Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Joe sells XYZ and claims a 5-point loss, but triggers the wash sale by repurchasing XYZ at $40. Joe's cost basis is:

1. $35

2. $40

3. $45

4. $50

The correct answer is: $45

In this scenario, Joe's actions regarding his investment in XYZ trigger a wash sale. A wash sale occurs when a security is sold at a loss, and then the same security is repurchased within 30 days before or after the sale. When a wash sale happens, the Internal Revenue Service (IRS) disallows the deduction of the loss for tax purposes but adjusts the cost basis of the repurchased security. Joe sells XYZ at a loss, claiming a 5-point loss. If we assume he originally purchased the shares for $45, selling them for $40 would indeed reflect a $5 loss. However, since he repurchases XYZ for $40 within the wash sale period, the loss is disallowed, and the cost basis of the repurchased shares is adjusted. When calculating the cost basis for the repurchased shares, the adjusted basis becomes the purchase price of $40 plus the amount of the disallowed loss, which is $5 in this case. Therefore, Joe's new cost basis for the repurchased XYZ shares will be $40 (the repurchase price) + $5 (the disallowed loss), totaling $45. This adjusted cost basis impacts future transactions involving the security, as it reflects the lower gain or higher loss in