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

What generates a capital gain or loss?

1. The sale of an asset at a price that exceeds its basis

2. The sale of an asset at a price lower than its basis

3. Both a and b

4. Net income from all sources

The correct answer is: Both a and b

A capital gain or loss is generated when an asset is sold for a price that is different from its basis, which is essentially the original value or cost of the asset adjusted for various factors (like improvements or depreciation). When the asset is sold for a price that exceeds its basis, it results in a capital gain, indicating an increase in value from the time of purchase. Conversely, if the asset is sold for a price lower than its basis, it results in a capital loss, indicating that the asset has decreased in value since its acquisition. Therefore, both scenarios – selling the asset at a price that exceeds its basis (resulting in a gain) and selling it at a lower price than its basis (resulting in a loss) – correctly generate capital gains or losses. This dual nature of capital gains and losses is key in understanding how investments are evaluated for tax purposes and for assessing overall investment performance. Net income from all sources does not directly relate to capital gains or losses; it encompasses a broader scope of income types beyond just the selling of assets.