Question

Carol and Dave each purchase 100 shares of stock of Burgundy, Inc., a publicly owned corporation, in July for $10,000 each. Carol sells her stock on December 31 for $8,000. Because Burgundy’s stock is listed on a national exchange, Dave can ascertain that his shares are worth $8,000 on December 31. Does the Federal income tax law treat the decline in value of the stock differently for Carol and Dave? Explain.

Answer 1

Answer:

See below

Explanation:

From the above information, we can deduce that the stock owned by Carol and Dave falls in value by $2,000 I.e ($10,000 - $8,000) ; it is to be noted that Carol solely has realised and recognized loss of $2,000.

Here, one of the cogent factors that determines whether a sale has taken place is if realization has been effected. Here, stock sold by Carol qualifies as a disposition while the decline in the value of stock sold by Dave does not qualify as disposition.

With regards to the foregoing, we can conclude that the federal income tax law treat the decline in the value of the stock differently for Carol and Dave.