Your customer purchased 1,000 shares of SmallCo Stock at $10 a share and sold them a year later for $12 a share. What is the nature of the capital gain realized?

The correct understanding of the scenario revolves around the distinction between short-term and long-term capital gains, as well as the calculation of the gain itself. A capital gain occurs when an asset is sold for more than its purchase price. In this case, the investor bought shares at $10 each and sold them at $12 each, leading to a profit of $2 per share. Since the investor sold 1,000 shares, the total gain is $2,000 ($2 gain per share multiplied by 1,000 shares).

For tax purposes, the determination of whether this gain is classified as short-term or long-term hinges on the holding period of the asset. In general, if an asset is held for one year or less before being sold, the gain is classified as short-term; if it is held for more than one year, it is considered long-term. Since this scenario indicates that the shares were sold one year after their purchase, the gain is realized after holding the asset for just one year, which places it in the short-term category.

Thus, the investor realizes a $2,000 short-term capital gain. The correct classification is vital for tax implications, as short-term gains are usually taxed at higher rates than long-term gains