### What is a capital gains tax? - [x] A tax on profits from selling a non-inventory stake in a company - [ ] A tax on wages earned from employment - [ ] A tax on property owned - [ ] A tax on interest earned from savings accounts > **Explanation:** A capital gains tax is specifically levied on the profits made from the sale of non-inventory assets, such as stocks in a company. The profit is calculated based on the difference between the selling price and the original purchase price. ### In the given example, what amount is subject to capital gains tax? - [ ] $15 per share - [x] $3 per share - [ ] $18 per share - [ ] The total purchase price > **Explanation:** The taxable amount in a capital gains calculation is the profit made on the sale. In this example, the investor bought the stock for $15 a share and sold it for $18 a share, resulting in a $3 per share profit, which is subject to the capital gains tax. ### How are short-term capital gains typically taxed compared to long-term capital gains? - [ ] At the same rate - [ ] At a lower rate - [x] At a higher rate - [ ] They are not taxed > **Explanation:** Short-term capital gains, which are gains from assets held for one year or less, are typically taxed at a higher rate than long-term capital gains to encourage investors to hold their investments for a longer period. ### What is the primary purpose of classifying capital gains as either short-term or long-term? - [ ] To simplify the tax code - [ ] To increase the overall tax revenue - [x] To encourage long-term investment - [ ] To penalize frequent traders > **Explanation:** The classification of capital gains into short-term and long-term categories aims to encourage investors to maintain their investments over longer periods. Long-term capital gains generally receive more favorable tax treatment, promoting stability in the market. ### Which of the following methods can be used to reduce or defer capital gains taxes? - [ ] Selling assets immediately for a profit - [x] Contributing to a Roth IRA - [ ] Holding investments for less than one year - [ ] Investing in high-risk stocks > **Explanation:** Individuals can reduce or defer their capital gains taxes using several strategies within the tax code. Contributing to accounts such as a Roth IRA can provide significant tax advantages, including deferring taxes on gains until withdrawal. ### If an investor experiences a loss on the sale of a non-inventory asset, what is the tax implication? - [x] There is no capital gains tax - [ ] The loss is taxed at short-term rates - [ ] The loss reduces taxable income - [ ] The loss incurs a penalty > **Explanation:** If an investor sells a non-inventory asset at a loss, there is no capital gains tax on that transaction since the purpose of the tax is to levy charges on profits, not losses. ### If an investor buys stock for $20 per share and sells it for $25 per share under short-term capital gains tax laws, how much profit per share is subject to tax? - [ ] $20 per share - [x] $5 per share - [ ] $25 per share - [ ] No profit is subject to tax > **Explanation:** The profit or gain per share subject to tax is the difference between the selling price and the purchase price, which in this case is $5 per share. ### Why might an investor prefer to invest in a tax-free savings account or a Roth IRA? - [ ] To avoid paying any taxes forever - [x] To reduce or defer capital gains taxes - [ ] To invest in high-risk stocks - [ ] To avoid reporting gains to the IRS > **Explanation:** Investors often choose tax-advantaged accounts like a Roth IRA or tax-free savings accounts as these structures allow them to reduce or defer capital gains taxes, maximizing the growth potential of their investments. ### What is the main advantage of long-term capital gains tax rates being lower than short-term rates? - [ ] To reduce the tax burden for frequent traders - [ ] To complicate the tax code - [ ] To penalize long-term investors - [x] To incentivize holding investments longer > **Explanation:** The main advantage of having lower tax rates for long-term capital gains is to encourage investors to hold onto their investments for longer periods, promoting economic stability and sustained investment in businesses. ### If an investor holds an asset for more than one year before selling it for a profit, how is the profit classified? - [x] Long-term capital gains - [ ] Short-term capital gains - [ ] Ordinary income - [ ] Tax-exempt earnings > **Explanation:** When an investor holds an asset for more than a year before selling it at a profit, the profit is classified as long-term capital gains, which generally receive a lower tax rate than short-term gains.