Sign up  |  Log in

Cost Basis in Deferred Capital Gains Tax question

Hello, I’m having a bit of trouble understanding the cost basis concept on deferred capital gains tax (study session 4). I understand you add back the tax associated with asset cost to the FV, as the cost is not subject to this tax.

However, the B factor doesn’t make sense to me, more specifically when B>1. When B>1, then I have made a realized loss on the asset (market price<purchase price), so why is my FV greater here than when B=1. B=1 and B>1 both imply there is no realized gain, so why do I get extra marginal FV for the more loss I realize on sale? If for example I make a huge loss (say B=100), then that will hugely inflate my FV right? Am I not understanding this correctly?

Any help would be greatly appreciated!

With exam day right around the corner, Schweser's Final Review products are designed to help you finish out your study plan and walk into the testing center feeling prepared and confident.

B cannot be greater than 1.  B is the percentage (or fraction) of the asset’s initial value that will be subject to capital gains tax, so:

0 ≤ B ≤ 1

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

S2000magician wrote:

B cannot be greater than 1.  B is the percentage (or fraction) of the asset’s initial value that will be subject to capital gains tax, so:

0 ≤ B ≤ 1

Hi Magic. I’m sorry but think you’re wrong here. B can be 1, <1 or >1 if some of asset value is not recognized for a tax purpose, therefore is tax deductible. As I recall same was mentioned in L3 tax chapter.

Divided We Stand...