4.   Reporting Gains and Losses

Introduction

This chapter explains how to report capital gains and losses and ordinary gains and losses from sales, exchanges, and other dispositions of property.

Although this discussion refers to Schedule D (Form 1040) and Form 8949, many of the rules discussed here also apply to taxpayers other than individuals. However, the rules for property held for personal use usually will not apply to taxpayers other than individuals.

Topics - This chapter discusses:

  • Information returns

  • Schedule D (Form 1040)

  • Form 4797

  • Form 8949

Useful Items - You may want to see:

Publication

  • 550 Investment Income and Expenses

  • 537 Installment Sales

Form (and Instructions)

  • Schedule D (Form 1040) Capital Gains and Losses

  • 1099-B Proceeds From Broker and Barter Exchange Transactions

  • 1099-S Proceeds From Real Estate Transactions

  • 4684 Casualties and Thefts

  • 4797 Sales of Business Property

  • 6252 Installment Sale Income

  • 6781 Gains and Losses from Section 1256 Contracts and Straddles

  • 8824 Like-Kind Exchanges

  • 8949 Sales and Other Dispositions of Capital Assets

See chapter 5 for information about getting publications and forms.

Information Returns

If you sell or exchange certain assets, you should receive an information return showing the proceeds of the sale. This information is also provided to the IRS.

Form 1099-B.   If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a substitute statement from the broker. Use the Form 1099-B or a substitute statement to complete Form 8949 and/or Schedule D. Whether or not you receive 1099-B, you must report all taxable sales of stock, bonds, commodities, etc. on Form 8949 and/or Schedule D, as applicable. For more information on figuring gains and losses from these transactions, see chapter 4 in Publication 550. For information on reporting the gains and losses, see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040).

Form 1099-S.   An information return must be provided on certain real estate transactions. Generally, the person responsible for closing the transaction (the “real estate reporting person”) must report on Form 1099-S sales or exchanges of the following types of property.
  • Land (improved or unimproved), including air space.

  • An inherently permanent structure, including any residential, commercial, or industrial building.

  • A condominium unit and its related fixtures and common elements (including land).

  • Stock in a cooperative housing corporation.

If you sold or exchanged any of the above types of property, the “real estate reporting person” must give you a copy of Form 1099-S or a statement containing the same information as the Form 1099-S. The “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.

  For more information see chapter 4 in Publication 550. Also, see the Instructions for Form 8949.

Schedule D and Form 8949

Form 8949.   Individuals, corporations, and partnerships, use Form 8949 to report the following.

  
  • Sales or exchanges of capital assets, including stocks, bonds, etc., and real estate (if not reported on another form or schedule such as Form 4684, 4797, 6252, 6781, or 8824). Include these transactions even if you did not receive a Form 1099-B or 1099-S.

  • Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit.

  • Nonbusiness bad debts.

  Individuals, If you are filing a joint return, complete as many copies of Form 8949 as you need to report all of your and your spouse's transactions. You and your spouse may list your transactions on separate forms or you may combine them. However, you must include on your Schedule D the totals from all Forms 8949 for both you and your spouse.

   Corporations and electing large partnerships also use Form 8949 to report their share of gain or loss from a partnership, S Corporation, estate or trust.

  Business entities meeting certain criteria, may have an exception to some of the normal requirements for completing Form 8949. See the Instructions for Form 8949.

Schedule D.    Use Schedule D (Form 1040) to figure the overall gain or loss from transactions reported on Form 8949, and to report certain transactions you do not have to report on Form 8949. Before completing Schedule D, you may have to complete other forms as shown below.

  
  • Complete all applicable lines of Form 8949 before completing lines 1b, 2, 3, 8b, 9, or 10 of your applicable Schedule D. Enter on Schedule D the combined totals from all your Forms 8949.

  • For a sale, exchange, or involuntary conversion of business property, complete Form 4797 (discussed later).

  • For a like-kind exchange, complete Form 8824. See Reporting the exchange under Like-Kind Exchanges in chapter 1.

  • For an installment sale, complete Form 6252. See Publication 537.

  • For an involuntary conversion due to casualty or theft, complete Form 4684. See Publication 547, Casualties, Disasters, and Thefts.

  • For a disposition of an interest in, or property used in, an activity to which the at-risk rules apply, complete Form 6198, At-Risk Limitations. See Publication 925, Passive Activity and At-Risk Rules.

  • For a disposition of an interest in, or property used in, a passive activity, complete Form 8582, Passive Activity Loss Limitations. See Publication 925.

  • For gains and losses from section 1256 contracts and straddles, complete Form 6781. See Publication 550.

Personal-use property.   Report gain on the sale or exchange of property held for personal use (such as your home) on Form 8949 and Schedule D (Form 1040), as applicable. Loss from the sale or exchange of property held for personal use is not deductible. But if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, report the transaction on Form 8949 and Schedule D, even though the loss is not deductible. See the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949 for information on how to report the transaction.

Long and Short Term

Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. The time you own an asset before disposing of it is the holding period.

If you received a Form 1099-B, (or substitute statement) box 1c may help you determine whether the gain or loss is short-term or long-term.

If you hold a capital asset 1 year or less, the gain or loss from its disposition is short term. Report it in Part I of Form 8949 and/or Schedule D, as applicable. If you hold a capital asset longer than 1 year, the gain or loss from its disposition is long term. Report it in Part II of Form 8949 and/or Schedule D, as applicable. 

Table 4-1. Do I Have a Short-Term or Long-Term Gain or Loss?

IF you hold the property...  
THEN you have a...
1 year or less, Short-term capital gain or 
loss.
More than 1 year, Long-term capital gain or 
loss.

These distinctions are essential to correctly arrive at your net capital gain or loss. Capital losses are allowed in full against capital gains plus up to $3,000 of ordinary income. See Capital Gains Tax Rates, later.

Holding period.   To figure if you held property longer than 1 year, start counting on the day following the day you acquired the property. The day you disposed of the property is part of your holding period.

Example.

If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year.

Patent property.   If you dispose of patent property, you generally are considered to have held the property longer than 1 year, no matter how long you actually held it. For more information, see Patents in chapter 2.

Inherited property.   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it.

Installment sale.   The gain from an installment sale of an asset qualifying for long-term capital gain treatment in the year of sale continues to be long term in later tax years. If it is short term in the year of sale, it continues to be short term when payments are received in later tax years.

  
The date the installment payment is received determines the capital gains rate that should be applied not the date the asset was sold under an installment contract.

Nontaxable exchange.   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. That is, it begins on the same day as your holding period for the old property.

Example.

You bought machinery on December 4, 2012. On June 4, 2013, you traded this machinery for other machinery in a nontaxable exchange. On December 5, 2013, you sold the machinery you got in the exchange. Your holding period for this machinery began on December 5, 2012. Therefore, you held it longer than 1 year.

Corporate liquidation.   The holding period for property you receive in a liquidation generally starts on the day after you receive it if gain or loss is recognized.

Profit-sharing plan.   The holding period of common stock withdrawn from a qualified contributory profit-sharing plan begins on the day following the day the plan trustee delivered the stock to the transfer agent with instructions to reissue the stock in your name.

Gift.   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. For more information on basis, see Publication 551, Basis of Assets.

Real property.   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, the day after you took possession of it and assumed the burdens and privileges of ownership.

  However, taking possession of real property under an option agreement is not enough to start the holding period. The holding period cannot start until there is an actual contract of sale. The holding period of the seller cannot end before that time.

Repossession.   If you sell real property but keep a security interest in it and then later repossess it, your holding period for a later sale includes the period you held the property before the original sale, as well as the period after the repossession. Your holding period does not include the time between the original sale and the repossession. That is, it does not include the period during which the first buyer held the property.

Nonbusiness bad debts.   Nonbusiness bad debts are short-term capital losses. For information on nonbusiness bad debts, see chapter 4 of Publication 550.

  

Net Gain or Loss

The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately.

Net short-term capital gain or loss.   Combine your short-term capital gains and losses, including your share of short-term capital gains or losses from partnerships, S corporations, and fiduciaries and any short-term capital loss carryover. Do this by adding all your short-term capital gains. Then add all your short-term capital losses. Subtract the lesser total from the other. The result is your net short-term capital gain or loss.

Net long-term capital gain or loss.   Follow the same steps to combine your long-term capital gains and losses. Include the following items.
  • Net section 1231 gain from Part I, Form 4797, after any adjustment for nonrecaptured section 1231 losses from prior tax years.

  • Capital gain distributions from regulated investment companies (mutual funds) and real estate investment trusts.

  • Your share of long-term capital gains or losses from partnerships, S corporations, and fiduciaries.

  • Any long-term capital loss carryover.

The result from combining these items with other long-term capital gains and losses is your net long-term capital gain or loss.

Net gain.   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Different tax rates may apply to the part that is a net capital gain. See Capital Gains Tax Rates, later.

Net loss.   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. But there are limits on how much loss you can deduct and when you can deduct it. See Treatment of Capital Losses, next.

  

Treatment of Capital Losses

If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you do not have ordinary income to offset it. The yearly limit on the amount of the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return).

Table 4-2. Holding Period for Different Types of Acquisitions

Type of acquisition: When your holding period starts:
Stocks and bonds bought on a securities market Day after trading date you bought security. Ends on trading date you sold security.
U.S. Treasury notes and bonds If bought at auction, day after notification of bid acceptance. If bought through subscription, day after subscription was submitted.
Nontaxable exchanges Day after date you acquired old property.
Gift If your basis is giver's adjusted basis, same day as giver's holding period began. If your basis is FMV, day after date of gift.
Real property bought Generally, day after date you received title to the property.
Real property repossessed Day after date you originally received title to the property, but does not include time between the original sale and date of repossession.

Capital loss carryover.   Generally, you have a capital loss carryover if either of the following situations applies to you.
  • Your net loss is more than the yearly limit.

  • Your taxable income without your deduction for exemptions is less than zero.

If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carryover to 2014.

Example.

Bob and Gloria Sampson sold property in 2013. The sale resulted in a capital loss of $7,000. The Sampsons had no other capital transactions. On their joint 2013 return, the Sampsons deduct $3,000, the yearly limit. They had taxable income of $2,000. The unused part of the loss, $4,000 ($7,000 − $3,000), is carried over to 2014.

If the Sampsons' capital loss had been $2,000, it would not have been more than the yearly limit. Their capital loss deduction would have been $2,000. They would have no carryover to 2014.

Short-term and long-term losses.   When you carry over a loss, it retains its original character as either long term or short term. A short-term loss you carry over to the next tax year is added to short-term losses occurring in that year. A long-term loss you carry over to the next tax year is added to long-term losses occurring in that year. A long-term capital loss you carry over to the next year reduces that year's long-term gains before its short-term gains.

  If you have both short-term and long-term losses, your short-term losses are used first against your allowable capital loss deduction. If, after using your short-term losses, you have not reached the limit on the capital loss deduction, use your long-term losses until you reach the limit.

To figure your capital loss carryover from 2013 to 2014 use the Capital Loss Carryover Worksheet in the 2013 Instructions for Schedule D (Form 1040).

Joint and separate returns.   On a joint return, the capital gains and losses of spouses are figured as the gains and losses of an individual. If you are married and filing a separate return, your yearly capital loss deduction is limited to $1,500. Neither you nor your spouse can deduct any part of the other's loss.

  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 jointly and are now filing separately, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss.

Death of taxpayer.   Capital losses cannot be carried over after a taxpayer's death. They are deductible only on the final income tax return filed on the decedent's behalf. The yearly limit discussed earlier still applies in this situation. Even if the loss is greater than the limit, the decedent's estate cannot deduct the difference or carry it over to following years.

Corporations.   A corporation can deduct capital losses only up to the amount of its capital gains. In other words, if a corporation has a net capital loss, it cannot be deducted in the current tax year. It must be carried to other tax years and deducted from capital gains occurring in those years. For more information, see Publication 542.

Capital Gains Tax Rates

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 gains 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 2013, the maximum tax rates for individuals are 0%, 15%, 20%, 25%, and 28%. Also, individuals, use the Qualified Dividends and Capital Gain Worksheet in the Instructions for Form 1040, or the Schedule D Tax Computation Worksheet in the Instructions for Schedule D (Form 1040) (whichever applies) to figure your tax if you have qualified dividends or net capital gain.

For more information, see chapter 4 of Publication 550. Also see the Instructions for Schedule D (Form 1040).

Unrecaptured section 1250 gain.   Generally, this is the part of any long-term capital gain on section 1250 property (real property) that is due to depreciation. Unrecaptured section 1250 gain cannot be more than the net section 1231 gain or include any gain otherwise treated as ordinary income. Use the worksheet in the Schedule D instructions to figure your unrecaptured section 1250 gain. For more information about section 1250 property and net section 1231 gain, see chapter 3.

Form 4797

Use Form 4797 to report:

  • The sale or exchange of:

    1. Property used in your trade or business;

    2. Depreciable and amortizable property;

    3. Oil, gas, geothermal, or other mineral properties; and

    4. Section 126 property.

  • The involuntary conversion (from other than casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit.

  • The disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of your trade or business).

  • The disposition of capital assets not reported on Schedule D.

  • The gain or loss (including any related recapture) for partners and S corporation shareholders from certain section 179 property dispositions by partnerships (other than electing large partnerships) and S corporations.

  • The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less.

  • Gains or losses treated as ordinary gains or losses, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f).

You can use Form 4797 with Form 1040, 1065, 1120, or 1120S.

Section 1231 gains and losses.   Show any section 1231 gains and losses in Part I. Carry a net gain to Schedule D (Form 1040) as a long-term capital gain. Carry a net loss to Part II of Form 4797 as an ordinary loss.

  If you had any nonrecaptured net section 1231 losses from the preceding 5 tax years, reduce your net gain by those losses and report the amount of the reduction as an ordinary gain in Part II. Report any remaining gain on Schedule D (Form 1040). See Section 1231 Gains and Losses in chapter 3.

Ordinary gains and losses.   Show any ordinary gains and losses in Part II. This includes a net loss or a recapture of losses from prior years figured in Part I of Form 4797. It also includes ordinary gain figured in Part III.

Mark-to-market election.   If you made a mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Form 8949 and Schedule D (Form 1040). See the Instructions for Form 4797. Also see Special Rules for Traders in Securities, in chapter 4 of Publication 550.

Ordinary income from depreciation.   Figure the ordinary income from depreciation on personal property and additional depreciation on real property (as discussed in chapter 3) in Part III. Carry the ordinary income to Part II of Form 4797 as an ordinary gain. Carry any remaining gain to Part I as section 1231 gain, unless it is from a casualty or theft. Carry any remaining gain from a casualty or theft to Form 4684.


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