Question $1.$

A wealth manager's client has a $1,000,000$ portfolio held in a taxable account. The end of the tax year

is approaching and the client has recognized $100,000$ worth of capital gains. His portfolio has

securities that have experienced $60,000$ of losses. These securities have not yet been sold and their

losses are therefore unrecognized. He could sell these securities and replace them with similar

securities expected to earn identical returns. The government taxes capital gains at $20$ percent.

a$.$ Without making any further transactions, how much tax does the client owe this year?

$[6$ marks$]$

b$.$ How much tax will he owe this year if he sells the securities with the $60,000$ loss?

$[6$ marks$]$

c$.$ How much tax will he save this year if he sells the securities with the $60,000$ loss?

$[6$ marks$]$

Question $2.$

In the Question $1$ above, the securities with an unrealized loss have a current market value of

$110,000$ and cost basis of $170,000($an unrealized loss of $60,000).$ The client could either hold the

securities with the unrealized loss, or sell the securities in the current tax year and replace them with

securities offering the same return. Assume that the next tax year $(2023),$ the securities increase in

value to $200,000$ and the securities are sold regardless of which option the client chooses.

a$.$ Calculate the client's $2023$ tax liability if he holds the securities until year end $2019.$

$[6$ marks$]$

b$.$ Calculate the client's $2023$ tax liability if he recognizes the loss in $2022,$ replaces them

with securities offering the same return, and realizes the capital gain at year end $2023.$

$[6$ marks$]$

c$.$ Compare the total two$-$year tax liability under both options using the $2022$ tax liability

computed in the Question $1$ above, in which the $2022$ tax liability was $20,000$ if the loss

was not realized and $8,000$ if the loss was realized.

$[6$ marks$]$