Question 1

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

Accepted Answer

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

Question 2

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 true according to the IRS guidelines for individual taxpayers. The $3,000 limit for deducting net capital losses for AGI is the same for both short-term and long-term capital losses. Any net capital loss exceeding $3,000 can be carried forward to future tax years.

Question 3

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 4

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 $45,000 received by the lessor is ordinary income because it is considered a cancellation fee for the lease agreement. The lessor had no tax basis for the lease, so there is no gain or loss to be realized. The length of time the lease was held and whether it was a capital asset do not factor into the taxation of the cancellation fee.

Question 5

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 statement is true according to the tax laws governing capital gains and losses in the United States. A net short-term capital loss is first used to offset any 28% net long-term capital gain, before it is used to offset either 25% net long-term capital gain or 0%/15% net long-term capital gain.

Question 6

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

Accepted Answer

This statement is false. Short-term capital gains are always taxed at a higher rate than long-term capital gains, regardless of how much they exceed long-term gains.

Question 7

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 8

The three tax statuses are:

Accepted Answer

The three tax statuses are capital asset, ordinary asset, and § 1231 asset. These categories determine how gains and losses are taxed. A capital asset is usually held for investment purposes and includes stocks, bonds, and real estate. An ordinary asset is usually held for resale and includes inventory or property used in a trade or business. Finally, § 1231 assets are used in a trade or business and include property like equipment or vehicles.

Question 9

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 10

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 purchaser of an option exercises the option, they add the cost of the option to the basis of the property to which the option relates. This is because the cost of the option becomes part of the cost of acquiring the property. If the option is sold or lapses, the cost of the option is not added to the basis of the property. If the option is rescinded, the cost of the option may be refunded to the purchaser, so it would not make sense to include it in the basis of the property.

Question 11

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 12

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 an asset that is held by an individual for investment purposes rather than for sale in the normal course of business. Option B specifies that the securities are designated as held for investment, making them a capital asset. Options A, C, D, and E do not specifically mention the securities being held for investment, so they may or may not be capital assets depending on the circumstances.

Question 13

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 14

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

Hiram has assigned all substantial rights in the patent, which means he no longer has any ownership or control over it. The lump sum payment and royalty payments are both considered to be payments for the sale or exchange of a capital asset (the patent). Since Hiram held the patent for more than one year, the gain from the sale or exchange is considered a long-term capital gain. Therefore, Hiram has automatic long-term capital gain from both the lump sum payment and the royalty payments.

Question 15

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 16

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

Long-term capital gains may be taxed at a lower rate than ordinary gains, and net capital loss is deductible only up to $3,000 per year for individual taxpayers. Additionally, capital losses that are short-term are not deductible. Therefore, both options a and c are correct.

Question 17

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 18

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 19

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

Accepted Answer

This is true according to current US tax laws (as of 2021). Collectibles, such as art, antiques, and coins, are subject to a higher tax rate if sold for a long-term gain (held for more than a year) than other types of investments. The alternative tax rate for collectibles is 28%, while the maximum long-term capital gains tax rate for other types of investments is currently 20%.

Question 20

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, he did not exercise the option and did not acquire the 1,000 shares of General, Inc. Therefore, he incurred a $3,000 short-term capital loss on the expired option, which is reported on Schedule D of his tax return.

Quiz 16: Property Transactions: Capital Gains and Losses