Wash Sale

Wash Sale is a sale or disposition of stock or

securities where substantially identical securities are
acquired or purchased within a 61-day period,
beginning 30 days before the sale and ending 30 days
after the sale.
Substantially identical securities indicates
stocks or securities of the same class or similar on their
important features like bonds where the only difference
is the date of maturity.
Below are examples of transactions of securities not
substantially identical and therefore not subject to wash
sales:

Exchanges of:
1. Common stock to preferred stock (vice versa);
2. Voting stock to non-voting stock (vice versa);
3. Stock of one corporation to stock of another corporation;and
4. Bonds of the same corporation that differ as to interest rates,
interest payment dates, and dates of issuance and maturity, or
one is secured by a mortgage and the other is not.
Requisites of Wash Sales Loss

In order that the sale of securities is considered wash sale, the

following requisites must be met;

1. The sale of the stock or securities is at a loss.

2. Within 30 days before or after such sale, the seller
acquired by purchase or exchange substantially identical
stock or securities.
3. The seller is not a dealer in stock or securities
Note: Even if the seller is a dealer in securities if the
transaction was not made in the ordinary course of the
business of such dealer, there is still a wash sale.
 Treatment of Losses and Gains from Wash
Sale
The following rules shall be observed related to the losses and gains from wash
sales:
1. As a general rule, losses from wash sale are not deductible while gains from
wash sale are taxable.
2. If the number of securities sold is more than the number of securities
purchased within the sixty-one day period, then:

a. No loss shall be recognized on the acquisitions within the sixty-one day period
which are matched with a number of shares or securities disposed of ; and
b. A capital loss shall be recognized on the number of shares or securities disposed
of which cannot be matched with acquisitions within the sixty-one day period.
3. If the number of securities sold is less than the number of securities purchased
within the sixty-one day period, then:
a. The stocks or securities disposed of will be matched with an equal number of
shares of stock or securities acquired in accordance with the other of acquisition
beginning with the earliest acquisition.
 Formula:
1. To determine the amount of nondeductible wash
sale loss

Nondeductible loss= Number of shares bought

(during the prohibited period)x Amount of loss
Number of shares sold
2. To determine the tax basis (cost) of reacquired
shares

Cost of acquisition Pxxx

Add: Wash sale loss (nondeductible loss) xxx
Tax basis or adjusted cost Pxxx
Illustration
Mr. X had the following transaction in ABC
Corporations ordinary share classified as capital
asset:

Date Participants Amount

Jan. 10, 200x Purchased 10,000 shares at P50 per share P500,000
Jan. 20, 200x Purchased 4,000 share at P50 per share 200,000
Feb. 10, 200x Purchased 3,000 shares at P48 per share 144,000
Feb. 14, 200x Sold 10,000 shares at P45 per share
(from January 10,200x) 450,000
Required : Compute the following:
1. Deductible and nondeductible loss on
February 14, 200x sales.
2. New cost of January 20 and Feb. 10
purchases.
3. If on Feb. 25, Mr. X sold 4,000 shares at P60
per share, how much is the capital gain
(loss)?
Solution:
1. Sales P450,000
Less: Cost of sales 500,000
Capital loss P 50,000

Nondeductible loss (P50,000x 7/10)-wash sales P 35,000

Deductible loss (50,000x3/10) P 15,000
2. January 20 February 10
Original cost P 200,000 P 144,000
Add:Nondeductible loss
Jan. 20 (P35,000x4/7) 20,000
Feb. 10 (P35,000x3/7) ________ 15,000
New cost P 200,000 P 159,000
3. Sales (P60x4,000) P 240,000
Less: Cost of sale 220,000
Capital gain P 20,000
Short Sales
The Tax Code provides that short sales could either be
classified as (a) short sale of property, and (b) failure to
exercise privileges or option to buy or sell property.
The gains or losses on short sales are capital asset
transactions.
Short Sale of Properties. A short sale is made when a
speculator sells property which he does not own and
postpones their delivery to a later date when the purchase
price of the property is lower than the amount he received
from the sale to make a profit. But should the price of
securities go up, he incurs a loss.
Illustration:
Miss Mari Mar, a speculator of financial securities,
obtained P120,000 to buy 1,000 shares for Mr. Mar
Bernardo.

If the fair market value of securities becomes P110 er

share and Miss Mar purchased and delivered the same
to Mr. Bernardo, how mch is the capital gain on short
sales of securities?

The capital gain short sales is P 10,000, computed as

follows:
Selling Price received P 120,000
Less: Purchase price of securities (1,000 x P110) 110,000
Capital gain on short sales P 10,000

If the fair market value of the securities goes up to P125 per share,then
Miss Mar would sustain a capital loss on short sales amounting to P
5,000, thus;

Selling price received P 120,000

Less: Purchase price of securities ( P125 x 1,000 shares) 125,000
Capital loss on short sales P 5,000
Failure to Exercise Option to Buy or Sell Property. When a taxpayer
provided a consideration for an option period to buy a capital property
but such privilege was not exercised , the option money shall be
considered as capital loss.
Illustration:
Mr. Buyer gave P2,000 to Mr. Seller in consideration of the option to
buy the latter's capital asset within 30 days. He failed to exercise the
privilege to buy the property within the prescribed period and Mr.
Seller forfeited the option money. The P2,000 shall become a capital
loss on the part of Mr. Buyer and capital gain on the part of Mr. Seller.

Securities Becoming Worthless

The following a the rules to be observed on securities becoming
worthless for purposes of income taxation:
1. The securities are ascertained worthless and written off:
2. The taxpayer owning the securities being written off should not be a
bank or a trust company incorporated under Philippine laws; and
3. The writen off amount is a capital loss.
Illustration:
Adalyn Company, a domestic corporation engaged in producing
chocolates, invested 10,000 ordinary shares amounting to P200,000
in Philippines Airlines.
Due to bankruptcy Philippine Airlines closed its operations, such that
the investment of Adalyn was ascertained worthless and should be
written off. The entire amount of investment (P200,000) should be
considered capital loss on shares becoming worthless.
Liquidating Dividends
When a corporation distributes all of its assets in full dissolution, the
gain realized or loss incurred by the stockholder, whether individual
or corporate, is taxable or deductible from capital gain as the case a,y
be.
Illustration:
Mr. Condrad Mapalo invested in Benguet Corporation by buying
5,000 shares at P50 per share. If Mr. Mapalo received a total amount
of P300,000 from Benguet Corporation upon its complete liquidation
then the determination of taxable gain would be:
Total amount received P 300,000
Less: Cost of shares surrendered (P50 x 5,000 shares) 250,000
Taxable gain P 50,000

If Mr. Mapalo received a total amount of P240,000 from Benguet Corporation upon
its complete liquidation, then the determination od deductible loss would be:

Total amount received P 240,000

Less: Cost of shares surrendered (5,000 x P50) 250,000
Deductible loss P 10,000