Casimir purchased one share of Norcet stock for $100 in year 1 and sold that share in year 2 for $200. The inflation rate between year 1 and year 2 was 50 percent. If the capital gains tax is imposed at a rate of 50 percent, what is Casimir's after-tax real capital gain?

Question

Quizplus · Accepted Answer

Casimir's nominal capital gain is $200 - $100 = $100. With a 50% capital gains tax, he pays $50 in taxes, leaving him with a nominal gain of $50. However, due to 50% inflation, the real value of his initial $100 investment would need to be $150 in year 2 to maintain its value. Since he ends up with $150 after selling the share and paying taxes, his real capital gain is $0, as his final amount just keeps pace with inflation.

Casimir Purchased One Share of Norcet Stock for $100 in Year