### What is a capital gain? - [x] The profit an investor makes when selling a capital asset - [ ] The decrease in value of an asset over time - [ ] The total value of an investor's portfolio - [ ] The annual dividends received from an investment > **Explanation:** A capital gain represents the profit earned from selling a capital asset for more than its purchase price. Capital assets can include stocks, bonds, and real estate. ### When does a capital gain occur? - [ ] When the value of an asset increases - [x] When an investor sells an asset for more than its purchase price - [ ] When an investor buys an asset at a lower price - [ ] When an investor receives interest income > **Explanation:** A capital gain only occurs when the investor sells a capital asset for more than what they originally paid for it. Unrealized gains, or increases in the value of an asset that is still owned, do not result in a capital gain. ### Which of the following is an example of a capital gain? - [x] Selling 100 shares bought for $1000 for $1100 - [ ] Holding onto 100 shares with an increased market value - [ ] Buying 100 shares for $1000 - [ ] Receiving dividend payments from 100 shares > **Explanation:** A capital gain is realized when an asset, such as 100 shares in this example, is sold for more than its purchase price. If the shares are simply held, no capital gain is recognized. ### How are capital gains treated for tax purposes? - [ ] They are tax-exempt - [ ] They are taxed only when the asset is purchased - [x] They must be claimed on the investor's income taxes - [ ] They are only taxed if held for more than one year > **Explanation:** Capital gains, whether short-term or long-term, must be claimed on the investor's income taxes. ### What results in a capital loss? - [ ] Selling an asset for more than its purchase price - [x] Selling an asset for less than its purchase price - [ ] Holding onto an asset that has increased in value - [ ] Receiving interest payments from an asset > **Explanation:** A capital loss occurs when an asset is sold for less than its purchase price. ### Can unrealized gains be considered capital gains? - [ ] Yes, always - [x] No, only realized gains count - [ ] Depends on the type of asset - [ ] Only for tax-exempt accounts > **Explanation:** Capital gains are only recognized when a capital asset is sold. Unrealized gains, which are increases in value before the sale, do not count as capital gains. ### Are capital gains applicable to real estate transactions? - [x] Yes - [ ] No - [ ] Yes, but only if it's commercial real estate - [ ] Yes, but only for residential properties > **Explanation:** Capital gains apply to the sale of all types of capital assets, including both commercial and residential real estate. ### What impact does the holding period have on capital gains? - [ ] It has no impact on capital gains - [x] It determines if the gain is short-term or long-term - [ ] It only affects capital gains if the asset is a stock - [ ] Capital gains are always considered long-term > **Explanation:** The holding period of an asset dictates whether the gain is considered short-term or long-term, which can have different tax implications. ### How is the capital gain calculated in this scenario: An investor buys 200 shares of stock at $5 each and sells them at $8 each? - [x] $600 - [ ] $3 per share - [ ] $1600 - [ ] $800 > **Explanation:** The capital gain is calculated by subtracting the purchase price from the selling price: \(200 \times (8-5) = 600\). ### Which type of asset can result in a capital gain for an investor? - [x] Stocks - [x] Bonds - [x] Real estate - [x] All of the above > **Explanation:** Capital gains can result from the sale of various assets, including stocks, bonds, and real estate. ### What happens if an investor holds a stock that rises in value but does not sell it? - [ ] A capital gain is realized - [ ] Income tax must be paid on the increase in value - [x] No capital gain occurs - [ ] Capital loss is recorded > **Explanation:** Unless the asset is sold, no capital gain is realized; the increase in value is considered an unrealized gain. ### In tax terms, how are long-term capital gains typically treated differently than short-term capital gains? - [x] Long-term capital gains often have a lower tax rate - [ ] Short-term capital gains are tax-exempt - [ ] Long-term capital losses are not deductible - [ ] They are treated the same for tax purposes > **Explanation:** Long-term capital gains, those realized from assets held for more than one year, generally benefit from lower tax rates compared to short-term capital gains. ### What needs to happen for an investor to claim a capital loss? - [ ] The investment must increase in value - [ ] The investment must remain unsold - [x] The investment must be sold at a loss - [ ] The investor must hold the investment for more than a year > **Explanation:** A capital loss is claimed when an investor sells an investment for less than what they paid for it. ### Which of the following statements about capital losses is true? - [ ] They are never deductible for tax purposes - [ ] They only occur with real estate - [x] They can offset capital gains - [ ] They increase taxable income > **Explanation:** Capital losses can offset capital gains, reducing the overall tax liability for the investor. ### What is the capital gain if an investor buys a property for $200,000 and sells it for $250,000? - [x] $50,000 - [ ] $250,000 - [ ] $200,000 - [ ] $100,000 > **Explanation:** The capital gain is the difference between the selling price and the purchase price: \(250,000 - 200,000 = 50,000\). ### How does a capital gain affect an investor's tax return? - [ ] It decreases taxable income - [ ] It has no effect - [x] It increases taxable income - [ ] It provides a tax deduction > **Explanation:** Capital gains increase an investor's taxable income because they represent profit earned from the sale of investments. ### What is considered a short-term capital gain? - [ ] Any gain from the sale of an investment held for at least one year - [ ] Gain from the sale of any investment - [x] Gain from the sale of an investment held for one year or less - [ ] Gain from tax-exempt investments > **Explanation:** A short-term capital gain arises from the sale of an investment held for one year or less and is typically taxed at the investor's ordinary income tax rate. ### What is an example of a long-term capital gain? - [ ] Selling stocks after 6 months for a profit - [ ] Selling a bond after 9 months for a profit - [x] Selling real estate after 2 years for a profit - [ ] Receiving dividends from stocks > **Explanation:** Long-term capital gains are profits from the sale of an investment held for more than one year, such as selling real estate after two years. ### How can an investor defer capital gains taxes? - [ ] By immediately reinvesting the proceeds - [x] By using a 1031 exchange - [ ] By holding the asset indefinitely - [ ] By claiming unrealized gains as income > **Explanation:** Investors can defer paying capital gains taxes by using a 1031 exchange when selling property, allowing them to reinvest the proceeds in a similar property. ### Which of the following methods cannot be used to avoid capital gains tax? - [x] Ignoring the tax obligation - [ ] Using tax-advantaged accounts like IRAs - [ ] Offsetting gains with losses - [ ] Using tax credits > **Explanation:** Ignoring the tax obligation is not a valid or legal method to avoid capital gains taxes. Compliance with tax regulations is mandatory.