Bob exchanges 4,000 shares of Beetle Corporation stock that he had purchased for $800,000 for 6,000 shares of Butterfly Corporation common stock with a fair market value of $1,000,000.What is Bob's recognized gain on the exchange and his basis in the Butterfly stock?

Question

Quizplus · Accepted Answer

Bob's recognized gain on the exchange is determined by comparing the fair market value of the Butterfly Corporation stock received ($1,000,000) to his adjusted basis in the Beetle Corporation stock ($800,000).

Since the fair market value of the Butterfly Corporation stock received ($1,000,000) exceeds Bob's adjusted basis in the Beetle Corporation stock ($800,000), he has a recognized gain of $200,000.

Bob's basis in the Butterfly Corporation stock received is equal to his adjusted basis in the Beetle Corporation stock exchanged, increased by any recognized gain on the exchange.

Therefore, Bob's basis in the Butterfly Corporation stock is $800,000 + $200,000 = $1,000,000.

Bob Exchanges 4,000 Shares of Beetle Corporation Stock That He