1). 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.
2). Sally purchased one share of Stryker stock for $200 in year 1 and sold that share in year 2 for $400. The inflation rate between year 1 and year 2 was 50%. If the capital gains tax is 50%, calculate Sally's after tax real capital gain if the tax is on nominal gains? What is it if the tax is on real gains?
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1) To calculate the tax on Kelly's nominal gains, we first need to determine the nominal gain. The nominal gain is the difference between the selling price in year 2 and the purchase price in year 1.
Nominal gain = Selling price - Purchase price
Nominal gain = $220/share - $200/share
Nominal gain = $20/share
Next, we need to apply the 5% increase in price level between year 1 and year 2 to determine the real gain. The real gain adjusts for inflation.
Real gain = Nominal gain - (Nominal gain * Inflation rate)
Real gain = $20/share - ($20/share * 0.05)
Real gain = $20/share - $1/share
Real gain = $19/share
If the capital gains tax is on nominal gains, we can calculate the tax by multiplying the nominal gain by the tax rate of 50%.
Tax on nominal gains = Nominal gain * Tax rate
Tax on nominal gains = $20/share * 0.5
Tax on nominal gains = $10/share
Therefore, Kelly pays $10 in tax on her gain if the tax is on nominal gains.
If the tax is on real gains, we don't need to calculate the tax separately since the real gain already considers the inflation-adjusted value. Kelly's capital gains in this case would be $19/share.
2) To calculate Sally's after-tax real capital gain, we first need to find the nominal gain. The nominal gain is the difference between the selling price in year 2 and the purchase price in year 1.
Nominal gain = Selling price - Purchase price
Nominal gain = $400 - $200
Nominal gain = $200
Next, we need to apply the 50% inflation rate between year 1 and year 2 to determine the real gain.
Real gain = Nominal gain - (Nominal gain * Inflation rate)
Real gain = $200 - ($200 * 0.5)
Real gain = $200 - $100
Real gain = $100
If the capital gains tax is on nominal gains, we can calculate the tax by multiplying the nominal gain by the tax rate of 50%.
Tax on nominal gains = Nominal gain * Tax rate
Tax on nominal gains = $200 * 0.5
Tax on nominal gains = $100
Therefore, Sally's after-tax real capital gain, if the tax is on nominal gains, would be $100 - $100 (tax) = $0.
If the tax is on real gains, we don't need to calculate the tax separately since the real gain already considers the inflation-adjusted value. Sally's after-tax real capital gain would be $100.
1) To calculate Kelly's tax on nominal gains, we need to calculate the nominal gain first. The nominal gain is the difference between the selling price and the purchase price.
Nominal gain = Selling price - Purchase price
Nominal gain = $220 - $200
Nominal gain = $20
Next, we need to calculate the tax on the nominal gain. The tax on capital gains is 50%, so we can calculate it by multiplying the nominal gain by 0.5:
Tax on nominal gain = Nominal gain * 0.5
Tax on nominal gain = $20 * 0.5
Tax on nominal gain = $10
Therefore, Kelly pays $10 in tax on her nominal gain.
Now, let's calculate Kelly's capital gains if the tax is on real gains. Real gains take inflation into account. The price level increased by 5% between year 1 and year 2, so we need to adjust the purchase price:
Adjusted purchase price = Purchase price * (1 + inflation rate)
Adjusted purchase price = $200 * (1 + 0.05)
Adjusted purchase price = $200 * 1.05
Adjusted purchase price = $210
Now, we can calculate the real gain:
Real gain = Selling price - Adjusted purchase price
Real gain = $220 - $210
Real gain = $10
If the tax is on real gains, Kelly's capital gain is $10. The tax on real gains is not specified in the question, so we cannot calculate the tax amount for this case.