Question

For a cash-basis taxpayer, gain or loss on a year-end sale of listed stock arises on the?

1) Trade date
2) Settlement date
3) Date of receipt of cash proceeds
4) Date of delivery of stock certificate

Answer 1

Cash-basis taxpayers recognize the gain or loss on the sale of stock on the trade date. A share of stock represents company ownership and provides value to the investor through dividends or capital gains. Companies only receive the funds during the initial stock sale and not during subsequent trading.

Step-by-step explanation:

For a cash-basis taxpayer, gain or loss on a year-end sale of listed stock arises on the trade date. A share of stock represents ownership in the company, and when a firm issues stock, it does so expecting to provide a rate of return to investors. This return can come in the form of dividends, which are direct payments to shareholders, or through capital gains, which occur when an investor sells stock for more than the purchase price. For instance, buying a share at $45 and selling it at $60 yields a $15 capital gain. Firms receive money during the initial stock offering, but not when their stock is traded between investors afterwards.

Answer 2

For a cash-basis taxpayer, the gain or loss on a year-end sale of listed stock arises on the Settlement date (option 2).

Step-by-step explanation:

Cash-basis taxpayers recognize income or expenses when the cash is received or disbursed, respectively. In the context of selling listed stock, the timing of recognizing the gain or loss is crucial. When dealing with listed stocks, transactions typically occur in two phases: the trade date and the settlement date. The trade date is when the transaction is initiated, agreeing upon the terms of the sale, while the settlement date is when the actual exchange of ownership and funds takes place.

In the case of a cash-basis taxpayer, the gain or loss on the sale of listed stock is recognized on the settlement date. This is because cash-basis accounting focuses on the actual flow of cash rather than the contract or trade agreement. The settlement date is when the cash is received from the sale, marking the point of recognition for tax purposes. Until the settlement occurs, the transaction is not complete, and the taxpayer doesn't realize the gain or loss as per cash-basis accounting principles.

Therefore, for tax reporting purposes, the gain or loss on the sale of listed stock is realized by a cash-basis taxpayer on the settlement date when the actual transfer of ownership and funds occurs, aligning with the cash accounting method that records transactions when cash is exchanged. The correct option is 2) Settlement date.