susan bought a mutual fund with a 10,000 lump sum amount 10 yrs ago. during the

Question

susan bought a mutual fund with a 10,000 lump sum amount 10 yrs ago. during the 4 years, 4,000 were reinvested. today the shares are valued at 20,000 including any shares purchased with dividends. If susan sells shares equal to 13,000, which of the following one/ ones are true?

1. the taxable gain can be based on an average cost per share.

2. susan can control which shares to sell, therefore controlling taxable gain

3. to minimize the taxable gain today, susan would sell shares with higher cost basis.

4. susan will not have a gain as long as she sells for less than she invested.

Answers:

a) 1 only

b) 1, 2, and 3 only

c) 3 only

d) 2 and 3 only

e) 1 and 3 only

Explanation / Answer

a) 1 only. Correct

1. the taxable gain can be based on an average cost per share. Correct. As stock prices will be averaged.

2. susan can control which shares to sell, therefore controlling taxable gain. No that is on average buying price.

3. to minimize the taxable gain today, susan would sell shares with higher cost basis. No that is on average buying price.

4. susan will not have a gain as long as she sells for less than she invested. No if the selling price is more than average price than she will make a gain and vice versa.

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