Question 1

A taxpayer can deduct a loss on a security when the market price of the stock is less than the basis at the end of the year.

Accepted Answer

A taxpayer can only deduct a loss on a security when it is actually sold for less than its basis, not merely when its market price falls below the basis.

Question 2

All net losses exceeding the $3,000 per year are carried over as long-term losses because they will have occurred more than one year ago.

Accepted Answer

Net losses exceeding $3,000 per year can be carried over to subsequent years, but they retain their original character as either short-term or long-term losses, depending on the nature of the original losses.

Question 3

To figure the gain or loss from the sale of property received as a gift,the donor's adjusted basis at the time of the gift is the basis to the donee.

Accepted Answer

The answer of To figure the gain or loss from...

Question 4

The amount realized from a sale or trade of property is the amount received for the asset minus the basis that will be recognized for tax purposes.

Accepted Answer

The amount realized from a sale or trade of property is the total amount received for the asset without subtracting the basis. The basis is considered separately to determine gain or loss.

Question 5

Any Section 1245 gain is recognized as "ordinary" to the extent of the depreciation taken.

Accepted Answer

This is correct, Section 1245 gain relates to personal property used in trade or business and is subject to depreciation recapture rules. Any gain recognized is treated as ordinary income to the extent of the depreciation taken on the property.

Question 6

Section 1221 assets are any asset used in a trade or business.

Accepted Answer

Section 1221 assets refer specifically to capital assets, which are generally defined as property held by an individual or business outside of their usual course of business. This excludes inventory, certain property used in a trade or business, accounts receivable, and other specific assets that are not held for investment purposes.

Question 7

To figure the gain or loss from the sale of property received as a gift,the donee must know the donor's adjusted basis as well as the FMV at the date of the gift.

Accepted Answer

This is true because the donee's gain or loss is calculated from the difference between the sale price and the donor's adjusted basis at the time of the gift. The FMV at the date of the gift is also important because it helps determine if the donor needs to pay any gift taxes.

Question 8

Ordinary gains or losses produced outside the normal course of business relate to the sale of business property held less than one year and do not include the sale of accounts receivable.

Accepted Answer

Ordinary gains or losses produced outside the normal course of business can include the sale of accounts receivable. They typically refer to gains or losses that are not directly related to the primary operations of the business.

Question 9

A taxpayer who receives only one form 1099-B from the sales of stock can enter the transaction directly to Schedule D.

Accepted Answer

The answer of A taxpayer who receives only one form...

Question 10

For sales of Section 1231 business property,long-term gains are taxed at preferential rates while long-term losses are considered ordinary losses and have unlimited loss deductibility in the year they are incurred.

Accepted Answer

This is true according to the United States tax code. Section 1231 property refers to depreciable property used in a trade or business and held for more than one year, and any gains or losses from the sale of this property are classified as either short-term or long-term depending on how long the property was held. Long-term gains are currently taxed at a maximum rate of 20%, while long-term losses are treated as ordinary losses, which can be used to offset other types of income and potentially result in a larger tax deduction for the taxpayer.

Question 11

The taxpayer always reports a worthless security as a long-term capital loss in the year the security becomes worthless.

Accepted Answer

The answer of The taxpayer always reports a worthless security...

Question 12

The basis of property transferred to a taxpayer from a spouse or former spouse incident to a divorce is the FMV of the property at the date the divorce was final.

Accepted Answer

The basis of property transferred to a taxpayer from a spouse or former spouse incident to a divorce is the carryover basis, not the fair market value (FMV) at the date the divorce was final. This means the recipient assumes the same basis in the property that the transferring spouse had.

Question 13

If land were an investment held in a trade or business,the gain or loss would be reported on Schedule D.

Accepted Answer

Land held as an investment in a trade or business is considered a capital asset and any gain or loss would be reported on Schedule D of the tax return.

Question 14

Capital assets are usually defined by the IRC as any asset used for personal or investment purposes and sometimes are defined by the IRC as what they are not.

Accepted Answer

Capital assets are defined by the Internal Revenue Code (IRC) as assets owned for personal or investment purposes. However, the IRC does not always provide a clear definition of what qualifies as a capital asset; instead, it may define certain assets as not being capital assets, such as inventory or property used in a trade or business.

Question 15

All gains and losses on the sale of property that was held for more than one year is subject to preferential tax rates.

Accepted Answer

The answer of All gains and losses on the sale...

Question 16

If the taxpayer has capital gain distributions from a mutual fund and no other capital gain transactions for the year,a Schedule D is not required to be prepared.

Accepted Answer

If the taxpayer has only capital gain distributions from a mutual fund and no other capital gain transactions for the year, it can be reported directly on Form 1040, Line 13. A Schedule D is not required in this case.

Question 17

If a taxpayer cannot specifically identify which shares of stock were sold,the average cost of all shares held is used as the adjusted basis of the shares that were sold.

Accepted Answer

The IRS requires the use of the FIFO (First-In, First-Out) method if specific shares cannot be identified, not the average cost method.

Question 18

In general,the basis of property purchased is the cost of the asset including cash,debt obligations,and other property or services included in acquiring the asset.

Accepted Answer

The basis of property purchased includes not only the cash paid for the asset but also any debt obligations or other property/services included in the transaction. This is known as the cost basis.

Question 19

The 25% bracket is a special rate that relates to capital gains from Section 1250 property used in a trade or business.

Accepted Answer

The 25% bracket refers to the special tax rate applied to the unrecaptured Section 1250 gain, which is part of the gain realized on the sale of Section 1250 property (real property) that has been depreciated. This rate is distinct from other capital gains rates.

Question 20

When a Section 1231 asset is sold,the gain can be only classified as an ordinary gain.

Accepted Answer

When a Section 1231 asset is sold, the gain can be classified as either ordinary or capital depending on whether it is a net gain or a net loss for the year. If there is a net gain, it is treated as long-term capital gain. If there is a net loss, it is treated as an ordinary loss.

Quiz 7: Capital Gains and Other Sales of Property Schedule D and Form 4797