How Olivia Realized a Capital Gain from Selling an Option to Buy Land

How did Olivia realize a capital gain from selling an option to buy land?

After purchasing an option to buy the land for $8,000 and selling it for $10,000, what was the amount and character of Olivia's gain or loss?

Amount and Character of Olivia's Gain or Loss

Olivia realized a capital gain of $2,000 from selling the option to buy the land. This gain is considered a long-term capital gain because the option was held for more than a year.

Olivia's transaction involving the option to purchase land resulted in a capital gain of $2,000. This gain was calculated by subtracting the cost Olivia paid initially for the option, which was $8,000, from the selling price of the option, which was $10,000. The difference of $2,000 was the capital gain Olivia realized.

The character of this gain was deemed to be a long-term capital gain because Olivia held the option for 14 months before selling it. Capital gains are categorized as long-term if the asset is held for more than a year before being sold or disposed of. This distinction is important for tax purposes, as long-term capital gains are typically taxed at lower rates compared to short-term capital gains.

In conclusion, Olivia's decision to sell the option to buy the land resulted in a capital gain of $2,000, representing the financial benefit she obtained from the transaction after considering the initial investment in acquiring the option.