Question: If instead of the second transaction James sold his 700 shares of Microsoft on October 12, 2005 for $15,500. H Assume James purchased 1000 shares Microsoft Inc. stock on Jan. 12, 2004 for $28,000. On May 12, 2005 he sells it for $25,000. On June 1, 2005 he buys back 700 shares of Microsoft stock for $15,000. Discuss and explain the tax ramifications to James on his 2005 federal Income Tax return. \n\n\n\n2) Assume he also purchased 100 shares of IBM on May 13, 2005 for $8,000 and sold it for $14,000 on October 12, 2005. How does this  transaction combine with the first transaction? \n\n\n\n3) If instead of the second transaction James sold his 700 shares of Microsoft on October 12, 2005 for $15,500. How does this combine with the first transaction?

Answer: Wow, didn't know people posted homework questions on here.\n\nI'll be nice and help.\n\n1st transaction their is no tax effect for the 700, but the 300 shares have a $900 short term loss.  The other 700 falls under the "wash sale" rule of the IRS, and his basis remains the same as the original transaction (IE, 700 shares has a purchase basis of $19,600 (700*$28 original price per stock)\n\n2nd Short term capital gain of $6,000.  No releveance to the first transaction since the stocks are from different entitied.  He offsets the loss to the gain for a net gain of $5,100\n\n3rd.  Basis due to wash shale is $19,600.  He captures the loss of the difference (19,600-15,500) leading to a loss of 4,100.  Combine this with the other short term loss of $900, you have a total loss of $5,000.  Of this, only $3,000 short term capital losses may be claimed, and the other $2,000 is carrier over to the next year.
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