Question

Peter buys 1000 shares of Sunshine Corporation stock in 2008 at $2 a share. In 2010 the stock is doing great, Peter decides to sell and use the money towards a new car. He sells the Sunshine Corporation stock for $10 a share. Peter has a 25% ordinary tax rate, and a 15% capital gains tax rate. How much will Peter owe in taxes on this stock sale?

Answer 1

Bought: 1,000 x $2 each = $2,000

Sold: 1,000 x $10 = $10,000

Profit = 10,000 - 2,000 = $8,000

Ordinary tax rate is used if they held the stocks for less than 1 year.

Since he had the stocks for 2 years only capital gain tax is used.

Capital gains tax is on the profit:

8,000 x 0.15 = 1200

Total taxes =  $1,200

Answer 2

Total taxes own = $3,200

Step-by-step explanation:

Given:

Number of shares = 1000

Cost per share = $2

Sales price per share = $10

Ordinary tax rate = 25%

Capital gains tax rate = 15%

Find:

Total taxes own

Computation:

Capital gain = 1000[$10 - $2]

Capital gain = 1000[$8]

Capital gain = $8,000

Total taxes own = Capital gain[Ordinary tax rate + Capital gains tax rate]

Total taxes own = $8,000[25% + 15%]

Total taxes own = $8,000[40%]

Total taxes own = $3,200

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