Adam purchased 1,000 shares of Airco Inc.common stock for $22,000 on February 3,2014.On April 1,2019,Adam received 100 new shares in a nontaxable stock dividend.As of April 1,the stock was trading at $25 per share.Adam sells the 100 new shares on June 15,2019 for $2,400.Due to the stock sale,Adam will recognize a
A)$100 STCL.
B)$2,400 STCG.
C)$400 STCG.
D)$400 LTCG.

Question

Quizplus · Accepted Answer

The stock dividend is nontaxable, so the basis of the original shares is allocated to the new shares. The original cost basis per share is $22 ($22,000/1,000 shares). The total basis for the 1,100 shares (1,000 original + 100 new) is still $22,000, making the basis per share $20 ($22,000/1,100 shares). Selling 100 shares at $2,400 means a basis of $2,000 (100 shares x $20), resulting in a gain of $400 ($2,400 - $2,000). Since the holding period is over a year, it is a long-term capital gain.

Adam Purchased 1,000 Shares of Airco Inc