Introduction

Welcome to Equity Tax Treatment: the unit that ties together everything you've learned about equity securities by showing how the IRS taxes the gains, losses, and income they produce.

Exam Weight: Part of Function 3 (73%), Equity Securities (~18 questions estimated for the equity block)

What You'll Learn

In this unit, you'll cover:

• Capital Gains and Losses: Short-term vs. long-term classification, tax rates, and the $3,000 loss deduction limit
• Netting Gains and Losses: The four-step process for determining net short-term and long-term results
• Holding Periods: Standard rules plus special situations (inherited, gifted, converted securities)
• Dividend Taxation: Qualified vs. non-qualified dividends and return-of-capital distributions
• Wash Sales: The 61-day window, cost basis adjustments, and the IRA trap
• When-Issued Securities: How the holding period works before a security is actually issued
• Cost Basis (Purchases): How commissions and fees factor into your basis
• Cost Basis (Convertible Securities): Why conversion is not a taxable event
• Cost Basis (Stock Dividends and Rights): The 15% threshold rule for rights allocation
• Cost Basis (Inherited and Gifted Securities): Stepped-up basis vs. the dual basis rule
• Cost Valuation Methods: First In, First Out (FIFO) as the default, Last In, First Out (LIFO), and specific identification

Why This Matters

Tax questions on the Series 7 are calculation-heavy and full of traps. You'll see scenarios that test whether you can determine the correct cost basis, identify the holding period, apply the wash sale rule, and calculate the tax owed on a transaction. Mastering this unit means free points on exam day. These rules are mechanical and predictable once you understand the logic.

Let's start with how capital gains and losses are classified and taxed.