Investment Tax-Advantaged Investing 3

Question 1

What is a SEP IRA?

Accepted Answer

A simplified retirement plan for self-employed individuals and small business owners with higher contribution limits

Answer

A SEP (Simplified Employee Pension) IRA allows self-employed individuals and small business owners to contribute significantly more than a traditional IRA — up to 25% of compensation or $69,000 in 2025.

Question 2

What is tax-loss harvesting?

Accepted Answer

Selling losing investments to offset capital gains and reduce your tax bill

Answer

Tax-loss harvesting involves strategically selling investments at a loss to offset taxable capital gains from other investments, potentially lowering your overall tax liability for the year.

Question 3

What is capital gains tax?

Accepted Answer

A tax on the profit earned from selling an investment for more than its purchase price

Answer

Capital gains tax is levied on the profit made when you sell an investment for more than you paid for it, with long-term rates (assets held over one year) being lower than short-term rates.

Question 4

What is the 'wash-sale rule' in investing?

Accepted Answer

An IRS rule that disallows a tax loss if you repurchase the same or substantially identical security within 30 days before or after the sale

Answer

The wash-sale rule prevents investors from claiming a tax loss on a security if they buy the same or a substantially identical security within 30 days before or after the sale.

Question 5

What is the difference between short-term and long-term capital gains tax rates in the U.S.?

Accepted Answer

Short-term gains (assets held one year or less) are taxed as ordinary income; long-term gains (over one year) receive preferential lower rates

Answer

The IRS taxes short-term capital gains (from assets held one year or less) at ordinary income tax rates, while long-term gains receive preferential rates of 0%, 15%, or 20% depending on income.

Investment Practice Test

Investment Practice Test

Investment Tax-Advantaged Investing 3