Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Is the conversion of a bond into stock considered a taxable event?

1. Yes

2. No

3. Only if sold

4. Only if held over a year

The correct answer is: No

The conversion of a bond into stock is generally not considered a taxable event for tax purposes, which is why the correct choice indicates 'No'. When a bondholder converts their bond into shares of stock, they do not realize any gain or loss at that moment; instead, the tax implications are deferred until the new shares are sold. In this scenario, the bondholder essentially exchanges their bond for common stock without triggering immediate tax consequences. The tax basis in the new stock typically becomes the basis of the converted bond, and the holding period may be carried over from the bond to the stock. Other options suggesting that the conversion might be taxable under certain conditions do not align with the general rules set by the IRS concerning the treatment of conversions. Therefore, the conversion itself remains a non-taxable event until the individual decides to sell the shares, leading to potential capital gains or losses at that later point.