Q4 Part B of CFA LIII 2017 AM exam asks us to calculate tax liability on Plans A and B and demonstrate that both plans have the same tax liability. The question says the loss on Stock Y was realized in Year 1 and Stock Y was replaced with Stock Z. I don’t understand why on Plan A year 2 liability we are considering the effect of Stock Y, since it has been realized and replaced in Year 1, i.e. why is the cost basis 220000-45000?
I was actually searching for info on Part A when I came across this.
For your question, when it says sell stock Y and replace with stock Z, you assume it’s bought with all of the funds received for selling stock Y.
In this case, stock Y had a loss of 45k and a cost basis of 220k = 175k cost basis for stock Z.
Meaning stock Z will make a profit of 250k - 170k = 75k.
Hope this helps.
You bought Stock Y for 220k and you have 45k in unrealized losses. So the current value is 220k-45k
They tell you to realize your losses, so you sell Stock Y and receive (220-45k) in cash.
You use this cash to buy stock Z. So (220k-45k) is the cost basis for stock Z