Chapter 11 Study
Deuce has been adjusting his portfolio to meet his target asset allocation, and has realized several capital gains and losses this year. $13,000 in short-term capital gains $9,000 in short-term capital losses $4,000 in long-term capital gains $7,000 in long-term capital losses What is Deuce's net gain or loss?
$1,000 Net short term capital gain (13k-9k = 4k short term gain 4k-7k =3k long term loss 4k gain - 3k loss = 1k net short term gain)
Sampson has three capital transactions during the current year:- Short-term capital loss of $5,000- Short-term capital gain of $3,000- Long-term capital loss of $2,000What is the net effect on Sampson's income taxes if he is in the 35% income tax bracket?
$1050 tax reduction Net the STCG and STCL = $2,000 STCL. The $2,000 LTCL plus the $2,000 STCL = Total Loss of $4,000.He can only utilize $3,000 of losses to offset ordinary his income at 35% = $3,000 X 0.35 = $1,050. The remaining $1,000 is a long-term capital loss carryover.
Michael is in the 32% marginal tax bracket. He recently sold a gold coin for $12,000 that he purchased six months ago for $2,000. How much federal income tax will Michael pay on this transaction?
$3200 (10k gain x 32% = 3200)
In determining net capital gains, the net short-term gain/loss can be combined with the net long-term gain/loss only if the net results are either both gains or both losses. T/F?
False
When property is sold to a related party, the holding period used to determine whether any subsequent gains or losses are short-term or long-term depends on the holding periods of both the seller and the purchaser T/F?
False
On January 1, Andrea reviews her investment portfolio and finds out that she has had a very profitable year. To offset some of her gains, Andrea sells 100 shares of Big Bear Corporation for $10,000. She purchased those shares for $15,000 two years earlier. On January 25 of the same year, Andrea reads a newspaper article indicating that the price of Big Bear Corporation is expected to increase substantially. Second-guessing the wisdom of selling her previous shares of Big Bear stock, she purchases 100 shares of Big Bear Corporation for $8,000. What are the tax consequences to Andrea this year? a.$5,000 realized, but not recognized loss. b.$8,000 realized and recognized loss. c.$5,000 realized and recognized loss. d.$7,000 realized, but not recognized loss.
a. $5,000 realized but not recognized loss (15k basis - 10k selling= 5k realized but not recognized because its a wash sale)
Which of the following statements correctly identifies when income is subject to tax? a. Capital gains must be realized before they can be recognized on a tax return. b. Realization occurs when the gain on an asset is reflected on the taxpayer's return. c. As a general rule, realized gains are not recognized unless a provision in the IRC requires recognition. d. Recognition occurs when an assets has been sold or exchanged.
a. Capital gains must be realized before they can be recognized on a tax return. (b is false, it is recognized. C is false, all are recognized unless IRC excludes, and d if false, it is realized)
Christopher purchased a home in Connecticut three years ago for $300,000. He had been working in Connecticut for the past 10 years. Yesterday, his employer decided to transfer him to San Diego, California branch, effective next month. Unfortunately, the real estate market has weakened over the past few years, and Christopher is only able to sell his home for $270,000. Which of the following statements correctly identifies his tax consequences of the sale: a. Christopher is not permitted to deduct the loss on his income tax return. b. Christopher's loss will be reflected as a long-term capital loss on his tax return. c. Christopher's loss will be reflected as a short-term capital loss on his tax return. d. Christopher will recognize an ordinary loss of $30,000.
a. Christopher is not permitted to deduct the loss on his income tax return (because personal losses are not allowed--however, the 270k received - 300k basis equals a 30k loss)
6. As the end of the year was approaching, Edward reviewed his stock portfolio and decided to sell his holdings in Windsor Industries on December 18th of Year 1. The shares were purchased two years ago. His basis in the shares was $20,000 and the market value of the shares was $18,000. Edward wanted to use the $2,000 loss to help him minimize taxes for Year 1. On January 10th, year 2, Windsor Industries announced new initiatives, and Edward has second guessed his decision to sell the shares in the company. He buys back the 1,000 shares for $17,000 on January 11th. Assuming that Edward had no other capital transactions for Year 1, what is the impact of this transaction on Edward's year 1 income tax return? a. The sale of Windsor Enterprises will not impact Edward's AGI for the year 1. b. The sale will generate a $2,000 short-term capital loss that will reduce Edward's AGI. c. The sale will generate a $2,000 long-term capital loss that will reduce Edward's AGI. d. The sale will trigger an ordinary loss deduction for $2,000.
a. The Sale of Windsor Enterprises will not impact Edward's AGI for the year 1. (because its a wash sale)
Tax savings from tax loss harvesting must outweigh several costs, such as possible higher future tax rates or waiting for at least 31 days to purchase the same security in order to recognize loss. a. True b. False
a. true. (wash sale rule)
Andy gave 1,000 shares of Meade Productions, Inc. to his son, John. Andy paid $15,000 for the shares, and they were worth $12,000 at the time he transferred them to John. If John sells the shares for $13,000, how much capital has the family lost on a permanent basis? a. $1,000. b. $2,000. c. $13,000. d. $15,000.
b. $2,000 (because his basis was transferred to his son)
On September 20 of Year 1, Henry purchased 1,000 shares of Tudor Enterprises, Inc. common stock for $25,000. He sold the shares for $35,000 on September 2 of Year 2. Which of the following statements correctly identifies the tax consequences of this transaction? a. Henry will recognize a $10,000 ordinary gain on the sale b. Henry will recognize a $10,000 short-term capital gain on the sale c. Henry will recognize a $10,000 long-term capital gain on the sale d. Henry will not be required to recognize the gain on the transaction
b. Henry will recognize a $10,000 short term capital gain on the sale
Kevin engaged in several capital transactions this year. He had a short-term capital gain of $400; a shortterm capital loss of $600; a long-term capital gain of $800 and a long-term capital loss of $500. How will Kevin report these items on his income tax return? a. Kevin will report a net short-term capital gain of $100 b. Kevin will report a net long-term capital gain of $100 c. Kevin will report a net short-term capital loss of $200 and net long-term capital gain of $300 d. Kevin will report ordinary income of $100
b. Kevin will report a net long term capital gain of $100. (ST: STCG 400 minus STCL 600 = NSTCL -200. LT: LTG 900 minus LTCL 500 = NLTCG 300. -200 + 300 = $100 NLTCG)
Tax loss harvesting generally provides the greatest benefits when portfolios are made up of volatile, positively correlated securities. a. True b. False, volatile negatively correlated securities
b. false, volatile negatively correlated securities
Ken is in the 33% marginal tax bracket. He recently sold a coin for $110,000 that he had purchased eight years earlier for $10,000. How much federal income tax will ken pay on this transaction? a. $15,000 b. $25,000 c. $28,000 d. $33,000
c. $28,000 (sale for 110k minus basis of 10k+ 100k LTCG 100k x 28% = 28,000)**A coin is a collectible item, and long-term capital gains on collectibles are subject to a flat capital gains tax rate of 28%. Therefore, Ken's tax on this transaction equals $28,000 [28% x ($110,000 - $10,000)].
Ajamu, a single individual, was an investor in a company that became worthless this year, and suffered an $80,000 capital loss. He initially invested in the company five years ago when it was starting up, and the company had $500,000 in initial capitalization so it met the qualifications of Section 1244 Stock. Assuming that Ajamu had no other capital transactions this year and has $100,000 of ordinary income, how much will his AGI for this year decline as a result of this loss? a. $3,000 b. $50,000 c. $53,000 d. $80,000
c. $53,000 (80k where 50k loss Section 1244 Offset ordinary income and 3k is the max LTCG equals 27 LTCG is carried foward. So 50k 1244 + 3k max LTCG = $53,000) He has a 1244 loss of $50,000 plus a long-term capital loss of $30,000 of which he can take $3,000 this year. Thus, his AGI for this year will decline $53,000 as a result of this loss. The stock that generated the loss qualified as Section 1244 stock, since Ajamu was one of the original investors in a company that was initially capitalized with less than $1 million. Consequently, the first $50,000 of the loss is treated as an ordinary loss under Section 1244 and the remaining $30,000 loss is treated as a capital loss. The $50,000 ordinary loss can offset Ajamu's AGI in full, but the capital loss can only offset AGI by up to $3,000 per year. This year, therefore, the total reduction in Ajamu's AGI as a result of this transaction is $53,000, and he can carry forward the additional $27,000 loss and use that against income in future years
Brenda purchased 50 shares of Walsh Co. stock three years ago for $1,000. Brenda recently gifted the stock to her brother, Brandon. On the date of the gift, the stock had a fair market value of $750. Six months after receiving the stock from Brenda, Brandon decides to sell the stock. Which of the following statements is correct? a. If Brandon sells the stock for $700, he will have a long-term capital loss. b. If Brandon sells the stock for $1,100, he will have a short-term capital gain. c. If Brandon sells the stock for $600, he will have a short-term capital loss. d. If Brandon sells the stock for $800, he will have a long-term capital gain.
c. If Brandon sells the stock for $600, he will have a short term capital loss (short term because 6 months, a loss because less than FMV and purchase price)
disallowed losses
losses that are realized, but not permitted to be recognized, including losses on the sale of personal assets (except for casualty losses) losses on the subsequent sale of property gifted or sold to a related party when its FMV is less than the original owner's adjusted basis, and losses associated with a wash sale
recognition event
occurs when a realized gain is included on a taxpayer's income tax return. all realized gains are generally recognized unless a provision in the Code provided otherwise.
wash sale
occurs when a taxpayer sells a stock or security at a loss and purchase substantially identical stock or securities within a 30 day period before or after the sale.
amount realized
the amount of money plus the value of property received in the sale of exchange of an asset
holding period
the period over which a taxpayer owns an asset
Jacob loaned $10,000 to his close friend and business associate, Luke, so that Luke could start up a homebased business. Jacob is not in the business of money lending. Luke paid interest on the loan annually at a rate of 6 percent, and the principal was due in a lump sum on maturity 10 years later. After 4 years of making payments, Luke informs Jacob in year 5 that he has filed for bankruptcy and will not be able to make any future interest ($500 per year) or principal payment, causing the debt to become wholly worthless. What is the income tax consequence for Jacob? a. Jacob will recognize an ordinary income tax loss of $10,000 for Year 5 b. Jacob will recognize an ordinary income tax loss of $10,500 for Year 5 c. Jacob will recognize a short-term capital loss of $10,000 for Year 5 d. Jacob will recognize a long-term capital loss of $10,000 for Year 5
c. Jacob will recognize a short-term capital loss of $10k for Year 5 (This is a personal debt that has become wholly worthless. Therefore, Jacob can deduct the amount of the outstanding debt, $10,000, as a short-term capital loss. All personal debts that become worthless must be deducted as a short-term capital loss. Jacob cannot deduct the $500 of lost interest for Year 5. Since he is a cash basis taxpayer, he never received the interest payment, and therefore never included it in his income. Recall that, generally, deductions are only allowed for items that are already included in the taxpayer's income.)
John sold a farm with an adjusted basis of $200,000 to Isaac for $500,000. In addition, Isaac agreed to assume the note on the farm, which had a remaining balance of $50,000. Not taking into consideration any potential depreciation recapture, what is the amount realized in the transaction from John's perspective? a. $200,000. b. $350,000. c. $500,000. d. $550,000.
d. $550,000 (500k cash + 50k assumed noted = $550k realized)
Which of the following is not a disallowed loss? a. Losses on the sale of personal use assets. b. Losses on the subsequent sale of property gifted or sold to a related party when its fair market value is less than the original owner's adjusted basis. c. Wash sales. d. Capital losses in excess of $3,000.
d. Capital losses in excess of $3,000
Which of the following statements concerning the taxation of assets is correct? a. Ordinary income may qualify for a special 0% rate. b. Capital gains are always taxed at the taxpayers marginal tax rate. c. Gains on Section 1231 assets are taxed at ordinary rates, and losses are taxed at capital rates. d. Gains on Section 1231 assets are taxed at long-term capital gains tax rates, and losses are taxed at ordinary income tax rates.
d. Gains on Section 1231 assets are taxed at long-term capital gains tax rates, and losses are taxed as ordinary income tax rates. (A is false, it is capital gains assets with lower taxable income. B is false, and C is false, the terms are reversed)
Which of the following is a deductible loss for income tax purposes? a. Losses on the sale of personal use assets. b.L osses on the subsequent sale of property gifted or sold to a related party when its fair market value is less than the original owner's adjusted basis and the sale price is greater than the fair market value at the time of the gift but less than the donors original basis. c. A loss from a wash sales transaction. d. Net long-term capital losses in excess of $3,000.
d. net long-term capital losses in excess of $3,000
realization event
generally occurs when an asset has been sold or exchanged. gains on capital assets are subject to tax only when there has been both a realization event and a recognition event
