Risk and Tax Considerations Flashcards
Degree of uncertainty that an instrument will earn its expected rate of return.
Risk
Bond holders are most susceptible to this risk.
Inflationary
Risk that one may lose some or all of their investment.
Capital Risk
Can apply to almost any investment at purchase or sale.
Timing risk.
Specific to bond holders and traders and will impact the bond prices when the rates fluctuate.
Interest rate risk
Risk embedded in financial markets that cannot be diversified away, only mitigated.
Systemic/market risk
Risk that a companies financial difficulties may impede its ability to satisfy its obligations, causing the yield on its fixed income obligations to rise.
Credit risk
Applicable to thinly traded domestic securities, private investments that avoid the public market, private equity, hedge funds, real estate, and credit derivatives. Impedes the ability to readily dispose of an investment at current market price.
Liquidity risk
Transaction in which buyers and sellers of a product act independently of each other and have no relationship.
Arms length transaction
Shares in a company whose earnings are expected to grow at an above average rate.
Growth Stock
High risk, high reward, low share price stocks that carry the risk of losing it all.
Speculative stock
Stock that provides constant dividend and stable earnings, regardless of overall state of the market.
Defensive stock
Three types of income recognized by federal authorities.
- Earned income
- Investment income
- Passive income
Buying of a security such as stock, commodity or currency with the expectation that the asset will rise in value
Buying long/long position
How are dividends taxed?
As ordinary income.
How is interest income from T-notes, bills, and bonds taxed?
Subject to federal tax but exempt from state.
How is municipal bond interest taxed?
Tax exempt
How are retirement plan distributions taxed?
As ordinary income
How are annuities taxed?
As ordinary income
Name the three items that are taxed as ordinary income.
Dividends, retirement plan distributions, and annuities.
How are securities inherited from deceased taxed?
Step up basis; according to value at death, not purchase price
How are securities received as gifts taxed?
They are tax free up to $13,000.
What are the exceptions to the securities gift tax?
Gifts to spouse, charity, political organization, or education expenses paid directly to the university.
For foreign capital gains, where are they taxed?
In the country where the investor resides.
Where can foreign dividends be taxed?
In home, foreign, or sometimes both countries.
Type of consumption tax placed on a product whenever value is added at a stage of production and at the final sale. This is common in the EU.
Value Added Tax
IRS rule prohibiting taxpayers from claiming a loss on the sale or trade of a security in a wash sale.
Wash sale rule
When a security is sold at a loss and within 30 days before or after, a “substantially identical” stock is bought, outright or with an option or contract
Wash sale
What is included in investment income?
Capital gains, cash dividends, and stock dividends
