May 28 mgmt127a

May 28 mgmt127a - MGMT 127A Exceptions for recognition DO...

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May 28, 2008 MGMT 127A Exceptions for recognition DO NOT REPORT LOSSES: Sales of Personal Assets- Example Say you sell your piano at a loss. Can you recognize the loss? No. You cannot recognize losses on personal items. What if you sold the piano at a gain? Do you have to report that gain? You must report the gain. The rule says you cannot report a loss, but it does not say that you don’t have to report a gain. Therefore, by inference, you must report that gain. WASH SALES Example You bought Countrywide stock for $50, and it has now fallen to $5. The price has fallen by $45 dollars. Your broker tells you to sell your stock, so you can realize and book your $45 loss. However, you say you think it is a bargain for $5 and you want to hold on to it. The broker insists that you sell them, and if you still think it’s a bargain, you can buy them back immediately in order to take care of the realization requirement. You are “technically” realizing and recognizing your loss. You are creating an artificial realization. Congress plugged the loophole. If you sell stock at a loss, and soon thereafter replace it (within 30 days), you may not claim your loss. It is an artificial loss. Really, you have an investment in the stock on a continuous basis. You originally purchased 100 shares at $8 per share You sold 100 shares at $3 per share At this point, your realized loss is $500 ($800-$300) However, less than 30 days after, you purchase 100 shares at $4 per share How much loss is recognized? Your recognized loss would be zero. You can’t claim the loss because you were only momentarily out of the stock. The new shares cost $400. You had a $500 loss. Are we going to prevent you from ever taking that loss? No, we are going to postpone the loss. Simply delay the recognition of the loss until you no longer own the stock. If we want to eventually give you the $500 loss, how will we do it? We will adjust the basis of the stock. We will adjust basis upwards or downwards, as appropriate, such that all else equal, you will be able to claim your gain or loss in the future. If we want someone to have a bigger gain, we will adjust their basis
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This note was uploaded on 10/27/2009 for the course ECON 183 taught by Professor Boustan during the Summer '09 term at UCLA.

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May 28 mgmt127a - MGMT 127A Exceptions for recognition DO...

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