What is the definition of capital asset.

a) All assets used in a trade or business.

b)Inventory assets, accounts receivable

c)Assets other than an asset used in a trade or business, accounts receivable or notes receivable through a business.

d)Investments in a partnership.

2. Why does the law provide preferential rates on certain capital gains?

a)Because this income has a higher tax rate.

b)Because taxpayers may not have the cash to pay the tax on this gains until they sell the investment, or Congress may want to stimulate the economy.

c) Because the tax basis of this asset is using the fair market value and the tax liability is reduced.

d)Because passive income is generally taxed at a preferential rate.

3.What is one of the taxable differences between interest income and dividend income?

a)Investment income is taxed at a preferential rate.

b)Some dividend income may be taxed at preferential rates.

c) Under the tax law, interest income and dividend income are not different.

d)Interest income is exempt from tax.

4.What happens to capital losses that are not deductible in the current year?

a)Capital losses are lost if they are not applied in the current year.

b)Capital losses go through the netting process against long term capital losses.

c)They are applied against ordinary income in the current year.

d)They are carried forward to future years

5.Gloria does not use her car for tax purposes. When she sells her car at a loss, she can deduct the loss against ordinary income.

TRUE

FALSE

6. What are the implications of treating losses as passive?

(Check all that may apply)

a) Losses are applied against ordinary income.

b)Losses may not be applied against ordinary income if the loss is from a passive activity.

c)Passive losses can only be netted against passive income.

d)Passive losses are carried forward until there is passive income or until the investment is sold