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