NASAA Series 65 — All Questions

An analyst plans to outperform by reading companies' newly released earnings reports faster than other investors. If the semi-strong form of market efficiency holds, what result should the analyst expect?

• a.No consistent excess return, because prices adjust to public announcements almost at once✓
• b.Excess returns, because published earnings reports take several weeks to be fully reflected in stock prices
• c.Excess returns, but only if the analyst also studies past price charts and trading volume to confirm the pattern
• d.No excess return, but only for stocks that are not followed by many analysts

Semi-strong efficiency says prices already reflect all public information, so fast reading of public releases gives no consistent edge. Slow adjustment is the opposite claim, and charting does not add to public information that is already priced. The form does not carve out thinly followed stocks, which is a different question about market structure.Efficient market hypothesis

Studies find that corporate insiders earn abnormal profits on trades in their own companies' stock. Which form of the efficient market hypothesis does this evidence contradict?

• a.The semi-strong form only
• b.The strong form only✓
• c.All three forms
• d.The weak form only

Strong-form efficiency says even private information is reflected in prices. Consistent insider profits show that private information is not fully priced in, which contradicts the strong form but says nothing about whether public information or past prices are reflected. The weak and semi-strong forms are therefore not contradicted by this evidence.Efficient market hypothesis

Which finding is generally treated as a market anomaly, meaning a pattern that appears to conflict with market efficiency?

• a.Index funds have earned returns close to the market return before fees
• b.Over long periods, small-company stocks have earned more than their CAPM-predicted returns✓
• c.Stocks with higher betas have tended to earn higher average returns than stocks with lower betas
• d.Stock prices jump within minutes of an unexpected earnings announcement

The size effect, a return premium for small companies beyond what beta explains, is a documented anomaly. Quick price reactions to news and index funds tracking the market are what an efficient market predicts, and a link between beta and return is the relationship CAPM itself describes.Market anomalies

A client asks why the adviser favors index funds when some active managers beat the market. Which response best reflects the evidence?

• a.Active managers underperform mainly because they hold too few stocks to diversify, not because of their costs
• b.Index funds avoid market risk, so their value does not fall when the index declines and the market has a bad year
• c.Index funds hold the best-performing stocks in each sector, so they beat active managers in every kind of market
• d.Active managers must overcome higher fees and trading costs, and few outperform consistently after costs✓

Studies of active funds generally find that costs consume the gross outperformance of most managers, and past winners are hard to pick in advance. An index fund still bears market risk and falls when its index does. Concentration may raise volatility but is not why most active funds trail, and an index fund holds the market's securities, not a selection of the best ones.Active versus passive management

An adviser keeps a client's long-term policy at 60% stocks and 40% bonds, but holds 68% stocks for the next 6 to 12 months because she believes equities are undervalued. This is an example of:

• a.Tactical asset allocation✓
• b.Portfolio rebalancing
• c.Dynamic asset allocation
• d.Strategic asset allocation

A short-term, deliberate deviation from the long-term policy mix to exploit a market view is tactical asset allocation. Strategic allocation is the long-term policy mix itself, rebalancing returns a drifted portfolio to target and does not express a view, and dynamic allocation changes the mix mechanically as markets move.Asset allocation approaches

A client wants low-cost broad market exposure for most of her money but would like a smaller portion in actively managed specialty ideas. Which structure fits?

• a.Sector rotation, with the whole portfolio moved among industries
• b.Barbell, with holdings concentrated in short-maturity and long-maturity bonds
• c.Constant-mix, with fixed proportions restored after every market move and no split between passive and active
• d.Core-satellite, with a large index core and smaller actively managed holdings around it✓

A core-satellite design pairs an inexpensive passive core with smaller active positions. Constant-mix is a rebalancing rule and not a way of dividing passive and active money. A barbell describes bond maturities, and sector rotation is a whole-portfolio active style.Core-satellite portfolio construction

A target-date fund described as having a "through" glide path will do which of the following?

• a.Keep lowering its stock allocation for years after the target date✓
• b.Reach its most conservative mix at the target date and hold it there
• c.Raise its stock allocation after the target date to offset inflation
• d.Hold a constant stock and bond mix throughout its life

A "through" glide path continues shifting toward bonds into retirement, on the assumption that the money must last for decades. The fund that stops at the target date has a "to" glide path. A fixed mix is not a glide path at all, and increasing stock exposure after the date is not how either type is designed.Target-date funds

A client's policy is 50% stocks, 30% bonds and 20% real assets, with a rebalancing band of plus or minus 3 percentage points. The portfolio now holds 57% stocks, 28% bonds and 15% real assets. Which asset classes breach their bands?

• a.Stocks and real assets only✓
• b.All three asset classes
• c.Stocks only, because it shows the largest deviation from target
• d.Bonds and real assets only

Stocks are 7 points over target, outside the 3-point band, and real assets are 5 points under, also outside. Bonds are 2 points under, within the band. Stocks alone ignores the real-asset shortfall, and the other two choices wrongly include bonds.Rebalancing policy; tolerance bands

A foundation owes a single $5 million grant in exactly eight years and wants its bond portfolio concentrated near that date. Which structure is that?

• a.A barbell, with holdings in 1-year and 15-year bonds
• b.A ladder, with equal amounts maturing each year for eight years
• c.A bullet portfolio, with maturities clustered around year eight✓
• d.A floating-rate portfolio, with coupons that reset periodically

A bullet portfolio concentrates maturities at one point and suits a known single liability. A ladder spreads maturities evenly and leaves most of the money to mature before or after the date. A barbell sits at the short and long ends and not at the target date, and floating-rate notes address interest-rate resets, not the timing of the liability.Bond portfolio strategies

A client holds a ladder of five Treasury notes, $20,000 each, maturing in one through five years. The one-year note matures. To keep the ladder intact, what should the adviser do with the proceeds?

• a.Buy a new five-year note✓
• b.Hold cash until rates rise
• c.Buy a new one-year note
• d.Buy a new ten-year note

Rolling the maturing rung into the longest rung restores the original structure of one maturity per year over five years. Buying another one-year note would leave two rungs at the short end and no five-year rung, a ten-year note extends beyond the ladder, and waiting in cash is market timing that abandons the strategy's purpose.Bond ladder

A manager screens for companies whose earnings are growing faster than the market but whose price-to-earnings ratio is low relative to that growth rate. This style is best described as:

• a.Growth at a reasonable price (GARP)✓
• b.Momentum investing
• c.Deep-value investing
• d.Contrarian investing

GARP seeks growth stocks whose valuation is moderate relative to their growth, often measured by a PEG ratio. Deep value buys the cheapest stocks regardless of growth, momentum buys recent price winners, and contrarian investing buys what the crowd is selling.Equity investment styles

A manager buys the stocks in the top tenth of 12-month price performance, expecting recent winners to continue to outperform. This is best described as:

• a.Growth at a reasonable price
• b.Value investing
• c.Momentum investing✓
• d.Contrarian investing

Buying recent winners in the expectation that the trend will persist is momentum investing. Contrarian investing does the opposite, value investing looks at low prices relative to fundamentals, and GARP screens on growth relative to valuation, not past price performance.Equity investment styles

An adviser compares a barbell of 2-year and 20-year bonds with a bullet portfolio of 11-year bonds, both having about the same duration. Compared with the bullet, the barbell will generally have:

• a.Zero reinvestment risk
• b.Greater convexity✓
• c.Lower convexity
• d.A shorter maturity than its duration

For the same duration, the barbell's cash flows are more spread out, which gives it greater convexity: its price gains from falling rates are larger than its losses from equal rises. Lower convexity describes the bullet. The barbell's average maturity is not shorter than its duration, and its short-maturity bonds create reinvestment risk, not remove it.Bond portfolio strategies; convexity

A client holds a large position in her employer's stock and wants to limit downside for a year without selling. The adviser suggests a collar. What does the strategy involve?

• a.Buying both a put and a call on the stock
• b.Buying a protective put and selling a covered call on the stock✓
• c.Selling a put and buying a call on the stock
• d.Selling a covered call and buying more shares with the premium

A collar combines a long put for downside protection with a short call, whose premium helps pay for the put, at the cost of capping upside. Selling a put and buying a call adds exposure instead of limiting it. Buying both options costs more and does not cap upside, and using the premium to buy shares increases concentration.Collars; hedging concentrated positions

A client with a large, low-basis stock position wants diversification without recognizing the gain immediately. Which approach is designed for this?

• a.Contribute the shares to an exchange fund in return for an interest in a diversified pool, with the original basis carrying over✓
• b.Pledge the shares as collateral for a margin loan and use the proceeds for a diversified portfolio, which removes the concentration
• c.Donate the shares to her own revocable trust, which is treated as a transfer that resets the basis to the market value on the transfer date
• d.Swap the shares for stock in a similar company, which reduces the position without triggering a taxable gain on either side of the exchange

An exchange fund lets investors pool concentrated shares into a diversified portfolio; the gain is deferred and the original basis carries over to the new interest. A revocable trust is not a sale and does not reset basis. A swap for another stock is a taxable exchange, and a margin loan against the shares leaves the concentration in place.Exchange funds; concentrated positions

A client owns 10,000 shares of employer stock worth $60 each with a $12 per-share basis. She plans to sell 2,500 shares a year for four years. Assuming a 20% federal rate on long-term gains and no price change, what is the tax on the first year's sale?

• a.$30,000, taxing the full proceeds
• b.$96,000, taxing all 10,000 shares
• c.$6,000, taxing only the basis sold
• d.$24,000, which is 20% of the $120,000 gain✓

Gain per share is 60 - 12 = $48, so 2,500 shares produce a $120,000 gain, and 20% of that is $24,000. The $30,000 figure taxes the $150,000 of proceeds and ignores basis. The $96,000 figure taxes the gain on all 10,000 shares. The $6,000 figure taxes only the $30,000 of basis in the shares sold.Concentrated stock; staged sales

A client owns a stock trading at $52 and enters a sell stop order at $48. After bad overnight news the stock opens at $41. What most likely happens?

• a.The stop triggers at the open and becomes a market order that fills near $41✓
• b.The order does not execute, because the stock never actually traded at $48 after the open
• c.The order fills at exactly $48, because the stop price is guaranteed once the order is entered
• d.The order becomes a limit order at $48 and stays unfilled

A stop order becomes a market order once the stop price is reached or passed, so a gap down fills at whatever the market offers, here near $41. The stop price is a trigger, not a guaranteed fill. A gap through the stop price still triggers it, and only a stop-limit order would convert to a limit order at its limit price.SEC Investor Bulletin: Stop, Stop-Limit, and Trailing Stop Orders

A client buys a stock at $50 and places a sell trailing stop order with a $4 trail. The stock rises to $58 and then declines steadily. At what price does the stop trigger?

• a.$58, the highest price the stock reached
• b.$46, the initial stop set below the purchase price
• c.$50, the price at which the client bought the stock
• d.$54, which is $4 below the $58 peak✓

A trailing stop follows the stock's high by the trail amount and does not move down, so after the $58 peak the stop sits at 58 - 4 = $54 and triggers when the price falls to that level. The $46 figure is the initial stop that has since ratcheted up. The $50 figure is the purchase price, and $58 is the peak, not the stop.SEC Investor Bulletin: Stop, Stop-Limit, and Trailing Stop Orders

A client wants to buy 5,000 shares of a stock but only if all 5,000 can be bought immediately; otherwise the whole order should be canceled. Which order type does this?

• a.All-or-none
• b.Immediate-or-cancel
• c.Fill-or-kill✓
• d.Good-till-canceled limit

A fill-or-kill order must be executed in full immediately or canceled in its entirety. An all-or-none order also requires a complete fill but stays active until it is filled or canceled. An immediate-or-cancel order is filled as far as possible at once and cancels the rest, so partial fills occur. A good-till-canceled limit order simply persists.SEC Investor Bulletin: Understanding Order Types

A stock closed yesterday at $40 and today trades at $35.80. What restriction applies to short sales of that stock under the SEC's alternative uptick rule?

• a.All short selling in the stock is halted for the remainder of the trading day, and trading resumes normally tomorrow morning
• b.Short sales may be executed only at a price above the last sale, as in the old uptick rule, and only until the close today
• c.All short selling market-wide is halted for 15 minutes, and then normal short selling resumes for the rest of the session
• d.Short sale orders may not be executed or displayed at or below the national best bid for the rest of today and tomorrow✓

Rule 201 is triggered by a decline of 10% or more from the prior close, and 35.80 is down 10.5%. Restricted short sales must then be priced above the national best bid for the rest of that day and the following day. It is a price test, not a trading halt. A plus-tick rule is the old uptick rule, and market-wide halts come from the separate market-wide circuit breakers.Regulation SHO Rule 201 (17 CFR 242.201)

A broker-dealer routes all customer equity orders to the market center that pays it the most for order flow, although another center consistently gives better prices. Which obligation is the firm most likely violating?

• a.The limit order display rule, which requires all customer orders to be shown on an exchange
• b.The short-sale price test, which limits routing of orders to the national best bid
• c.The order protection rule, which requires every order to be routed to the exchange with the highest volume
• d.Best execution, which requires reasonable diligence to obtain the most favorable terms for the customer✓

FINRA Rule 5310 requires reasonable diligence to find the best market so the customer's resulting price is as favorable as possible, with regular and rigorous review of execution quality; payment for order flow does not override that duty. The other rules cover trade-throughs, order display and short selling, not routing based on the firm's compensation.FINRA Rule 5310

A client buys 600 shares at $45 in a margin account. Under Regulation T initial margin, how much must the client deposit?

• a.$13,500, which is 50% of the $27,000 cost✓
• b.$18,900, which is 70% of the purchase cost of $27,000
• c.$27,000, which pays the full cost in cash with no loan
• d.$6,750, which is the 25% maintenance rate applied to the cost

The purchase costs 600 x 45 = $27,000, and Regulation T requires 50% initially, or $13,500, with the broker lending the other $13,500. The $6,750 figure is 25%, the maintenance rate. The $18,900 figure is 70%, and $27,000 is the full price paid in cash.Regulation T (12 CFR 220.12); FINRA Rule 4210

A client buys $30,000 of stock in a margin account with a $15,000 deposit and a $15,000 loan. The maintenance requirement on long positions is 25%. At what market value does a maintenance call arise?

• a.$15,000, which is zero equity and well past the call point
• b.$18,750, which applies the 25% rate to the loan balance
• c.$22,500, which assumes the stock must fall 25% before a call
• d.$20,000, where equity equals 25% of market value✓

Equity equals market value minus the $15,000 debit, so a call arises when (MV - 15,000) / MV falls to 25%, which gives MV = 15,000 / 0.75 = $20,000. The $18,750 figure applies 25% to the debit instead. The $22,500 figure assumes a 25% fall in value, and $15,000 would be zero equity, well past the call point.FINRA Rule 4210

A client sells short 1,000 shares at $50 and deposits the Regulation T margin of 50% of the sale value. The maintenance requirement on a short position is 30% of current market value. At about what price per share does a maintenance call arise?

• a.$65.00
• b.$75.00
• c.$57.69✓
• d.$60.00

The account holds credit of $50,000 sale proceeds plus a $25,000 deposit = $75,000. Equity is 75,000 - 1,000P, and a call arises when it equals 30% of 1,000P, so 75,000 = 1,300P and P = $57.69. The $65.00 figure adds 30% to the sale price. The $60.00 figure uses the 25% rate for longs, and $75.00 would be zero equity.Regulation T; FINRA Rule 4210

A margin account holds stock now worth $28,000 against a $18,000 debit balance. The maintenance requirement is 25%. Which statement is correct?

• a.Equity is about 64.3% of market value, so there is no call
• b.Equity is about 35.7% of market value, and a call arises because the debit exceeds half the market value
• c.Equity is about 35.7% of market value, which exceeds the maintenance requirement, so there is no call✓
• d.Equity is about 35.7% of market value, which is below the 50% initial requirement, so a maintenance call is issued

Equity is 28,000 - 18,000 = $10,000, or 35.7% of $28,000. That is above the 25% maintenance minimum, so no call arises. The 50% Regulation T figure applies to new purchases, not to a continuing position. The 64.3% figure is the debit as a share of market value, not equity, and the size of the debit relative to value is not a trigger on its own.FINRA Rule 4210

A client buys $20,000 of stock on 50% margin. A year later the stock is up 20% and the loan interest is 6% of the $10,000 borrowed. Ignoring commissions and dividends, what is the return on the client's invested $10,000?

• a.34%, the $3,400 net gain on $10,000 invested✓
• b.28%, which charges interest on the whole $20,000
• c.20%, the unleveraged return on the stock
• d.40%, which leaves out the interest cost on the loan entirely

The gain is 20% of $20,000 = $4,000, less $600 interest, or $3,400 on $10,000 invested, which is 34%. The 40% figure ignores the interest cost. The 20% figure is the unleveraged return on the stock. The 28% figure charges interest on the entire $20,000 position instead of the $10,000 loan.Margin leverage

On Thursday, December 31, 2026, a client sells stock at a loss in a regular-way trade that settles in January 2027. In which tax year is the loss recognized?

• a.2027, because recognition waits for settlement
• b.2026, but only if the client asks for same-day cash settlement
• c.2026, because the trade date controls✓
• d.2027, unless the client elects to treat it as a 2026 sale

For publicly traded securities a gain or loss is recognized on the trade date, not the settlement date, so a December 31 sale counts for that year even though it settles one business day later in January. The client cannot choose a year by election, and no special settlement request is needed to put the loss in 2026.IRS Publication 550; SEC Rule 15c6-1(a)

A pension fund that has sold securities instructs its custodian how to deliver them. The fund wants to be sure it does not deliver the securities before receiving payment. Which instruction provides that protection?

• a.Receive versus payment (RVP)
• b.Delivery versus payment (DVP)✓
• c.Cash on trade date
• d.Free delivery

In a DVP settlement the securities and the cash change hands simultaneously, so the seller does not part with the securities unpaid. Free delivery moves securities with no payment at the same time. Receive versus payment is the buyer-side counterpart, which protects a purchaser and is not the arrangement a seller uses, and cash on trade date describes timing, not simultaneous exchange.Delivery versus payment; institutional settlement

A client buys a stock at $40, receives $1.20 in dividends during the year, and sells it at $43. What is the holding period return?

• a.7.5%
• b.3.0%
• c.10.5%✓
• d.9.8%

Holding period return = (ending price - beginning price + income) / beginning price = (43 - 40 + 1.20) / 40 = 10.5%. The 7.5% figure leaves out the dividend. The 9.8% figure divides by the ending price instead of the beginning price. The 3.0% figure is the dollar capital gain.

A fund returns +40% in its first year and -30% in its second year. What is the fund's annualized (geometric) return over the two years?

• a.About 0.0%
• b.About +5.0%
• c.About -2.0%
• d.About -1.0%✓

The growth factors are 1.40 and 0.70, which multiply to 0.98, and the square root of 0.98 is about 0.990, a geometric return of about -1.0% per year. The +5.0% figure is the arithmetic average. The -2.0% figure is the cumulative two-year loss, not an annual rate. A 0.0% figure would require the two returns to offset exactly.

A client invests $100,000 at the start of year 1 and the portfolio gains 20%. At the start of year 2 she adds another $100,000, and the portfolio then loses 10%. Which statement is correct?

• a.The time-weighted return is about -0.7%, because it counts the added $100,000
• b.The two returns are equal, because the same investments earned them over the same two years in the same account
• c.The money-weighted return is higher, because more dollars were invested in the year of the gain than in the year of the loss
• d.The time-weighted return, about 3.9% a year, is higher than the money-weighted return, about -0.7% a year✓

Time-weighted return removes the effect of cash flows: 1.20 x 0.90 = 1.08, about 3.9% a year. Money-weighted return reflects the client's decision to add money before the weak year; solving the cash flows gives about -0.7%. The larger sum was invested in the losing year, so the money-weighted return is lower, and the two measures differ whenever flows occur between periods.

A bond portfolio earns a 12% nominal return in a year when inflation is 5%. Using the exact formula, the real return is closest to:

• a.6.0%
• b.17.6%
• c.7.0%
• d.6.7%✓

The real return is (1.12 / 1.05) - 1 = 6.67%, about 6.7%. The 7.0% figure uses simple subtraction, which is only an approximation. The 17.6% figure multiplies the two rates (1.12 x 1.05) instead of dividing. The 6.0% figure subtracts 6 points of inflation from nominal return, an arithmetic slip.

A savings account pays a stated annual rate of 12% compounded monthly. What is its effective annual rate?

• a.12.68%, compounding twelve times a year✓
• b.12.55%, compounding four times a year
• c.12.36%, compounding twice a year
• d.12.00%, with no compounding

The effective annual rate is (1 + 0.12/12)^12 - 1 = 1.01^12 - 1 = 12.68%. The 12.00% figure is the stated rate with no compounding. The 12.36% figure reflects semiannual compounding and 12.55% reflects quarterly compounding, both of which compound less often than monthly.

A portfolio returned 11% for the year against a benchmark return of 8%. Its tracking error was 4%, its standard deviation was 14% and the risk-free rate was 3%. What is its information ratio?

• a.0.57, excess return over the risk-free rate divided by standard deviation
• b.0.21, active return divided by total standard deviation
• c.0.75, active return divided by tracking error✓
• d.2.75, the portfolio return divided by tracking error

The information ratio is active return divided by tracking error: (11 - 8) / 4 = 0.75. The 0.57 figure is the Sharpe ratio, (11 - 3) / 14. The 0.21 figure divides active return by the portfolio's total standard deviation. The 2.75 figure divides the raw return by tracking error.Information ratio

Four funds are compared with the same benchmark (up-market capture, down-market capture). Which fund has the most favorable profile?

• a.Fund D: 110% up capture, 120% down capture
• b.Fund C: 80% up capture, 70% down capture
• c.Fund A: 95% up capture, 110% down capture
• d.Fund B: 105% up capture, 85% down capture✓

A strong fund gains more than the benchmark when it rises and loses less when it falls, so it should have up capture above 100% and down capture below 100%. Fund B alone does both. Fund A gains less and loses more. Fund C loses less but gives up even more of the gains, and Fund D gains more but also loses more.Up/down capture ratios

A manager holds 18% in a sector that is 10% of the benchmark. The sector outperformed the overall benchmark, and the manager's holdings in the sector returned exactly the sector index's return. Which attribution effect explains the added return?

• a.The selection effect
• b.The allocation effect✓
• c.The market-timing effect
• d.The interaction effect

The extra return came from overweighting a sector that did well, which is the allocation effect. Because the manager's holdings matched the sector index, security selection added nothing, and the interaction effect, which depends on selection differing from the index, is also zero. No timing decision between asset classes is described.Performance attribution

A researcher averages the 10-year returns of all funds in a category that exist today and concludes that the category's typical return was strong. What is the main problem?

• a.Funds that closed were mostly strong performers, so the average is understated
• b.The benchmark was chosen after the results were known, which makes the comparison unreliable
• c.Funds that closed or merged because of poor results were left out, so the average is overstated✓
• d.The study used information that was not available at the time, so it suffers from look-ahead bias

Survivorship bias arises when failed funds drop out of the data, leaving only the survivors and overstating performance. Poor performers, not strong ones, are the funds that typically close. Look-ahead bias and benchmark selection after the fact are different problems and do not describe analyzing only funds that still exist.Survivorship bias

For 2026, a single filer has $60,000 of taxable income. Assume the brackets are 10% up to $12,400, 12% from $12,400 to $50,400, and 22% from $50,400 to $105,700. Which figure is closest to the filer's effective federal income tax rate on this income?

• a.About 14.7%, the simple average of the three brackets reached
• b.22%, because the last dollars of income fall in the 22% bracket
• c.About 13.2%, because the roughly $7,912 of total tax is spread over the whole $60,000✓
• d.12%, because most of the taxable income sits in the 12% bracket

Tax is $1,240 on the first $12,400, $4,560 on the next $38,000, and $2,112 on the last $9,600, which totals $7,912. Dividing by $60,000 gives about 13.2%. The 22% figure is the marginal rate on the next dollar, not the effective rate. Averaging the bracket percentages ignores how much income falls in each bracket. The 12% figure picks the bracket holding the most income and ignores the 10% and 22% slices.IRC s.1 (rate schedules); Rev. Proc. 2025-32

An investor buys 500 shares of a U.S. common stock 10 days before the ex-dividend date and sells them 30 days after it, collecting a $600 dividend in between. How is the dividend taxed?

• a.As a qualified dividend, because the shares were held for more than 30 days
• b.As a qualified dividend, because any dividend from a U.S. corporation qualifies
• c.At ordinary rates, because the shares were not held more than 60 days in the 121-day window around the ex-dividend date✓
• d.As a qualified dividend, because the 61 days are counted from the payment date

Common stock must be held more than 60 days during the 121-day period that starts 60 days before the ex-dividend date. This investor held the shares only 40 days, so the dividend is taxed at ordinary rates. Thirty days is not the test for common stock. Being a U.S. corporation is necessary but not sufficient, since the holding period must also be met. Counting from the payment date would not help, because 40 days of ownership falls short of 61 either way.IRC s.1(h)(11)(B)(iii); IRS Pub. 550

A client in the 32% ordinary bracket, who would pay 15% on long-term gains, holds shares bought 11 months ago with a $10,000 unrealized gain. Ignoring other factors, how much federal tax does waiting until the shares have been held more than one year save?

• a.$3,200, because the entire short-term tax disappears
• b.$1,500, because that is the tax due at the long-term rate
• c.$1,200, because the long-term rate would be 20%
• d.$1,700, which is the 17-point difference between the two rates applied to the gain✓

A gain on shares held one year or less is taxed at ordinary rates, so the sale now costs $3,200. After the holding period the same gain costs $1,500 at 15%, so the saving is $1,700. The saving is not the whole $3,200, since the long-term tax is still owed. The $1,500 figure is the remaining tax, not the saving. A 20% long-term rate applies only at much higher income and is not the stated rate.IRC s.1(h); s.1222

A single filer has $50,000 of 2026 taxable income. Assume the 12% bracket ends at $50,400 and the next bracket is 22%. She earns $1,000 more in ordinary income. About how much additional federal income tax results?

• a.About $120, because she is in the 12% bracket
• b.About $115, which applies her average rate to the extra income
• c.About $180, because $400 is taxed at 12% and $600 at 22%✓
• d.About $220, because the entire $1,000 is taxed at 22%

Only $400 of the extra income fits under the $50,400 ceiling of the 12% bracket, which costs $48. The remaining $600 is taxed at 22%, which costs $132, for a total of $180. Taxing all $1,000 at 22% ignores the room left in the lower bracket. Taxing all of it at 12% ignores that the bracket fills up. Her average rate of about 11.5% is not the rate that applies to additional income.IRC s.1 (rate schedules)

An investor bought 100 shares of a mutual fund at $20 and later 100 shares at $30, for an average cost of $25 a share. She sells 50 shares at $35 and has elected the average cost method. What gain does she report?

• a.$500, because the gain is $10 a share on 50 shares✓
• b.$250, as if the latest $30 shares had been sold first
• c.$750, as if the earliest $20 shares had been sold first
• d.$1,000, as if 100 shares had been sold at the $10 difference

Under average cost the basis is $25 a share, so the gain is ($35 - $25) x 50 = $500. The first-in, first-out result would be $15 x 50 = $750. Selling the latest shares first would give $5 x 50 = $250. The $1,000 figure uses the right per-share gain but the wrong share count, since only 50 shares were sold.IRC s.1012; Treas. Reg. s.1.1012-1(e)

A client sells shares in a taxable account at a $5,000 loss, and two weeks later her IRA buys the same shares. What is the tax result?

• a.The loss is deferred and becomes deductible on her return in the year the IRA later sells the same shares
• b.The loss is allowed in full, because an IRA is a separate account with its own tax status and its own holding period
• c.The loss is disallowed and is not added to the IRA's basis, so the tax benefit is lost permanently✓
• d.The loss is disallowed but is added to the IRA's basis, just as it would be if she repurchased in a taxable account

A purchase by the investor's IRA within the 61-day window triggers the wash-sale rule, and the IRS has ruled that the disallowed loss does not increase the IRA's basis, so it is never recovered. Adding the loss to basis works only for replacement shares bought in a taxable account. The IRA is not a separate taxpayer for this purpose. Nothing is deferred to a later IRA sale, because IRA basis does not drive any later tax.Rev. Rul. 2008-5; IRC s.1091; IRS Pub. 550

An investor sells 300 shares at a loss of $10 a share, then buys 100 shares of the same stock 15 days later. How is the $3,000 loss treated?

• a.$2,000 is deductible now, and $1,000 is disallowed and added to the basis of the 100 new shares✓
• b.$1,000 is deductible now, and $2,000 is disallowed and added to basis
• c.The entire $3,000 is deductible, because only 100 of the 300 shares were replaced
• d.The entire $3,000 is disallowed and added to the basis of the 100 new shares

The wash-sale rule disallows the loss only on the number of shares replaced. The 100 replacement shares cover one third of the loss, or $1,000, which is added to their basis, and the other $2,000 is deductible now. Disallowing everything overstates the replacement. Allowing everything ignores the 100 replaced shares. Reversing the split gets the proportions backward.IRC s.1091(a); IRS Pub. 550

A donor whose basis is $40,000 gives shares worth $30,000 to her nephew. The nephew later sells them for $36,000. What gain or loss results?

• a.A $36,000 gain, because a gift carries no basis to the recipient
• b.A $4,000 loss, measured from the donor's $40,000 basis
• c.A $6,000 gain, measured from the $30,000 value on the day of the gift
• d.None, because a sale between the value at the gift and the donor's basis produces neither gain nor loss✓

When value at the gift is below the donor's basis, the recipient uses the donor's basis to measure a gain and the lower value to measure a loss. A sale price between the two results in neither. Using the $30,000 value alone would wrongly show a gain, and using the $40,000 basis alone would wrongly show a loss. A gift does carry basis to the recipient, so the full proceeds are not gain.IRC s.1015(a); Treas. Reg. s.1.1015-1

An investor buys 1,000 shares for $20,000. Over the years the company pays $1,500 of distributions classified as return of capital. She later sells the shares for $25,000. What gain does she report?

• a.$3,500, because the $1,500 of return of capital is subtracted from the $5,000 gain
• b.$5,000, because return of capital does not reduce her basis and the gain is simply proceeds minus cost
• c.$6,500, because the return of capital lowered her basis to $18,500✓
• d.$1,500, because only the return of capital is taxable when she finally sells the shares

Return-of-capital distributions are not taxed when received but reduce the basis, here from $20,000 to $18,500. The gain on a $25,000 sale is then $6,500. Ignoring the reduction understates the gain by $1,500. Subtracting the distribution from the gain makes the error run in the wrong direction. The return of capital was not taxed as income and does not by itself become the gain.IRC s.301(c)(2); s.1016(a)(4)

In one year an investor has short-term gains of $5,000, short-term losses of $8,000, long-term gains of $4,000, and long-term losses of $2,000. What is the net result?

• a.A net long-term gain of $2,000 taxed at long-term rates, with the $3,000 short-term loss carried forward
• b.A net capital loss of $1,000 that cannot be used until it offsets gains in a later year
• c.A net short-term loss of $3,000, because losses of a different term do not offset one another
• d.A net short-term loss of $1,000, deductible against ordinary income✓

Short-term items net to a $3,000 loss and long-term items net to a $2,000 gain. The two nets are then combined, leaving a $1,000 net short-term loss, which is deductible against ordinary income under the $3,000 annual limit. Carrying forward a loss that could be absorbed this year ignores the netting step. A net loss does not have to wait for future gains. Netting across the two terms is required, so the $3,000 figure is wrong.IRC s.1222; s.1211(b)

A single investor has a $20,000 net capital loss in year one and no other gains. In year two she realizes a $5,000 net gain on new trades. Assuming ample ordinary income, how much loss carryforward remains after year two?

• a.$9,000, after the $3,000 deducted in year one, then the $5,000 gain and another $3,000 deduction in year two✓
• b.$12,000, because the carryforward offsets only year two's $5,000 gain
• c.$14,000, because only one more $3,000 deduction is used
• d.$6,000, because the first year's $3,000 deduction is subtracted a second time

Year one uses $3,000 against ordinary income and carries forward $17,000. In year two the carryforward first offsets the $5,000 gain and then supports another $3,000 ordinary deduction, leaving $17,000 - $5,000 - $3,000 = $9,000. Offsetting only the gain skips the new $3,000 deduction. Using only the deduction ignores the gain. Subtracting the year-one deduction again double counts it.IRC s.1212(b); s.1211(b)

A single filer has modified AGI of $240,000, which includes $60,000 of net investment income. What is the 3.8% Net Investment Income Tax?

• a.$2,280, which is 3.8% of all $60,000 of net investment income, regardless of the threshold
• b.$9,120, which is 3.8% of the entire $240,000
• c.$1,520, which is 3.8% of the $40,000 by which modified AGI exceeds $200,000✓
• d.$0, because the tax starts only when modified AGI exceeds $250,000 for a single filer

The tax applies to the lesser of net investment income ($60,000) or the excess of modified AGI over the threshold ($240,000 - $200,000 = $40,000). Then 3.8% of $40,000 is $1,520. Taxing all the investment income ignores the cap. Taxing all of modified AGI treats wages as investment income. The $250,000 threshold is for joint filers, not a single filer.IRC s.1411

An executive exercises incentive stock options and keeps the shares through year-end. What is the tax effect for that year?

• a.There is no tax effect of any kind until the shares are sold
• b.No regular income arises from the spread, but the spread is an AMT adjustment that may trigger the alternative minimum tax✓
• c.The spread is a long-term capital gain taxed at the time of exercise
• d.The spread is wages subject to withholding, as with a nonqualified option

Exercising an incentive stock option creates no regular taxable income, but the bargain element is included in alternative minimum taxable income, so AMT may apply even though no shares were sold. Wage treatment at exercise describes nonqualified options. A capital gain does not arise until a sale. Saying there is no effect at all overlooks the AMT adjustment.IRC s.56(b)(3); s.422; s.421(a)