the donor’s acquisition date. If the value at the date if the gift is used, the holding period begins on the date of the gift.
Example 1- sale for gain-donor acquisition date before 1/1/76.
Colette purchased 1,200 shares of IBM on 7/1/73 for $30,000. On 10/1/12 she makes a gift of the shares to Jason, her grandson. On that date, the value was $180,000. She paid gift tax of $1,500. The entire $1,500 gift tax is added to Colette’s basis since she purchased the shares before 1/1/76. This makes her adjusted basis $31,500. On 8/1/13 Jason sells all the shares for $192,000. Since the shares were sold for more than the donor’s basis, Colette’s adjusted basis is used for Jason’s basis. Jason has a long-term capital gain of $160,500 ($192,000 – $31,500). Even though Jason held the shares for only 10 months, the gain is long-term because his holding period starts with Colette’s purchase date.
Example 2-sale for gain-donor acquisition date after 12/31/76.
Assume the same facts as Example 1 and the gift tax annual exclusion in 1975 was $8,000. Colette’s gift tax adjustment is the gift tax paid multiplied by the ratio of the donor’s appreciation in value divided by the value at date of the gift, less the annual gift tax exclusion: $1,500 x [($180,000-$30,000) / ($180,000 – $8,000)] = $1,305. Jason’s basis for gain will be $31,305 ($30,000 + $1,305) and his long-term capital gain is $160,695 ($192,000 – $31,305).
Example 3-sale for less than donor’s basis.
On 6/30/2008 Grace purchased 500 shares of Dell for $22,500. On 12/25/2012 she gives them to Joe. At that date, the shares value was $17,500. On 7/31/12 Joe sells the shares for $15,500. Since the value of the shares at the date of the gift was less than Grace’s cost, Joe must use the value at the date of the gift for his basis and the date of the gift is the start of his holding period. Joe has a short-term capital loss of $2 ,000 ($17,500 – $15,500).
Sale of Inherited Property
When a taxpayer sells property received as an inheritance, the basis for determining the recipient’s gain or loss is the fair vale at the date of death or the alternate valuation date, if the executor elects to use that date to value the deceased’s property for the estate tax. There is no adjustment for estate tax paid as there is for the gift tax. When securities are distributed, the executor should always provide the appropriate value. The IRS regulations state that the holding period will always be LONG-TERM, regardless of how long they were held by the deceased and recipient.
Example. On 7/15/13 John received 1,000 shares of IBM stock from his grandfather’s estate who died 11/15/12. His grandfather purchased the shares for $85,000 in 2002. The executor elected the fair value at date of death for estate tax purposes. At that time, the fair value was $155,000. On 12/27/13, John sold 500 shares for $175 per share (total $87,500). John will report a long-term capital gain of $10,000 [$87,500 – (500 / 1,000 x $155,000)]. Note that even though John held the shares for only five months, the holding period is still long-term. If John sells the shares for $70,000, he will report a long-term loss of $7,500 ($77,500 – $70,000). His basis in the remaining 500 shares is $77,500 (1/2 x $155,000). Basis per share is $155 ($77,500/500)
Non-Business Bad Debts
A non-business bad debts is treated as a short-term capital loss, regardless of how long it has been owed to the creditor. The debt must be bona fide. If the creditor cannot substantiate that the debt is bona fide, and reasonable efforts were made to collect it, the IRS may consider it as a gift and no deduction will be allowed. This is particularly true for debts involving related parties. To be able to substantiate and validate the debt, the debt agreement should be in writing and signed and dated by the debtor and creditor. The creditor should have documentation (such as letters and records of phone calls to the debtor) for attempts to collect it. A very good way to document the worthlessness of a debt is to obtain a court judgment against the debtor and show proof of follow-up attempts to collect the judgment. Non-business debts are not limited to loans. They could be for amounts paid on behalf of another person.
Example – On February 15, 2012, Harold purchased a computer for $1,200 for his friend Barb and made $100 monthly payments for 12 months. There was a written agreement that Barb would repay the amounts that he paid starting in July 2012. Harold had copies of the cancelled checks for the payments. Barb did not make the payments despite many oral and written requests. On September 15, 2013, Harold sued her in small claims court and obtained a judgment for $1,200. Despite many attempts to collect the judgment Barb did not pay him. Harold was able to document the legitimacy of the debt by the written repayment agreement, cancelled checks for payments made, and letters requesting payment. Harold can take a $1,200 short-term capital loss in 2013.
Note that even though the debt agreement was held for 19 months (February 2012 to September 2013), the loss is still a short-term capital loss per IRS regulations.
The creditor could have a partial loss if any amount has been collected from the debtor or a collection agency. If the creditor takes a capital loss for part or all of the debt and in a later year collects part or all of it, the amount recovered must be reported as ordinary income in the year received.
A corporation may go out of business and it securities become worthless. This results in a capital loss equal to the taxpayer’s basis in the securities less any recovery. Regardless of when during the year the loss became evident, the holding period ends on the last day of the tax year in which the security became worthless.
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