Question

An investor purchased 100 shares of MJS on June 19, 2015 at a price of $40 per share. On June 1, 2016, MJS declared a 25% stock dividend. On July 1, 2016, the investor sold 50 shares of the MJS at $50 per share.

Which of the following statements are correct?
I. The adjusted cost basis of the shares is $30
II. The adjusted cost basis of the shares is $32
III. There is a short-term capital gain on 25 shares, long-term gain on the other 25 shares
IV. There is a long-term capital gain on all of the shares sold

Answer 1

IV) There is a long-term capital gain on all of the shares sold

Step-by-step explanation:

Long term capital gains refers to a profit made on an asset that an individual or business has held for more than a year. In this case, the investor had a long term capital gain when he sold 50 shares at $50 per share, since their cost basis was $40 per share ($10 per share as long term capital gains). He bought the shares on June 19, 2015 and sold them on July 1, 2016.

He also had some short term capital gains, since he received 25% stock dividends on June 1, 2016.

Long-term capital gains are those you earn on assets you've held for more than a year. ... The long-term capital gains tax rates are 0%, 15% and 20%, and they're typically much lower than the ordinary income tax rate