Assume you buy stock and its price rises just as much as the price level. Before taxes, what have you made?

Question

Quizplus · Accepted Answer

If the price of the stock rises just as much as the price level (inflation), your nominal wealth increases because the stock is worth more in dollar terms. However, your real wealth (purchasing power) hasn't increased because the price level (cost of goods and services) has also risen by the same proportion. Taxes are typically levied on nominal gains (the increase in the dollar value of the investment), not on the real gains (adjustment for inflation), meaning you pay taxes on the increase in the stock's value even though your real purchasing power hasn't changed.

Assume You Buy Stock and Its Price Rises Just as Much