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SIE practice questionhardWash Sale Rule

An investor sells 100 shares of XYZ at a loss and purchases 100 shares of XYZ 20 days later. Under the wash sale rule, what is the tax consequence?

  1. AThe investor must pay a penalty tax
  2. BThe loss is fully deductible in the current tax year
  3. CThe gain on the new purchase is taxed at double the normal rate
  4. DThe loss is disallowed and added to the cost basis of the new shares✓ Correct answer
Explanation

Why D — The loss is disallowed and added to the cost basis of the new shares

The wash sale rule disallows a tax loss if the investor purchases substantially identical securities within 30 days before or after the sale. Since the investor repurchased XYZ only 20 days later (within the 30-day window), the loss is disallowed. However, the disallowed loss is added to the cost basis of the replacement shares, deferring (not eliminating) the tax benefit. There is no penalty tax (C) — the rule simply defers the loss recognition.

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