Book 2 Page 257 prob 21

the way the wording is on this questions seems to show DiCenzo as having a tax credit in both years…I get that over the long term tax loss harvesting only defers taxes but in this example I see the first yr as a credit of 7.5K then he reinvests the 50K at the same return which is a loss of 33.33% giving him another tax credit…but the answer says its a savings of 0. Are they just saying that over the long term it is zero or that over these 2 years they balance out?

Initially I also thought the same but the word “same returns” is problematic. The way answer is given, It implies that they want to say that whatever the loss incurred in the current year will earn the same return on new securities to offset the loss exactly.

However on the basis of above implicit assumoption explanation is given below :-

Current value of Securities is 50,000 and cost basis is 75,000 so there is a loss of 25,000 therefore tax savings on loss = .30*25,000 = 7500. This is the situation for current year.

Next Quest no. 21 says that securities are being sold and repurchased with the same $ amount from the proceeds in the current year say 50,000 as given. Now securities cost basis is 50,000. Earlier cost basis was higher ( 75000) and our value of the securities was lower so it was loss------Catch the theme " Higher the cost basis, lower the chance of gain, greater the chace of loss and vice versa".What will happen if the value of the securities next year rises to 75,000 and as you know our new cost basis is now 50,000, there is a gain of 25,000. In this case, if the securities are sold as mentioned in the question then there will be tax on gain i.e. (75,000 - 50,000) * .30 = 7,500. Question also assumes that whatever you saved taxes in the current year will not be re-invested.