Apply Equity Tax Rules - Series 7

Using FIFO, what is the basis for selling $150$ shares if lots are $100@\$10$ then $100@\$12$ ?

$1,600. FIFO exhausts the earliest lot first, then prorates the next for the remaining shares sold.
Which term describes securities that trigger wash sale rules when repurchased: identical or substantially identical?

Substantially identical. Wash sale rules apply to securities that are substantially identical, not just exactly the same, to prevent circumvention.
What is the basis method called when the investor uses the average cost of all shares (commonly for mutual funds)?

Average cost basis method. This method calculates basis by averaging the cost of all shares held, typically used for mutual funds to simplify tracking.
Identify the tax character of a nonqualified dividend (ordinary or preferential rates).

Ordinary income tax rates. Nonqualified dividends do not meet criteria for preferential rates and are taxed as ordinary income.
Which cost basis method requires the investor to specify the exact shares being sold at the time of sale?

Specific identification. This method allows taxpayers to choose specific share lots to optimize tax outcomes at the time of sale.
What is the basis of replacement shares if $100$ shares are bought at $50 and a $200 wash loss is disallowed?

$5,200 total basis. The basis increases by the disallowed loss amount to defer recognition until the replacement shares are sold.
What is the tax character of a qualified dividend paid on common stock (ordinary or preferential rates)?

Preferential tax rates (qualified dividend). Qualified dividends are taxed at lower long-term capital gains rates if holding period and other criteria are met.
What is the average cost per share if $100@\$20$ and $100@\$30$ are owned and averaged?

$25 per share. Averaging totals the cost of all shares and divides by the quantity to find the uniform per-share basis.
Identify the correct tax treatment of commissions on a stock sale for proceeds purposes.

Subtract commissions from sales proceeds. Commissions reduce the sales proceeds as they are expenses deducted from the gross amount received from the sale.
Which loss is disallowed if an investor sells at a loss and buys the same stock $10$ days later?

The loss is disallowed as a wash sale. Repurchasing within 30 days triggers wash sale rules, disallowing the loss to defer tax benefits.
What happens to a disallowed wash sale loss for tax basis purposes on the replacement shares?

Add the disallowed loss to replacement share basis. The disallowed loss adjusts the basis of the new shares upward to preserve the loss for future recognition.
Identify whether a wash sale disallowed loss is permanently lost or deferred for tax purposes.

Deferred until the replacement shares are sold. Wash sale losses are not permanently lost but added to the basis of replacement shares for later recognition.
Which cost basis method is the default for covered shares when no specific identification is made?

FIFO (first-in, first-out). FIFO assumes shares are sold in the order purchased, serving as the default method unless otherwise elected.
What is the holding period classification for a stock held for $12$ months or less?

Short-term capital gain or loss. Assets held for one year or less qualify as short-term for capital gains tax purposes, determining the applicable tax rate.
Using FIFO, what is the basis for selling $100$ shares if lots are $100@\$10$ then $100@\$12$ ?

$1,000. FIFO uses the cost of the first lot purchased, as it assumes those shares are sold first.
What is the per-share basis if total basis is $5,200 for $100$ replacement shares?

$52 per share. Dividing the adjusted total basis by the number of shares accounts for the added disallowed loss per share.
Under FIFO, which lot is treated as sold first when multiple purchase lots exist?

The earliest purchased shares. FIFO prioritizes the oldest shares to determine basis, often resulting in longer holding periods for gains.
What is the cost basis of stock purchased for $2,000 plus a $20 commission?

$2,020. Cost basis includes the purchase price plus any associated commissions to reflect the total investment cost.
What is a wash sale in terms of timing and a loss on a security transaction?

Loss sale with purchase within $30$ days before or after. Wash sale rules apply to losses when substantially identical securities are repurchased within the 61-day period to prevent tax loss harvesting.
What happens to the holding period when a wash sale occurs and replacement shares are purchased?

Holding period carries over to replacement shares. The original holding period tacks onto the replacement shares to maintain continuity for long-term classification.
State the formula for capital gain or loss on a stock sale using net proceeds and basis.

$\text{Gain/Loss}=\text{Net Proceeds}-\text{Cost Basis}$ . This formula determines the taxable gain or loss by comparing the adjusted sale amount to the adjusted purchase cost.
What is the holding period classification for a stock held for more than $12$ months?

Long-term capital gain or loss. Assets held longer than one year receive long-term capital gains treatment, often at lower tax rates than short-term.
What is the net sales proceeds when stock sells for $5,000 and commission is $25?

$4,975. Net sales proceeds are calculated by deducting commissions from the gross sale price to determine the actual amount received.
Identify the wash sale window length and how it is counted around the loss sale date.

$61$ -day window: $30$ days before to $30$ days after. The rule covers repurchases from 30 days prior to 30 days after the sale date to curb abusive tax practices.
Identify the correct tax treatment of commissions on a stock purchase for cost basis purposes.

Add commissions to cost basis. Commissions increase the cost basis as they represent additional expenses incurred to acquire the asset.

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