Series 7 practice questioneasyTax Implications — Capital Gains
An investor bought 100 shares of XYZ stock at $40 per share and sold them 8 months later at $55 per share. The gain is classified as:
- AShort-term capital gain of $1,500✓ Correct answer
- BLong-term capital gain of $1,500
- COrdinary income of $1,500
- DTax-exempt gain of $1,500
Explanation
Why A — Short-term capital gain of $1,500
The gain is $55 - $40 = $15 per share x 100 shares = $1,500. Since the stock was held for only 8 months (less than one year), this is a short-term capital gain. Short-term capital gains are taxed at the investor's ordinary income tax rate, which can be significantly higher than the preferential long-term capital gains rate.
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