Question

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

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?

Answer 1

Answer and Explanation:

The computation is shown below:

Given that

Per share increase in price = $20

no of shares = 1000

Now

total capital gain = 1000 × $20 = $20,000

Now

Tax rate if hold one year more is

= $20,000 × 15%

= $3,000

If sold instantly so it would be taxed as a short term capital gain

Now

= $20000 × 35%

= $7,000

Now the saving amount is

= $7,000 - $3,000

= $4,000

b. In this the share price decline and the capital appreciation decreased that results in rise of the risk that is associated with the investment so she would not be wait for the liquidity