Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What term refers to the original value of an asset for tax purposes?

1. Dividend

2. Basis

3. Market value

4. Return on investment

The correct answer is: Basis

The term that refers to the original value of an asset for tax purposes is “basis.” This concept is crucial in understanding how capital gains taxes are calculated when an asset is sold. The basis is essentially the amount that you invested in the asset, and it may include the purchase price plus any associated costs, such as commissions or fees. When the asset is sold, the difference between the sale price and the basis determines the capital gain or loss, which is subject to taxation. For instance, if you purchased a stock for $1,000 and later sold it for $1,500, your basis would be $1,000, and your capital gain would be $500, which may be taxed. Understanding basis helps investors and taxpayers accurately report their gains or losses and comply with tax regulations. The other terms do not accurately convey this specific financial principle. Dividends refer to distributions of earnings to shareholders, market value indicates the current price at which an asset can be bought or sold in the market, and return on investment measures the efficiency or profitability of an investment relative to its cost, rather than the original value for tax purposes.