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Series 7 practice questionmediumTax Implications — Cost Basis

An investor purchased 200 shares of DEF stock: 100 shares at $25 in February and 100 shares at $35 in May. The investor sells 100 shares at $40 using specific identification and selects the May shares. What is the capital gain?

  1. A$500✓ Correct answer
  2. B$1,000
  3. C$1,500
  4. D$5,000
Explanation

Why A — $500

With specific identification, the investor chooses which shares to sell. By selecting the May shares (cost basis $35 per share), the gain is ($40 - $35) x 100 shares = $500. If the investor had used FIFO, the February shares ($25 cost) would have been sold first, resulting in a ($40 - $25) x 100 = $1,500 gain. Specific identification allows tax planning by choosing higher-cost shares to minimize gains.

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