This lesson covers the remaining topics in Function C (tax, technical analysis, account communications) plus all of Function D (trade execution, short sales, market structure, complaints, and margin). Together they represent roughly 11% of the exam. These are heavily operational topics. The exam tests whether you can apply rules to specific scenarios, not just recall definitions.
You need to distinguish short-term from long-term capital gains. Hold a security for more than 12 months and your gain is long-term, taxed at preferential rates. Sell at 12 months or less and you pay ordinary income rates.
KEY: The holding period starts the day after purchase and includes the day of sale. A stock bought January 15 must be sold no earlier than January 16 of the following year for long-term treatment.
For mutual fund distributions, the character of the gain depends on how long the fund held the underlying securities, not how long you held the fund shares.
HIGH-FREQUENCY: Buying fund shares right before a distribution date creates a tax trap. You receive a taxable distribution that simply reduces your net asset value (NAV).
Common mistakes
- Confusing FOK with AON. Both require the entire order to be filled. FOK demands immediate execution or cancellation. AON requires a complete fill but allows time. On the exam, if the question says "immediately," it is FOK. If it just says "must be filled entirely," look for the timing qualifier.
- Using the donor's basis on inherited stock. Inherited securities get a stepped-up basis to FMV at the date of death. Gifted securities get a carryover basis. Mix these up and every number in the problem changes.
- Forgetting that wash sale losses are deferred, not destroyed. The disallowed loss adds to the cost basis of the replacement shares. Trap: choosing "the loss is permanently disallowed." It is not. It is deferred until you sell the replacement shares.
Bottom line
- Wash sale rule: loss disallowed if you buy substantially identical securities within 30 days before or after the sale, and the disallowed loss adds to the replacement shares' cost basis (deferred, not destroyed)
- Inherited securities get a stepped-up basis to FMV at death and are always long-term; gifted securities carry over the donor's basis (unless gift FMV is lower and you sell at a loss, then use the lower FMV)
- Long margin equity = market value minus debit balance; short margin equity = credit balance minus short market value; long maintenance call triggers at debit balance divided by 0.75
- SMA is a memo entry that persists even when the market drops; SMA buying power = SMA times 2 at 50% Reg T
Exam shortcut
When you see a margin calculation, write three numbers first: market value, debit balance, and equity. Everything else derives from those three. SMA = equity minus 50% of market value. Buying power = SMA times 2. Maintenance trigger = debit divided by 0.75. Do not try to hold formulas in your head -- write the three numbers and the rest follows.
The full lesson (about 3,735 words, 25 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- D31
- D32
- D33
- D34
- D35
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