Unit 13 – Investment Returns and Investment Taxation

Yield

a measurement of the amount of income an investor will receive as a percentage of the cost of the investment

Dividend yield

income is from a stock dividend

Current yield

annual figure of income an investor will receive as a percentage, =annual income (in $s)/current market value

Long/open positions

customer buys a security and holds it, closed by selling

Short sale

customer opens the position by selling and closes the position by buying

Capital gains

generated from closing an open position at a profit, taxable depending on how long the customer held the position

Capital losses

close an open position for a loss, negative number

Adjusted cost basis

amount paid for a position modified by any adjustments, most often from a stock split or stock dividend

Realized gain/loss

comes from closing a position, position was opened (either by buying or selling short) and then closed (either by selling or buying back) and the position is flat

Unrealized gain/loss

comes from an open position but issue will calculation is that the market will likely change before you complete the calculation, you can use CMV in place of the closing price to calculate

Total return

measure of the return an investor receives from an investment that includes both income and any gain or loss, expressed as a percentage of the cost basis of the investment = (income + gains or – losses) / cost basis

Ordinary income

consists of several different types of income that are combined, used to determine the income tax rate that an investor will pay (earned income, investment income, and passive income

Earned income

includes salary, wages, bonuses, tips, and other income that is derived from active participation in a trade or business – majority if not all of their taxable income

Investment income

income earned from one's investments including dividends and interest payments (derived from an assets the investor holds) – aka portfolio income

Passive income

type of investment income that is derived from certain investments, primarily direct participation programs like limited partnerships and many real estate investments that could also produce passive losses

Passive losses

loss incurred through a rental property, limited partnership, or other enterprise in which individual is not actively involved – may be used to offset any passive income received that tax year but not offset other types of income

Lon-term capital gains

position must have been held for more than one year, taxed at a lower rate than ordinary income and changes regularly (not taxed as ordinary income)

Short-term capital gains

capital gains made from assets held for a period of one year or less are taxed as ordinary income, - not part of a person’s ordinary income but are added to the ordinary income to determine amount of tax investor must pay – tax rate will be higher than the long-term capital gains tax rate

Capital losses

not a total loss, losses used to offset capital gains on a dollar-for-dollar basis helping an investor reduce their income tax liability ($3k is max allowed to take as a deduction in a year and if losses still exist exceeding $3k they can carry them over to the next tax year)

Carryforward losses

capital loss incurred in one tax year that is carried over to the next or later years to use as a capital loss deduction (exceed $3k), may be carried forward until used with no time limit

Wash sale

investor creates a capital loss only to offset capital gains for tax purposes (sell at a loss), while still maintaining ownership of the securities

Maintaining ownership

investor repurchases the same securities on or within 30 days before or after the date establishing the loss, then loss may not be used for tax purposes

Wash sale rules

1) applies to recreating long positions and short positions 2) applies for attempts to recreate the same position using not only the exact same security but also substantially identical securities

Substantially identical

any position that may be converted or exercised into the same security as the one that was sold for a loss, long calls and convertible securities