Schedule D: Capital Gains and Losses

Transcription

1 Schedule D: Capital Gains and Losses Contents Determine cost basis Figure gain or loss Report gains and losses Compute the gain on section 1250 property Objectives Schedule D, Capital Gains and Losses Form 8949, Sales and Other Dispositions of Capital Assets Form 6781, Gains and Losses From Section 1256 Contracts and Straddles Additional References Publication Selling Your Home Publication Business Expense Publication Sales and Other Dispositions of Assets Publication Investment Income and Expenses Publication Basis of Assets Publication Survivors, Executors, and Administrators Publication Home Mortgage Interest Deduction ****************************************************************************** Capital gains and losses are reported on Form 1040, line 13 (Schedule D, Capital Gains and Losses) or line 14 (Form 4797, Sales of Business Property). Some Form 4797 sales are covered in this module. More detailed information is provided in the Form 4797: Sales of Business Property module. DETERMINING COST BASIS In order to determine if a gain or loss exists, the basis of the property must be established. The basis of property purchased is usually its cost. The cost is the amount paid in cash, debt obligations, other property or services. Cost also includes the amounts paid for the following: sales tax, freight, installation and testing, excise taxes, legal and accounting fees, revenue stamps, recording fees and real estate taxes assumed for seller. Silver Level Document: Schedule D 1

2 The basis of stocks and bonds is determined by the purchase price plus any cost of purchase or sale such as commissions and recording fees or transfer fees. Average basis can be used for mutual fund shares purchased at different times and prices and the shares put on deposit in an account kept by a custodian or agent. Average basis cannot be used for stocks or bonds purchased at different times and prices. For real estate (real property) the cost basis must be allocated between land and building. Land is not depreciable property and its cost basis must be calculated separately. For real property, certain fees and other expenses are part of the basis in the property such as certain settlement fees, closing costs, legal fees, surveys, owner s title insurance, and sales commissions. Points paid to obtain a loan (including a mortgage, second mortgage, line of credit, or home equity loan) are not added to the basis of the related property. Generally, the points are deducted over the term of the loan. For more information on deducting points, see Publication 936, Home Mortgage Interest Deduction. Special rules apply to points paid by the buyer and seller to obtain a mortgage to purchase a main home. Points can be deducted in full for the first year in which they are 2 Silver Level Document: Schedule D

3 paid if certain requirements are met. Reduce the basis of the home by any sellerpaid points. If a taxpayer builds property or has assets built for them, the expenses for the construction is part of the taxpayer s basis. These expenses may include the cost of land, the cost of labor and materials, architect s fees, building permit charges, payments to contractors, payments to rent equipment and inspection fees. The value of the taxpayer s own labor, or any other labor the taxpayer did not pay for, cannot be included in the basis of any property the taxpayer constructs. Property Received as a Gift The basis of property received as a gift is usually the donor s adjusted basis plus any gift tax paid, at the time of the gift. If the giver s adjusted basis is greater than the item s FMV at the time of the gift, and the recipient sells the item at a loss, the basis for determining the loss is limited to FMV at the time of the gift. Inherited Property The basis in property inherited from a decedent is generally one of the following: The FMV of the property on the date of the decedent s death. The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. The decedent s adjusted basis in land due to qualified conservation easement. See Form 706, United States Estate and Generation-Skipping Transfer Tax Return, for additional information. If a federal estate tax return does not have to be filed, the basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. See Publication 559, Survivors, Executors, and Administrators, for additional information on inherited property. Adjusted basis. The adjusted basis of property is the original cost or other basis plus certain additions and minus certain reductions, such as depreciation and casualty losses. In determining gain or loss, the costs of transferring property to a new owner, such as selling expenses, are added to the adjusted basis of the property. Amount realized. The amount realized from a sale or exchange is the total of all the money received plus the fair market value of all property or services received. The amount realized also includes any of the taxpayer s liabilities that were Silver Level Document: Schedule D 3

4 assumed by the buyer and any liabilities to which the property transferred is subject, such as real estate taxes or a mortgage. Amount recognized. The gain or loss determined from a sale of property is usually a recognized gain or loss for tax purposes. Recognized gains must be included in gross income. Recognized losses are deductible from gross income. A loss from the disposition of property held for personal use is not deductible. Fair Market Value (FMV). The price that property brings when it is offered for sale by someone who is willing but not obligated to sell, and is bought by someone who is willing or desires to buy but is not compelled to do so. Capital Assets For the most part, everything owned and used for personal purposes or investment is a capital asset. Some examples are stocks and bonds, a house owned and used by the taxpayer and family, household furnishings, cars, coins or stamp collections, gems, jewelry and gold, silver and other metals. Property held for personal use is a capital asset. Gain from the sale of personal property is a capital gain. Loss from the sale of personal property is not deductible. A loss relating to personal-use property is deductible only if it results from a casualty or theft. Investment property (i.e., stocks and bonds) is a capital asset and a gain or loss from its sale is a capital gain or loss and the loss is deductible. Noncapital Assets A noncapital asset is property that is not a capital asset. Some examples are inventory held for sale to customers, depreciable property used in a trade or business (even if fully depreciated), accounts receivable, copyright, and supplies regularly used in a trade or business. SALE OF PROPERTY A sale is a transfer of property for money or a mortgage, note or other promise to pay money. Gain or loss is usually realized when property is sold or exchanged. See Publication 523, Selling Your Home, for additional information on selling a home. 4 Silver Level Document: Schedule D

5 NONTAXABLE TRADES Certain trades of property are not taxable. This means any gain from the trades is not recognized, and any loss cannot be deducted. The gain or loss will not be recognized until the replacement property is sold or otherwise disposed of. Like-Kind Exchanges The trade of property for the same kind of property is the most common type of nontaxable exchange. To qualify as a like-kind exchange, both the property transferred and the property received must be held for business or investment purposes and has the same class life. For depreciation purposes, the basis of the property received is the same as the basis of the property that was given up with certain adjustments. Exchange expenses such as brokerage commissions, attorney fees, etc., are added to the basis of the like-kind property received. If a taxpayer traded property in a like-kind exchange and also paid money, the basis of the property received is the basis of the property given up increased by the money that was paid. HOW TO FIGURE GAIN OR LOSS Gain or loss is usually realized when property is sold or exchanged. A gain is the amount realized from a sale or exchange of property that is more than its adjusted basis. A loss is the adjusted basis of the property that is more than the amount realized. REPORTING GAINS AND LOSSES Schedule D is used to report sales, exchanges, and other disposition of capital assets. Before completing Schedule D, one or more of the following forms may also have to be completed: Form Sales and Other Dispositions of Capital Assets Form Like-Kind Exchanges Form Sales of Business Property Form Installment Sale Income Form Casualties and Thefts (Section B Business and Income Producing Property) Silver Level Document: Schedule D 5

6 If the Adjusted basis is more than the amount realized Amount realized is more than the adjusted basis Then there is a Loss Gain Taxpayers should receive Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, or substitute Form 1099-B reporting sales of stocks, bonds, mutual funds, etc. Form 1099-B has boxes for reporting the date of acquisition (box 1b), whether the gain or loss is short term or long term (box 1c), cost or other basis (box 3), amount of loss due to wash sale (box 5), and whether the property sold is a covered or noncovered security transaction (box 6). The taxpayer may be required to recognize gain from the receipt of cash, stock, or other property that was exchanged for the corporations stock (box 8). Covered/Noncovered Securities The cost basis reporting requirements to the IRS apply only to the disposition of covered securities that occur on or after their effective date. A covered security is the type of security purchased or acquired on or after its effective date as determined by Congress and the IRS. The legislation is rolling it out in three phases, which started in The effective dates of covered securities are: Equity securities acquired on or after January 1, 2011 Mutual fund and dividend reinvestment plan (DRIP) shares acquired on or after January 1, 2012 Debt securities, options, and all other financial instruments acquired on or after January 1, 2014 Noncovered securities are any securities purchased or acquired before the above effective dates. Transactions involving assets purchased and held prior to these effective dates will continue to be reported as they have been in the past, meaning there will be no detailed cost basis reporting to the IRS on the sales of noncovered securities - only gross proceeds. It will still be the taxpayer s responsibility to report the transactions on their tax returns along with the proper cost basis on noncovered securities. If a taxpayer acquired securities prior to the dates listed above, they will be required to provide the cost basis information for any transactions that occur from his or her own records. So it is important that taxpayers keep accurate records of 6 Silver Level Document: Schedule D

7 when stocks, bonds, etc., were purchased, at what price they were purchased and any costs associated with the purchases such as commissions and sales charges. Many brokerage firms and financial institutions provide a combined year-end statement that includes all relevant 1099s (INT, DIV, B, OID, etc.) and a section that gives the cost basis, date of purchase and other important tax-related information for transactions involving noncovered securities as well. All sales of stocks, bonds, etc., must be reported on Schedule D using Form 8949 whether the taxpayer receives a Form 1099-B or not. On real estate transactions the taxpayer generally will receive a Form 1099-S, Proceeds from Real Estate Transactions. Form Sales and Other Dispositions of Capital Assets Form 8949 is for reporting the details of individual investment sales. Gain and loss information is recorded on one or more 8949 forms based on the information provided on the 1099-B. Enter on Schedule D the combined totals for all Forms On Form 8949, use Part I for short-term transactions (page 1) and Part II for longterm transactions (page 2). Select the appropriate checkbox at the top of Form 8949 according to whether basis was reported on the Form 1099-B received, or not, or if no Form 1099-B was received. A Short-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS (covered). B Short-term transactions reported on Form(s) 1099-B showing basis was not reported to the IRS (non-covered). C Short-term transactions not reported to you on Form 1099-B D Long-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS E Long-term transactions reported on Form(s) 1099-B showing basis was not reported to the IRS F Long-term transactions not reported to you on Form 1099-B Generally, Form 1099-B will show information in boxes 1b, 1c, and 3, for stocks bought and sold in Complete the Form(s) 8949 using the information from Form 1099-B or substitute Form 1099-B. If there is adjustment to the gain or loss a Silver Level Document: Schedule D 7

8 code may have to be entered in column (b) and an adjustment made in column (g). For more details on adjustment codes see the instructions for Schedule D and Form Form Form 8453 is used when submitting by paper certain forms and documents supporting a tax return filed electronically. Check the box on Form 8453 for Form 8949, Sales and Other Dispositions of Capital Assets, (or a statement with the same information), if you elect not to report your transactions electronically on Form Long and Short Term Capital Gains The holding period for short-term capital gains and losses is one year or less. The holding period for long-term capital gains and losses is more than one year. To figure the holding period, begin counting on the day after the property was received and include the day on which it was disposed of. A short-term gain is subject to the taxpayer s regular tax rate. A summary of short term gain or loss is reported on Schedule D, Part I. Details of the gain or loss are reported on Form Nonbusiness bad debts are short-term capital losses. Inherited property is always long-term. A summary of long term capital gains are reported on Schedule D, Part II with the details being reported on Form The following transactions should also be reported in Part II of Schedule D. Undistributed long term capital gains from a mutual fund Taxpayer s share of long term capital gains or losses from partnerships, S corporations and fiduciaries All capital gain distributions from mutual funds and REITs not reported directly on line 13 of Form 1040 and Long term capital loss carryovers Capital Gain Tax Rates Maximum capital gain tax rates are shown in the following table. 8 Silver Level Document: Schedule D

9 Collectibles include works of art, rugs, antiques, metals (such as gold, silver, and platinum bullion), gems, stamps, coins, alcoholic beverages, and certain other intangible property. Collectibles gain includes gain from the sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles. Unrecaptured section 1250 gain. Generally, this is any part of the capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than the 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 unrecaptured section 1250 gain. Qualified Dividends Qualified dividends are the ordinary dividends that are subject to the same 0% or 15% maximum tax rate that applies to net capital gain. They are shown in box 1b of Form 1099-DIV. Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are subject to the 0% rate. To qualify for the 0% or 15% maximum rate, all of the following requirements must be met: The dividends must have been paid by a U.S. corporation or a qualified foreign corporation. The dividends are not of the type listed later under Dividends that are not qualified dividends The holding period is met (discussed next) Silver Level Document: Schedule D 9

10 The stock that pays the dividend must have been held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The exdividend date is the first date following the declaration of a dividend on which the buyer of a stock will not receive the next dividend payment. Instead, the seller will get the dividend. When counting the number of days the stock was held, include the day the stock was disposed of, but not the day it was acquired. A foreign corporation is a qualified foreign corporation if it meets any of the following conditions: The corporation is incorporated in a U.S. possession. The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the U.S. Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. The corporation does not meet the 2 conditions above, but the stock is readily tradable on an established securities market in the United States. Dividends that are not qualified dividends include: Capital gain distributions. Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, federal savings and loan associations, and similar financial institutions. Dividends from a corporation that is a tax-exempt organization or farmers cooperative during the corporation s tax year in which the dividends were paid or during the corporation s previous tax year. Dividends paid by a corporation on employer securities which are held by an employee stock ownership plan (ESOP) maintained by that corporation. Dividends on any share of stock to the extent that the taxpayer is obligated to make related payments for positions in substantially similar or related property. Payments in lieu of dividends, but only if the taxpayer knows or have reason to know that the payments are not qualified dividends. Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent the taxpayer knows or has reason to know the payments are not qualified dividends. If the taxpayer has qualified dividends, the tax must be figured by completing either the Qualified Dividends and Capital Gain Tax Worksheet or Schedule D Tax 10 Silver Level Document: Schedule D

11 Worksheet. Enter qualified dividends on line 2 of the required worksheets. Capital Gain Distributions Line 13 of Schedule D is for capital gain distributions. However, capital gain distributions do not have to be reported on Schedule D if all of the following are true: The only amounts that are required to be reported on Schedule D are capital gain distributions from box 2a of Form 1099-DIV (or substitute statement). There is not an amount in box 2b, 2c or 2d of Form 1099-DIV. If these statements are true, report capital gain distributions directly on line 13 of Form 1040 and check the box on that line. If Schedule D is not used, then use the Qualified Dividends and Capital Gains Tax Worksheet to compute the tax that is entered on line 44 of Form Combine net short-term capital gain or loss with net long-term capital gain or loss to arrive at total net gain or loss. Capital Loss Carryover If the taxpayer has a total net loss on line 16 of Schedule D that is more than the yearly limit on capital deductions ($3,000, or $1,500 if MFS), the unused part can be carried to the next year. If part of the loss is still unused, it can be carried over to later years until it is completely used up. The amount of the capital loss carryover is the amount of the total net loss that is more than the lesser of: 1. The allowable capital loss deduction for the year, or 2. The taxable income increased by the allowable capital loss deduction for the year and the deduction for personal exemptions. When figuring the amount of any capital loss carryover to the next year, the current year s allowable deduction must be taken into account, whether or not it was claimed and whether or not a return for the current year was filed. If the taxpayer is not required to file a tax return for the year, but also has a capital loss carryforward, the taxpayer s taxable income for the year must still be calculated in order to determine the amount of carryover to the next year. If the deductions are more than the gross income for the year, use the negative taxable income in computing the amount in item (2). The Capital Loss Carryover Worksheet should be completed to compute any allowed capital loss carryover. Silver Level Document: Schedule D 11

12 Example: Brad, who is single, sold some stock in 2015 and had a short-term loss of $5,000 and a long-term loss of $2,000. On Form 1040, his only other income is $6,000 of wages and his AGI is $3,000 (after the $3,000 capital loss). Brad s standard deduction (line 40) is $5,950 and line 41 is -$2,950. His shortterm carryover is $4,700 and his long-term carryover is $2, Silver Level Document: Schedule D

13 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 income tax return filed for the decedent. The decedent s estate cannot deduct any of the loss or carry it over to following years. Sale of Stocks Shares of stock are generally bought on different days and for different prices. Each group of shares bought on the same day at the same price is considered a block. When selling stock, the investor can direct the broker to sell a specific block, part of a block or all of the stock. Making this specification can make a difference in determining the holding period for gain or loss. If there is no specification of what block to sell, the broker must sell the first block purchased first. Traders in Securities Traders in securities are engaged in the business of buying and selling securities for their own account. To be engaged in business as a trader in securities the taxpayer: Must seek to profit from daily market movements in the prices of securities and not from dividends, interest or capital appreciation. The activity must be substantial. The activity must be carried on with continuity and regularity. Silver Level Document: Schedule D 13

14 The following facts and circumstances should be considered in determining if the activity is a business: Typical holding periods for securities bought and sold. The frequency and dollar amounts of trades during the year. The extent to which the individual pursues the activity to produce income for a livelihood. The amount of time devoted to the activity. If the nature of the trading activities does not qualify as a business, he or she is considered an investor, and not a trader. It does not matter whether the taxpayer calls himself or herself a trader or a day trader. Further, a taxpayer may be a trader in some securities and hold other securities for investment. The special rules for traders do not apply to the securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader s records on the day he or she acquires them. The tax treatment of sales of securities held in connection with a trading business depends on whether a trader has previously made an election under section 475(f) to use the mark-to-market method of accounting. If the mark-to-market election was not made, then the gains and losses from sales of securities are treated as capital gains and losses that must be reported on Schedule D. Some individuals want to be incorrectly categorized as traders or day traders so they can report the investment activities on Form The benefit to making the mark-to-market election is that traders can take an ordinary loss deduction for short-term trading losses (not subject to the $3,000 per year limit and the wash sale rules do not apply) by reporting the investment activity on Form Interest expenses and other investment expenses are deducted by a trader on Schedule C if the expenses are from the trading business. The limit on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. Gains and losses from selling securities as part of a trading business are not subject to self-employment tax. 14 Silver Level Document: Schedule D

15 Worthless Securities Taxpayers are allowed to take a capital loss for securities that become completely worthless during the year. The securities are treated as being sold on the last day of the year that the stock became worthless. To abandon a security, the taxpayer must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Facts and circumstances determine whether the transaction is properly characterized as abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend or gift. The IRS allows a 7-year period of limitations (as opposed to the normal 3-year period) within which to file an amended return due to the losses from worthless securities. Wash Sale A wash sale occurs when stock is sold or traded at a loss and within 30 days before or after the sale, substantially identical stock is bought. A loss on a wash sale is not deductible. The disallowed loss is added to the cost of the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Most year-end brokerage statements will indicate trades that were wash sales. Short Sales Short sales occur when a taxpayer sells borrowed property (generally stock) and repays the lender (generally a stock brokerage firm) at a later date with substantially identical property. The transaction is closed when the taxpayer delivers the replacement property to the lender. Investors generally enter into short sales contracts when they expect the price of the stock to decline in the short term. Gain or loss on a short sale is recognized when the stock is delivered to the lender on the settlement date. A short sale can be looked at as the reverse of a long sale where the investor first purchases and later sells stock with the expectation that the price of the stock will increase. Section 1250 Property Section 1250 property is real property that is or has been subject to an allowance for depreciation and that is not and never has been section 1245 property. A gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Unrecaptured section 1250 gain. Generally, this is any part of the capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than the net section 1231 gain), reduced by any let loss in the 28% group. Silver Level Document: Schedule D 15

16 Additional Depreciation If section 1250 property is held for longer than 1 year, the additional depreciation is the excess of actual depreciation (including any special depreciation allowance) over depreciation figured using the straight line method. If section 1250 property is held for 1 year or less, all the depreciation is additional depreciation. Additional depreciation does not apply if any of the following conditions apply: Depreciation was calculated using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method, the property was held longer than 1 year, and if the property was qualified property, a timely election was made not to claim any special depreciation allowance. Disposition of residential low-income rental property held for 16 2/3 years or longer. The alternate ACRS method was chosen for the types of 15, 18, or 19-year real property covered by the section 1250 rules. Dispositions of residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986 if MACRS was used), held longer than 1 year, and if the property was qualified property, a timely election was made not to claim any special depreciation allowance. These properties were depreciated using the straight line method. SECTION 1256 CONTRACTS Futures, options and foreign currency contracts are known as section 1256 contracts. These contracts often remain open at the end of the year. Under the mark-to-market rules, these open items are treated as if they were sold at the fair market value on the last day of the year. The gain or loss is treated as 60% longterm and 40% short-term. When the taxpayer later disposes of the section 1256 contract, the gain or loss is adjusted for previously recognized gain or loss. Taxpayers who trade in futures contracts receive a Form 1099-B showing their activity for the year in boxes 10 through 13. Box 9. Shows the profit or loss realized on regulated futures or foreign currency contracts closed during Box 10. Shows any year-end adjustments to the profit or loss on open contracts held in the taxpayers account on December 31, Silver Level Document: Schedule D

17 Box 11. Shows the unrealized profit or loss on open contracts held in the taxpayer s account on December 31, These are considered sold as of that date. This will become an adjustment reported in box 10 in Box 12. Boxes 9, 10, and 11 are all used to figure the aggregate profit or loss on regulated futures or foreign currency contracts for the year. Include this amount on the 2014 Form The box 12 amount is entered on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles, line 1 column (b) or (c). The gain or loss is then computed on line 8 or line 9 and carried to line 4 or line 11 of Schedule D. Part III of Form 6781 is completed only if the taxpayer has a recognized loss. Securities Futures Contracts A securities futures contract is a contract of sale for future delivery of a single security or of a narrow-based security index. Any gain or loss from the contract is treated as if the investor held the underlying asset itself. If the underlying asset is a capital asset to the investor, any gain or loss on the sale will be treated as a shortterm capital gain or loss regardless of how long the contract was actually held. Security future contracts are subject to wash sale rules. These contracts are not section 1256 contracts (unless they are dealer securities futures contracts). Silver Level Document: Schedule D 17