IRS Income and Assets 4

Question 1

A taxpayer has a net short-term capital loss of $3,000 and a net long-term capital gain of $8,000. What is the net capital gain reported?

Accepted Answer

$5,000 long-term capital gain

Answer

Short-term capital losses offset long-term capital gains first; $8,000 − $3,000 = $5,000 net long-term capital gain.

Question 2

What is the annual capital loss deduction limit against ordinary income for an individual taxpayer?

Accepted Answer

$3,000

Answer

Individuals may deduct up to $3,000 of net capital losses against ordinary income per year; excess losses carry forward.

Question 3

A taxpayer receives stock options from their employer and exercises nonqualified stock options (NQSOs) this year. When is ordinary income recognized?

Accepted Answer

When the options are exercised

Answer

For NQSOs, ordinary income equal to the spread (FMV minus exercise price) is recognized at the time of exercise.

Question 4

A taxpayer converts a traditional IRA to a Roth IRA. What is the tax treatment of the converted amount?

Accepted Answer

Included in gross income in the year of conversion

Answer

The taxable portion of a traditional IRA converted to a Roth IRA is included in gross income in the year of the conversion.

Question 5

Under the installment sale method, when does a taxpayer recognize gain from the sale of appreciated property?

Accepted Answer

As payments are received, proportional to the gross profit percentage

Answer

Installment method spreads gain recognition over the collection period; each payment contains a proportionate amount of gain based on the gross profit ratio.

(IRS) Internal Revenue Service Certified Practice Test

(IRS) Internal Revenue Service Certified Practice Test

IRS Income and Assets 4