Kelly purchased ten shares of Gentech stock for $200 in year 1 and sold all the shares in year 2 for $220 a share. Between year 1 and year 2, the price level increased by 5%. The tax on capital gains is 50%. If the capital gains tax is on nominal gains, calculate how much tax Sally pays on her gain. Calculate Kelly's capital gains if the tax is on real gains.
See my response to Sally above.
Sorry. See my respose to Sarah above.
95
To calculate the tax amount, we need to determine the nominal gain and the real gain.
1. Nominal gain: This is the gain calculated using the prices at which the shares were bought and sold, without adjusting for inflation.
The price level increased by 5%, so the new price per share in year 2 can be calculated as follows:
New price = Old price + (Old price * Percentage increase)
New price = $200 + ($200 * 0.05)
New price = $200 + $10
New price = $210
The nominal gain per share is the difference between the selling price and the buying price:
Nominal gain per share = Selling price - Buying price
Nominal gain per share = $220 - $200
Nominal gain per share = $20
The total nominal gain can be calculated by multiplying the nominal gain per share by the number of shares:
Total nominal gain = Nominal gain per share * Number of shares
Total nominal gain = $20 * 10
Total nominal gain = $200
2. Real gain: This is the gain adjusted for inflation, taking into account the change in the price level.
To calculate the real gain, we need to adjust the buying price for inflation:
Adjusted buying price = Buying price + (Buying price * Percentage increase)
Adjusted buying price = $200 + ($200 * 0.05)
Adjusted buying price = $200 + $10
Adjusted buying price = $210
The real gain per share is the difference between the selling price and the adjusted buying price:
Real gain per share = Selling price - Adjusted buying price
Real gain per share = $220 - $210
Real gain per share = $10
The total real gain can be calculated by multiplying the real gain per share by the number of shares:
Total real gain = Real gain per share * Number of shares
Total real gain = $10 * 10
Total real gain = $100
Now, let's calculate the tax amount for nominal gains and the capital gains for real gains:
1. Tax amount on nominal gains:
Tax amount = Total nominal gain * Tax rate
Tax amount = $200 * 0.5
Tax amount = $100
2. Capital gains on real gains:
Capital gains = Total real gain - Tax amount (since the tax is applied only on the nominal gains)
Capital gains = $100 - $100
Capital gains = $0
Therefore, Kelly pays $100 in tax on her nominal gain, while her capital gains after tax on real gains is $0.