Canadian Securities Course (CSC) Level 2 Practice Exam

What is the characteristic of Superficial Loss in the context of investments?

1. Result of significant market gains

2. Occurs when securities are repurchased within 30 days

3. Designed to increase investor profits

4. Triggered by significant market volatility

The correct answer is: Occurs when securities are repurchased within 30 days

In the context of investments, Superficial Loss refers to a specific tax rule that applies when an investor sells a security at a loss and then repurchases that same security or an identical one within a 30-day period before or after the sale. This concept is particularly important for understanding capital losses and how they can be utilized for tax purposes. When a Superficial Loss occurs, the loss cannot be claimed for tax purposes in the year the transaction took place because the investor has effectively not exited their position in the asset. Instead, the disallowed loss is added to the cost basis of the repurchased security, which can impact the capital gains or losses when that security is sold in the future. This rule is designed to prevent tax avoidance through the strategic sale of securities at a loss followed by a quick repurchase, which does not reflect an actual loss in the investor's holdings. The other options do not accurately describe the nature of Superficial Losses. Significant market gains, while they are an investment consideration, do not directly relate to the definition of Superficial Loss. Similarly, while volatility can affect investment values, it is not a defining characteristic of Superficial Loss. The concept is not designed to increase investor profits; instead,