Question

If you buy a share of stock for $1, and at the end of the year the market value of the share is $3, how do you report the income tax you will pay on the gain when you sell the share?

a) Capital gains tax on $2.
b) Capital gains tax on $1.
c) As a deferred income tax liability
d) Tax exemption for stock gains.

Answer 1

When you sell a share for a higher price than you bought it for, you report the profit as a capital gain for tax purposes. In your case, buying for $1 and selling for $3 results in a $2 capital gain, which is subject to capital gains tax.

Step-by-step explanation:

When you purchase a share of stock for $1 and sell it for $3, the income you report for tax purposes is based on the capital gain you realized from the sale. In this case, your capital gain is $2, which is the difference between the selling price ($3) and your purchase price ($1). This $2 gain is what you would report as income, and it would be subject to capital gains tax.

Investors must acknowledge that the return on investment can come from either dividends or capital gains. Capital gains are generated when the share is sold for a higher price than it was purchased. For example, buying a share at $45 and selling it at $60 would result in a $15 capital gain. This applies similarly to your situation where the gain is $2, implying that you would report a capital gains tax on $2 when selling the share.