Which of the following best describes the calculation for gains or losses for tax purposes?

• A. Multiply the asset's fair market value by its useful life.
• B. Subtract the asset's book value from its salvage value.
• C. Subtract the asset's cost basis from the amount realized on its sale.
• D. Add the asset's accumulated depreciation to its original cost.

Answer: (C)

Verified step by step guidance

1. Understand the concept of gains or losses for tax purposes: Gains or losses are calculated to determine the financial impact of selling an asset, and they are important for tax reporting.
2. Identify the key components involved in the calculation: The cost basis of the asset (original purchase price plus any adjustments like improvements) and the amount realized from the sale (sale price minus any selling expenses).
3. Set up the formula for calculating gains or losses: Gains or losses are determined by subtracting the asset's cost basis from the amount realized on its sale. In MathML, this can be expressed as: $\mathrm{Gain/Loss}=\mathrm{Amount\; Realized}-\mathrm{Cost\; Basis}$
4. Clarify the meaning of each term: The cost basis represents the original value of the asset adjusted for factors like improvements or depreciation, while the amount realized is the net proceeds from the sale of the asset.
5. Apply the formula to the given scenario: Subtract the cost basis of the asset from the amount realized on its sale to determine the gain or loss for tax purposes.