Caroline pays 15% taxes on dividends and capital gains and 35% taxes on ordinary income. Three years ago, she purchased 100 shares of XYZ, Inc. for $70. In January, Caroline wrote a six month put option on the stock at an exercise price of $90 and received $500. Three days after the purchase, the price of XYZ dropped significantly and has not been above $80 since. The result is that the put buyer chose not to exercise her put. Ignoring commissions, Caroline's tax on this transaction is

A. $ 75B. $175

C. $225D. $325E. $650

Question

Business

Isai Russell

1 August, 22:25

Caroline pays 15% taxes on dividends and capital gains and 35% taxes on ordinary income. Three years ago, she purchased 100 shares of XYZ, Inc. for $70. In January, Caroline wrote a six month put option on the stock at an exercise price of $90 and received $500. Three days after the purchase, the price of XYZ dropped significantly and has not been above $80 since. The result is that the put buyer chose not to exercise her put. Ignoring commissions, Caroline's tax on this transaction is

A. $ 75B. $175

C. $225D. $325E. $650

+2

Answers (1)

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Matthew Palmer · Answer 1

The answer is: B) $175

Explanation:

Caroline made an income of $500 from this transaction and it should be taxed at ordinary income rate (35%).

Caroline's taxes = $500 x 35% = $175

In order for Caroline to be taxed at 15% (capital gains rate) she should have sold a capital asset that she had owned for more than one year, but in this case she didn't sell any stock.