Question

In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions?
a. Disallowed loss to Lance of $2,000; gain to James of $1,000.
b. Deductible loss to Lance of $2,000; gain to James of $3,000
c. Disallowed loss to Lance of $2,000; gain to James of $3,000.
d. Disallowed loss to James of $2,000; gain to Lance of $1,000.

Answer 1

Answer: a. Disallowed loss to Lance of $2,000; gain to James of $1000

Explanation:

Based on the scenario in the question, the realized loss for Lance will be:

= $26000 - $24,000

= $2000

It's a loss to Lance because the cost of the stick is more than the selling price that he sold the stock.

It should be noted that James has a realized gain of ($27,000 - $24,000 = $3000) which we'll then deduct the disallowed loss of $2,000 for Lance.

Therefore, James recognized gain will be:

= $3000 - $2000

= $1,000