Cost Basis in Deferred Capital Gains Tax question

CFA Level III Portfolio Management
#1

Hello, I’m having a bit of trouble understanding the cost basis concept on deferred capital gains tax (study session 4). I understand you add back the tax associated with asset cost to the FV, as the cost is not subject to this tax.

However, the B factor doesn’t make sense to me, more specifically when B>1. When B>1, then I have made a realized loss on the asset (market price1 both imply there is no realized gain, so why do I get extra marginal FV for the more loss I realize on sale? If for example I make a huge loss (say B=100), then that will hugely inflate my FV right? Am I not understanding this correctly?

Any help would be greatly appreciated!

#2

B cannot be greater than 1. B is the percentage (or fraction) of the asset’s initial value that will be subject to capital gains tax, so:

0 ≤ B ≤ 1

#3

Hi Magic. I’m sorry but think you’re wrong here. B can be 1, <1 or >1 if some of asset value is not recognized for a tax purpose, therefore is tax deductible. As I recall same was mentioned in L3 tax chapter.