Eddie slick Haskell needs your tax advice regarding a recent stock transaction that didn't turn out...

Transcribed Image Text:

Eddie "slick" Haskell needs your tax advice regarding a recent stock transaction that didn't turn out the way he planned. On January 20, 2021, Slick purchased 100 shares of Tesla stock (ticker TSLA) for $290.52 per share. By mid-May of the same year, the stock had fallen to nearly $200 per share which represents an unrealized loss of over $9,000. Slick still believes in TSLA stock and wants to hold it long-term, but he really wanted to capture that $9,000 loss as a tax deduction on his tax return. Being a seasoned investor, Slick was aware of the "wash sale" rule that would disallow the loss if he purchased the same stock within 30 days before or after the date he sold it, so he came up with a "slick" plan. He sold the 100 shares of TSLA stock that was held in his taxable brokerage account for $201.20 and immediately purchased 100 shares in his traditional IRA account at the same price. Slick thought he had beaten the system until he received his account statement which listed the $8,932 loss as a disallowed "wash sale" loss. Can Eddie deduct the loss on his 2021 tax return, or is the broker correct in reporting it as a wash sale? If the broker is correct, Eddie would like to know what his cost basis of the Tesla stock in his IRA account is. Is that $8,902 loss permanently forfeited? What would be his cost basis if he were to re-purchase 100 shares of Tesla stock in his taxable brokerage account? Write a research memo for your permanent record and a client letter like the ones shown in the example. The memo should be no longer than 2 typed single-spaced pages and could easily be shorter. The client letter should be no longer than 1 page. The Tax Research assignment is due at 11:59 pm on December 1, 2023. Excerpt from textbook: Wash Sales The wash sale rules are designed to eliminate the opportunity to sell stock at a loss, recognize the loss for tax purposes, but replace the stock sold by buying back identical shares shortly before or after the sale. If the wash sale rule applies, a realized loss on the sale or exchange of stock or securities is not recognized. Recognition of the loss is disallowed because the taxpayer is considered to be in substantially the same economic position after the sale and repurchase as before the sale and repurchase. The wash sale rule applies if a taxpayer sells or exchanges stock or securities at a loss and within 30 days before or after the date of the sale or exchange acquires substantially identical stock or * securities. Concept Summary 14.3 provides an overview of these rules. Concept Summary 14.3 14.3 Wash Sale Rules May 14, 2023 Purchase: 100 shares ABC, Inc. Cost: $1,400 Wash Sale January 2, 2023 Purchase: 100 shares ABC, Inc. Cost: $2,000 May 1, 2023 Sell: 100 shares ABC, Inc. Selling Price: $1,200 Gain (Loss): ($800) If June 5, 2023 Purchase: 100 shares ABC, Inc. Cost: $1,400 No Wash Sale RESULT The $800 loss from the May 1 sale is disallowed. The basis of the May 14 shares will be $2,200 (the $1,400 cost of the shares purchased on May 14 plus the $800 disallowed loss). The holding period of the shares begins on January 2, 2023. RESULT The $800 loss from the May 1 sale is allowed (it will be a short-term capital loss) The basis of the shares purchased on June 5 will be the $1,400 cost. The holding period of the shares begins on June 5, 2023. + Eddie "slick" Haskell needs your tax advice regarding a recent stock transaction that didn't turn out the way he planned. On January 20, 2021, Slick purchased 100 shares of Tesla stock (ticker TSLA) for $290.52 per share. By mid-May of the same year, the stock had fallen to nearly $200 per share which represents an unrealized loss of over $9,000. Slick still believes in TSLA stock and wants to hold it long-term, but he really wanted to capture that $9,000 loss as a tax deduction on his tax return. Being a seasoned investor, Slick was aware of the "wash sale" rule that would disallow the loss if he purchased the same stock within 30 days before or after the date he sold it, so he came up with a "slick" plan. He sold the 100 shares of TSLA stock that was held in his taxable brokerage account for $201.20 and immediately purchased 100 shares in his traditional IRA account at the same price. Slick thought he had beaten the system until he received his account statement which listed the $8,932 loss as a disallowed "wash sale" loss. Can Eddie deduct the loss on his 2021 tax return, or is the broker correct in reporting it as a wash sale? If the broker is correct, Eddie would like to know what his cost basis of the Tesla stock in his IRA account is. Is that $8,902 loss permanently forfeited? What would be his cost basis if he were to re-purchase 100 shares of Tesla stock in his taxable brokerage account? Write a research memo for your permanent record and a client letter like the ones shown in the example. The memo should be no longer than 2 typed single-spaced pages and could easily be shorter. The client letter should be no longer than 1 page. The Tax Research assignment is due at 11:59 pm on December 1, 2023. Excerpt from textbook: Wash Sales The wash sale rules are designed to eliminate the opportunity to sell stock at a loss, recognize the loss for tax purposes, but replace the stock sold by buying back identical shares shortly before or after the sale. If the wash sale rule applies, a realized loss on the sale or exchange of stock or securities is not recognized. Recognition of the loss is disallowed because the taxpayer is considered to be in substantially the same economic position after the sale and repurchase as before the sale and repurchase. The wash sale rule applies if a taxpayer sells or exchanges stock or securities at a loss and within 30 days before or after the date of the sale or exchange acquires substantially identical stock or * securities. Concept Summary 14.3 provides an overview of these rules. Concept Summary 14.3 14.3 Wash Sale Rules May 14, 2023 Purchase: 100 shares ABC, Inc. Cost: $1,400 Wash Sale January 2, 2023 Purchase: 100 shares ABC, Inc. Cost: $2,000 May 1, 2023 Sell: 100 shares ABC, Inc. Selling Price: $1,200 Gain (Loss): ($800) If June 5, 2023 Purchase: 100 shares ABC, Inc. Cost: $1,400 No Wash Sale RESULT The $800 loss from the May 1 sale is disallowed. The basis of the May 14 shares will be $2,200 (the $1,400 cost of the shares purchased on May 14 plus the $800 disallowed loss). The holding period of the shares begins on January 2, 2023. RESULT The $800 loss from the May 1 sale is allowed (it will be a short-term capital loss) The basis of the shares purchased on June 5 will be the $1,400 cost. The holding period of the shares begins on June 5, 2023. +