CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsEasy
A client, Ms. Lopez, bought stock for $5,000 on January 15, 2022. On January 14, 2023, she sold the stock for $7,000. What is the character of her gain?
- AOrdinary income
- BSection 1231 gain
- CLong-term capital gain
- DShort-term capital gain
Show answer & explanationAnswer & explanation
Correct answer: D. Short-term capital gain
A capital asset held for one year or less results in a short-term capital gain or loss. Ms. Lopez held the stock for exactly one year (January 15, 2022, to January 14, 2023). Therefore, her gain is short-term.
Why the other options are wrong
- A. This is incorrect; stock sales are typically capital gains, not ordinary income.
- B. This is incorrect; Section 1231 gain applies to business property, not investment stock.
- C. This would be true if the holding period was more than one year.
Short-Term Capital Gain
Gain from the sale or exchange of a capital asset held for one year or less. Short-term capital gains are taxed at ordinary income tax rates.
- Holding period is one year or less.
- Taxed at ordinary income rates.
- Applies to capital assets (e.g., stocks, bonds, investment property).
Memory trick: One year or less, short-term stress; over one year, long-term cheer!