chapter 3
An investor purchased 1,000 shares of XYZ at $45 a share and, five months later, purchased another 1,000 shares of XYZ at $50 a share. If the investor sold 400 shares of XYZ nine months after the second purchase, which TWO of the following statements are TRUE? I. The investor is not required to identify which shares are being sold II. The investor is required to identify which shares are being sold III. The cost basis is $45 per share IV. The cost basis is $50 per share a.I and III b.I and IV c.II and III d.II and IV
A-In this question, the investor has two positions in XYZ stock and each position was purchased at different times and at different prices. When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. Since the investor did not identify the shares to be sold, the cost basis will be $45 per share (based on the first purchase).
In April, an investor purchased 1,000 shares of XYZ at $47 and, in August, purchased another 1,000 shares of XYZ at $55 per share. In June of the following year, the investor sold 400 shares of XYZ at $59 per share and stipulated that the shares being sold are from the purchase that was made in August. For tax purposes, the investor will report a: a.Short-term capital gain of $4,000 b.Short-term capital gain of $1,600 c.Long-term capital gain of $3,000 d.Long-term capital gain of $12,000
B-In this question, the investor has two positions in ABC stock and each position was purchased at different times and at different prices. When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. Since the investor stipulated that the shares being sold were against the shares that were purchased in August and those shares were held for one year or less, the capital gain is short-term. The cost basis of the shares being sold is $55 and the proceeds per share on the sale is $59. Therefore, the gain of $4 per share is multiplied by the 400 share position, resulting in a $1,600 total gain.
A customer in the highest tax bracket has $1,500 in long-term capital gains from stock transactions at the end of the year. The customer will need to pay taxes of: a. $150 b. $300 c. $420 d. $525
B-Long-term capital gains are gains on securities held in excess of 12 months and are taxed at a maximum rate of 20%. Although the investor is in the highest tax bracket, the investor will be taxed at a rate of 20%. Therefore, the customer will need to pay taxes of $300 ($1,500 x 20% = $300).
A senior investor with a brokerage account at a firm appears to be showing signs of dementia. Which of the following actions is the LEAST appropriate for the RR to take? a.Contact a principal of the firm b.Contact a close family relative without informing the client c.Contact the compliance department of the firm d.If a trading authorization is on file at the firm, contact this person for help in setting up a meeting with the client
B-When servicing the account of a senior investor, an RR should be aware of the common signs of diminished capacity or dementia. These signs include difficulty speaking, memory loss, poor judgment, and being confused and disoriented. For RRs, some of the recommended actions are to discuss the situation with either their immediate supervisor (principal) or their firm's legal/compliance department or to ask the client to bring a close relative (family member) or friend to a meeting. In some cases, the senior investor may have granted trading authorization or durable power of attorney to a relative. If this is the case, an RR may use the written documentation that is on file to contact this person. Choice (b) is the least appropriate action since an RR should first ask the client to contact the close family member or friend. An RR should not take this action without informing the client
Relative to a sales tax, which TWO of the following statements are TRUE? I.It is a progressive tax II.It is a regressive tax III.It affects low income individuals the most IV.It affects all individuals equally a. I and III b. I and IV c. II and III d. II and IV
C-A regressive tax applies the same tax rate regardless of a person's income. This has an adverse effect on a low-income person since the tax represents a higher percentage of income
An investor has taken the following gains and losses during the tax year: a $19,000 capital gain on stock positions and a $24,000 loss on option positions. What amount of ordinary income may the investor offset this year? a. 0 b. $2,000 c. $3,000 d. $5,000
C-Capital gains may be offset against capital losses regardless of whether they are from stocks or options. The maximum capital loss an investor may write off against ordinary income in one tax year is $3,000. The balance of the $2,000 capital loss must be carried forward to the next year.
Cash dividends received from which of the following securities will be taxed as ordinary income? a.Preferred stock issued by a bank b.Common stock issued by an oil company c.A real estate investment trust d.Convertible preferred stock issued by a software company
C-Currently, dividends paid on both common and preferred stock are taxed at a maximum rate of 20% if the stock is held for more than 60 days. Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT does not pay corporate income tax if it distributes a minimum percentage of its income. The type of company that issued the shares is not relevant to the tax status of the cash dividend.
Which TWO of the following taxes would best describe income taxes and estate taxes? I.Flat taxes II.Graduated taxes III.Regressive taxes IV.Progressive taxes a. I and III b. I and IV c. II and III d. II and IV
D-A progressive tax is graduated (the tax rate increases as the taxable amount increases). Income taxes, estate taxes, and gift taxes are progressive. A flat tax is a situation where the tax rate remains constant regardless of the taxable amount. Flat taxes tend to be regressive in nature, which means that they have a greater effect on lower wage earners. Therefore, flat taxes are often categorized as regressive. Examples of regressive taxes are sales taxes and gasoline taxes.
Which TWO of the following choices BEST describe a gasoline tax? I.Graduated taxes II.Flat taxes III.Progressive taxes IV.Regressive taxes a.I and III b.I and IV c.II and III d.II and IV
D-A regressive tax is flat (i.e., the tax rate remains constant regardless of the taxable amount). Examples of regressive taxes are sales taxes and gasoline taxes. A progressive tax is graduated (i.e., the tax rate increases as the taxable amount increases). Income taxes, estate taxes and gift taxes are progressive.
An individual purchases 600 shares of BAZ preferred stock. One week later the stock pays a dividend of $1.20 per share and the investor sells the stock the next day. For tax purposes, how will the dividends be taxed? a. 70% of the dividend will be tax-exempt and the remainder will be taxed as ordinary income b. 70% of the dividend will be tax-exempt and the remainder will be taxed as a capital gain c. The dividend will be taxed at long-term capital gains rates d. The dividend will be taxed as ordinary income
D-Currently, dividends paid on stock held by individuals for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date are taxed at a maximum rate of 20%. This is the same maximum tax rate as long-term capital gains. Since the individual held the stock less than the 60-day period, the dividend is taxed as ordinary income. The corporate dividend exclusion allows a corporation to exclude from taxation 70% of the dividends it receives from other corporations.
On March 9, an investor purchased 1,000 shares of ABC at $20 and then on July 20, the investor purchased an additional 1,000 shares of ABC at $12. On May 11 of the following year, the investor sold 1,000 shares of ABC at $25. For tax purposes, he must report a: a.$13,000 short-term capital gain b.$13,000 long-term capital gain c.$5,000 short-term capital gain d.$5,000 long-term capital gain
D-In this question, the investor has two positions in ABC stock and each position was purchased at different times and at different prices. When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. Since the investor did not identify the shares to be sold, it is the first shares that were purchased in March at $20 that were sold. Therefore, since the shares were held for more than one year, the investor will report a $5,000 long-term capital gain.
If a registered representative receives information that a client has recently received a large sum of money, the proper course of action is to: a. Encourage increased leverage in the account b. Suggest a sizable investment in tax-exempt investments c. Solicit the sale of taxable investments that the investor is holding d. Determine if the customer's investment objectives have changed
D-Registered representatives have a responsibility to update customer information periodically in case something has changed that would alter a customer's goals and objectives. Given that the customer has just experienced a financial windfall, the representative should check to see if the customer's investment objectives have changed before making any recommendations.
customer has realized a capital gain from the sale of a municipal bond. To reduce the customer's tax liability, the capital gain can be offset against a capital loss from which of the following investments? I.A general obligation bond II.An equity security III.A corporate bond IV.A real estate investment trust a. I only b. II or III only c. I, II, or III only d. I, II, III, and IV
D-Since all of the investments are considered capital assets, a capital loss in any of these can offset a capital gain from the sale of a municipal bond. Capital assets include stocks, bonds, options, municipal securities, real estate, and interests or shares in partnerships
An investor has made the following purchases of XAM stock: •Shares bought at $39 in May 2013 •Shares bought at $56 in September 2013 •Shares bought at $36 in January 2014 •Shares bought at $36 in June 2014 The investor sells some of his XAM shares in March 2015 at $51. Based on the various purchases, which shares may be sold to result in the greatest gain with the lowest tax liability? a.Sell from the shares that were purchased in May 2013 b.Sell from the shares that were purchased in September 2013 c.Sell from the shares that were purchased in January 2014 d.Sell from the shares that were purchased in June 2014
When an investor sells a portion of his holdings, C-unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. To find which shares should be sold to generate the largest gain with the lowest tax liability, let's consider each possibility separately. 1.Choice (a) results in a 12-point long-term gain. 2. Choice (b) results in a long-term loss, not a gain. 3. Choice (c) results in a 15-point long-term gain. 4. Choice (d) results in a 15-point short-term gain (due to the shares having been held for one year or less). Since the tax rate on long-term gains (20%) is lower than the tax rate on short-term gains (as ordinary income), selling the shares that were held the longest is the best option. Although the sale of shares that were purchased in January 2014 will result in the same gain as the sale of shares that were purchased in June 2014, the tax liability will be lower.
