LeAnn has invested in a snow skiing resort in Hawaii. The stock ticker symbol is
ID: 2572964 • Letter: L
Question
LeAnn has invested in a snow skiing resort in Hawaii. The stock ticker symbol is HISKI. The stock price has been falling ever since she purchased the stock but the company is implementing a new marketing plan "Ski the volcano" and LeAnn believes that the stock price will take off. She wants to benefit from her current year losses on the stock, but she also wants to hold onto the stock because of the potential upside. LeAnn currently owns 100,000 shares with a total fair market value of $12,000 (adjusted Basis of $15,000). LeAnn decides to purchase an additional 100,000 shares on July 5th. She then sells the 100,000 that she had owned on July 6th. What is the tax consequence of this transaction?
Explanation / Answer
In the USA, federal income tax is levied on the net total of all the capital gains arising to an individual (or corporation, etc.) The tax rates depend on investor's tax bracket and the duration the investment was held. Short-term capital gains are taxed at the individial's ordinary income tax rate whereas the Long-term capital gains are taxed on dispositions of assets held for more than a year.
Long term capital gain tax is generally less as compared to Short term capital gain tax. The government promotes the investors to maintain their securities for more than a year in order to pay tax at lower amount than they would end up paying in case they dispose their securities sooner than a year of purchase.
In the present case, LeAnn had 100000 shares from previous years which were already running into a loss of $3000 ($15000-$12000=$3000), she buys 100000 additional shares of the same security and one day later sells 100000 shares, on the 6th of July. As clear from the points mentioned in the question, LeAnn sells these securities on a loss of $3000, it would be advisable for her to sell securities from the lot she held previously than the ones she recently purchased, it would give her the benefit of claming $3000 capital loss in the current year as she has held these securities for more than a year now.
As per the US tax law, an individual can claim a net capital loss of $3000 as a deduction in a year against the ordinary income of that year. LeAnn is eligible to settle $3000 as her capital loss against her ordinary income.
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