Investment Returns and Taxation

Question 1

What is yield in investment terms?

Answer 1

A measurement of the amount of income an investor will receive as a percentage of the cost of the investment.

Question 2

What does the term current yield (CY) apply to?

Answer 2

Both stocks and bonds.

Question 3

What is dividend yield?

Answer 3

Income from a stock dividend, also referred to as current yield when applicable.

Question 4

How is current yield (CY) calculated?

Answer 4

annual income (in dollars) / current market value

Question 5

What is the default assumption regarding dividend payments?

Answer 5

Dividends are paid quarterly.

Question 6

What is an open position in securities trading?

Answer 6

When a customer buys a security and holds it.

Question 7

How is a position closed in securities trading?

Answer 7

By selling the security.

Question 8

What occurs in a short sale?

Answer 8

The customer opens the position by selling and closes it by buying.

Question 9

What are capital gains?

Answer 9

Generated from closing an open position at a profit.

Question 10

What are capital losses?

Answer 10

Result from closing an open position for a loss.

Question 11

What is the formula for calculating capital gains and losses?

Answer 11

sales proceeds – adjusted cost basis

Question 12

What does a positive number in the capital gains formula indicate?

Answer 12

Capital gains.

Question 13

What does a negative number in the capital gains formula indicate?

Answer 13

Capital losses.

Question 14

What is adjusted cost basis?

Answer 14

The amount paid for a position modified by any adjustments.

Question 15

What typically causes adjustments to the cost basis?

Answer 15

A stock split or a stock dividend.

Question 16

What is a realized gain or loss?

Answer 16

A realized gain or loss comes from closing a position

A position is closed by selling or buying back, resulting in a flat position.

Question 17

What does it mean when a position is flat?

Answer 17

Flat means the position no longer exists.

Question 18

How can you calculate realized gains, losses, and total return?

Answer 18

By closing a position.

Question 19

What is an unrealized gain or loss?

Answer 19

An unrealized gain or loss comes from an open position.

Question 20

What value is used to calculate unrealized gains or losses?

Answer 20

The current market value (CMV) of the security.

Question 21

What is a major issue with calculating unrealized gains or losses?

Answer 21

The market can change before completing the calculation.

Question 22

What is total return?

Answer 22

Total return is a measure of the return an investor receives from an investment that includes both income and any gain or loss.

Question 23

How is total return expressed?

Answer 23

As a percentage of the cost basis of the investment.

Question 24

What is the formula for calculating total return?

Answer 24

total return = (income + gains or – losses) / cost basis

Question 25

What is ordinary income?

Answer 25

Ordinary income consists of earned income, investment income, and passive income ## Footnote Ordinary income is used to determine the income tax rate that an investor will pay.

Question 26

What types of income are included in earned income?

Answer 26

Earned income includes salary, wages, bonuses, tips, and income from active participation in a trade or business ## Footnote For most people, the majority of their taxable income is derived from earned income.

Question 27

What is investment income?

Answer 27

Investment income is income earned from investments, including dividends and interest payments ## Footnote It is sometimes referred to as portfolio income.

Question 28

Define passive income.

Answer 28

Passive income is a type of investment income derived from certain investments, primarily direct participation programs and real estate investments ## Footnote Passive income may produce passive losses that can offset passive income.

Question 29

What happens to passive losses in a given tax year?

Answer 29

A taxpayer may use passive losses to offset any passive income received in that tax year ## Footnote Passive losses cannot offset other types of income.

Question 30

How are capital gains from assets held for one year or less taxed?

Answer 30

Capital gains from assets held for one year or less are taxed as ordinary income ## Footnote The ordinary income tax rate is usually higher than the long-term capital gains tax rate.

Question 31

Are short-term capital gains considered part of ordinary income?

Answer 31

Short-term capital gains are not part of a person's ordinary income but are added to it for tax calculations ## Footnote They are effectively part of ordinary income.

Question 32

What is a wash sale?

Answer 32

A wash sale occurs when an investor sells a security at a loss and repurchases the same security within 30 days ## Footnote Losses from a wash sale cannot be used for tax purposes.

Question 33

Are rights, warrants, call options, or convertible bonds considered substantially identical for wash-sale rules?

Answer 33

Yes, they are considered substantially identical in regard to wash-sale rules ## Footnote This affects how losses are treated for tax purposes.

Question 34

What is the holding period required for a gain to be taxed as a long-term capital gain?

Answer 34

The position must be held for 'more than one year' ## Footnote It is important to note that 'one year or more' does not meet this requirement.

Question 35

Fill in the blank: Ordinary income consists of ______, investment income, and passive income.

Answer 35

earned income