Practice Quiz

FINRA Series 6

Category - Series 6

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Tex Payor owns 500 shares of Amazon.com, Inc. that he bought seven years ago when the stock price was $18 a share, at which time he paid a commission of $12.95 to purchase the stock. At the beginning of this year, Amazon was selling for $89 a share. Today, December 31st, Amazon’s stock closed at $152 a share. Based on this information, what must Tex include on this year’s tax return as taxable income from his investment in Amazon?
  1. only the capital appreciation on the stock this year: $63 a share x 500 shares = $31,500
  2. the value of the stock on December 31st minus the price he paid for it, which includes the commission he paid, divided by the 7 years he has owned the stock: $152 - ($18 + $12.95) x 500 shares = $60,525 ÷ 7 = $8,646
  3. the capital appreciation on the stock this year minus the commission he originally paid to purchase the stock:($63 - $12.95) x 500 = $25,025
  4. none of the above
Explanation
Answer: D - None of the selections is the amount that Tex must include as taxable income on this year’s tax return from his investment in Amazon. Until Tex sells his shares of Amazon.com, he has earned only unrealized capital gains, which are not subject to taxation. When Tex sells his shares, he will then have realized capital gains and must pay tax on those gains.
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