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12 June, 18:15

Melvin receives stock as a gift from his uncle. No gift tax is paid. The adjusted basis of the stock is $19,000 and the fair market value is $25,000. Melvin trades the stock for bonds with a fair market value of $22,000 and $3,000 cash. What is his recognized gain and the basis for the bonds?

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  1. 12 June, 18:21
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    Recognized gain = $6000

    Basis of the bond = $22,000

    Explanation:

    Given the following;

    Adjusted basis of stock = $19,000

    After trading the stock for bond;

    Market value of bond = $22,000

    Cash received = $3000

    Recognized gain = valuation after trading stock for bond - Adjusted basis of stock

    Therefore,

    Recognized gain = ($22,000+$3000) - $19,000 = $6000

    Basis of a bond is simply the market value or quoted price of the bond.

    Here, the market value of the bond received by trading his stock is $22,000

    Therefore, the basis of the bond is $22,000
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