Chapter 16, Problem 1DQ

To determine

Explain the issue face by the person S while preparing a federal income tax return.

Explanation of Solution

Income tax: Income tax is a tax levied on an individual’s income (taxable income). It is a direct tax which means it is levied on and paid by the same individual. It is a progressive tax which means the tax rates will change according to the changes in the level of income.

Generally stock is a capital asset. So, the profit or loss from the sale of stock is a capital gain or loss. This gain or loss is separated from person S other gains and losses. Stock is inherited and person S holding this share for longer period. Sale of stock only determines whether there is a capital gain or loss. Net gain or loss is required because to check whether the long-term gain is eligible for alternative tax calculation and to check whether there is a deduction for net capital loss.