Can anyone explain why are we deducting CLC 45000 again when calculating cost basis in year 2?We have already realized loss and netted it with gain in Plan A year 1?
Realizing a gain increases the cost basis (tax basis); realizing a loss reduces the cost basis (tax basis).
Thank you magician for your response but we have already used CLC 45000 in year 1 then why are we using it again?Could you provide some more explanation?I am confused why are we using CLC 45000 both in year 1 and year 2?
That’s my point: you recognized the loss in year 1, thus reducing your cost basis (tax basis).
Think back to your Level I inventory. Suppose that the cost is $100, but the market price falls to $80. You show an inventory write-down of $20. The following year the market price rises to $100, and you have to show a write-up of $20. How did you get those numbers?
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Year 1: Market price less cost basis = $80 − $100 = ($20). The cost basis is reduced by the amount of the realized loss: $100 − $20 = $80.
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Year 2: Market price less cost basis = $100 − $80 = $20. The cost basis is now increased by the amount of the realized gain: $80 + $20 = $100.
Note that your net gain/loss is $0, which it should be: the cost basis started at $100 and it’s back to $100.
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In this scenario (plan A) they sell the entire position in year 1 and realize the loss and replace it with another stock which they believe will have the same expected return as the stock they sold. So I was also confused on why it was being used again in year 2 for the new stock…but I guess we are to assume this stock also has an unrealized loss of 45k??? But the problem did not specify that.
I think it gave you that in the story.