Question

A stock's price has risen due to an overall market increase. This increase in price is considered:

A. A non-taxable capital gain
B. A taxable capital gain
C. An unrealized capital gain
D. Amortization

Answer 1

The correct answer to the question is 'C. An unrealized capital gain'.

Step-by-step explanation:

When an investor buys a share of stock at one price and the stock's value increases, but the investor has not yet sold the stock, the increase in value is referred to as an unrealized capital gain. This means that the investor has a paper gain, which is not taxed because the gain has not been realized through sale.

For example, if an investor bought shares of Wal-Mart for $45 and the price rises to $60 but the shares are not sold, the $15 increase per share is considered an unrealized capital gain. Capital gains are only subject to tax when they are realized — that is, when the asset is sold and the gain is actually received.