Investment Analysis Flashcards

A client inherits stock that the decedent bought for $20,000 and that was worth $90,000 at death. The client sells it two months later for $92,000. What is the gain and its character?

Answer: $2,000 long-term

Inherited property receives a stepped-up basis to FMV at death and is automatically treated as long-term.

A parent gifts stock with a $30,000 basis and a $22,000 FMV at the time of the gift. The child later sells it for $25,000. What is the recognized gain or loss?

Answer: No gain or loss

Under the dual-basis rule, the gain basis is $30,000 and the loss basis is $22,000, so a $25,000 sale between the two produces no gain or loss.

Under Section 1244, what is the maximum annual ordinary loss a married couple filing jointly may claim on qualifying small business stock?

Answer: $100,000

Section 1244 allows up to $100,000 ($50,000 for other filers) of loss on qualifying stock to be treated as ordinary rather than capital.

Regulated futures contracts under Section 1256 are taxed using which gain split, regardless of holding period?

Answer: 60% long-term, 40% short-term

Section 1256 contracts are marked to market at year-end with gains treated as 60% long-term and 40% short-term.

An investor borrows on margin to buy taxable bonds. How is the deductible investment interest expense limited?

Answer: To net investment income, with any excess carried forward

Investment interest expense is deductible only up to net investment income, and disallowed amounts carry forward indefinitely.

What can a taxpayer elect to increase net investment income for the investment interest deduction?

Answer: Include qualified dividends and net long-term capital gains, giving up the preferential rate on them

Electing to treat qualified dividends and LTCG as investment income raises the deduction limit, but those amounts are then taxed at ordinary rates.

When a mutual fund distribution is labeled a return of capital, how is it treated?

Answer: Not currently taxed but reduces the shareholder's basis

Return of capital is a nontaxable recovery of investment that lowers basis, becoming capital gain only once basis reaches zero.