3 Questions
- All of the following are normally taxed at the investor's ordinary income tax rate except
A. qualified dividends.
B. interest from a corporate bond.
C. nonqualified dividends.
D. short-term capital gains.
qualified dividends.
- Casey sells 100 shares of XYZ Corporation common stock on January 21 for $22 per share. The shares were purchased three years ago for $23 per share. On February 1, Casey buys 1 XYZ Corporation bond. The bond is convertible into 25 XYZ Corporation shares. How much capital loss may Casey claim for this trade?
A. $75
B. $25
C. $100
D. None
$75
- To qualify as a conduit, a mutual fund must pay out a minimum of
A. 90% of gross investment income.
B. 90% of net expenses.
C. 90% of net investment income (NIl).
D. 95% of net investment income (Ni).
90% of net investment income (NIl).
Study Notes
Taxation of Investments
- Qualified dividends are normally taxed at a rate different from the investor's ordinary income tax rate.
- Interest from a corporate bond is taxed at the investor's ordinary income tax rate.
- Nonqualified dividends are taxed at the investor's ordinary income tax rate.
- Short-term capital gains are taxed at the investor's ordinary income tax rate.
Wash Sale Rule
- The wash sale rule disallows a capital loss if the investor buys a "substantially identical" security within 30 days of the sale.
- A convertible bond is considered a "substantially identical" security.
- If Casey buys a convertible bond that can be converted into 25 XYZ Corporation shares, the capital loss may be disallowed.
- Casey may not be able to claim a capital loss for this trade.
Mutual Fund Requirements
- To qualify as a conduit, a mutual fund must pay out a minimum of 90% of its gross investment income.
- The payout requirement is based on gross investment income, not net expenses or net investment income.
Test your knowledge on investor taxation by identifying which types of income are taxed at the ordinary income tax rate. Choose the option that is not normally taxed at the investor's ordinary income tax rate.
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