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Taxmap/pubs/p550-027.htm#TXMP23a3a51f Reporting Capital   Gains and Losses

Capital Gains and Losses

This section discusses how to report your capital gains and losses on Schedule D (Form 1040). Enter your sales and trades of stocks, bonds, etc., and real estate (if not reported on Form 4684, 4797, 6252, 6781, or 8824) on line 1 of Part I or line 8 of Part II, as appropriate. Include all these transactions even if you did not receive a Form 1099-B or 1099-S (or substitute statement). You can use Schedule D-1 as a continuation schedule to report more transactions.

Be sure to add all sales price entries in column (d) of lines 1 and 2 and enter the total on line 3. Also add all sales price entries in column (d) of lines 8 and 9 and enter the total on line 10. Then add the following amounts reported to you for 2004 on Forms 1099-B and Forms 1099-S (or on substitute statements):

1. Proceeds from transactions involving stocks, bonds, and other securities, and
2. Gross proceeds from real estate transactions (other than the sale of your main home if you had no taxable gain) not reported on another form or schedule.

If this total is more than the total of lines 3 and 10, attach a statement to your return explaining the difference.

Taxmap/pubs/p550-027.htm#TXMP2beddba4 Installment sales.

You cannot use the installment method to report a gain from the sale of stock or securities traded on an established securities market. You must report the entire gain in the year of sale (the year in which the trade date occurs).

Taxmap/pubs/p550-027.htm#TXMP4e212a9c At-risk rules.

Special at-risk rules apply to most income-producing activities. These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. The at-risk rules also apply to a loss from the sale or trade of an asset used in an activity to which the at-risk rules apply. For more information, see Publication 925, Passive Activity and At-Risk Rules. Use Form 6198, At-Risk Limitations, to figure the amount of loss you can deduct.

Taxmap/pubs/p550-027.htm#TXMP2cd48de2 Passive activity gains and losses.

If you have gains or losses from a passive activity, you may also have to report them on Form 8582. In some cases, the loss may be limited under the passive activity rules. Refer to Form 8582 and its separate instructions for more information about reporting capital gains and losses from a passive activity.

Taxmap/pubs/p550-027.htm#TXMP6ce6d1e7 Form 1099-B transactions.

If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Use the Form 1099-B or equivalent statement to complete Schedule D.

Report the gross proceeds shown in box 2 of Form 1099-B as the gross sales price in column (d) of either line 1 or line 8 of Schedule D, whichever applies. However, if the broker advises you, in box 2 of Form 1099-B, that gross proceeds (gross sales price) less commissions and option premiums were reported to the IRS, enter that net sales price in column (d) of either line 1 or line 8 of Schedule D, whichever applies.

If the net sales price is entered in column (d), do not include the commissions and option premiums in column (e).

Taxmap/pubs/p550-027.htm#TXMP5a34a576 Section 1256 contracts and straddles.

Use Form 6781 to report gains and losses from section 1256 contracts and straddles before entering these amounts on Schedule D. Include a copy of Form 6781 with your income tax return.

Taxmap/pubs/p550-027.htm#TXMP3a1f73fd Market discount bonds.

Report the sale or trade of a market discount bond on Schedule D (Form 1040), line 1 or line 8. If the sale or trade results in a gain and you did not choose to include market discount in income currently, enter "Accrued Market Discount" on the next line in column (a) and the amount of the accrued market discount as a loss in column (f). Also report the amount of accrued market discount as interest income on Schedule B (Form 1040), line 1, and identify it as "Accrued Market Discount."

Taxmap/pubs/p550-027.htm#TXMP6e806abe Form 1099-S transactions.

If you sold or traded reportable real estate, you generally should receive from the real estate reporting person a Form 1099-S, Proceeds From Real Estate Transactions, showing the gross proceeds.

"Reportable real estate" is defined as any present or future ownership interest in any of the following:

1. Improved or unimproved land, including air space,
2. Inherently permanent structures, including any residential, commercial, or industrial building,
3. A condominium unit and its accessory fixtures and common elements, including land, and
4. Stock in a cooperative housing corporation (as defined in section 216 of the Internal Revenue Code).

A "real estate reporting person" could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property.

Your Form 1099-S will show the gross proceeds from the sale or exchange in box 2. Follow the instructions for Schedule D to report these transactions, and include them on line 1 or 8 as appropriate.

It is unlawful for any real estate reporting person to separately charge you for complying with the requirement to file Form 1099-S.

Taxmap/pubs/p550-027.htm#TXMP530acb01 Nominees.

If you receive gross proceeds as a nominee (that is, the gross proceeds are in your name but actually belong to someone else), report on Schedule D, lines 3 and 10, only the proceeds that belong to you. Then add the following amounts reported to you for 2004 on Forms 1099-B and 1099-S (or substitute statements) that you are not reporting on another form or schedule included with your return:

1. Proceeds from transactions involving stocks, bonds, and other securities, and
2. Gross proceeds from real estate transactions (other than the sale of your main home if you are not required to report it).

If the total of (1) and (2) is more than the total of lines 3 and 10, attach a statement to your return explaining the reason for the difference.

Taxmap/pubs/p550-027.htm#TXMP33aa8166 File Form 1099-B or Form 1099-S with the IRS.

If you received gross proceeds as a nominee in 2004, you must file a Form 1099-B or Form 1099-S for those proceeds with the IRS. Send the Form 1099-B or Form 1099-S with a Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to your Internal Revenue Service Center by February 28, 2005 (March 31, 2005, if you file Form 1099-B or Form 1099-S electronically). Give the actual owner of the proceeds Copy B of the Form 1099-B or Form 1099-S by January 31, 2005. On Form 1099-B, you should be listed as the "Payer." The other owner should be listed as the "Recipient." On Form 1099-S, you should be listed as the "Filer." The other owner should be listed as the "Transferor." You do not, however, have to file a Form 1099-B or Form 1099-S to show proceeds for your spouse. For more information about the reporting requirements and the penalties for failure to file (or furnish) certain information returns, see the General Instructions for Forms 1099, 1098, 5498, and W-2G.

Taxmap/pubs/p550-027.htm#TXMP4a0ec6f8 Sale of property bought at various times.

If you sell a block of stock or other property that you bought at various times, report the short-term gain or loss from the sale on one line in Part I of Schedule D and the long-term gain or loss on one line in Part II. Enter "Various" in column (b) for the "Date acquired." See the Comprehensive Example later in this chapter.

Taxmap/pubs/p550-027.htm#TXMP07f92ea5 Sale expenses.

Add to your cost or other basis any expense of sale such as broker's fees, commissions, state and local transfer taxes, and option premiums. Enter this adjusted amount in column (e) of either Part I or Part II of Schedule D, whichever applies, unless you reported the net sales price amount in column (d).

Taxmap/pubs/p550-027.htm#TXMP12a87f5c Short-term gains and losses.

Capital gain or loss on the sale or trade of investment property held 1 year or less is a short-term capital gain or loss. You report it in Part I of Schedule D. If the amount you report in column (f) is a loss, show it in parentheses.

You combine your share of short-term capital gain or loss from partnerships, S corporations, and fiduciaries, and any short-term capital loss carryover, with your other short-term capital gains and losses to figure your net short-term capital gain or loss on line 7 of Schedule D.

Taxmap/pubs/p550-027.htm#TXMP766f1f14 Long-term gains and losses.

A capital gain or loss on the sale or trade of investment property held more than 1 year is a long-term capital gain or loss. You report it in Part II of Schedule D. If the amount you report in column (f) is a loss, show it in parentheses.

You also report the following in Part II of Schedule D:

1. Undistributed long-term capital gains from a regulated investment company (mutual fund) or real estate investment trust (REIT),
2. Your share of long-term capital gains or losses from partnerships, S corporations, and fiduciaries,
3. All capital gain distributions from mutual funds and REITs not reported directly on line 10 of Form 1040A or line 13 of Form 1040, and
4. Long-term capital loss carryovers.

The result after combining these items with your other long-term capital gains and losses is your net long-term capital gain or loss (line 15 of Schedule D).

Taxmap/pubs/p550-027.htm#TXMP2658ec0c Capital gain distributions only.

You do not have to file Schedule D if both of the following are true.

1. The only amounts you would have to report on Schedule D are capital gain distributions from box 2a of Form 1099-DIV (or substitute statement).
2. You do not have an amount in box 2b, 2c, or 2d of any Form 1099-DIV (or substitute statement).

If both of the above statements are true, report your capital gain distributions directly on line 13 of Form 1040 and check the box on line 13. Also, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax.

You can report your capital gain distributions on line 10 of Form 1040A, instead of on Form 1040, if both of the following are true.

1. None of the Forms 1099-DIV (or substitute statements) you received have an amount in box 2b, 2c, or 2d.
2. You do not have to file Form 1040 for any other capital gains or losses.

Taxmap/pubs/p550-027.htm#TXMP6f7f2a8f Total net gain or loss.

To figure your total net gain or loss, combine your net short-term capital gain or loss (line 7) with your net long-term capital gain or loss (line 15). Enter the result on Schedule D, Part III, line 16. If your losses are more than your gains, see Capital Losses, next. If both lines 15 and 16 are gains and line 42 of Form 1040 is more than zero, see Capital Gain Tax Rates, later.

Taxmap/pubs/p550-027.htm#TXMP585ebb39 Capital Losses

Capital Loss

If your capital losses are more than your capital gains, you can claim a capital loss deduction. Report the deduction on line 13 of Form 1040, enclosed in parentheses.

Taxmap/pubs/p550-027.htm#TXMP184f5626 Limit on deduction.

Your allowable capital loss deduction, figured on Schedule D, is the lesser of:

1. $3,000 ($1,500 if you are married and file a separate return), or
2. Your total net loss as shown on line 16 of Schedule D.

You can use your total net loss to reduce your income dollar for dollar, up to the $3,000 limit.

Taxmap/pubs/p550-027.htm#TXMP62672f90 Capital loss carryover.

If you have a total net loss on line 16 of Schedule D that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up.

When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it.

When you carry over a loss, it remains long term or short term. A long-term capital loss you carry over to the next tax year will reduce that year's long-term capital gains before it reduces that year's short-term capital gains.

Taxmap/pubs/p550-027.htm#TXMP2cb2fda3 Figuring your carryover.

The amount of your capital loss carryover is the amount of your total net loss that is more than the lesser of:

1. Your allowable capital loss deduction for the year, or
2. Your taxable income increased by your allowable capital loss deduction for the year and your deduction for personal exemptions.

If your deductions are more than your gross income for the tax year, use your negative taxable income in computing the amount in item (2).

Complete Worksheet 4-1 to determine the part of your capital loss for 2004 that you can carry over to 2005.

Taxmap/pubs/p550-027.htm#TXMP2bee4063
Example.

Bob and Gloria sold securities in 2004. The sales resulted in a capital loss of $7,000. They had no other capital transactions. Their taxable income was $26,000. On their joint 2004 return, they can deduct $3,000. The unused part of the loss, $4,000 ($7,000 − $3,000), can be carried over to 2005.

If their capital loss had been $2,000, their capital loss deduction would have been $2,000. They would have no carryover.

Taxmap/pubs/p550-027.htm#w24331I01

Worksheet 4-1. Capital Loss Carryover Worksheet 1. Enter the amount from Form 1040, line 40. If a loss, enclose the amount in parentheses 1.          2. Enter the loss from Schedule D, line 21, as a positive amount 2.          3. Combine lines 1 and 2. If zero or less, enter -0- 3.          4. Enter the smaller of line 2 or line 3 4.               If line 7 of Schedule D is a loss, go to line 5; otherwise, enter -0- on line 5 and go to line 9.          5. Enter the loss from Schedule D, line 7, as a positive amount 5.          6. Enter any gain from Schedule D, line 15 6.                 7. Add lines 4 and 6 7.          8. Short-term capital loss carryover to 2005. Subtract line 7 from line 5. If zero or less, enter -0- 8.               If line 15 of Schedule D is a loss, go to line 9; otherwise, skip lines 9 through 13.          9. Enter the loss from Schedule D, line 15, as a positive amount 9.          10. Enter any gain from Schedule D, line 7 10.                 11. Subtract line 5 from line 4. If zero or less, enter -0- 11.                 12. Add lines 10 and 11 12.          13. Long-term capital loss carryover to 2005. Subtract line 12 from line 9. If zero or less, enter -0- 13.

Taxmap/pubs/p550-027.htm#TXMP459e66bc Use short-term losses first.

When you figure your capital loss carryover, use your short-term capital losses first, even if you incurred them after a long-term capital loss. If you have not reached the limit on the capital loss deduction after using the short-term capital losses, use the long-term capital losses until you reach the limit.

Taxmap/pubs/p550-027.htm#TXMP331087fb Decedent's capital loss.

A capital loss sustained by a decedent during his or her last tax year (or carried over to that year from an earlier year) can be deducted only on the final return filed for the decedent. The capital loss limits discussed earlier still apply in this situation. The decedent's estate cannot deduct any of the loss or carry it over to following years.

Taxmap/pubs/p550-027.htm#TXMP2131c822 Joint and separate returns.

If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. However, if you and your spouse once filed a joint return and are now filing separate returns, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss.

Taxmap/pubs/p550-027.htm#TXMP65706ee8 Capital Gain Tax Rates

Capital Gain Tax Rate

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.

The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

For 2004, the maximum capital gain rates are 5%, 15%, 25%, and 28%. See Table 4-2 for details.

If you figure your tax using the maximum capital gain rate and the regular tax computation results in a lower tax, the regular tax computation applies.

Taxmap/pubs/p550-027.htm#TXMP16685034
Example.

All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. Because you are single and your taxable income is $25,000, none of your taxable income will be taxed above the 15% rate. The 28% rate does not apply.

Taxmap/pubs/p550-027.htm#TXMP6df69f21 Investment interest deducted.

If you claim a deduction for investment interest, you may have to reduce the amount of your net capital gain that is eligible for the capital gain tax rates. Reduce it by the amount of the net capital gain you choose to include in investment income when figuring the limit on your investment interest deduction. This is done on the Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet. For more information about the limit on investment interest, see Interest Expenses in chapter 3.

Taxmap/pubs/p550-027.htm#TXMP4e461734 28% rate gain.

This gain includes gain or loss from the sale of collectibles and the taxable part of gain equal to your section 1202 exclusion from the sale of qualified small business stock.

Taxmap/pubs/p550-027.htm#TXMP51c36ea7 Collectibles gain or loss.

This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year.

Collectibles gain includes gain from the sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles.

Taxmap/pubs/p550-027.htm#TXMP3eff4cfd Gain on qualified small business stock.

If you realized a gain from qualified small business stock that you held more than 5 years, you generally can exclude one-half of your gain from your income. The taxable part of your gain equal to your section 1202 exclusion is a 28% rate gain. See Gains on Qualified Small Business Stock, earlier in this chapter.

Taxmap/pubs/p550-027.htm#TXMP6db99292 Unrecaptured section 1250 gain.

Generally, this is any part of your capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than your net section 1231 gain), reduced by any net loss in the 28% group. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions to figure your unrecaptured section 1250 gain. For more information about section 1250 property and section 1231 gain, see chapter 3 of Publication 544.

Taxmap/pubs/p550-027.htm#w15093r04

Table 4-2. What Is Your Maximum Capital Gain Rate? IF your net capital gain is from ... THEN your maximum capital gain rate is ... collectibles gain 28% gain on qualified small business stock equal to the section 1202 exclusion 28% unrecaptured section 1250 gain 25% other gain 1 and the regular tax rate that would apply is 25% or higher 15% other gain 1 and the regular tax rate that would apply is lower than 25% 5% 1Other gain means any gain that is not collectibles gain, gain on small business stock, or unrecaptured section 1250 gain.

Taxmap/pubs/p550-027.htm#TXMP1c83ac31 Tax computation using maximum capital gains rates.

Use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet (whichever applies) to figure your tax if you have qualified dividends or net capital gain. You have net capital gain if Schedule D, lines 15 and 16, are both gains.

Taxmap/pubs/p550-027.htm#TXMP1c0e5cf2 Schedule D Tax Worksheet.

You must use the Schedule D Tax Worksheet in the Schedule D instructions to figure your tax if:

• You have to file Schedule D, and
• Schedule D, line 18 (28% rate gain) or line 19 (unrecaptured section 1250 gain), is more than zero.

See the Comprehensive Example later for an example of how to figure your tax using the Schedule D Tax Worksheet.

Taxmap/pubs/p550-027.htm#TXMP51d25f7d Qualified Dividends and Capital Gain Tax Worksheet.

If you do not have to use the Schedule D Tax Worksheet (as explained above) and any of the following apply, use the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040 or Form 1040A (whichever you file) to figure your tax.

• You received qualified dividends. (See Qualified Dividends in chapter 1.)
• You do not have to file Schedule D and you received capital gain distributions. (See Capital gain distributions only earlier.)
• Schedule D, lines 15 and 16, are both more than zero.

Taxmap/pubs/p550-027.htm#TXMP2ce39a6a Alternative minimum tax.

These capital gain rates are also used in figuring alternative minimum tax.

Taxmap/pubs/p550-027.htm#TXMP229d7d24 Comprehensive Example

Emily Jones is single and, in addition to wages from her job, she has income from stocks and other securities. For the 2004 tax year, she had the following capital gains and losses, which she reports on Schedule D. Her filled-in Schedule D is shown at the end of this example.

Taxmap/pubs/p550-027.htm#TXMP413456e1 Capital gains and losses—Schedule D.

Emily sold stock in two different companies that she held for less than a year. In June, she sold 100 shares of Trucking Co. stock that she had bought in February. She had an adjusted basis of $1,150 in the stock and sold it for $400, for a loss of $750. In July, she sold 25 shares of Computer Co. stock that she bought in June. She had an adjusted basis in the stock of $2,000 and sold it for $2,500, for a gain of $500. She reports these short-term transactions on line 1 in Part I of Schedule D.

Emily had three other stock sales that she reports as long-term transactions on line 8 in Part II of Schedule D. In February, she sold 60 shares of Car Co. for $2,100. She had inherited the Car stock from her father. Its fair market value at the time of his death was $2,500, which became her basis. Her loss on the sale is $400. Because she had inherited the stock, her loss is a long-term loss, regardless of how long she and her father actually held the stock. She enters the loss in column (f) of line 8.

In June, she sold 500 shares of Furniture Co. stock for $5,000. She had bought 100 of those shares in 1993, for $1,000. She had bought 100 more shares in 1995 for $2,200, and an additional 300 shares in 1998 for $1,500. Her total basis in the stock is $4,700. She has a $300 ($5,000 − $4,700) gain on this sale, which she enters in column (f) of line 8.

In December, she sold 20 shares of Toy Co. stock for $4,100. This was qualified small business stock that she had bought in September 1999. Her basis is $1,100, so she has a $3,000 gain, which she enters in column (f) of line 8. Because she held the stock more than 5 years, she has a $1,500 section 1202 exclusion. She claims the exclusion on the line below by entering $1,500 as a loss in column (f). She also enters the exclusion as a positive amount on line 2 of the 28% Rate Gain Worksheet.

She received a Form 1099-B (not shown) from her broker for each of these transactions. The entries shown in box 2 of these forms total $14,100.

Taxmap/pubs/p550-027.htm#TXMP176fb7c9 Reconciliation of Forms 1099-B.

Emily makes sure that the total of the amounts reported in column (d) of lines 3 and 10 of Schedule D is not less than the total of the amounts shown on the Forms 1099-B she received from her broker. For 2004, the total of lines 3 and 10 of Schedule D is $14,100, which is the same amount reported by the broker on Forms 1099-B (not shown).

Taxmap/pubs/p550-027.htm#TXMP5e2b3de8 Form 6781.

On June 2, 2004, Emily had a realized loss from a regulated futures contract of $11,000. She also had an unrealized marked to market gain on open contracts of $27,000 at the end of 2004. She had reported an unrealized marked to market gain of $1,000 on her 2003 tax return. (This $1,000 must be subtracted from her 2004 profit.) These amounts are shown in boxes 8, 9, and 10 of the Form 1099-B she received from her broker for these transactions. Box 11 shows her combined profit of $15,000 ($27,000 − $1,000 − $11,000). She reports this gain in Part I of Form 6781 (not shown). She shows 40% ($6,000) as short-term gain on line 4, column (f) of Schedule D and 60% ($9,000) as long-term gain on line 11 of Schedule D.

The Form 1099-B that Emily received from her broker, XYZ Trading Co., is shown later.

Taxmap/pubs/p550-027.htm#TXMP2049b852 Capital loss carryover from 2003.

Emily has a capital loss carryover to 2004 of $800, of which $300 is short-term capital loss, and $500 is long-term capital loss. She enters these amounts on lines 6 and 14 of Schedule D. She also enters the $500 long-term capital loss carryover on line 5 of the 28% Rate Gain Worksheet.

She kept the completed Capital Loss Carryover Worksheet in her 2003 edition of Publication 550 (not shown), so she could properly report her loss carryover for the 2004 tax year without refiguring it.

Taxmap/pubs/p550-027.htm#TXMP6a0d6655 Tax computation.

Because Emily has gains on both lines 15 and 16 of Schedule D, she checks the "Yes" box on line 17 and goes to line 18. On line 18 she enters $1,000 from line 7 of the 28% Rate Gain Worksheet. Because line 18 is greater than zero, she checks the "No" box on line 20 and uses the Schedule D Tax Worksheet to figure her tax.

After entering the gain from line 16 on line 13 of her Form 1040, she completes the rest of Form 1040 through line 42. She enters the amount from that line, $30,000, on line 1 of the Schedule D Tax Worksheet. After filling out the rest of that worksheet, she figures her tax is $3,352. This is less than the tax she would have figured without the capital gain tax rates, $4,244.