Question

For the following independent cases, determine whether economic income is present and, if so, whether it must be included in gross income (that is, is it realized and recognized for tax purposes?). Asia owns stock that is listed on the New York Exchange, and this year the stock increased in value by $20,000.

Answer 1

Economic income is not realized or recognized for tax purposes when the stock value increases but is not sold. Therefore, it should not be included in gross income.

Step-by-step explanation:

Economic income refers to the increase in the value of an asset, such as the stock owned by Asia. In this case, the stock increased in value by $20,000, which constitutes economic income. However, for tax purposes, income must not only be realized but also recognized. Realization occurs when the stock is sold and the gain is actually received in cash or other property. Recognition, on the other hand, happens when the gain is reported on the tax return. Since Asia still owns the stock and has not sold it, the economic income is not realized or recognized for tax purposes and therefore should not be included in gross income.