The more rapidly market values are increasing and the closer an asset is to the end of its depreciation period, the greater the chances for a:

• A. Inventory write-off
• B. Substantial capital gain
• C. Minor capital loss
• D. Tax credit

Answer: (B)

Depreciation lowers an asset’s book value over time, so as you approach the end of its useful life the adjusted basis tends to be quite small. If market values are rising, the sale price can be much higher than that already-depressed basis. The gain realized from selling is simply the sale proceeds minus the asset’s adjusted basis, so a high sale price combined with a low basis yields a large (substantial) capital gain.

This scenario isn’t about writing off old inventory, which is an inventory accounting adjustment unrelated to selling a depreciable asset. It isn’t about getting a tax credit, which isn’t earned from selling assets. And it isn’t typically described as a minor capital loss, since rising values and a low basis make a loss unlikely.