Sharon buys some common stock in 1990 for $10,000 and sells it in 2000 for $15,000.During the same period, prices have risen by 75 percent.The net result of Sharon's stock purchases is that she will
A)pay no taxes because she earned negative real capital gains.
B)lose purchasing power and have to pay taxes anyway.
C)earn a real capital gain of $5,000 plus 75 percent.
D)earn a real capital gain of $15,000 minus 75 percent.

Question

Quizplus · Accepted Answer

Sharon's nominal gain is $5,000 ($15,000 - $10,000). However, due to a 75% inflation rate, the real value of her initial investment has decreased. The real value of her initial $10,000 investment would need to be $17,500 by 2000 to maintain its purchasing power ($10,000 * 1.75). Since she sold for $15,000, she actually lost purchasing power. Despite this loss in real terms, she would still be liable for taxes on the nominal gain.

Sharon Buys Some Common Stock in 1990 for $10,000 and Sells