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 are calculation-heavy and full of traps. You'll work scenarios that require determining the correct cost basis, identifying the holding period, applying the wash sale rule, and calculating the tax owed on a transaction. These rules are mechanical and predictable once you understand the logic.
Let's start with how capital gains and losses are classified and taxed.