When someone owns an asset (such as a share of stock) that rises in value, he ha

Question

When someone owns an asset (such as a share of stock) that rises in value, he has an "accrued" capital gain. If he sells the asset, he "realizes" the gains that have previously accrued. Under the U.S. income tax, realized capital gains are taxed, but accrued gains are not. Which of the following statements express how individuals' behavior is affected by this rule? Check all that apply. When capital gains taxes are lowered, the investor has a greater incentive to sell the investment. Investors can avoid the tax by not selling the investment. Individuals are unaffected when they are taxed. Cuts in capital gains tax rates can raise tax revenue if the lower tax rate the volume of trade transactions by a large enough margin.

Explanation / Answer

(1) Correct options are:

- When capital gains tax is lowered, investor has more incentive to sell.

- Investors can avoid tax by not selling (No capital gains tax to be paid on unrealized gain)

(2) Tax revenue will increase if lower tax rate increases volume of trade.

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