Series 7 Taxes Notes

Series 7 – Taxes & Tax Shields

Types of Income

  1. Earned Income/Loss
    1. Income from your primary job/career/earning activity
    2. Taxed progressively (current max at 39.6%, now 37% with 2018 tax law but don’t know if exam has updated yet)
      1. Sales tax is regressive (flat taxes) because poorer people pay more as a percentage of their total income
  2. Portfolio Income/Loss
    1. Dividends
      1. Taxed at 15% if qualified
      2. Qualified: dividends on domestic stock
      3. Non-Qualified: dividends from foreign stocks
        1. Taxed at ordinary income
    2. Interest from bonds
      1. Taxed as ordinary income rates
      2. Cost basis = price + commission
        1. Accrued interest is not counted in basis! It is a deducted portfolio expense
        2. Accrued interest received when you sell is portfolio income taxable in the year sold
    3. Capital gains / capital loss
      1. Short term: taxed as ordinary income
      2. Long term: taxed at 15%
        1. 1 year and 1 day to be considered LT
      3. Capital Loss
        1. Netted against capital gains
        2. Net loss is deductible at a maximum of $3k/year
        3. Have to sell the position to get the capital loss!!
        4. Losses can be rolled over from year to year, to net with cap gains
  3. Passive Income/Loss
    1. Income from Direct Participation Programs (DPP’s) and Real Estate
    2. Passive loss restriction:
      1. Can only offset passive losses against other passive gains!


Is fifo unless you specifically identify the shares

Have to identify the shares by settlement date

Options Tax Treatment

Tax treatment when the option:

  1. Expires
    1. Buyer of option:
      1. Short term capital loss
    2. Seller of option:
      1. Short term capital gain
  2. Is Exercised
    1. Holder on exercise (call):
      1. Establishes a cost basis in the stock at the strike price, plus premium. Cost basis is your breakeven point
    2. Seller on exercise (call):
      1. Cost basis is also same as breakeven, stock plus premium
    3. Cost basis is always same as breakeven price!
  3. Is Traded
    1. Simple profit/loss calculation

Wash Sale Rule

If you sell a security at a loss, and you buy back that position or an equivalent within 30 days of the sale that gave rise to the loss, your loss deduction is disallowed (deferred)

If you buy back: that strategy, a convertible, call right or warrant, or sell a deep in the money put

Buying back the strategy adjusts the cost basis up, adds it back to the purchase price of the newly applied shares. Can then take the loss, when the new position is sold

61 days aggregated window of time for wash sale

If you purchase a put against a long security, it destroys the stocks holding period, and forces the holding period to 0. Can’t use this strategy to stretch a short-term gain to a long term gain

What will affect the holding period of a stock held short-term? Answer is BUY A PUT

Charitable Contributions

If securities that have appreciated in value are donated to a charity or not-for-profit institution, the donor gets a charitable deduction equal to the fair market value of the securities (not the cost of the securities). Must have been held for 1 year

AMT flat tax of 26-28% – taxable income but add back tax preference

Pay the higher amount??

Death tax is due within 9 months date of death


Daily Bond Buyer newspaper: muni bond newspaper for people interested in buying new issue Munis from issuers. Electronic version called MuniFacts (also has secondary info)

EMMA = electronic municipal market access. Has all the official statements for Munis. Running tape for municipal bonds

Official Notice of Sale = notice that muni wants to sell bonds by competitive bids. Notice is an advertisement to solicit bids for a new issue