*Series 6 : Investment Company and Tax Concepts Practice Questions

An owner of a non-qualified variable annuity would like to withdraw a lump sum. The owner is 53 years old. Which of the following statements is true? A) A portion of the lump sum will be taxable as ordinary income and a 10% penalty will apply to the earnings portion of the withdrawal B) A portion of the lump sum will be taxable as a capital gain and a 10% penalty will apply to the earnings portion of the withdrawal C) A portion of the lump sum will be taxable as ordinary income but a 10% penalty will not apply D) A portion of the lump sum will be taxable as a capital gain but a 10% penalty will not apply

A) A portion of the lump sum will be taxable as ordinary income and a 10% penalty will apply to the earnings portion of the withdrawal Lump sum withdrawals from nonqualified variable annuities are taxed on a LIFO (last in, first out) basis. Earnings are considered the last in, and are fully taxed as ordinary income when withdrawn. Annuities are considered retirement products, so when funds are withdrawn prior to the age of 59 ½, a 10% penalty applies to the amount of the withdrawal that is considered earnings.

At which of the following levels is the interest paid on U.S. Treasury obligations taxable? A) At the Federal income tax level, but not the state/local level B) At the State/local income tax level, but not the federal level C) At both the federal and state/local income tax levels D) At neither the federal nor state level

A) At the Federal income tax level, but not the state/local level Interest paid on U.S. Treasury bonds and other direct obligations of the U.S. Government is taxable at the federal income tax level, but is excluded from taxable income for state and local income tax purposes.

Which of the following is LEAST likely to be received by a UIT unit holder? A) Capital gains from the sale of securities in the trust B) Capital gains or losses from the termination of the trust C) Ordinary income from dividend distributions of the trust D) Return of capital distributions from the trust

A) Capital gains from the sale of securities in the trust UITs rarely distribute capital gains distributions because they hold their securities until the trust's termination, with rare exception. If trust securities are sold, the sale proceeds are usually distributed to the unit holders as a return of capital and are not taxable. Instead these distributions represent a reduction to the investor's cost basis.

Which of the following statements regarding mutual funds dividend distributions and their taxation is correct? A) Dividend distributions are taxed as ordinary income unless qualified B) Ordinary dividends are taxable at ordinary income rates, but qualified dividends are not taxable C) Investors can defer taxation on dividends by reinvesting them instead of receiving them in cash D) Dividend distributions are considered a return of capital and are not taxable

A) Dividend distributions are taxed as ordinary income unless qualified Mutual fund dividend distributions are taxable as ordinary income to shareholders, unless categorized as qualified. Qualified dividends are taxed at a preferential rate.

All of the following types of distributions from mutual fund portfolios are considered nonqualified dividends EXCEPT A) Dividends from stock in domestic corporations B) Taxable interest from corporate bonds C) Dividends from stock in foreign corporations D) Dividends on stock that was held for 60 days or less

A) Dividends from stock in domestic corporations Dividends of stock from domestic corporations receive "qualified dividend" status and are taxed at favorable capital gains rates which are currently 15 or 20%. Taxable interest from corporate bonds, dividends on stock that was held for 60 days or less, and dividends from stock in foreign corporations are nonqualified dividends and are taxed as ordinary income.

An owner of a non-qualified variable annuity elects to receive monthly income payments for life at age 55. The IRS 10% penalty on early withdrawals A) Does not apply B) Applies to the portion of each payment that is considered earnings C) Applies unless the monthly income is needed due to disability D) Applies only if the annuitant is employed

A) Does not apply The IRS 10% early withdrawal penalty does not apply to annuity payments that begin prior to age 59 ½ if the annuitant has elected a life annuity option. There are also exceptions from the penalty if withdrawals are due to death and disability.

In an inflationary environment, which method of share identification usually results in the lowest cost basis when shares are liquidated? A) FIFO B) LIFO C) Step-up basis D) Average cost method

A) FIFO The share identification method, also known as the specific lot method, allows investors to select the shares they wish to liquidate. In an inflationary environment, prices are rising, so the shares with the lowest cost basis are usually the ones that were purchased earliest. FIFO, or first-in-first-out typically results in the lowest cost basis.

A beneficiary receives the death benefit from a variable life insurance policy. What are the tax consequences to the beneficiary? A) Has no taxes to pay on the death benefit B) Must pay ordinary income tax on the death benefit C) Must pay tax on the death benefit at capital gains rates D) Must pay ordinary income tax on the amount of the death benefit that exceeds the purchase payments that were made by the policy owner

A) Has no taxes to pay on the death benefit Death benefits from life insurance policies are not taxable to beneficiaries.

An owner of a nonqualified variable annuity age 56, wishes to surrender her contract. Surrender charges no longer apply. What are the tax consequences of cashing in the contract? I. The 10% early withdrawal penalty applies II. The 10% early withdrawal penalty does not apply because the contract is out of its surrender charge period III. Gains in the contract are taxable as ordinary income IV. Gains in the contract are taxable as capital gains A) I and III B) I and IV C) II and III D) II and IV

A) I and III A penalty of 10% applies on withdrawals prior to age 59 1/2 in addition to the tax that applies to the contract gains. The gains in the contract are taxed as ordinary income.

Which two of the following statements regarding the taxation of life insurance death benefits are TRUE? I. The beneficiary receives the benefits tax-free II. The beneficiary must pay ordinary income taxes on death benefits III. The value of the death benefit is generally included in the estate of the deceased policyholder IV. There are no tax consequences for either the deceased policyholder or the beneficiary A) I and III B) I and IV C) II and III D) II and IV

A) I and III One of the great advantages of life insurance death benefits is that they are received by beneficiaries tax-free. The estate of the deceased must include the value of the death benefit.

Which two of the following statements are TRUE regarding Subchapter M of the Internal Revenue Code? I. It applies to taxation of mutual funds II. It applies to taxation of mutual fund shareholders III. It helps eliminate double taxation of distributions IV. It enables taxation of mutual funds distributions at favorable capital gains rates A) I and III B) I and IV C) II and III D) II and IV

A) I and III Subchapter M applies to the taxation of mutual fund. If a mutual fund distributes a minimum of 90% of its net investment income, it is only taxed on the amount it keeps, which eliminates double taxation of fund income

The cost basis of a UIT investor is decreased by which of the following? I. Return of capital distributions II. C& D fees III. The purchase price of the units A) I only B) I and III only C) II and III only D) I, II and III

A) I only The cost basis of the owner of UIT units is reduced by return of capital distributions. The unit purchase price and sales charge, which may consist of front end, deferred charges, and creation and development fees, (C&D fees) increase the investor's basis.

An investor's mutual fund shares have appreciated. This increase in NAV: A) Is not taxable to the investor at the present time, but will be taxable when the investor redeems her shares. B) Is taxable at long-term capital gain rates if the shares have been held more than one year. C) Is taxable at a preferred rate if the mutual fund is a regulated investment company. D) Is not currently taxable, but increases the investor's cost basis per share

A) Is not taxable to the investor at the present time, but will be taxable when the investor redeems her shares. Share appreciation itself is not a taxable event. It is the redemption of the shares above cost basis that triggers a tax event. This redemption will be taxed at income rates if the shares were held one year or less. Taxed at long-term rates if the shares were held at least 366 days.

Jim owns 1,000 shares of the XYZ mutual fund. This year Jim received $150 dividends and $200 in capital gains and elected to reinvest these distributions back into the fund. Which of the following statements is true? A) Jim's cost basis in this fund will increase, due to the reinvested distributions. B) Jim's cost basis in this fund will be reduced, due to the reinvested distributions. C) The reinvested distributions will have no impact on Jim's cost basis in the mutual fund. D) Jim will need to file IRS Form 1099C at or prior to the tax filing deadline next year.

A) Jim's cost basis in this fund will increase, due to the reinvested distributions. Jim's cost basis in this fund will be increased owing to the additional investment Jim is making.

Distributions from mutual funds are reported to investors on which form? A) On Form 1099 B) On a W-2 C) On written request D) They are not reported to the account owner

A) On Form 1099 Distributions from a mutual fund, for example capital gains or dividends, are reported to investors on Form 1099.

Dividends paid by UITs that are reclassified and eligible for more favorable tax treatment are called A) Qualified dividends B) Return of capital C) Preferred dividends D) Phantom income

A) Qualified dividends Some dividends paid by a UIT may be reclassified at the end of the year as qualified dividends. These dividends are taxed at long-term capital gains rates instead of ordinary income tax rates. A general rule is that no more than 20% of a UIT's dividends are qualified dividends.

A shareholder reinvests a cash distribution that reflects the sale of securities that were held by a mutual fund for 24 months. What are the shareholder's tax consequences? A) The distribution is classified as a long-term gain and is taxed to the investor even though it is reinvested. B) The distribution is classified as a long-term capital gain but is not taxable because it was reinvested. C) The distribution is classified as a qualified dividend and is taxed to the investor even though it is reinvested. D) The distribution is classified as a qualified dividend and is not taxed to the investor because it is classified.

A) The distribution is classified as a long-term gain and is taxed to the investor even though it is reinvested. A mutual fund capital gains distribution is classified as long- or short-term based on the fund's holding period. A long-term gain results when securities were held for more than one year and is taxed at preferential long-term capital gains rates. Capital gains distributions are taxable whether taken in cash or reinvested.

Under which of the following circumstances does an investor have no tax consequences resulting from an investment company distribution? A) The investor receives a return of capital distribution from a unit investment trust B) Capital gains distributions are received from a municipal bond fund C) Dividend distributions are reinvested in the purchase of additional mutual fund shares D) Shares of an aggressive growth fund are exchanged for shares of a balanced fund in the same fund family

A) The investor receives a return of capital distribution from a unit investment trust Return of capital distributions from unit investment trusts are not taxable to investors. Dividend distributions from municipal bond funds, but not capital gains distributions, are not taxable. Distributions that are reinvested and also exchanges of funds are taxable events

Which of the following statements regarding capital gains distributions from UITs is TRUE? A) They are rare B) They are regularly distributed and are taxable as ordinary income regardless of how long the investor has owned the units C) They are regularly distributed and are taxable as long-term capital gains regardless of how long the investor has owned the units D) They are regularly distributed and are taxable as short-term capital gains

A) They are rare the 1099-DIV from the UIT will categorize them for taxpayers Capital gains from UITs are very rare because of the buy and hold mandate of these trusts. In the rare event that capital gains apply, the 1099-DIV received by the investor will explain their tax treatment.

A customer has contributed $100,000 to a single premium nonqualified deferred variable annuity. The value of the annuity has grown to $130,000, and the customer would like to withdraw $50,000. How will the $50,000 withdrawal be taxed? A) The full $50,000 is taxed as a capital gain B) $30,000 is taxed as ordinary income; the remainder is not taxed C) $20,000 is taxes as ordinary income, the remainder is not taxed D) No taxes are due. The $50,000 is considered a return of principal and is not taxable

B) $30,000 is taxed as ordinary income; the remainder is not taxed Lump sum withdrawals from nonqualified variable annuities are taxed on a LIFO (last in, first out) basis. Earnings are considered the last in, and are fully taxed as ordinary income when withdrawn. In this situation the $30,000 of earnings will be taxed as ordinary income, and $20,000 will be returned tax free because the payments into the annuity were made with after-tax dollars

An annuity owner, age 65, has chosen to annuitize a qualified annuity. Each monthly income payment will be A) received tax free B) 100% taxable as ordinary income C) Partially taxed as ordinary income based on the exclusion ratio D) Partially taxed as capital gains

B) 100% taxable as ordinary income Qualified annuities are funded with pretax dollars. Since neither the purchase payments nor the earnings in these annuities have been taxed, monthly payments from qualified annuities are fully taxable

The tax form that reports and categorizes mutual fund distributions for shareholders is the A) K-1 B) 1099-DIV C) W-9 D) Schedule A

B) 1099-DIV Investors receive a form 1099-DIV by February 15 of each year which reports taxable distributions to shareholders.

An annuity owner will begin receiving monthly payments from a nonqualified annuity at age 60. All of the following statements are true EXCEPT A) An exclusion ratio will be calculated to determine the tax consequences that apply B) A 10% penalty will apply on the amount of each payment that is considered earnings C) A portion of each payment will be taxable as ordinary income D) A portion of each payment will be considered a tax free return of principal

B) A 10% penalty will apply on the amount of each payment that is considered earnings Monthly payments from an annuity are taxed based on an exclusion ratio calculation. The calculation determines the amount of each monthly payment that is excluded from taxation, and the amount that is taxable as ordinary income. A 10% penalty does not apply when payments begin after the age of 59 ½.

An investor has purchased shares of a growth fund for $9.00 and sells them 18 months later for $9.50. At that time, a deferred charge of $.05 per share is applied. The investor must report A) A long-term capital gain of $.50 per share B) A long-term capital gain of $.45 per share C) A short-term capital gain of $.50 per share D) A short-term capital gain of $.45 per share

B) A long-term capital gain of $.45 per share An investor's cost basis in mutual fund shares is calculated by adding the initial purchase price and sales charges or fees that were applied. In this example the cost basis is $9.05. Because the investor sold the shares at a higher price after holding them for more than one year, a long-term capital gain of $.45 per share must be reported.

Of the following, which is not taxable to the owner of a life insurance policy? A) Death benefit paid to the owner's estate at death B) An annual dividend distribution received in cash C) Cash surrender value in excess of the policy owner's cost basis D) A policy loan that is outstanding at the time the policy is surrendered which exceeds the investor's basis

B) An annual dividend distribution received in cash Dividend distributions paid to owners of life insurance policy are considered a return of premium and are not taxable

Which of the following best characterizes a regulated investment company? A) A business that complies with all federal tax laws and passes through business deductions to shareholders B) An entity eligible for preferential tax treatment under IRC standards C) An investment company that is managed and regulated by an outside auditor D) A mutual fund company that has satisfied all SEC filing and prospectus requirements

B) An entity eligible for preferential tax treatment under IRC standards A regulated investment company is one that meets IRS standards for special tax treatment. The fund passes through at least 90% of its net investment income to shareholders, thus avoiding tax liability at the fund level.

An investor's cost basis in closed end company shares is used to determine A) The amount of loss than can be carried forward when shares are sold at a loss B) Any gain or loss when shares are sold C) The amount of ordinary income that must be reported each year fund shares are owned D) The amount of capital gains distributions that can be excluded from taxation each year

B) Any gain or loss when shares are sold An investor must track cost base or basis to determine if there is a capital gain or loss to report when closed end fund shares are sold.

The benefit investors receive for reinvestment of mutual fund dividend and capital gains distributions is A) Tax deferred growth B) Compound growth C) Tax exempt growth D) A sales charge discount on the reinvested amount

B) Compound growth The opportunity to reinvest mutual fund distributions results in compounded earnings. Unless the shares are held in a qualified retirement plan, taxation will apply on the distributions, whether reinvested or taken in cash. Reinvestment of distributions is permitted at no sales charge.

The tax policy that provides relief from double taxation of dividend and interest income earned by open and closed end companies when distributed to shareholders is the A) Contrarian Theory B) Conduit Theory C) Subscription Theory D) Phantom Income Theory

B) Conduit Theory Subchapter M, also known as the Conduit Theory, applies to the taxation of investment companies. If an investment company distributes a minimum of 90% of its net investment income, it is only taxed on the amount it keeps, which eliminates double taxation of fund income

In times of rising inflation in inventory costs, which of the following methods of valuing inventory will result in the largest reported gross profit? A) LIFO B) FIFO C) There is no difference between LIFO and FIFO D) It depends on the company's inventory turnover ratio

B) FIFO FIFO means "first-in-first-out" so the oldest inventory is considered to be sold first. This inventory will have the lowest cost basis in inflationary times. Therefore, the firm will report (and pay tax on) higher gross profit due to lower cost of goods sold. LIFO (last-in-first-out) assumes the most recent inventory (highest cost) is sold first.

An investor receives monthly dividend distributions from the municipal bond UIT units he holds. For tax purposes these distributions are A) Tax deferred B) Federally tax exempt C) Taxed as ordinary income D) Taxed as long term capital gains

B) Federally tax exempt The monthly or quarterly dividend distributions that are received by holders of UIT units are typically taxed as ordinary income. Because these distributions are from a municipal UIT, they are exempt from federal income taxes, and may be exempt from state income taxes depending on the owner's residency

A unit investment trust pays a return of capital to an owner of units. Which two of the following statements are TRUE? I. The distribution is not taxable II. The distribution is taxable III. The distribution increases the investor's cost basis IV. The distribution reduces the investor's cost basis A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Return of capital distributions from UITs come from the sale of capital assets owned by the trust. These are tax exempt when received but reduce the investor's cost basis in the UIT.

Which two of the following statements correctly state the tax treatment that applies to U.S. Treasury securities? I. Capital gains are fully taxable II. Capital gains are tax deductible III. Interest payments are generally tax free at the federal level IV. Interest payments are taxable at the federal level but exempt at the state level A) I and III B) I and IV C) II and III D) II and IV

B) I and IV U.S. Treasury securities pay interest that is generally tax exempt at the state level, but is taxable at the federal level. Capital gains are fully taxable.

Investors that purchase Ginnie Mae, Fannie Mae or Freddie Mac mortgage-backed securities will benefit from which of the following? A) Full backing by the U.S. Government B) Income that is slightly higher than income from U.S. Treasury securities C) Exemptions from interest taxation at the federal, state, and local levels D) Interest payments every six months

B) Income that is slightly higher than income from U.S. Treasury securities Investors purchase mortgage-backed securities for the monthly income stream that is very safe from default. Should these issuers ever default, the government would probably use its creditworthiness to guarantee investors' payments of interest and principal. Some agency securities receive exemptions from state and local taxation, but mortgage-backed agency securities are subject to taxation at all levels.

An investor chooses to reinvest proceeds received from the termination of a UIT into a new UIT offered by the same sponsor. This transaction A) Generates no tax consequences because the trust is within the same family B) Is taxable as a sale and repurchase C) Is tax deferred until the proceeds are withdrawn from the trust D) Generates ordinary income taxes on any gains over the investor's cost base that were reinvested

B) Is taxable as a sale and repurchase This transaction is similar to an exchange within a mutual fund family. Both of these transactions are considered a sale and repurchase by the IRS and are taxable.

A mutual fund is NOT subject to taxation on current distributions made to shareholders in which of the following situations? A) It distributes a minimum of 75% of its net investment income B) It distributes a minimum of 90% of its net investment income C) It distributes a minimum of 75% of its gross investment income D) It distributes a minimum of 90% of its gross investment income

B) It distributes a minimum of 90% of its net investment income A mutual fund is not taxed on the income it distributes provided it distributes a minimum of 90% of its net investment income.

A tax exemption on a distribution to shareholders exists in which of the following situations? A) The distribution is made to an investor over the age of 70 1/2 B) It is a dividend distribution from a municipal bond mutual fund, although a capital gains distribution from the same fund would be taxable C) It is a distribution of either municipal bond fund dividends or capital gains D) The distribution is made from a unit investment trust

B) It is a dividend distribution from a municipal bond mutual fund, although a capital gains distribution from the same fund would be taxable Dividend distributions from municipal bond fund mutual funds are tax exempt. However, capital gains distributions from these funds are taxable. Although unit investment trusts sometimes return capital, which is a non-taxable distribution, other distributions are currently taxable

An annuity owner that has received annuity payments for the last five years has died. The beneficiary of the contract A) Will receive the remaining annuity payments tax free B) Must continue taking income from the contract at the same pace as the original annuitant took income, or faster. C) Must take monthly income over life expectancy D) Can receive the distribution in a lump sum only

B) Must continue taking income from the contract at the same pace as the original annuitant took income, or faster. If an annuity contract terminates due to a death after the date on which the annuity is converted to a stream of income, beneficiaries must continue taking income from the contract at the same pace as the original annuitant took income, or faster. If the contract has not yet been annuitized, beneficiaries have up to ten years to take the distribution in full. The annuity proceeds are taxed as ordinary income

Investors who purchase Ginnie Mae securities benefit from which of the following? A) A steady stream of income paid every six months B) Protection from default of the underlying mortgages C) An exemption from taxation at the federal level D) Protection from interest rate risk

B) Protection from default of the underlying mortgages Investors who purchase Ginnie Mae securities receive pass-through income based on pooled consumer mortgages. The income is paid on a monthly basis and is subject to taxation at all levels. The U.S. government fully protects Ginnie Mae investors from defaults on mortgage payments, so investors have no principal risk. They are subject to interest rate risk, however, because the value of the certificate will fluctuate as interest rates change.

Dividends paid by closed end funds that are reclassified and eligible for exemption from current taxes are called A) Qualified dividends B) Return of capital C) Preferred dividends D) Phantom income

B) Return of capital Some dividends paid by a closed end fund may be reclassified as a return of an investor's investment into the fund. These dividends, called a return of capital, are not taxed. Cost basis, however is reduced by return of capital distributions.

Which of the following statements about Interest and dividend income earned by a closed end fund is TRUE? A) It is subject to double taxation if the fund distributes more than 90% of its net income B) Shareholders pay ordinary income tax rates on receipt of this income if it is distributed C) If distributed, it increases investor cost basis D) If distributed to shareholders, this income is categorized as passive income for tax reporting purposes

B) Shareholders pay ordinary income tax rates on receipt of this income if it is distributed The dividends and income that are received by a closed end fund for securities it holds in its portfolio are distributed as dividends to shareholders. These distributions are not subject to double taxation if the fund distributes a minimum of 90% of its net investment income. Shareholders pay ordinary income tax on closed end fund dividend distributions

An investor receives quarterly dividend distributions from the municipal bond closed end fund shares he holds. For tax purposes these distributions are A) Tax deferred B) Tax exempt C) Taxed as ordinary income D) Taxed as long term capital gains

B) Tax exempt The monthly or quarterly dividend distributions that are received by holders of closed end fund shares are taxed as ordinary income, unless they come from municipal funds. Distributions from municipal closed end shares are tax exempt.

An investor receives monthly dividend distributions from the nonqualified bond UIT units he holds. For tax purposes these distributions are A) Classified as a return of capital and reduce cost basis B) Tax exempt at the federal level if comprised of interest from bonds held in a municipal bond UIT C) Tax deferred if reinvested into other available UITs offered through the same sponsor D) Taxed as long-term capital gains

B) Tax exempt at the federal level if comprised of interest from bonds held in a municipal bond UIT The monthly or quarterly dividend distributions that are received by holders of UIT units are taxed as ordinary income. However, if these distributions are paid from a UIT that holds municipal bonds, they are tax-exempt at the federal and possibly the state level, depending on the securities held and the state residency of the investor

A mutual fund dividend that is classified as non-qualified is A) Taxed at long term capital gains rate B) Taxed at ordinary income rates C) Exempt from taxation at the federal level D) Exempt from taxation at the state and local level

B) Taxed at ordinary income rates Non-qualified dividends are taxed as ordinary income. Qualified dividends are taxed as long-term capital gains at a a more favorable rate.

The IRS considers all of the following permissible tax free exchanges EXCEPT A) The replacement of an annuity contract for another annuity contract with identical annuitants B) The replacement of an annuity contract with a life insurance contract with the same owner C) The replacement of a fixed life insurance contract with a variable life insurance contract on the same insured D) The replacement of a life insurance contract with an annuity contract for the same owner

B) The replacement of an annuity contract with a life insurance contract with the same owner A tax free exchange under IRS Section 1035 cannot be made when the proceeds of an annuity are used to purchase life insurance. This is a taxable event. A life insurance contract can be exchanged in the purchase of an annuity, however.

All of the following statements regarding dividend distributions from mutual funds are true EXCEPT: A) They are taxed at preferential rates if they are qualified B) They are not taxable if they are reinvested into additional shares of the fund C) They are usually distributed quarterly for stock funds D) They are usually distributed monthly for bond funds

B) They are not taxable if they are reinvested into additional shares of the fund Mutual fund dividends are taxable to investors if they are taken in cash or reinvested into additional shares.

Which of the following statements regarding UITs and qualified retirement plans is TRUE? A) UITs are not eligible for inclusion in qualified plans B) UITs may be included in qualified plans and all distributions and capital gains are tax deferred C) UITs may be included in qualified plans and all distributions are tax deferred, but capital gains are currently taxable D) UITs may be included in qualified plans and all capital gains are tax deferred, but dividend distributions are currently taxable

B) UITs may be included in qualified plans and all distributions and capital gains are tax deferred UITs may be included in qualified plans like IRAs and SEP plans, etc. Distributions and capital gains are both tax deferred

A customer buys a common stock for the first time on January 1 in a taxable account. It pays a dividend to shareholders of record on February 4. He sells the stock on February 15 and doesn't buy it again. How will the dividend be taxed? A) as a qualified dividend B) as a nonqualified dividend C) he has a choice of treating it as either qualified or nonqualified D) it will not be taxable because he didn't hold the stock long enough

B) as a nonqualified dividend To obtain qualified dividend status on a common stock, the stock must be held for more than 60 days during the 121- day period surrounding the ex-dividend date. Since didn't hold the stock for 60 days the dividend will be taxed as nonqualified, at the same rate as ordinary income

For a mutual fund, gross investment income less operating expenses provides A) shareholder's equity. B) net investment income. C) book value per share. D) earnings per share.

B) net investment income. Net investment income is found by deducting operating expenses from gross investment income

In January, Victor purchased 2,500 shares of Issuer J at 21. In June J is trading at 26.25. Victor has realized A) a capital loss of 525. B) no gain or loss. C) a short-term capital gain or 525. D) a long-term gain of 525

B) no gain or loss. As Victor has not sold his shares, he does not have a capital gain or loss, since nothing has been realized.

What is the annual amount per beneficiary that may be contributed by the owner of a 529 Plan without triggering federal gift tax or generation-skipping transfer tax consequences? A) The annual gift tax exclusion B) 3 X the annual gift tax exclusion C) 5 X the annual gift tax exclusion D) 10 X the annual gift tax exclusion

C) 5 X the annual gift tax exclusion In one tax year, the owner may contribute up to five years' worth of annual gift tax exclusions for each beneficiary. For 2023, the exclusion is $17,000, so up to $85,000 may be contributed once per beneficiary, without federal gift tax consequences.

To avoid double taxation of distributions a closed end fund receives from securities it holds within its portfolio, a fund must distribute a minimum of A) 70% of net investment income B) 75% of net investment income C) 90% of net investment income D) 95% of net investment income

C) 90% of net investment income IRC Subchapter M enables investment companies to avoid double taxation on portfolio income if they distribute a minimum of 90% of their net investment income.

To avoid double taxation of distributions a mutual fund receives from securities it holds within its portfolio, a fund must distribute a minimum of A) 70% of net investment income B) 75% of net investment income C) 90% of net investment income D) 95% of net investment income

C) 90% of net investment income Internal Revenue Code (IRC) Subchapter M enables mutual funds to avoid double taxation on portfolio income if they distribute a minimum of 90% of their net investment income.

A customer that takes advantage of the exchange provision offered by a mutual fund is likely to experience all of the following EXCEPT A) A limit on the number of exchanges that can be executed within a year B) A capital gain or loss that must be reported for tax purposes C) A sales charge on the new purchase D) A waiver on redemption fees

C) A sales charge on the new purchase Exchanges or conversions allow investors to exchange shares of one fund for an equivalent investment in another fund of the same family. There are no redemption fees on the redeemed shares or sales charges on the new shares. However, the exchange is a taxable event, and any gain or loss must be reported. The number of exchanges in a year may also be limited.

Mutual funds usually follow which of the following methods for calculating an investor's cost basis? A) LIFO B) FIFO C) Average Cost Method D) Specific Lot Identification Method

C) Average Cost Method Funds typically use the Average Cost method as the default for the calculation of basis

Which of the following types of closed end fund distributions is exempt from taxation? A) Dividends from stock in domestic corporations B) Long term gains from securities held in the portfolio C) Dividends considered a return of capital D) Dividends from stock in foreign corporations

C) Dividends considered a return of capital Closed end fund dividends that are considered a return of capital are exempt from taxation. They reduce the investor's cost basis in the shares.

A customer contributed $100,000 to a nonqualified variable annuity. The value of the annuity is now $150,000. If the customer withdraws a lump sum of $60,000, which two of the following statements are TRUE? I. Ordinary income tax rates apply to a portion of the withdrawal II. Capital gains rates apply to a portion of the withdrawal III. $10,000 of the withdrawal is taxed IV. $50,000 of the withdrawal is taxed A) II and IV B) I and III C) I and IV D) II and II

C) I and IV Lump sum withdrawals from nonqualified variable annuities are taxed on a LIFO (last in, first out) basis. Earnings are considered the last in, and are fully taxed as ordinary income when withdrawn. In this situation the $50,000 of earnings will be taxed as ordinary income, and $10,000 will be a tax free return of principal.

With regard to securities issued by the federal government, which two of the following statements are TRUE? I. Interest is exempt from taxation at the federal level II. Interest is taxable at the federal level III. Capital gains are subject to full taxation IV. Capital gains are not taxable A) I and III B) I and IV C) II and III D) II and IV

C) II and III Interest on government securities is taxable at the federal level. Capital gains are fully taxable as well.

Which two of the following statements apply to the distributions received from UITs? I. Unit holders receive interest distributions II. Unit holders receive dividend distributions III. They are taxed as ordinary income IV. They are taxed as long-term capital gains A) I and III B) I and IV C) II and III D) II and IV

C) II and III Because UITs are an ownership interest, their distributions are dividends. The dividends paid by the UIT may include interest from bonds held in the portfolio. The monthly or quarterly dividend distributions that are received by holders of UIT units are taxed as ordinary income.

Which two of the following statements about taxation of capital gains are TRUE? I. Long term capital gains are taxed at ordinary income rates II. Short term capital gains are taxed at ordinary income rates III. Capital losses may be used to reduce ordinary income IV. Capital losses may be used to offset capital gains, but not ordinary income A) I and III B) I and IV C) II and III D) II and IV

C) II and III Short term gains apply to securities held for 12 months or less. Gains are taxed at ordinary income rates. Net capital losses may be used to offset ordinary income, and may be carried forward in to future years until they are fully used.

A mutual fund shareholder's cost basis in shares is less than the redemption price received. Which two of the following statements are TRUE? I. The investor realized a loss II The investor realized a gain III. The shareholder has a taxable event to report IV. The shareholder does not have a taxable event to report A) I and III B) I and IV C) II and III D) II and IV

C) II and III When the redemption price of shares is greater than the cost basis, a shareholder has realized a capital gain. Both realized capital gains and losses are taxable events that must be reported.

Which of the following increase a UIT investor's cost base? I. Return of capital distributions II. C& D fees III. The purchase price of the units A) I and II only B) II only C) II and III only D) I, II, and III

C) II and III only The cost basis of the owner of UIT units includes the purchase price and sales charge, which may be front end, deferred charges, and creation and development fees (C&D) fees. Return of capital distributions are a reduction of basis.

An annuity owner will begin receiving monthly income payments from a nonqualified annuity at age 60. Which of the following statements is TRUE? A) Monthly payments from annuity contracts are taxed on a LIFO basis B) Monthly payments from annuity contracts are taxed on a FIFO basis C) Monthly payments from annuity contracts are taxed based on an exclusion ratio, which determines the amount of each payment excluded from taxation and the amount taxed as ordinary income D) Monthly payments from annuity contracts are taxed based on an exclusion ratio, which determines the amount of each payment excluded from taxation and the amount taxed as a capital gain

C) Monthly payments from annuity contracts are taxed based on an exclusion ratio, which determines the amount of each payment excluded from taxation and the amount taxed as ordinary income Monthly payments from a non-qualified annuity are taxed based on an exclusion ratio calculation. The calculation determines the amount of each monthly payment that is excluded from taxation, and the amount that is taxable as ordinary income.

Which of the following statements correctly describes a shareholder's tax consequences when a mutual fund's dividend distributions are taken in cash? A) There are no taxes due because the distribution represents a return of capital B) Mutual fund dividends are always considered qualified and are subject to taxation at a preferential rate C) Mutual fund dividends are subject to taxation as ordinary income unless identified as qualified dividends D) Mutual fund dividends represent realized appreciation of securities in the portfolio, are and subject to taxation at capital gains rates

C) Mutual fund dividends are subject to taxation as ordinary income unless identified as qualified dividends Dividends are taxable as ordinary income, unless they are identified by the fund that distributed them as "qualified". Dividends are taxable to shareholders whether taken in cash or reinvested.

Which of the following statements correctly describes a shareholder's tax consequences from the reinvestment of a mutual fund's dividend distributions? A) There are no taxes due when dividends are reinvested B) Reinvested dividends are always considered qualified and are subject to taxation at a preferential rate C) Reinvested dividends are subject to taxation as ordinary income D) Reinvested dividends are a return of capital and subject to taxation at capital gains rates

C) Reinvested dividends are subject to taxation as ordinary income Dividends are taxable as ordinary income, unless they are identified by the fund that distributed them as "qualified". Dividends are taxable to shareholders whether taken in cash or reinvested into the fund.

Which of the following reduces an investor's cost basis in mutual fund shares? A) Purchase price of fund shares B) Sales charges C) Return of capital distributions D) Reinvested capital gains distributions

C) Return of capital distributions Investors must maintain their cost basis in fund shares to determine if there is a capital gain or loss at the time of sale. Basis is increased by costs to the investor, such as the purchase price of fund shares, sales charges and reinvested gains and distributions. It is reduced by return of capital distributions.

A customer makes a lump sum withdrawal from a non-qualified annuity. Which of the following best describes the taxation that applies? A) The lump sum is partially taxable, and partially tax free based on the calculation of an exclusion ratio B) Tax is calculated based on the first in, first out method C) Tax is calculated based on the last in, first out method D) The lump sum is fully taxable at favorable capital gains rates

C) Tax is calculated based on the last in, first out method Lump sum withdrawals are calculated using the last in, first out method. Earnings are considered the last contribution and are taxed first when withdrawn. Any excess over the earnings is a return of principal and is not taxable.

The UIT investor's gains at the time of trust termination are A) Tax deferred B) Taxed as ordinary income C) Taxed as long-term or short-term capital gains D) Tax exempt

C) Taxed as long-term or short-term capital gains Any gain from the termination of a UIT is taxable as a long or short-term capital gain depending on whether the investor owned the stock for more than 12 months or less

At retirement, an investor chooses to take all proceeds from a nonqualified variable annuity in a lump sum. What are the tax consequences to this investor? A) The entire distribution is taxable B) The contributions are subject to taxation at ordinary income rates, but the earnings are tax free C) The earnings are taxed as ordinary income, but the contributions are not taxed D) The earnings are reported as capital gains and the contributions are not taxed

C) The earnings are taxed as ordinary income, but the contributions are not taxed The earnings are taxed at ordinary income rates because they have not previously been taxed. The contributions were made after taxes is a non-qualified annuity, so are not taxable at withdrawal. Retirement plan distributions are taxable as ordinary income.

Your client has changed her mind about her investment in an aggressive growth stock fund and would like shares of a balanced fund instead. She is concerned with losing money on the transaction because of new sales charges that may apply. Which of the following statements is TRUE?

C) The fund's exchange privilege will allow her to convert the shares of the aggressive growth fund to a balanced fund in the same family without a sales charge, but tax consequences will apply A fund's exchange or conversion privilege allows investors to convert their shares into an equivalent investment of another fund in the same family without a sales charge. However, the IRS views this transaction as a sale and repurchase, so taxation of any gain or loss will apply.

Which of the following statements about return of capital distributions is true? A) There is no tax impact because they represent a return of investment, and there is no impact on the owner's cost basis B) They are not currently taxable but increase the owner's cost basis C) They are not currently taxable but decrease the owner's cost basis D) They are taxed like capital gains, and will be classified as long- or short-term depending on the holding period of the distributor

C) They are not currently taxable but decrease the owner's cost basis A return of capital distribution represents a payback of a portion of a shareholder's investment in a fund. There is no current tax impact, but the investor's cost basis is reduced. These distributions are common with UITs, REITs and closedend companies

An investor exchanges mutual fund shares held in a nonretirement account from a fund in one fund family to another similar fund in a different fund family. The consequences of this transaction include all of the following EXCEPT: A) The transaction is treated as a sale and repurchase B) Any capital gains or losses must be recognized when the exchange occurs C) This exchange takes place at NAV D) The taxation of any gain or loss is based on the investor's holding period

C) This exchange takes place at NAV Because this investor is purchasing shares in another fund family, the new shares will be purchased at the POP, not the NAV. Purchase at NAV is only offered for exchanges within the same fund family.

Which of the following statements correctly describes the tax treatment that applies to an increase in the net asset value of mutual fund shares? A) This is a taxable gain that is taxed according to the funds holding period B) This is a taxable gain that is taxed according to the investor's holding period C) This is an unrealized gain that is not taxable D) This gain is taxable unless the shares are held in a retirement account

C) This is an unrealized gain that is not taxable An increase in NAV is unrealized if the shares are not sold. Unrealized gains, or paper profits, are not taxable. Gains are only taxable when they are realized.

A cash dividend received by a retail investor would be taxed at a preferred rate if the investor A) purchased the shares at least 30 days prior to the ex-dividend date. B) owns at least 20% of the outstanding shares of the issuer. C) has held the stock for greater than 60 days surrounding the ex-dividend date. D) sells their shares no later than 60 days after receiving the dividend.

C) has held the stock for greater than 60 days surrounding the ex-dividend date. A cash dividend would be taxed at a preferred rate if the investor holds the shares for greater than 60 days of the 121-day period surrounding the ex-dividend date. Otherwise, the dividend would be taxed at ordinary income tax rates.

A 'regulated investment company' is one where A) the IRS has done a complete audit of the fund's books and declares its procedures compliant with current tax law. B) dividend distributions are made on a quarterly basis. C) the mutual fund acts as a conduit for the distribution of net investment income. D) capital gains distributions are made on an annual basis

C) the mutual fund acts as a conduit for the distribution of net investment income. A 'regulated investment company' is one that acts as a "conduit" for the distribution of the net investment income of the mutual fund.

Mr. Jones buys 100 shares of a mutual fund on December 28, 2001, for $4,000. He receives a capital gains distribution of $2.40 per share on March 6, 2002. He sells his 100 shares for $4,300 on June 19, 2002. For tax purposes, these transactions will result in A) a $240 capital gain B) a $300 capital gain C) two reportable capital gains distributions D) no capital gains to report

C) two reportable capital gains distributions When Mr. Jones receives the capital gains distribution he has a $240 capital gain. Additionally, when he sells his mutual fund shares for $4,300 versus his cost basis of $4,000, he has another capital gain of $300.

What type of self-directed retirement plan is established by public school systems and nonprofit organizations? A) 401(k) B) SIMPLE C) 457(b) D) 403(b)

D) 403(b) 403(b) plans are established by public school systems and nonprofit organizations such as hospitals and charities.

The total period of time that is considered to determine whether an investor violated terms of the wash sale rule in the sale of mutual funds is A) 30 days B) 31 days C) 60 days D) 61 days

D) 61 days A wash sale occurs when an investor has sold shares at a loss but repurchases similar shares within 30 days before or after the loss. The IRS views this as a "sham" transaction and disallows the tax loss on the transaction. The total period, including the date the shares were sold at a loss, is 61 days.

An equity mutual fund is required to provide written notice that dividend and capital gains distributions may be reinvested at NAV with what frequency? A) At account opening only B) Monthly C) Quarterly D) Annually

D) Annually A mutual fund is required to provide notice of reinvestment of distributions at NAV no less than annually

An investor transfers the shares held in one fund to another fund in the same family. Which of the following statements correctly describes the tax consequences that apply? A) There is no tax as long at the transfer is completed within 60 days B) This is a sale and repurchase and is subject to ordinary income taxation C) If gains are generated, they are taxed based on the funds holding period D) Any gain or loss will be classified based on the investor's holding period of the shares in the fund

D) Any gain or loss will be classified based on the investor's holding period of the shares in the fund This is an example of an exchange and must be treated as a sale and repurchase of shares. The gain/loss will be taxed as short-term or long-term based on the investors holding period

All of the following distributions are likely to be paid to UIT unit owners EXCEPT A) Qualified dividends B) Ordinary dividends C) Return of capital D) Capital gains

D) Capital gains UITs rarely distribute capital gains distributions because they hold the securities they buy for the trust until the trust's termination with rare exception.

Which of the following life insurance events is taxable to the recipient? A) Dividend distributions to a policy owner B) Death benefit payable to a named beneficiary C) Policy loan taken by the owner when the policy is in force D) Cash surrender value of the policy if it exceeds the owner's basis in the policy

D) Cash surrender value of the policy if it exceeds the owner's basis in the policy The cash surrender value of a life insurance policy is taxable if exceeds the owner's cost basis. Cost basis equals the premiums paid, plus dividend distributions if any, and any other withdrawals.

All of the following statements are true about capital gains and dividend distributions EXCEPT A) Dividends from equity funds are typically distributed quarterly, while dividends from bond funds are often distributed monthly B) Capital gains from the fund are distributed annually C) Both dividend and capital gain distributions may be reinvested to purchase additional shares D) Distributions are taxable if taken in cash but not when reinvested

D) Distributions are taxable if taken in cash but not when reinvested The opportunity to reinvest dividend and capital gains distributions enables compounding for shareholders. Gains of the fund are distributed annually, while dividends are typically distributed monthly by bond funds and quarterly by equity funds. Distributions are taxable whether taken in cash or reinvested in additional shares.

Capital gains on portfolio securities held by the fund are I. Classified as long-term gains if the securities were held for more than 6 months II. Classified as long-term gains if the securities were held for more than 1 year III. distributed quarterly IV. distributed annually A) I and III B) I and IV C) II and III D) II and IV

D) II and IV Capital gains on portfolio securities held by the fund and sold at a profit are classified as long-term gains if the securities were held for more than 1 year, and are distributed to shareholders annually.

Which two of the following statements are TRUE regarding the taxation of variable life insurance contracts? I. The increase in cash value from year to year is taxable II. Cash value increases on a tax deferred basis III. Death benefit proceeds are taxable when paid to beneficiaries but not if paid to the estate of the insured IV. Policy loans are not taxable while a policy is in force A) I and III B) I and IV C) II and III D) II and IV

D) II and IV Cash value in a life insurance contract increases on a tax deferred basis. Death benefit proceeds are not taxable to beneficiaries but are included in the estate of the insured. Policy loans taken while the policy is in force are not taxable

Due to strong market performance, the value of a customer's mutual fund shares has increased 25% since last year. This increase A) Is a realized gain and is taxable to the shareholder B) Is a realized gain but is not taxable to the shareholder C) Is an unrealized gain but is taxable to the shareholder D) Is an unrealized gain and is not taxable to the shareholder

D) Is an unrealized gain and is not taxable to the shareholder A gain is unrealized until the shares are sold. A realized gain is a taxable event. Unrealized gains, or paper profits, are not taxable events.

A registered investment company (RIC) is defined as a company that: A) Is considered diversified because it follows the required investment standards B) Is managed by an investment advisor that is registered under the Investment Advisors Act of 1940 C) Earns at least 95% of its income from investments in securities D) Is not taxed on income it distributes

D) Is not taxed on income it distributes An investment company that complies with Subchapter M by distributing at least 90% of its net investment income is a RIC. A RIC is not taxed on the income it distributes.

All of the following statements regarding a mutual fund exchange privilege are true EXCEPT A) It is offered to investors at no charge B) It allows conversion of shares from one fund to another in the same family C) A contract or letter of intention is not required for this privilege D) It is not a taxable event

D) It is not a taxable event An exchange or conversion from shares of one fund for shares of another within the same family is considered at sale and repurchase by the IRS. It is a taxable event, and investors must report any applicable gain or loss on the exchanged shares.

If a sale and repurchase of mutual fund shares qualifies as a wash sale, an investor A) Must pay a tax penalty B) Has phantom income to report which is taxed at ordinary income rates C) Cannot carry forward any of the unused loss to future years D) May not claim a tax loss on those shares

D) May not claim a tax loss on those shares A wash sale occurs when an investor has sold shares at a loss but repurchases similar shares within 30 days before or after the loss. The IRS views this as a "sham" transaction and disallows the tax loss on the transaction

For tax purposes, return of capital distributions from ownership in closed end fund shares are A) Taxed as ordinary income B) Taxed as long-term capital gains C) Tax deductible D) Tax exempt

D) Tax exempt Return of capital distributions from closed end fund shares come from the sale of capital assets owned by the trust. These are tax exempt when received but reduce the investor's cost basis in the shares.

An investor receives quarterly dividend distributions from the nonqualified equity UIT units she holds. For tax purposes these distributions are A) Tax deferred if reinvested into other available UITs offered through the same sponsor B) Classified as a return of capital and increase the investor's cost basis C) Classified as a return of capital and reduce the investor's cost basis D) Taxable as ordinary income

D) Taxable as ordinary income The monthly or quarterly dividend distributions that are received by holders of UIT units are taxed as ordinary income.

An investor receives quarterly dividend distributions from the equity closed end fund shares she holds. For tax purposes these distributions are A) Tax deferred if reinvested into other available closed end offered through the same fund family B) Classified as a return of capital and increase cost basis C) Classified as a return of capital and reduce cost basis D) Taxable as ordinary income

D) Taxable as ordinary income The monthly or quarterly dividend distributions that are received by holders of closed end fund shares are taxed as ordinary income.

A shareholder has owned shares in a mutual fund for six months and receives a long-term capital gains distribution from the fund. This distribution is A) Exempt from taxation B) Taxed as ordinary income C) Taxed as a short term capital gain D) Taxed as a long term capital gain

D) Taxed as a long term capital gain Long term capital gains that are distributed by a mutual fund to a shareholder are reported and taxed as long-term gains regardless of how long the shares have been held by the shareholder.

At retirement, an investor chooses to take all proceeds from a qualified variable annuity in a lump sum. Which statement best describes the consequences of this choice? A) No taxes will be due B) The distribution will be partially taxable at capital gains rates C) The distribution will be partially taxable at ordinary income tax rates D) The distribution will be fully taxable at ordinary income tax rates

D) The distribution will be fully taxable at ordinary income tax rates Distributions from qualified annuities are fully taxable at withdrawal because contributions were made with pre-tax dollars. Retirement plan withdrawals are subject to taxation at ordinary income rates

At the termination of a UIT an investor rolls his distribution into another UIT offered by the same sponsor. This transaction results in A) Tax deferral of any gains B) A tax deduction in that year for the gain or loss that results from the sale of the assets at trust termination C) A tax exemption for any distributions that would have been received from the UIT in that year D) The same tax consequences that would apply if a mutual fund shareholder exchanged shares for those of another fund

D) The same tax consequences that would apply if a mutual fund shareholder exchanged shares for those of another fund The rollover of units in a UIT at the termination of a trust into another UIT is a taxable event similar to the exchange of shares in one mutual fund for those of another fund in the same family. It is considered as a sale and repurchase by the IRS.

Which of the following statements regarding mutual funds capital gains distributions and their taxation is correct? A) Capital gains distributions may be ordinary or qualified B) Investors can defer taxation on capital gains by reinvesting them instead of receiving them in cash C) Capital gains distributions are considered a return of capital and are not taxed D) The tax rate that applies to capital gains distributions is determined by the holding period of the fund

D) The tax rate that applies to capital gains distributions is determined by the holding period of the fund Mutual fund capital gains distributions are taxable whether taken in cash or reinvested. They are categorized as long- or short-term based on the holding period of the fund.

A customer wanted predictable guaranteed retirement income for life, so at age 65 she rolled her IRA over into a qualified immediate annuity. She opened the IRA 10 years ago with non-deductible contributions. The annuity guarantees to pay her $1,000 per month for the rest of her life. How much taxable income will she report each year, and how will it be taxed? A) the tax amount depends on her life expectancy 100% is taxed as ordinary income B) $12,000; 100% is taxed as ordinary income C) $12,000; part of it is ordinary income and part is a return of principal D) it depends on whether her IRA is Traditional or a Roth

D) it depends on whether her IRA is Traditional or a Roth It is possible to roll over or transfer either a Traditional or Roth IRA to an immediate annuity that retains the tax characteristics of the original IRA. In a Traditional IRA, 100% of the annuity income is taxable as ordinary income (assuming she made no non-deductible contributions). In a Roth IRA, there is no tax on distributions, assuming the Roth has been held at least five years and distributions are not made before age 59 ½.

Mutual fund GHI distributes 85% of its net investment income to shareholders. This fund A) is subject to taxation on 15% of its net investment income. B) must pay capital gains tax on 15% of its net investment income. C) is considered an unregulated investment company and is in violation of IRS standards. D) must pay taxes on 100% of its net investment income.

D) must pay taxes on 100% of its net investment income. In keeping with IRS rules, a fund that passes through less than 90% of its net investment income (NII) to shareholders must pay tax on 100% of its NII.

Mutual fund dividends are typically paid from A) gross investment income, usually on a monthly basis. B) net investment income, normally on an annual basis. C) stockholder's equity and distributed twice per year, in most cases. D) net investment income, generally on a quarterly basis

D) net investment income, generally on a quarterly basis. Mutual fund dividends are paid from the fund's net investment income, usually on a quarterly basis

An investor purchased 500 shares of ABC at 22 in September, and during the last week of the year ABC is trading at 28.50. This investor A) has realized a capital gain of 6.50 per share. B) has made a profit of $3,250, which must be included in the investor's adjusted gross income for the year. C) will receive proceeds of $14,250 in two business days. D) would have a taxable capital gain of 6.50 per share if the shares were sold.

D) would have a taxable capital gain of 6.50 per share if the shares were sold. This is a short-term capital gain as the position remains open. If the investor sold at the current price 28.50, they would realize a short-term capital gain, taxable at ordinary income rates