Chapter 11, Problem 1DQ

Compare and contrast different ways in which a taxpayer triggers a realization event by disposing of an asset.

To determine

Compare and contrast the different ways in which a taxpayer stimulates a realization event by disposing of an asset.

Explanation of Solution

By disposal of an asset, a taxpayer stimulates a realization event in the following manner:

Usually a realization event for tax purposes is made in several ways. Thus, any disposal of an asset will end in a sale or other disposition. These include a sale, gift to charity, trade, disposal to the landfill, or devastation in a natural disaster.

Under a sale or trade exchange event, the taxpayer receives something as compensation (in value) in return for the asset. Whereas, for a disposal, charitable contribution, or destruction from a natural disaster the tax payer will results in a loss of any remaining basis in the asset without compensation, unless and until it is reimbursed by insurance.