ExpertHard1 markMultiple Choice
CPA · Question 58 · Area IV: Individual Taxation
A taxpayer holds a $10,000 bond issued by the City of New York. The bond pays $500 of interest in the current year. The taxpayer also sells the bond for a $200 gain. What are the federal tax consequences?
A taxpayer holds a $10,000 bond issued by the City of New York. The bond pays $500 of interest in the current year. The taxpayer also sells the bond for a $200 gain. What are the federal tax consequences?
Answer options:
A.
$500 interest income; $200 capital gain.
B.
$0 interest income; $0 capital gain.
C.
$0 interest income; $200 capital gain.
D.
$500 interest income; $0 capital gain.
How to approach this question
Muni Bonds: Interest is Tax-Free. Gain on Sale is TAXABLE.
Full Answer
C.$0 interest income; $200 capital gain.✓ Correct
C
Interest on state and local government bonds is generally excluded from gross income under IRC §103. However, gain from the sale of the bond is taxable as a capital gain.
Common mistakes
Thinking the gain on sale is also tax-exempt.
Practice the full CPA REG Practice Exam 4
72 questions · hints · full answers · grading
More questions from this exam
Q01A CPA is representing a client in an IRS examination. The client has requested that the CPA not p...HardQ02A tax return preparer is engaged to prepare a tax return for a client who has a significant deduc...HardQ03Regarding the burden of proof in a civil tax proceeding, which of the following statements is cor...HardQ04A taxpayer filed their Year 1 individual income tax return on April 1, Year 2. The return reporte...HardQ05Under the Ultramares doctrine regarding a CPA's liability for negligence to third parties, which ...Hard