In year one, Oscar owned a valuable pocket watch. It had a tax basis of $12,000
ID: 2436377 • Letter: I
Question
In year one, Oscar owned a valuable pocket watch. It had a tax basis of $12,000 but a fair value of $23,000. The pocket watch was stolen and never recovered. The insrance company settled his claim with the payment of $20,000. He immediately took this money and another $1,000 of his own money and bought a replacement pocket watch for $21,000. In year two, he sold this second pocket watch for $24,000 in cash. What is the impact of these transactions from an income tax perspective?
a. No gain or loss in year one but an $11,000 taxable gain in year two
b. A $3,000 taxable loss in year one but a $14,000 taxable gain in year 2
c. An $8,000 taxable gain in year one and another $3,000 taxable gain in year 2
d. No gain or loss in year one but a $3,000 taxable gain in year two
Explanation / Answer
the option D is the correct answer.
The gain of $3000 will be taxable as he has gained income after selling the watch. But wont be taxable in one year as he has spent that amount out of insurance claim
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