Capital Gains Tax MCQs

. What is a capital gain? A) Profit from the sale of an asset B) Loss from the sale of an asset C) Income from salary D) Interest from savings Answer: A 2. Which of the following is typically subject to capital gains tax? A) Interest income B) Dividend income C) Sale of real estate D) Wages Answer: C 3. What is the primary purpose of capital gains tax? A) To tax earned income B) To tax the increase in value of investments C) To reduce inflation D) To support low-income households Answer: B 4. How is a short-term capital gain typically defined? A) Gain from an asset held for less than 1 year B) Gain from an asset held for more than 1 year C) Gain from an asset held for 5 years D) Gain from a primary residence Answer: A 5. Which of the following is NOT considered a capital asset? A) Stocks B) Bonds C) Personal vehicle used for commuting D) Investment property Answer: C 6. Long-term capital gains are usually taxed at: A) A higher rate than short-term gains B) The same rate as short-term gains C) A lower rate than short-term gains D) A flat rate of 50% Answer: C 7. Capital gains tax rates are generally lower for: A) Short-term gains B) Long-term gains C) Both A and B D) Neither A nor B Answer: B 8. Which of the following can be used to offset capital gains? A) Ordinary income B) Capital losses C) Rental income D) Dividend income Answer: B 9. A capital loss can be carried forward to offset capital gains in: A) The current year only B) Up to 2 years C) Up to 5 years D) Future years indefinitely Answer: D 10. What is the tax treatment of capital gains on a primary residence in many countries? A) Fully taxable B) Partially exempt C) Fully exempt up to a certain amount D) Not taxable if reinvested within a year Answer: C 11. What is the effect of inflation on capital gains? A) Increases the real value of gains B) Decreases the real value of gains C) Has no effect on gains D) Makes gains tax-free Answer: B 12. What is the primary difference between realized and unrealized capital gains? A) Realized gains are not taxable B) Unrealized gains are not taxable until the asset is sold C) Realized gains occur when an asset is inherited D) Unrealized gains occur only in real estate Answer: B 13. How are capital gains from collectibles typically taxed? A) At a lower rate than other assets B) At a higher rate than other assets C) Exempt from tax D) At the same rate as ordinary income Answer: B 14. What is a “step-up in basis”? A) Increase in the purchase price of an asset B) Adjustment of the cost basis of an asset to its market value at the time of inheritance C) Tax deduction for long-term capital gains D) Increase in tax rates for capital gains Answer: B 15. What is the capital gains tax treatment for gifts of appreciated property? A) The donor pays the tax B) The recipient pays the tax based on the original purchase price C) The recipient pays the tax based on the market value at the time of the gift D) Gifts are always tax-free Answer: B 16. In which situation might a capital gain be deferred? A) Sale of a personal vehicle B) Sale of a primary residence with gains below the exemption limit C) Exchange of similar investment properties under a “like-kind” exchange D) Sale of stocks Answer: C 17. What is the “wash sale” rule? A) A rule that allows reinvestment of gains without paying taxes B) A rule that disallows claiming a loss on a sale if a substantially identical asset is purchased within 30 days C) A rule that taxes all capital gains at the same rate D) A rule that exempts gains from certain assets from taxation Answer: B 18. Capital gains tax on stocks is typically paid: A) When the stock is purchased B) When the stock pays a dividend C) When the stock is sold D) Annually regardless of sales Answer: C 19. The net investment income tax (NIIT) applies to: A) All capital gains B) High-income taxpayers C) All income D) Tax-free municipal bonds Answer: B 20. How does a taxpayer’s income level affect capital gains tax rates? A) Higher income may result in higher capital gains tax rates B) Higher income reduces capital gains tax rates C) Income level has no effect on capital gains tax rates D) Only low-income earners pay capital gains tax Answer: A 21. What is the maximum federal long-term capital gains tax rate in the United States as of 2024? A) 10% B) 15% C) 20% D) 25% Answer: C 22. Which of the following is a method to minimize capital gains tax? A) Holding investments for more than a year B) Frequent buying and selling of assets C) Selling low-performing assets first D) Avoiding investment in capital assets Answer: A 23. What is “indexation” in the context of capital gains tax? A) Adjusting the purchase price of an asset for inflation B) Setting a flat rate of tax for all gains C) Applying different tax rates to different types of assets D) Exempting certain gains from tax Answer: A 24. How are capital gains from the sale of business assets treated for tax purposes? A) As personal income B) As ordinary income C) As capital gains D) As tax-exempt income Answer: C 25. Which of the following is an example of a tax-deferred account that affects capital gains? A) Traditional IRA B) Checking account C) Regular brokerage account D) Savings account Answer: A 26. What happens to unrealized capital gains upon the death of the owner? A) They are taxed immediately B) They are transferred to heirs tax-free C) The heirs receive a step-up in basis D) The gains are eliminated Answer: C 27. Capital gains on inherited property are generally: A) Taxed at the original purchase price B) Taxed at the market value on the date of inheritance C) Not taxed D) Always taxed as short-term gains Answer: B 28. Which of the following can trigger capital gains tax? A) Selling a stock at a profit B) Holding a stock that appreciates in value C) Receiving interest income D) Reinvesting dividends Answer: A 29. What is the capital gains tax treatment for losses on the sale of personal use property? A) Fully deductible B) Partially deductible C) Not deductible D) Deductible only against capital gains Answer: C 30. Which of the following is NOT a capital asset? A) Stock in a company B) Investment property C) Office supplies D) A car used for business Answer: C 31. The capital gains tax rate on qualified dividends is generally: A) Higher than ordinary income tax rates B) The same as the long-term capital gains rate C) The same as the short-term capital gains rate D) Exempt from tax Answer:   You said: continue ChatGPT said: ChatGPT Sure! Here are the remaining MCQs: 31. The capital gains tax rate on qualified dividends is generally: A) Higher than ordinary income tax rates B) The same as the long-term capital gains rate C) The same as the short-term capital gains rate D) Exempt from tax Answer: B 32. Which of the following strategies can help in deferring capital gains tax? A) Gifting the asset B) Holding the asset for less than a year C) Engaging in a 1031 exchange (like-kind exchange) D) Selling the asset immediately Answer: C 33. When are capital gains taxes due? A) At the end of the tax year B) When the asset is sold C) Quarterly throughout the year D) They are not due until retirement Answer: B 34. Which of the following is a typical characteristic of long-term capital gains tax rates? A) They are higher than short-term rates B) They are the same as ordinary income tax rates C) They are lower than short-term rates D) They are only applied to losses Answer: C 35. How does capital gains tax apply to cryptocurrency transactions in many countries? A) They are not subject to capital gains tax B) They are taxed as ordinary income C) They are taxed as capital gains when sold D) They are exempt from all taxes Answer: C 36. What is the primary reason for the lower tax rate on long-term capital gains? A) To encourage long-term investment B) To increase government revenue C) To penalize short-term trading D) To reduce inflation Answer: A 37. Which of the following is a common exemption to capital gains tax? A) Sale of a secondary home B) Sale of a primary residence within a specified limit C) Sale of a luxury vehicle D) Sale of collectibles Answer: B 38. The capital gains tax rate for short-term gains is usually: A) The same as the taxpayer’s ordinary income tax rate B) Lower than the ordinary income tax rate C) Higher than the long-term capital gains rate but lower than ordinary income tax rate D) Flat for all taxpayers Answer: A 39. Which of the following would NOT affect the calculation of capital gains? A) The purchase price of the asset B) Improvements made to the asset C) Inflation D) The selling price of the asset Answer: C 40. What is the “holding period” for determining whether a capital gain is long-term or short-term? A) The time between purchasing and selling the asset B) The time the asset is held after selling C) The time between inheriting and selling the asset D) The time the asset is kept in a tax-advantaged account Answer: A 41. What happens if capital gains exceed capital losses in a tax year? A) The difference is taxed at the capital gains rate B) The difference is carried forward to the next year C) No tax is owed D) The difference is added to ordinary income Answer: A 42. Which of the following is true regarding capital gains on rental properties? A) They are taxed as ordinary income B) They are taxed as capital gains upon sale C) They are exempt from taxes if rented for more than 5 years D) They are not taxed Answer: B 43. How are capital gains from the sale of shares in a closely-held corporation typically taxed? A) As ordinary income B) As short-term capital gains C) As long-term capital gains if held for more than a year D) They are tax-exempt Answer: C 44. Which of the following is an example of a “capital improvement” that might increase the basis of a property? A) Regular maintenance B) New roof installation C) Painting the interior D) Landscaping Answer: B 45. Which of the following statements about capital gains tax and retirement accounts is true? A) Capital gains within retirement accounts are taxed annually B) Capital gains within retirement accounts are tax-deferred C) Capital gains are always tax-free in retirement accounts D) Retirement accounts do not hold capital assets Answer: B 46. What is the tax treatment of capital gains for foreign investors in many countries? A) They are exempt from capital gains tax B) They are taxed at a higher rate than domestic investors C) They are subject to withholding tax D) They are not allowed to invest in capital assets Answer: C 47. Which of the following is a common reason for a “capital gains tax holiday”? A) To increase short-term government revenue B) To encourage long-term holding of assets C) To stimulate the economy by encouraging asset sales D) To reduce tax rates permanently Answer: C 48. Which of the following is considered a capital loss? A) Loss on the sale of personal property B) Loss on the sale of stocks C) Loss on the sale of a primary residence D) Loss on the sale of a vehicle used for commuting Answer: B 49. How does capital gains tax affect investment decisions? A) It has no effect on investment decisions B) It encourages frequent trading to realize gains C) It may encourage holding assets for a longer period to benefit from lower tax rates D) It discourages all forms of investment Answer: C 50. Which of the following is a “capital gain distribution”? A) Distribution of profits from the sale of a mutual fund’s assets B) Interest payment from a bond C) Dividend payment from a stock D) Rental income from an investment property Answer: A