Question 1

The three tax statuses are:

Accepted Answer

The three tax statuses are capital asset, ordinary asset, and § 1231 asset. A capital asset is generally held for investment purposes, while an ordinary asset is typically used in the course of a trade or business. § 1231 assets are used for business purposes and can include depreciable business property or real estate used in a trade or business. § 1237 assets are a specific type of asset that pertains to certain business assets sold between related parties. Investment asset is not a tax status but rather a general classification of an asset held for investment purposes.

Question 2

A net short-term capital loss first offsets any 28% net long-term capital gain before it offsets either 25% net long-term capital gain or 0%/15% net long-term capital gain.

Accepted Answer

This is correct according to the United States' tax code.

Question 3

Laura purchased for $1,610 a $2,000 bond when it was issued two years ago.Laura amortized $200 of the original issue discount and then sold the bond for $1,800.Which of the following statements is correct?

Accepted Answer

The answer of Laura purchased for $1,610 a $2,000 bond...

Question 4

Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?

Accepted Answer

When the option is exercised, the cost of the option is added to the basis of the property. This is because the option holder is essentially purchasing the property at a higher cost than the original purchase price due to the cost of the option.

Question 5

A business taxpayer sells inventory for $40,000.The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year.The taxpayer has:

Accepted Answer

Since the sales price is less than the adjusted basis, the taxpayer incurs a loss. Since it is inventory held for business purposes, the loss is an ordinary loss, not a capital loss.

Question 6

Suzy purchased vacant land in 2005 that she subdivided for resale as lots.All 10 of the lots were sold during 2012.The lots had a tax basis of $9,000 each and sold for $45,000 each.Suzy made no substantial improvements to the lots.She acted as her own real estate broker; so there were no sales expenses for selling the lots.Which of the following statements is correct?

Accepted Answer

The answer of Suzy purchased vacant land in 2005 that...

Question 7

A worthless security had a holding period of 11 months when it became worthless on December 10,2012.The investor who had owned the security had a basis of $10,000 for it.Which of the following statements is correct?

Accepted Answer

The answer of A worthless security had a holding period...

Question 8

Hiram is a computer engineer and,while unemployed,invents a switching device for computer networks.He patents the device,but does not reduce it to practice.Hiram has a zero tax basis for the patent.In consideration of $800,000 plus a $1 royalty per device sold,Hiram assigns the patent to a computer manufacturing company.Hiram assigned all substantial rights in the patent.Which of the following is correct?

Accepted Answer

When a patent is assigned and the assignor has no tax basis in the patent, the entire amount received is treated as long-term capital gain. Therefore, Hiram will have long-term capital gain from both the lump sum payment and the royalty payments.

Question 9

Short-term capital losses are netted against long-term capital gains and long-term capital losses are netted against short-term capital gains.

Accepted Answer

The answer of Short-term capital losses are netted against long-term...

Question 10

An individual taxpayer with 2012 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2013.

Accepted Answer

This is correct according to IRS rules. A taxpayer can generally deduct up to $3,000 of net short-term capital losses against ordinary income in the current tax year and carry over any remaining amount to future tax years.

Question 11

The tax law requires that capital gains and losses be separated from other types of gains and losses.Among the reasons for this treatment are:

Accepted Answer

Option A is correct because long-term capital gains may be taxed at a lower rate than ordinary gains. Option B is incorrect because short-term capital losses are deductible, but only against short-term capital gains. Option C is correct because net capital loss is deductible only up to $3,000 per year for individual taxpayers. Therefore, options A and C, which are correct, form the best choice.

Question 12

On June 1,2012,Brady purchased an option to buy 1,000 shares of General,Inc.at $40 per share.He purchased the option for $3,000.It was to remain in effect for five months.The market experienced a decline during the latter part of the year,so Brady decided to let the option lapse as of December 1,2012.On his 2012 tax return,what should Brady report?

Accepted Answer

Since Brady let the option lapse before it could be exercised, it is considered a short-term capital loss. The loss would be reported on Schedule D of his tax return.

Question 13

All collectibles long-term gain is subject to a potential alternative tax rate of 28%.

Accepted Answer

This is true. Collectibles such as art, antiques and precious metals are subject to a potential alternative tax rate of 28% for long-term gains. This is higher than the maximum long-term capital gains tax rate for other investments, which is currently 20%.

Question 14

Ramon is in the business of buying and selling securities.Which of the following is a capital asset for Ramon?

Accepted Answer

A capital asset is generally any asset that is not held for sale in the ordinary course of business. Option B specifies that he designates certain securities as held for investment, which would qualify as a capital asset. Options A, C, and D do not necessarily meet this criteria, as they do not specify that the securities are held for investment purposes. Option E includes options B, C, and D, but it is not necessary to hold a security for more than 12 months in order for it to qualify as a capital asset.

Question 15

Siva operates a retail music store as a sole proprietorship.Which of the following items are capital assets in the hands of Siva?

Accepted Answer

The answer of Siva operates a retail music store as...

Question 16

Marvin is in the business of song writing.He writes jingles for web ads.He writes a song and sells it for a lump sum.He has:

Accepted Answer

The answer of Marvin is in the business of song...

Question 17

Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.

Accepted Answer

Short-term capital gain is taxed at ordinary income tax rates, while long-term capital gain is taxed at a lower, special tax rate.

Question 18

A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee.The tenant wanted to get out of its lease so it could move to a different building.The lessor had held the lease for three years before it was canceled.The lessor had a zero tax basis for the lease.The lessor has received:

Accepted Answer

The cancellation fee of $45,000 is considered ordinary income to the lessor since they did not have a tax basis in the lease. This means they did not invest anything or have any costs associated with acquiring the lease, so the entire amount is taxable as ordinary income. Long-term and short-term capital gains only apply when there is a basis in the asset being sold. Therefore, options B, C, and D are not applicable in this scenario.

Question 19

Mauve Company signs a 13-year franchise agreement with Mauve Too.Mauve Too retained significant powers,rights,and a continuing interest.Mauve Company (the franchisee)makes noncontingent payments of $16,000 per year for the first five years of the franchise.Mauve Company also pays a contingent fee of 1% of gross sales every month.Which of the following statements is correct?

Accepted Answer

The answer of Mauve Company signs a 13-year franchise agreement...

Question 20

Recognized gains and losses must be properly classified.Proper classification depends upon:

Accepted Answer

Proper classification of recognized gains and losses depends on all three factors listed in the answer choice, including the tax status of the property, the manner of disposition, and the holding period of the property. Therefore, choice D is correct.

Quiz 16: Property Transactions: Capital Gains and Losses