You bought 1,000 shares of Tund Corp. stock for $60.59 per share and sold it for $82.35 per share after a few years. How will your gain or loss be treated when you file your taxes?
A As a capital gain taxed at the long-term tax rate
B As a capital gain taxed at the current ordinary-income tax rate
The correct answer and explanation is :
Correct Answer: A — As a capital gain taxed at the long-term tax rate
Explanation:
When you sell an investment like stock, the IRS considers the profit or loss a capital gain or capital loss. The way this gain is taxed depends on how long you held the investment before selling it.
In this case, you bought 1,000 shares of Tund Corp. at \$60.59 per share and later sold them at \$82.35 per share. The profit per share is:
$$
\$82.35 – \$60.59 = \$21.76 \text{ per share}
$$
So your total gain is:
$$
1,000 \text{ shares} \times \$21.76 = \$21,760
$$
The key detail here is that you held the stock for “a few years,” which clearly exceeds one year. This qualifies the sale as a long-term capital gain.
Capital Gains: Short-Term vs. Long-Term
- Short-term capital gains: Assets held one year or less. These are taxed at your ordinary income tax rate, which could range from 10% to 37%, depending on your income.
- Long-term capital gains: Assets held more than one year. These are taxed at preferential rates: typically 0%, 15%, or 20%, depending on your taxable income and filing status.
Since you held the shares for more than one year, the gain is long-term, and thus taxed at the long-term capital gains rate, which is usually lower than the ordinary income tax rate.
Why This Matters:
The IRS provides lower tax rates for long-term capital gains to encourage long-term investment in the economy. This tax treatment can lead to significant savings, especially for high earners who would otherwise pay a much higher ordinary income tax rate.
Conclusion:
Your \$21,760 gain from selling the Tund Corp. stock after holding it for a few years will be classified as a long-term capital gain and taxed at the long-term capital gains tax rate, not your regular income tax rate. Therefore, Option A is the correct answer.