Question

Because no tax is due until a gain has been recognized, the law favors investments that yield:

a.Annual income rather than appreciation.
b.Interest rather than dividends.
c.Cash dividends rather than stock dividends.
d.Appreciation rather than annual income.
e.Dividends rather than interest.

Answer 1

The law favors investments with appreciation because taxes on capital gains are deferred until the asset is sold, which can be strategically advantageous for minimizing tax liabilities.

Step-by-step explanation:

The law favors investments that yield appreciation rather than annual income. This is because no tax is due until a gain has been realized, which typically occurs when an asset is sold for more than its purchase price, known as a capital gain. In contrast, annual income is often taxed as it is received. For instance, if an investor buys a share of stock for $45 and later sells it for $60, the $15 increase would constitute a capital gain. This gain is only taxable when the stock is sold, which can be strategically managed to minimize tax liabilities. Taxes like these can influence investor behavior by encouraging the pursuit of long-term capital gains over immediate income through dividends or interest.