2026/2027
TAX 2601 Comprehensive Exam
Review and Practice Workbook
2026/2027 Version for Quizzes, Test
Bank Preparation, and Academic
Success
Question 1
The tax law requires capital gains and losses to be separated from ordinary income.
Which of the following is a key reason for this treatment?
A. All capital gains are tax-exempt
B. Capital losses are always fully deductible without limitation
C. Capital gains may be taxed at preferential rates compared to ordinary income
D. Capital assets are never subject to taxation
Correct Answer: C. Capital gains may be taxed at preferential rates compared to
ordinary income
Rationale: Capital gains are treated separately because tax law provides preferential
rates for certain long-term capital gains, unlike ordinary income which is taxed at
standard rates. This separation ensures proper classification for taxation purposes.
Capital losses are not fully deductible without limitation, and capital assets are
definitely taxable when disposed of, making options A, B, and D incorrect.
Question 2
Which of the following is NOT recognized as a classification of tax assets?
A. Capital asset
B. Section 1231 asset
C. Ordinary asset
D. Inventory asset
Correct Answer: C. Ordinary asset
Rationale: Tax law recognizes capital assets, Section 1231 assets, and inventory
(ordinary business assets), but “ordinary asset” is not an official classification.
Ordinary income results from transactions, not asset classification, making C incorrect.
,2026/2027
Question 3
Recognized gains or losses from capital assets may result from which of the following
events?
A. Sale
B. Exchange
C. Casualty
D. Condemnation
Correct Answer: D. Condemnation
Rationale: All listed events—sale, exchange, casualty, and condemnation—can
trigger recognition of gains or losses under tax law. Therefore, condemnation is not
excluded and the correct answer is D.
Question 4
Which statement correctly defines a long-term capital asset holding period?
A. More than 6 months
B. More than 12 months
C. 12 months or less
D. More than 18 months
Correct Answer: B. More than 12 months
Rationale: A capital asset qualifies as long-term if it is held for more than 12 months.
Short-term applies to 12 months or less. Therefore, option B is correct.
Question 5
A business sells inventory held for more than one year. The resulting gain is:
A. Capital gain
B. Section 1231 gain
C. Ordinary income
D. Tax-exempt income
Correct Answer: C. Ordinary income
Rationale: Inventory is always treated as an ordinary asset regardless of holding
period. Therefore, any gain from its sale is ordinary income, not capital or Section
1231 gain.
Question 6
,2026/2027
A securities trader treats which of the following as capital assets?
A. All securities held during business operations
B. Securities held for resale to customers
C. Securities designated as held for investment
D. All securities held for less than 1 year
Correct Answer: C. Securities designated as held for investment
Rationale: Traders treat securities held for resale as ordinary assets, while those
specifically designated as investments are treated as capital assets.
Question 7
A taxpayer creates and sells advertising posters as part of business operations. The
gain is:
A. Capital gain
B. Section 1231 gain
C. Ordinary income
D. No gain recognized
Correct Answer: C. Ordinary income
Rationale: Assets created in the ordinary course of business (like posters) are not
capital assets; therefore, the income is ordinary.
Question 8
A personal-use painting is sold at a loss. The loss is:
A. Deductible capital loss
B. Ordinary deductible loss
C. Not deductible
D. Section 1231 loss
Correct Answer: C. Not deductible
Rationale: Personal-use property losses are not deductible under tax law, although
gains would be taxable if realized.
Question 9
Which of the following is a capital asset for a sole proprietor restaurant owner?
A. Tables and chairs
B. Building used in business
, 2026/2027
C. Inventory
D. Interest-bearing savings account
Correct Answer: D. Interest-bearing savings account
Rationale: Cash and bank accounts are capital assets, while business-use property and
inventory are not treated as capital assets.
Question 10
A lease cancellation payment received by a landlord is treated as:
A. Capital gain
B. Ordinary income
C. Tax-exempt income
D. Section 1231 loss
Correct Answer: B. Ordinary income
Rationale: Lease cancellation payments are treated as ordinary income because they
substitute for rental income.
Question 11
An option purchased for $3,000 lapses unexercised. The loss is:
A. Long-term capital loss
B. Short-term capital loss
C. Ordinary loss
D. Section 1231 loss
Correct Answer: B. Short-term capital loss
Rationale: Expired options result in short-term capital losses regardless of holding
period.
Question 12
When an option is exercised, its cost is:
A. Expensed immediately
B. Added to basis of underlying property
C. Treated as ordinary loss
D. Ignored for tax purposes
Correct Answer: B. Added to basis of underlying property
TAX 2601 Comprehensive Exam
Review and Practice Workbook
2026/2027 Version for Quizzes, Test
Bank Preparation, and Academic
Success
Question 1
The tax law requires capital gains and losses to be separated from ordinary income.
Which of the following is a key reason for this treatment?
A. All capital gains are tax-exempt
B. Capital losses are always fully deductible without limitation
C. Capital gains may be taxed at preferential rates compared to ordinary income
D. Capital assets are never subject to taxation
Correct Answer: C. Capital gains may be taxed at preferential rates compared to
ordinary income
Rationale: Capital gains are treated separately because tax law provides preferential
rates for certain long-term capital gains, unlike ordinary income which is taxed at
standard rates. This separation ensures proper classification for taxation purposes.
Capital losses are not fully deductible without limitation, and capital assets are
definitely taxable when disposed of, making options A, B, and D incorrect.
Question 2
Which of the following is NOT recognized as a classification of tax assets?
A. Capital asset
B. Section 1231 asset
C. Ordinary asset
D. Inventory asset
Correct Answer: C. Ordinary asset
Rationale: Tax law recognizes capital assets, Section 1231 assets, and inventory
(ordinary business assets), but “ordinary asset” is not an official classification.
Ordinary income results from transactions, not asset classification, making C incorrect.
,2026/2027
Question 3
Recognized gains or losses from capital assets may result from which of the following
events?
A. Sale
B. Exchange
C. Casualty
D. Condemnation
Correct Answer: D. Condemnation
Rationale: All listed events—sale, exchange, casualty, and condemnation—can
trigger recognition of gains or losses under tax law. Therefore, condemnation is not
excluded and the correct answer is D.
Question 4
Which statement correctly defines a long-term capital asset holding period?
A. More than 6 months
B. More than 12 months
C. 12 months or less
D. More than 18 months
Correct Answer: B. More than 12 months
Rationale: A capital asset qualifies as long-term if it is held for more than 12 months.
Short-term applies to 12 months or less. Therefore, option B is correct.
Question 5
A business sells inventory held for more than one year. The resulting gain is:
A. Capital gain
B. Section 1231 gain
C. Ordinary income
D. Tax-exempt income
Correct Answer: C. Ordinary income
Rationale: Inventory is always treated as an ordinary asset regardless of holding
period. Therefore, any gain from its sale is ordinary income, not capital or Section
1231 gain.
Question 6
,2026/2027
A securities trader treats which of the following as capital assets?
A. All securities held during business operations
B. Securities held for resale to customers
C. Securities designated as held for investment
D. All securities held for less than 1 year
Correct Answer: C. Securities designated as held for investment
Rationale: Traders treat securities held for resale as ordinary assets, while those
specifically designated as investments are treated as capital assets.
Question 7
A taxpayer creates and sells advertising posters as part of business operations. The
gain is:
A. Capital gain
B. Section 1231 gain
C. Ordinary income
D. No gain recognized
Correct Answer: C. Ordinary income
Rationale: Assets created in the ordinary course of business (like posters) are not
capital assets; therefore, the income is ordinary.
Question 8
A personal-use painting is sold at a loss. The loss is:
A. Deductible capital loss
B. Ordinary deductible loss
C. Not deductible
D. Section 1231 loss
Correct Answer: C. Not deductible
Rationale: Personal-use property losses are not deductible under tax law, although
gains would be taxable if realized.
Question 9
Which of the following is a capital asset for a sole proprietor restaurant owner?
A. Tables and chairs
B. Building used in business
, 2026/2027
C. Inventory
D. Interest-bearing savings account
Correct Answer: D. Interest-bearing savings account
Rationale: Cash and bank accounts are capital assets, while business-use property and
inventory are not treated as capital assets.
Question 10
A lease cancellation payment received by a landlord is treated as:
A. Capital gain
B. Ordinary income
C. Tax-exempt income
D. Section 1231 loss
Correct Answer: B. Ordinary income
Rationale: Lease cancellation payments are treated as ordinary income because they
substitute for rental income.
Question 11
An option purchased for $3,000 lapses unexercised. The loss is:
A. Long-term capital loss
B. Short-term capital loss
C. Ordinary loss
D. Section 1231 loss
Correct Answer: B. Short-term capital loss
Rationale: Expired options result in short-term capital losses regardless of holding
period.
Question 12
When an option is exercised, its cost is:
A. Expensed immediately
B. Added to basis of underlying property
C. Treated as ordinary loss
D. Ignored for tax purposes
Correct Answer: B. Added to basis of underlying property
