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Series 7 practice questionmediumTax Implications — Wash Sale Rule

An investor sells 100 shares of GHI stock at a $2,000 loss on March 15. On March 30, the investor buys 100 shares of GHI. What is the tax consequence?

  1. AThe $2,000 loss is fully deductible in the current year
  2. BThe $2,000 loss is permanently disallowed
  3. CThe $2,000 loss is disallowed, but it is added to the cost basis of the newly purchased shares✓ Correct answer
  4. DOnly $1,000 of the loss is disallowed
Explanation

Why C — The $2,000 loss is disallowed, but it is added to the cost basis of the newly purchased shares

Because the investor repurchased substantially identical shares within 30 days of the sale, the wash sale rule applies, and the $2,000 loss is disallowed for the current tax year. However, the disallowed loss is not permanently lost — it is added to the cost basis of the newly purchased shares. This effectively defers the loss recognition until the new shares are eventually sold.

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