Question

Elen holds 1,000 shares of fizbo inc. stock that she purchased 11 months ago. the stock has done very well and has appreciated $20/share since helen bought the stock. when sold, the stock will be taxed at capital gains rates (the long-term rate is 15 percent and the short-term rate is the taxpayer's marginal tax rate). ignore the time value of money.

Answer 1

Question option include: a. if Helen's marginal tax rate is 35 percent, how much would she save by holding the stock an additional month before selling? b. what might prevent Helen from waiting to sell?

Solution

Per share increase in price = $20

No of shares = 1000

Total capital gain = 1000 * $20 = $20,000

Tax rate if hold for one year more = $20,000 * 15% = $3,000

If sold immediately and taxed as short term capital gain, then = $20,000 * 35% = $7,000

So if shares are held for more than a month a tax of {($7000 - $3000) = $4,000} can be saved.

b In a month shares prices may fall and capital appreciation would be reduced and this will increase the risk associated with the investment and she will not to wait for the liquidity for a month more.