Saturday, November 17, 2012

Loss Sale Rules Section 1091

Under § 1091, if a taxpayer realizes a loss on the sale of stock, NO LOSS DEDUCTION is allowed if the taxpayer purchases “substantially identical stock” within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date.

Disallowed loss is preserved in the new stock, under § 1091(d)

Tax Loss Sale Rule Section 1091 Example:

Bob  purchased a share for $100 in 2011, which he sold January 20 for $80. On February 5, Bob purchased a share of the same corporation for $90. No loss from the sale is recognized under  § 1091. The basis of the new share is $110; that is, the basis of the old share ($100) increased by $10, the excess of the price at which the new share was acquired ($90) over the price at which the old share was sold ($80).

§ 267(a)(1) – Disallows any loss deduction on a sale or exchange of property between certain related parties, including a parent and child. These also must be considered along with tax loss sale rules.

§§267(b)(1)  and (c)(3) determine the relationship testb.    See 267(d). You can deduct gain by size of loss that Bob did not realize. Any gain on a subsequent resale is recognized only to the extent it exceeds the disallowed loss. Rule does not change basis of the property in the hands of the buying party. So if the buyer resells the property at a loss, the loss is not increased by the amount of the prior disallowed loss.

“Cherry Picking” and the Capital Loss Limitations of § 1211

Under § 1211(b) an individual may deduct capital losses only against capital gains and a piddling $3,000 of non-capital gain income. Under § 1212(b), losses disallowed may be carried forward.
 Congress is concerned that taxpayers might engage in “cherry picking”, which is selectively realizing losses in their investment portfolios while making a point of not realizing gains. This is how tax loss sale rules come into play frequently.

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