Frequently Asked Tax Questions And Answers
Keyword: Schedule D
10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
How do I prepare Schedule D for various stocks when records as to the original
purchase price have been lost?
The basis of stocks or bonds you own generally is the purchase price plus the costs
of purchase, such as commissions and recording or transfer fees. If you acquired stock
or bonds other than by purchase, your basis is usually determined by fair market value
or the previous owner's adjusted basis.
The basis of stock must be adjusted for certain events that occur after purchase.
For example, if you receive more stock from nontaxable stock dividends or stock splits,
you must reduce the basis of your original stock. You must also reduce your basis
when you receive nontaxable distributions, because these are a return of capital.
The taxpayer has the burden of proving the basis of property.
Failure to prove cost results in a basis determined by the IRS or even a basis of
zero.
Except for certain mutual fund shares, you cannot use an average price per share
to figure the gain or loss on the sale of stock.
Refer to Stocks and Bonds under Basis of
Investment Property in chapter 4 of Publication 550, Investment
Income and Expenses .
References:
How do I figure the cost basis when the stocks I'm selling were purchased
at various times and at different prices?
If you can identify which shares of stock you sold, your basis is what you paid
for the shares sold (plus sales commissions). If you sell a block of the same kind
of stock, you can report all the shares sold at the same time as one sale, writing VARIOUS in the "date acquired" column of Form 1040, Schedule D (PDF). However, what you enter into the "cost or other basis" column
is the total of all the acquisition costs of the shares sold.
If you cannot adequately identify the shares you sold and you bought the shares
at various times for different prices, the basis of the stock sold is the basis of
the shares you acquired first (first-in first-out). Except for certain mutual fund
shares, you cannot use the average price per share to figure gain or loss on the sale
of stock.
For more information, refer to Publication 550, Investment Income and Expenses.
References:
Can the cost averaging method be used for calculating the cost basis of
stocks, or is it limited only to mutual fund shares?
The average basis method may be used only for mutual fund shares that were purchased
at various times for various prices if the shares are left in the custody of a custodian
or agent in an account maintained for the acquisition or redemption of the shares.
References:
If a stock was sold short prior to the end of the year but was purchased
in the next year to cover the short sale, when should it be included on Schedule D?
Generally, gain or loss is realized on a short sale when you deliver the stock
that "covers" the short sale, not at the time you sell short. Gain (but not loss)
on a short sale may be recognized earlier under constructive sale rules if the taxpayer
subsequently acquires the same or substantially identical property to the property
sold short.
Refer to Constructive Sales of Appreciated Financial Positions in
Chapter 4 of Publication 550, Investment Income and Expenses for more details
and exceptions.
References:
Since the date acquired is after the date sold, how should I report a short
sale on Schedule D?
This can be confusing with a short sale since it is really a two-step process.
The date sold is the date that the transaction closes, which is the date you deliver
to the lender the stock or (other assets) that cover the short sale. The date acquired
is the date you purchased the stock (or other assets) delivered to the lender.
Normally, the short sale of a capital asset is considered to result in short-term
gain or loss since the stocks (or other assets) that are delivered to "cover" the
short sale are purchased the same time as the delivery. However, if stock held by
the taxpayer for greater than one year is used cover the short sale, then the gain
or loss is long-term.
References:
I held stock substantially identical to the stock I sold short, but I covered
the short sale with shares that I purchased later. How does that affect the way I
report the short sale?
If you held substantially identical stock at the time of the short sale, but you
subsequently acquired new stock to close the transaction, gain or loss would still
be recognized when you close the short sale. However, the loss would be long-term
if you held the substantially identical property more than one year at the time of
the short sale, regardless of what stock was delivered to close the transaction.
For more information on constructive sales, refer to Constructive
Sale treatment for Certain Appreciated Positions in Chapter 4 of Publication 550, Investment
Income and Expenses.
References:
Should I advise the IRS why amounts reported on Form 1099-B do not agree
with my Schedule D for proceeds from short sales of stock not closed by the end of
year that I did not include?
If you are able to defer the reporting of gain or loss until the year the short
sale closes, the following will allow you to reconcile your Forms 1099-B to your Schedule
D and still not recognize the gain or loss from the short sale:
Your total of lines 3 and 10, column (d), on your Schedule D should equal your
total gross proceeds reported to you on all Forms 1099-B.
In columns (b) and (c) write "SHORT SALE," and
in column (f) write "See attached statement."
In your statement, explain the details of your short sale and that it has not
closed as of the end of the year. Include your name as it appears on the return and
your social security number.
For more on these rules and exceptions that may apply, refer to Chapter 4 of Publication 550, Investment Income and Expenses.
References:
How do I determine my gain or loss on the proceeds reported on Form 1099-B
from a short sale entered into last year if I have not yet bought the stock to deliver
back to my broker?
In general, you cannot determine your gain or loss until you purchase the stock
that you are going to deliver to close the short sale. You still need to report the
gross proceeds on Schedule D so that the total of lines 3 and 10, column (d), reconciles
with all of your Forms 1099-B.
Also, in columns b and c write "short sale." In column f, write "see attached statement."
In the statement, explain the details of the short sale and that it is not closed.
Include your name as it appears on your return and your social security number.
For more information on rules and exceptions that may apply, refer to Chapter 4
of Publication 550, Investment Income and Expenses.
References:
I am a day trader. How do I go about paying tax on the gain as a business
and not on Schedule D?
Special rules apply if you are a trader in securities in the business of
buying and selling securities for your own account. To be engaged in business as a
trader in securities, you must meet all the following conditions.
. You must seek to profit from daily market movements in the prices of securities
and not from dividends, interest, or capital appreciation.
. Your activity must be substantial.
. You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your
activity is a securities trading business.
. Typical holding periods for securities bought and sold.
. The frequency and dollar amount of your trades during the year.
. The extent to which you to produce income for a livelihood.
. The amount of time you devote to the activity.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF),
Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses,
unless you file an election to change your method of accounting.
If you qualify and elect to change to the mark-to-market method of accounting,
you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property.
The mark-to-market method of accounting cannot be revoked without the consent of
the Secretary. Though there is no publication specific to day traders, information
for traders in securities and commodities is in Section 475(f) of the Internal Revenue
Code, Revenue Procedure 99-17, Revenue Procedure 2002-19, and Publication 550, Investment
Income and Expenses.
For details about not-for-profit activities, refer to Chapter 1 in Publication 535, Business
Expenses. That chapter explains how to determine whether your activity is carried
on to make a profit and how to figure the amount of loss you can deduct.
Regardless of whether your day trading activities are reported on Schedule D or
on Form 4797, you may need to pay tax on your gains by following the requirements
for making estimated tax payments on Form 1040-ES (PDF), Estimated
Tax for Individuals.
References:
10.3 Capital Gains, Losses/Sale of Home: Mutual Funds (Costs, Distributions, etc.)
How do you list gains from mutual funds on Schedule D and Form 1040 when
some mutual funds list short-term capital gains separately and others lump short-term
capital gains and taxable dividends together as dividends?
Only the capital gain distributions are reported on Form 1040, Schedule D (PDF), Capital Gains and Losses . They are reported in
Part II as long-term capital gains. Short-term capital gains are taxed as ordinary
income and are therefore treated as ordinary dividends on Form 1099-DIV. They are
reported on line 9a of Form 1040 (PDF) or Form 1040A (PDF).
Because many mutual fund companies send out annual fund statements as well as Forms
1099-DIV, or "consolidated statements," some confusion has arisen regarding short-term
capital gains. The purpose of Form 1099-DIV is to provide you with information to
report income correctly on your tax return.
The annual report often breaks down the income from fund activity as dividends,
tax-exempt dividends, short-term capital gains, long-term capital gains, returns of
capital, and undistributed capital gains. Form 1099-DIV, on the other hand, will show
only ordinary dividends (which includes the fund's short-term capital gains), capital
gain distributions, and returns of capital (nontaxable distributions), and qualified
dividends.
Mutual fund companies may combine the annual fund information with the Form 1099-DIV
information into a consolidated statement. If this is what you receive, look for the
part of the statement identified as the Form 1099-DIV or that contains language such
as "in lieu of Form 1099-DIV."
References:
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