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REG CPA Practice Questions: Capital Gains from Investments and Virtual Currencies
May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on how to calculate capital gains to be included in the gross income of an individual from the sale of investments or virtual currencies.
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0:00 Intro
00:47 Question 1: How to Calculate a Capital Gain
02:25 Question 2: Calculating Net Capital Gains/(Losses) for Virtual Currency
06:34 Question 3: Calculating Capital Gains/(Losses) from Multiple Transactions
08:50 Question 4: The Capital Loss Limit
12:15 Question 5: Net Capital Gains and Losses
15:33 Pillar Topics
Show More Show Less View Video Transcript
0:00
Hi, I'm Logan. In today's video, we're going to be going over calculating capital gains
0:04
on the sale of investments or digital securities, but we're going to be doing it the Superfast
0:09
CPA way, which is diving straight into questions and learning from those as our main learning
0:14
material. If this is the first thing you're seeing from Superfast CPA, again, that's our
0:18
main focus among other strategies. And if you want to learn more about our strategies
0:22
be sure to go to superfastcpa.com to watch our free one hour webinar training, where
0:27
we go over the six key ingredients to passing the CPA exam. There's a link in the description
0:32
so make sure you go watch that. If you like this approach of doing five questions, we
0:36
have a Superfast CPA app where you can do five question mini quizzes throughout the
0:40
day on your phone, so you can keep practicing questions wherever you are. With all that
0:45
said, let's get into some questions. All right, here's the first question. John, an individual
0:50
taxpayer has the following transactions during the tax year. Sale of stocks held for 18 months
0:55
where it costs 15,000 when he purchased it and he sold it for $22,000. Assuming John
0:59
has no other capital transactions during the year, what is the total capital gain or loss
1:04
to be included in John's gross income? And what is the character of the gain or loss
1:08
All right. If you don't know much about capital gains and how they affect gross income, then
1:13
you're in the right place. As you'll see, this is a pretty straightforward question to help us kind of get into the rest of the questions that will be a bit more difficult
1:21
So if you need to take a second, pause the video, make sure you understand what the question is asking. And when you're ready, come back and we will go over the answer. All right
1:28
let's go over the answer. So it would be a $7,000 long-term capital gain. So let's learn
1:35
about that. So to get the capital gain, we subtract the cost basis from the stocks of
1:40
the stocks from the selling price. So we subtract the $15,000 from the $22,000 and that gives
1:45
us $7,000. And since the stocks were held for more than one year, 18 months, the gain
1:49
is characterized as long-term. So $7,000 long-term capital gain. So right there, we
1:55
just wanted to learn a pretty simple part of capital gains, which is how to determine
2:00
whether they're short-term or long-term. And the easy answer to that is if it was sold
2:04
less than 12 months after it was purchased, then it's considered a short-term capital
2:09
gain. Whereas if it was sold over a year after it was purchased, then it would be considered
2:14
a long-term capital gain. So as we can see here, 18 months, obviously that's over a year
2:19
So it was a long-term capital gain. All right, that was a simple part of this. Now let's
2:23
dive into some more difficult questions. Okay, here's the next question. Alex purchased one
2:28
Bitcoin for $40,000 in January and sold it for $65,000 in December of the same tax year
2:34
That's not surprising that one Bitcoin would be worth that much. Additionally, Alex sold
2:39
Ethereum that was bought two years prior for $15,000, which had a cost basis of $20,000
2:45
So he bought it two years before for $20,000, sold it for $15,000. There were no other capital
2:52
transactions for the year. What is the net effect on Alex's gross income from these virtual
2:56
currency transactions and what are the characters of the gains or losses? All right, so pretty
3:02
similar. See if you can figure out what the short-term or long-term gains or losses would
3:08
be and then come back and we will look at the answer to learn a bit more about some
3:14
of the rules with capital losses and capital gains. All right, let's go ahead and look at the answer. So this is a long explanation. So it looks like we have a lot to learn here
3:22
So first off, the answer is $20,000 increase to gross income and there's a $25,000 short-term
3:28
capital gain and a $5,000 long-term capital loss. So let's learn more about this. The
3:32
sale of Bitcoin resulted in a gain since it was sold for more than the purchase price
3:37
And so, you know, that's the $65,000 selling price, less than $40,000 purchase price. So
3:42
$25,000 gain. And since it was in the same year, it's a short-term capital gain. The
3:47
sale of Ethereum resulted in a loss since it was sold for less than the purchase price
3:52
And since it was held for more than a year, this is a long-term capital loss. The loss
3:56
is $5,000. So there's a short-term $25,000 capital gain and a long-term $5,000 capital
4:02
loss. So let's go over the rules or the process for how you treat these and if you net them
4:08
and stuff. So for short-term gains and losses, they are netted first. So for example, if
4:14
there was this $25,000 short-term capital gain and then there was also a $10,000 short-term
4:20
capital loss, then the total short-term capital gain would be $15,000. Then you net the long-term
4:27
capital gains and losses. So basically you're trying to figure out what the net short-term
4:31
gain or loss is and what this net long-term gain or loss is. And then if there are both
4:37
net short-term gains and long-term gains, then you just report them as such. So if you
4:44
had, like for example, up here, if this was a $25,000 short-term gain and this was a $5,000
4:50
long-term gain, not a loss, but a gain in this situation, like as an example, then you
4:55
would just report a $25,000 short-term gain and a $5,000 long-term gain. So you don't
5:01
net them if they are both gains. But if after netting the gains and losses within each category
5:07
there are both a net gain and a net loss. So in this situation, that's what's happening
5:12
There's a net short-term gain and a net long-term loss. Then you net those together and then
5:20
you take on the category of whichever was largest. So you would net this $25,000 short-term
5:26
capital gain with this long-term $5,000 capital loss, giving you a $20,000 short-term capital
5:33
gain. However, and we'll see this rule applied in future questions, if the netting results
5:38
in a net capital loss, so just a total net capital loss after netting them, then you
5:44
apply this rule, which is up to $3,000 of the loss can be deducted from ordinary income
5:49
on the taxpayer's tax return with any remaining loss being carried forward to future years
5:54
So that's not applying here, but we need to remember that for the future. So again
5:59
just going over what I just barely said, the short-term gain from the Bitcoin was $25,000
6:03
The long-term loss from the Ethereum was $5,000. So you net those together, giving you a short-term
6:11
$20,000 gain. And we don't need to apply the $3,000 rule because again, that's only if there
6:16
is a net loss after netting the capital, the short-term capital gains or losses and the net
6:23
long-term capital gains or losses. All right. So a few steps there that we learned and let's
6:31
take these steps and see if we can apply them to the next questions. Okay. Here's the next question
6:35
during the tax year, Patricia, an individual taxpayer engaged in several investment transactions
6:40
below is the summary of her capital gains and losses, short-term capital gains. So that was
6:45
12,000 plus 8,000. So she had 20,000 short-term capital gains, $13,000 short-term capital losses
6:51
When you add these together and then the gain from the sale of real estate investment of $20,000
6:57
and a long-term capital loss from the sale of the rare coin collection and the sale of an art piece
7:05
There were no other sales or exchanges based on the information provided. How should Patricia
7:09
calculate the capital gain or loss to be included in her gross income for the tax year? So we just
7:14
barely went over this. See if you can pause the video and think through how much the net short-term
7:20
capital gain or loss would be, how much the net long-term capital gain or loss would be
7:25
If you need to net them and then how that's going to affect her Patricia's gross income. So go ahead
7:31
pause the video, take a second, calculate it yourself. And when you're ready, we'll come back
7:35
and go over the answer. All right, let's go over the answer. So it would be a net short-term
7:39
capital gain of $7,000 and a net long-term capital gain of $6,000. So first Patricia must calculate
7:46
the net short-term capital gain or loss by combining the short-term gains and losses
7:51
Then she does the same thing with the long-term capital gains or losses. So pretty straightforward
7:57
right here, $12,000 plus $8,000 from here, right? So that's $20,000 less the $13,000. So that's a
8:05
net short-term capital gain of $7,000. And then you net the long-term capital gains or losses
8:11
together, which is the $20,000 from the real estate investment gain. And then the losses from
8:18
the sale of the rare coin collection and the art piece. So that equals a $6,000 long-term capital
8:24
gain. And since they're both gains, you don't net them anymore. You just report them as they're
8:31
separate types of gains. So that's why you report it separately as the net short-term capital gain
8:36
of $7,000 and the net long-term capital gain of $6,000. There's no carry forward because there
8:42
was not, there wasn't a net loss. And so yeah, that's how we got to this answer right here
8:47
All right. We learned a little bit more there. Let's go ahead and go to the next question. All right. Here's the next question. Morgan, an individual taxpayer made the following sales of
8:55
investments and virtual currency during the tax year. So they sold shares of XYZ Corp for $10,000
9:02
It was 18 months. Sold Bitcoin at a loss for $15,000. They purchased that eight months before
9:08
Sold a piece of art for $7,000. And that was a gain. They owned that for 25 months and they
9:14
sold ABC Corp shares at a loss of $12,000. And they purchased those 24 months ago as well
9:20
So considering the applicable tax rules for netting capital gains and losses, what is the
9:24
net effect on Morgan's gross income from these transactions? All right. Let's see if we can
9:29
think through this together. So this is obviously a long-term gain of $10,000. So long-term capital
9:37
gain, $10,000. Maybe let's write this over here. Long-term, let's just do long-term. Sold Bitcoin
9:44
at a loss of $15,000. And this was eight months. So this is short-term. Sold a piece of art at a
9:49
gain of $7,000. They owned it for 25 months. So that's long-term. And then loss of $12,000
9:55
That's also long-term. So, and let's actually, let's just do, let's do this too. Long-term gain
10:02
short-term loss, long-term gain, and short-term, a long-term loss. Okay. So we know the rules at this point. We have to net the short-term gains and losses
10:16
and the long-term gains and losses. So here we only have one short-term loss. So that's a
10:21
short-term loss of $15,000. So we don't need to net that against any short-term gains
10:25
And then we have a long, two long-term gains and a long-term loss. So $10,000 from this gain
10:31
plus $7,000 from this gain, less $12,000 from this loss. So together, $17,000 less $12,000
10:39
That's a $5,000 gain net. So a $15,000 short-term loss and a $5,000 long-term gain. And now we know
10:51
there's a gain and a loss after netting the two short, the two different terms
10:56
we net that together again. So net long-term capital gain netted against the net short-term
11:04
capital loss equals a $10,000 capital loss total. But there was a rule up above that we went over
11:13
already. And that was that if there is a capital loss, a net capital loss, it is limited to $3,000
11:20
being able to affect the ordinary income per year. So that would mean that there's a $3,000
11:26
decrease in gross income and that the remaining $7,000 is going to be carried forward. So let's
11:30
look at the answer and see if we're correct there. All right. And this is exactly what we did there
11:36
So there's the short-term capital loss of $15,000 and the long-term capital gain
11:42
which netted to $5,000. So you combine those and that gives you a net total capital loss of $10,000
11:49
and that's short-term by the way. And then, but you can only apply $3,000 of that loss to the
11:55
ordinary income because of that $3,000 limit rule that we went over before. So the remaining $7,000
12:02
of the net short-term capital loss can be carried forward to future tax years to offset other
12:07
capital gains or decrease ordinary income. That was a bit more of a complex question. Let's go
12:12
to the final question and see if we can apply what we've learned. All right, here's the final
12:16
question. Taylor made several investments in stocks and virtual currencies throughout the year
12:21
Below are the details of the transactions. Taylor purchased 100 shares of company A at $50 per share
12:26
and sold them for $75 per share 13 months later. So 13 months later, that's long-term. Taylor
12:32
invested in Bitcoin, purchasing it for $20,000. Taylor sold the Bitcoin for $15,000 nine months
12:38
after the purchase. So that's short-term. Taylor bought 50 shares of company B at $100 per share
12:43
and sold them for $150 per share six months later. So again, that's short-term. Taylor purchased
12:48
Ethereum for $10,000 and sold it for $14,000 24 months after purchase. So that's long-term
12:54
So we have long-term, short-term, short-term, long-term. Assuming Taylor has no other investment
12:59
transactions for the year, calculate the net capital gains or losses and identify whether they
13:04
are short-term or long-term. What is the total impact on Taylor's gross income considering the
13:08
nature of the gains and the losses? Okay, so this is the final question of the video. You've learned
13:14
a lot from the previous questions. Take a second, pause the video, see if you can calculate what the
13:19
net short-term capital gains or losses would be, what the net long-term capital gains or losses
13:24
would be, how they affect each other, and then overall how is that going to affect Taylor's
13:29
gross income. So take a second and do that. Right, now that you've done that on your own, let's go
13:34
ahead and go over the answer. So it would have been a net short-term capital loss and then a net
13:39
long-term capital gain. So you would have net those two together and that would mean that there
13:44
it would be a $4,000 total long-term capital gain that would increase their gross income. Okay, so
13:50
pretty straightforward here. Long-term capital gain and that was the 100 shares multiplied by $25
13:56
of gain per share. So that's the $2,500. Bitcoin was a short-term capital loss because they purchased
14:03
it for $20,000. They sold it for $15,000. Company B had a short-term capital gain because there
14:09
was 50 shares and they sold each share for a $50 gain. And Ethereum was a long-term capital gain
14:15
of $4,000 because they purchased it for $10,000 and sold it for $14,000. So you net all that
14:21
together. So the $2,500 short-term gain from company B and the $5,000 short-term capital loss
14:28
from Bitcoin means you have short-term capital loss of $2,500. And then you net the $2,500
14:35
long-term gain from company A and the $4,000 long-term capital gain from Ethereum and that
14:41
nets to $6,500 of long-term capital gain. So you net the $6,500 of gain and the $2,500 of loss
14:51
giving you a net long-term capital gain of $4,000 and that increases Taylor's gross income by that
14:56
$4,000. One final note I want to make here about the things that we've seen in this video
15:01
Obviously there's normal investments like shares and stocks. There's also virtual currency. We've
15:07
seen Bitcoin and Ethereum in this video. Virtual currencies are treated very similarly if not the
15:13
same as investments. But the reason we need to distinguish them is because for tax purposes
15:20
the IRS wants to know if you sold virtual currencies or not. Just know that virtual
15:25
currencies are treated pretty much the same as normal investments in most regards and that's
15:30
what you mainly need to know for the reg exam. To finish up this video, let's do one last part of
15:35
the process which is making pillar topics. Now pillar topics is a part of the SuperfastCPA strategy
15:41
where after you've done questions to kind of learn the material, you take a second and pull out the
15:48
concepts that you learned that were obviously important and being taught in the questions that
15:53
you went over. So let's go ahead and make some pillar topics. Okay so basically I think the
15:59
biggest thing was learning those different steps. First you net short-term gains and losses. Next
16:08
you net long-term gains and losses. If there is a gain in both, then both gains are reported
16:21
separately. If there is a gain and a loss, then you net those. And if there is a net loss
16:33
it is limited to $3,000 of ordinary income. Okay so that's pretty straightforward there. I mean that
16:41
was the the gist of what mainly what we learned. Obviously short-term, long-term, you probably
16:48
that's pretty easy to remember. Short-term is anything less than a year. Long-term is anything
16:53
greater than a year. Virtual currency treated pretty much the same as investments. You didn't
16:58
really see any difference in this video. The main gist of it comes from knowing the steps for
17:03
getting the capital gains and losses and their terms. Alright that is the end of this video
17:09
If you liked this video, make sure to like it and leave a comment on the YouTube video
17:14
And especially go to the SuperfastCPA website and watch the free one-hour webinar training where we
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and months of struggling with your study process and failing exams. Also if you liked the idea of
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five question mini quizzes that you can access extremely easily doing them in the grocery line
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doing them on the train, doing them on the bus, doing them while you're walking from one place to
17:47
another at your work area. Super easy to do and helps you get coverage constantly throughout the
17:53
day. Thanks for watching and I'll see you in the next video
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