Taxed upon realization at ordinary tax rates

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Reference no: EM132029001

Assume that capital gains are taxed upon realization at ordinary tax rates. Jones, who has a federal personal income tax rate of 25 percent, holds an oil stock that appreciates in value by 10 percent each year. He bought the stock a year ago for $1,000. Jones’s stockbroker now wants him to switch the oil stock for a gold stock that is equally risky. Jones has decided that if he holds on to the oil stock, he will keep it only one more year and then sell it. (When he sells it, he will have to pay taxes on the gains at a tax rate of 25 percent.) If he sells the oil stock now, he will invest all the (after-tax) proceeds of the sale in the gold stock and then sell the gold stock one year from now. What is the minimum rate of return the gold stock must pay for Jones to make the switch? Relate your answer to the lock-in effect.

Reference no: EM132029001

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