Series 7 Quiz: Apply Equity Tax Rules
20 questions · exam conditions
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Apply Equity Tax RulesQuestion 1 of 20

Taxpayer sells 100 QRS at a $600 loss and repurchases 100 shares 25 days later; tax effect?

Recognize $600 loss; basis unchanged
Defer $600 loss by increasing new basis
Convert $600 loss to ordinary deduction
Recognize $600 loss only if holding period was long-term
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Series 7 Quiz

Series 7 Quiz: Apply Equity Tax Rules

Practice Apply Equity Tax Rules in Series 7 with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Apply Equity Tax Rules, giving you a quick way to practice the rules, question types, and explanations that matter most for Series 7.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Taxpayer sells 100 QRS at a $600 loss and repurchases 100 shares 25 days later; tax effect?

  1. Recognize $600 loss; basis unchanged
  2. Defer $600 loss by increasing new basis (correct answer)
  3. Convert $600 loss to ordinary deduction
  4. Recognize $600 loss only if holding period was long-term
Explanation: This question tests Series 7 equity transaction tax treatment skills, focusing on wash sale effects on losses. Understanding these tax rules is crucial for accurately reporting equity transactions to the IRS. The wash sale rule prevents claiming a tax loss on a sale and repurchase within 30 days. In this scenario, repurchasing in 25 days defers the $600 loss to the new basis. Choice B is correct because it aligns with IRS deferral rules. Choice A is incorrect as it allows recognition. Teaching strategies: Emphasize basis adjustments in wash sales. Encourage practice with real-world examples to solidify understanding.

Question 2

Client sells stock for $50, basis $35, held 8 months; what character is the $15 gain?

  1. Short-term capital gain (correct answer)
  2. Long-term capital gain
  3. Ordinary dividend income
  4. Tax-exempt gain
Explanation: This question tests Series 7 equity transaction tax treatment skills, focusing on wash sales and cost basis methods. Understanding these tax rules is crucial for accurately reporting equity transactions to the IRS. The wash sale rule prevents claiming a tax loss on a sale and repurchase within 30 days. The $15 gain held for 8 months is short-term capital gain. Choice A is correct because it aligns with IRS guidelines for wash sale disallowance and cost basis calculations. Choice B is incorrect as long-term requires over one year. Teaching strategies: Emphasize the importance of tracking transaction dates for wash sales and choosing the correct cost basis method based on tax objectives. Encourage practice with real-world examples to solidify understanding.

Question 3

Client wants lowest taxable gain; shares rose over time; which cost basis method is most favorable?

  1. FIFO, because it uses lowest basis first
  2. LIFO, because it uses highest basis first (correct answer)
  3. FIFO, because it uses highest basis first
  4. Average cost, required for all common stock
Explanation: This question tests Series 7 equity transaction tax treatment skills, focusing on wash sales and cost basis methods. Understanding these tax rules is crucial for accurately reporting equity transactions to the IRS. The wash sale rule prevents claiming a tax loss on a sale and repurchase within 30 days. For shares that rose over time, LIFO uses the highest (most recent) basis, minimizing the gain. Choice B is correct because it aligns with IRS guidelines for wash sale disallowance and cost basis calculations. Choice A is incorrect as FIFO would use the lowest basis. Teaching strategies: Emphasize the importance of tracking transaction dates for wash sales and choosing the correct cost basis method based on tax objectives. Encourage practice with real-world examples to solidify understanding.

Question 4

Client sells stock at loss, spouse buys same stock 10 days later; which wash sale implication applies?

  1. Loss is disallowed because spouse purchase is attributed (correct answer)
  2. Loss is allowed because accounts are separately titled
  3. Loss is allowed if filing jointly
  4. Loss is disallowed only if purchased in an IRA
Explanation: This question tests Series 7 equity transaction tax treatment skills, focusing on wash sales and cost basis methods. Understanding these tax rules is crucial for accurately reporting equity transactions to the IRS. The wash sale rule prevents claiming a tax loss on a sale and repurchase within 30 days. In this scenario, a spouse's purchase within 30 days is attributed to the seller, triggering the wash sale and disallowing the loss. Choice A is correct because it aligns with IRS guidelines for wash sale disallowance and cost basis calculations. Choice B is incorrect as spousal attribution applies regardless of account titling. Teaching strategies: Emphasize the importance of tracking transaction dates for wash sales and choosing the correct cost basis method based on tax objectives. Encourage practice with real-world examples to solidify understanding.

Question 5

Investor holds 200 shares: 100 at $10, 100 at $18; sells 100 at $20: lowest gain method?

  1. FIFO, using $10 shares
  2. LIFO, using $18 shares (correct answer)
  3. Average cost for equities
  4. Wash sale adjustment to basis
Explanation: This question tests Series 7 equity transaction tax treatment skills, focusing on selecting cost basis methods to minimize taxable gains. Understanding these tax rules is crucial for accurately reporting equity transactions to the IRS. The wash sale rule prevents claiming a tax loss on a sale and repurchase within 30 days, but this involves gain minimization. In this scenario, to achieve the lowest gain, LIFO uses the $18 shares, resulting in a smaller gain compared to FIFO. Choice B is correct because it aligns with IRS allowances for LIFO to minimize current taxes. Choice A is incorrect as it would maximize the gain. Teaching strategies: Emphasize comparing FIFO and LIFO outcomes for tax planning. Encourage practice with real-world examples to solidify understanding.

Question 6

On May 10, an investor sells 200 shares of ABC Corp. at $60 per share, realizing a loss. The original purchase price was $70 per share. On May 25, the investor purchases 200 shares of ABC Corp. at $63 per share.

What is the investor's new cost basis for the 200 shares of ABC Corp. purchased on May 25?

  1. $60 per share
  2. $63 per share
  3. $70 per share
  4. $73 per share (correct answer)
Explanation: This scenario triggers the wash sale rule. The disallowed loss is 10pershare(10 per share (70 original cost - $60 sale price). This disallowed loss is added to the cost basis of the new shares purchased. The new cost basis is the purchase price of the new shares plus the disallowed loss per share: $63 + $10 = $73 per share.

Question 7

An investor purchased 100 shares of DEF stock on January 15, 2022. On December 1, 2023, the investor sold the shares at a loss. On December 15, 2023, the investor repurchased 100 shares of DEF stock, triggering the wash sale rule.

If the investor sells the newly acquired DEF shares on January 20, 2024, at a gain, how will the gain be taxed?

  1. As a short-term capital gain.
  2. As a long-term capital gain. (correct answer)
  3. As ordinary income.
  4. The gain is deferred until the next tax year.
Explanation: When a wash sale occurs, the holding period of the original shares is added (or 'tacked on') to the holding period of the newly purchased shares. The original shares were held from January 15, 2022, to December 1, 2023, which is more than one year. Therefore, the new shares are immediately considered to have a long-term holding period. Any subsequent sale will result in a long-term capital gain or loss.

Question 8

An investor sells 100 shares of JKL stock at a loss on March 1st. Which of the following transactions, if made on March 15th, would trigger the wash sale rule?

  1. Purchasing a JKL put option with a 9-month expiration.
  2. Purchasing a JKL call option with a 6-month expiration. (correct answer)
  3. Selling short 100 shares of a different company in the same industry.
  4. Purchasing an ETF that has JKL as a top 5 holding.
Explanation: The wash sale rule is triggered by purchasing a 'substantially identical' security. For tax purposes, call options and warrants on a company's stock are considered substantially identical to the common stock itself. Purchasing a put option gives the right to sell, not own, the stock and is not considered substantially identical. An ETF or the stock of a competitor, even in the same industry, is also not considered substantially identical.

Question 9

A client made the following purchases of PQR stock:

  • Lot 1: 100 shares at $40 on January 10
  • Lot 2: 100 shares at $50 on March 15
  • Lot 3: 100 shares at $60 on June 20

On December 5 of the same year, the client sells 100 shares at $55. The client does not specify which shares to sell.

What is the resulting capital gain or loss on this sale?

  1. $1,500 short-term capital gain. (correct answer)
  2. $500 short-term capital gain.
  3. $500 short-term capital loss.
  4. $1,500 short-term capital loss.
Explanation: When a client does not specify which shares to sell, the IRS requires the use of the First-In, First-Out (FIFO) accounting method. The first shares purchased (Lot 1) are considered the first shares sold. The sale price is $55 per share and the cost basis is 40persharefromLot1.Thegainis(40 per share from Lot 1. The gain is (55 - $40) x 100 shares = $1,500. Since the shares were held for less than one year and a day, it is a short-term capital gain.

Question 10

During the tax year, an investor has a long-term capital gain of $8,000, a short-term capital gain of $3,000, a long-term capital loss of $5,000, and a short-term capital loss of $7,000. What is the investor's net tax consequence?

  1. A $1,000 net long-term capital gain.
  2. A $1,000 net short-term capital loss. (correct answer)
  3. A $3,000 net long-term capital gain and a $4,000 net short-term capital loss.
  4. A $4,000 net short-term capital loss.
Explanation: First, net the long-term gains and losses: $8,000 (gain) - $5,000 (loss) = $3,000 net long-term gain. Second, net the short-term gains and losses: $3,000 (gain) - $7,000 (loss) = $4,000 net short-term loss. Finally, net these results against each other: $3,000 (net LT gain) - 4,000(netSTloss)=−4,000 (net ST loss) = -1,000. The result is a $1,000 net short-term capital loss. Up to $3,000 of net capital losses can be used to offset ordinary income.

Question 11

On February 10, an investor gifts 100 shares of stock to his son. The investor's basis was $20 per share, and he had held the stock for 10 months. The market value on the date of the gift was $50 per share.

If the son sells the stock 3 months later for $60 per share, what is the tax result?

  1. A $4,000 short-term capital gain.
  2. A $4,000 long-term capital gain. (correct answer)
  3. A $1,000 short-term capital gain.
  4. A $1,000 long-term capital gain.
Explanation: When a gift is appreciated, the recipient takes the donor's cost basis (20)andthedonor′sholdingperiod.Thedonorheldthestockfor10months,andthesonhelditfor3months,foratotalholdingperiodof13months.Sincethetotalholdingperiodismorethanoneyear,thegainislong−term.Thegainiscalculatedas(SalePrice−Donor′sBasis)∗Shares=(20) and the donor's holding period. The donor held the stock for 10 months, and the son held it for 3 months, for a total holding period of 13 months. Since the total holding period is more than one year, the gain is long-term. The gain is calculated as (Sale Price - Donor's Basis) * Shares = (60 - $20) * 100 = $4,000.

Question 12

An investor sells short 100 shares of BCD stock at $50. The stock price rises, and the investor covers the short position at $60, realizing a $1,000 loss. Ten days later, the investor sells short another 100 shares of BCD stock at $58. What is the tax implication of these actions?

  1. The investor recognizes a $1,000 short-term capital loss.
  2. The investor's loss is disallowed under the wash sale rule. (correct answer)
  3. The investor has a short-term capital gain of $200.
  4. The wash sale rule does not apply to short sales.
Explanation: The wash sale rule applies to losses on closing a short sale if, within 30 days before or after the closing date, the investor sells substantially identical stock short or enters into a contract or option to do so. Here, the investor closed a short position at a loss and opened a new short position on the same stock within 30 days. Therefore, the $1,000 loss is disallowed and is added to the proceeds of the new short position for purposes of calculating future gain or loss.

Question 13

An investor sells 100 shares of a technology stock at a loss. To realize this loss for tax purposes while maintaining exposure to the tech sector, which of the following actions would be most appropriate within the next 30 days?

  1. Buy 100 shares of the same technology stock.
  2. Buy call options on the same technology stock.
  3. Buy shares of a technology sector ETF. (correct answer)
  4. Buy convertible bonds issued by the same technology company.
Explanation: To avoid the wash sale rule, the investor must not purchase a 'substantially identical' security. The same stock, its call options, and its convertible bonds are all considered substantially identical. A technology sector ETF, while providing exposure to the same industry, is diversified and not substantially identical to the single stock that was sold. This allows the investor to recognize the loss while reinvesting in the sector.

Question 14

All of the following are considered 'substantially identical' to a company's common stock for purposes of the wash sale rule EXCEPT:

  1. The company's convertible preferred stock.
  2. Warrants to purchase the company's common stock.
  3. The company's non-convertible bonds. (correct answer)
  4. A deep in-the-money call option on the company's common stock.
Explanation: Securities are considered substantially identical if they are convertible or exchangeable into one another. This includes convertible preferred stock, convertible bonds, warrants, and rights. Options are also generally considered substantially identical. Non-convertible bonds (straight debt) do not have an equity feature and are not considered substantially identical to the common stock of the same issuer.

Question 15

An investor's father purchased 1,000 shares of MNO stock for $20 per share ten years ago. The father passed away when the fair market value (FMV) of the stock was $100 per share. The investor inherited the shares and sold them one month later for $105 per share. What is the tax consequence for the investor?

  1. An $85,000 long-term capital gain.
  2. An $85,000 short-term capital gain.
  3. A $5,000 long-term capital gain. (correct answer)
  4. A $5,000 short-term capital gain.
Explanation: For inherited securities, the beneficiary's cost basis is 'stepped-up' to the fair market value on the date of the decedent's death. Therefore, the investor's cost basis is $100 per share. The sale at $105 per share results in a gain of $5 per share, or a total of $5,000. Regardless of the actual holding period, inherited securities are always considered to have been held long-term for tax purposes.

Question 16

An investor receives a gift of stock from her aunt. The aunt's cost basis was $30 per share, and she had held the stock for five years. On the date of the gift, the fair market value (FMV) of the stock was $50 per share. If the investor sells the stock one year later for $60 per share, what is her cost basis for determining the capital gain?

  1. $30 per share (correct answer)
  2. $40 per share
  3. $50 per share
  4. $60 per share
Explanation: For gifted securities, if the fair market value (FMV) on the date of the gift is greater than the donor's cost basis, the recipient's cost basis is the same as the donor's cost basis. In this case, the FMV (50)isgreaterthanthedonor′sbasis(50) is greater than the donor's basis (30), so the recipient's basis for determining a gain is $30 per share. The donor's holding period also carries over.

Question 17

An investor owns 500 shares of GHI stock with a cost basis of $30 per share. On July 10, the investor sells all 500 shares at $20 per share. On July 25, the investor buys 300 shares of GHI stock at $22 per share.

What is the amount of the capital loss that is disallowed due to the wash sale rule?

  1. $0
  2. $2,000
  3. $3,000 (correct answer)
  4. $5,000
Explanation: The total loss on the sale of 500 shares is ($30 - $20) x 500 = 5,000.Thewashsaleruleappliesbecausetheinvestorrepurchasedthestockwithin30days.However,theruleonlydisallowsthelossonthenumberofsharesthatwererepurchased.Since300shareswererepurchased,thelossassociatedwiththose300sharesisdisallowed.Thedisallowedlossis(5,000. The wash sale rule applies because the investor repurchased the stock within 30 days. However, the rule only disallows the loss on the number of shares that were repurchased. Since 300 shares were repurchased, the loss associated with those 300 shares is disallowed. The disallowed loss is (30 - $20) x 300 = $3,000. The investor can recognize a loss of $2,000 on the 200 shares that were not replaced.

Question 18

A client made the following purchases of PQR stock:

  • Lot 1: 100 shares at $40 on January 10
  • Lot 2: 100 shares at $50 on March 15
  • Lot 3: 100 shares at $60 on June 20

On December 5 of the same year, the client sells 100 shares at $55 and instructs their representative to sell the shares purchased in June.

What is the resulting capital gain or loss on this sale?

  1. $1,500 short-term capital gain.
  2. $500 short-term capital gain.
  3. $500 short-term capital loss. (correct answer)
  4. $1,500 short-term capital loss.
Explanation: By instructing the representative to sell a specific lot of shares, the client is using the specific identification method. The shares from Lot 3, purchased at $60, are sold. The sale price is 55pershare.Thelossis(55 per share. The loss is (60 - $55) x 100 shares = $500. Since the shares were held from June to December of the same year (less than one year and a day), it is a short-term capital loss.

Question 19

An investor receives a gift of stock from his uncle. The uncle's cost basis was $80 per share, and he had held the stock for three years. On the date of the gift, the fair market value (FMV) was $50 per share. The investor sells the stock two months later for $60 per share. What is the tax consequence of the sale?

  1. A $20 per share short-term capital loss.
  2. A $10 per share short-term capital gain.
  3. No gain or loss is recognized. (correct answer)
  4. A $20 per share long-term capital loss.
Explanation: When stock is gifted at a price below the donor's basis, a dual-basis rule applies. The basis for determining a gain is the donor's basis (80),andthebasisfordeterminingalossistheFMVatthetimeofthegift(80), and the basis for determining a loss is the FMV at the time of the gift (50). If the stock is sold for a price between these two values (as it is here at $60), no gain or loss is recognized for tax purposes.

Question 20

An investor purchases 100 shares of XYZ stock at $50 per share. On November 1st, the investor sells all 100 shares at $40 per share. On November 20th, the investor repurchases 100 shares of XYZ stock at $42 per share. For tax purposes, what is the immediate consequence of these transactions?

  1. The investor can recognize a $1,000 capital loss for the current tax year.
  2. The $1,000 loss is disallowed due to the wash sale rule. (correct answer)
  3. The investor must report a $200 capital gain.
  4. The transaction is considered a short-swing profit and must be disgorged.
Explanation: The wash sale rule disallows a loss on the sale of a security if the investor purchases a substantially identical security within 30 days before or after the sale (a 61-day window). Since the investor repurchased XYZ stock within 30 days of selling it at a loss, the 1,000loss((1,000 loss ((50 - $40) x 100 shares) is disallowed for the current tax year.