Assume you buy a stock and its price rises less than the price level. Before taxes, which of the following have you made?
A)a nominal and real gain, and you pay taxes on the nominal gain
B)a nominal gain and a real loss, and you don't have to pay taxes since you gained less than the change in the price level
C)a nominal and a real gain, and you pay taxes on the real gain
D)a nominal gain and a real loss, and you pay taxes on the nominal gain

Question

Quizplus · Accepted Answer

If the price of a stock rises less than the inflation rate, then you have made a nominal gain (in dollars) but a real loss (in purchasing power). You have to pay taxes on the nominal gain, even though you actually lost purchasing power. Therefore, only option D is correct as it mentions a nominal gain (which is taxed) and a real loss (which is the actual situation).

Assume You Buy a Stock and Its Price Rises Less