Tax Consequences - Wash & Bargain Sales

Wash Sales
The purpose of the "wash-sale" rule is to prohibit the taking of a tax loss deduction on a security position that is sold for a loss, if the identical position is repurchased again by the account owner within a reasonable short amount of time.

Wash-Sale Rule:
"A loss deduction is barred if within 30 days of a sale you buy substantially identical stock or securities or a 'put' or 'call' option on those securities."

The wash-sale period actually runs for 61 days total. This starts the 30 days before the sale to the 30 days after the date of sale. The wash-sale rule does not apply to gains, inheritance, tax-free exchanges or acquisitions by gift. The wash-sale rule does apply to spouses as well: whereas, a loss can be disallowed if you realize a loss in a security, and your spouse buys a substantially identical position within the period.

Bargain Sales
Bargain sales occur when a seller gifts or accepts an installment sale on a piece of property to a charitable organization for an amount less than the current fair market value (FMV). Typically, donors will accept less than FMV for a charitable contribution in order to receive a tax deduction.

Current tax law will allow you the full charitable deduction, but you must adjust cost basis which may trigger capital gains. Example:
Bruce owns a Civil War sword that was recently appraised at $40,000 that he would like to see in a museum on display. He paid $20,000 for the sword 10 years ago, and works out an agreement with a museum where they give him his original cost of $20,000 back for the sword.

FMV = $40,000

Adjusted Basis (B) = $20,000

Sale Price (SP) = $20,000

Bruce will get a $20,000 charitable tax deduction; however he will also have a $10,000 capital gain.

Basis allocated to sale = SP x [B/FMV]
= $20,000 x [$20,000/$40,000]
= $10,000

Realized gain = Amount realized (SP) less basis allocated to sale
= $20,000 - $10,000
= $10,000 capital gain

Section 1244 Stock and Installment Sales
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