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10.1 Capital Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.)
What is the basis of property received as a gift?
To figure the basis of property you get as a gift, you must know its adjusted basis
to the donor just before it was given to you. You also must know its fair market value
(FMV) at the time it was given to you. If the FMV of the property at the time of the
gift is less than the donor's adjusted basis, your basis depends on whether you have
a gain or loss when you dispose of the property. Your basis for figuring gain is the
same as the donor's adjusted basis, plus or minus any required adjustments to basis
while you held the property. Your basis for figuring a loss is the FMV of the property
when you received the gift, plus or minus any required adjustments to basis while
you held the property. See Adjusted Basis in Publication 551, Basis of Assets.
If you use the donor's adjusted basis for figuring a gain and get a loss, and then
use the FMV for figuring a loss and get a gain, you have neither a gain or loss on
the sale or disposition of the property.
If the FMV is equal to or greater than the donor's adjusted basis, your basis is
the donor's adjusted basis at the time you received the gift. Increase your basis
by all or part of any gift tax paid, depending on the date of the gift. Also, for
figuring gain or loss, you must increase or decrease your basis by any required adjustments
to basis while you held the property. See Adjusted Basis in Publication 551, Basis
of Assets.
If you received a gift before 1977, increase your basis in the gift (the donor's
adjusted basis) by any gift tax paid on it. However, do not increase your basis above
the FMV of the gift at the time it was given to you.
If you received a gift after 1976, increase your basis by the part of the gift
tax paid on it that is due to the net increase in value of the gift. Figure the increase
to basis by multiplying the gift tax paid by the following fraction. The numerator
of the fraction is the net increase in value of the gift and the denominator is the
amount of the gift.
The net increase in value of the gift is the FMV of the gift less the donor's adjusted
basis. The amount of the gift is its value for gift tax purposes, after reduction
by any annual exclusion and any marital or charitable deduction that applies to the
gift. For more information on the gift tax, please see Publication 950, Introduction
to Estate and Gift taxes.
For additional information on this subject see Gifts.
References:
I have investment property. Can you explain the term basis
of assets?
Basis is your investment in property for tax purposes. Before you can figure any
gain or loss on a sale, exchange, or other disposition of property, or figure allowable
depreciation, you must determine the adjusted basis. Adjusted basis is the result
of increasing or decreasing your original basis according to certain events. Your
original basis is usually your cost to acquire the asset.
Increases to basis include but are not limited to:
. Improvements having a useful life of more than a year
. Assessments for local improvements
. Sales tax
. The cost of extending utilities lines to the property
. Legal fees such as the cost of defending or perfecting title
. Zoning costs
Decreases to basis include but are not limited to:
. Depreciation
. Nontaxable corporate distributions
. Casualty and theft losses
. Easements
. Rebates from the manufacturer or seller
Additional information on basis can be found in Publication 551, Basis
of Assets, or Tax Topic 703, Basis of Assets.
References:
I sold my home last year. Do I have to report the sale?
Report the sale of your main home on your tax return only if you have a gain and
at least part of it is taxable, or you have a gain and choose not to exclude it. Report
any taxable gain on Form 1040, Schedule D (PDF), Capital
Gains and Losses. Form 2119, Sale of Your Home is obsolete beginning in 1998.
For more information, refer to Publication 523, Selling Your Home.
References:
I sold my principal residence this year. What form do I need to file?
If you meet the ownership and use tests, you will generally only need to report
the sale of your home if your gain is more than $250,000 ($500,000 if married filing
a joint return). This means that during the 5-year period ending on the date of the
sale, you must have:
Owned the home for at least 2 years (the ownership test), and
Lived in the home as your main home for at least 2 years (the use test).
If you owned and lived in the property as your main home for less than 2 years,
you may still be able to claim an exclusion in some cases. The maximum amount you
can exclude will be reduced. If you are required or choose to report a gain, it is
reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses .
If you were on qualified extended duty in the U.S. Armed Services or the Foreign
Service you may suspend the five-year test period for up to 10 years. You are on qualified
extended duty when:
At a duty station that is at least 50 miles from the residence sold, or
When residing under orders in government housing, for more than 90 days or for
an indefinite period.
This change applies to home sales after May 6, 1997. You may use this provision
for only one property at a time and one sale every two years.
For additional information on selling your home, refer to Publication 523, Selling
Your Home .
References:
If I sell my home and use the money I receive to pay off the mortgage, do
I have to pay taxes on that money?
It is not the money you receive for the sale of your home, but the amount of gain
on the sale over your cost, or basis, that determines whether you will have to include
any proceeds as taxable income on your return. You may be able to exclude any gain
from income up to a limit of $250,000 ($500,000 on a joint return in most cases).
If you can exclude all of the gain, you do not need to report the sale on your tax
return.
For additional information on selling your home, refer to Publication 523, Selling
Your Home.
References:
If I take the exclusion of capital gain tax on the sale of my old home this
year, can I also take the exclusion again if I sell my new home in the future?
With the exception of the 2-year waiting period, there is no limit on the number
of times you can exclude the gain on the sale of your principle residence so long
as you meet the ownership and use tests.
References:
What is the amount of capital gains from the sale of a home that can be
excluded if sold in less than the two year waiting period?
If you owned and lived in the property as your main home for less than 2 years,
you may still be able to claim an exclusion in some cases. The maximum amount you
can exclude will be reduced.
You can claim this reduced exclusion if either of the following is true.
(1) You did not meet the ownership and use tests on a home you sold due to:
. health reasons
. a change in place of employment
. to the extent provided by regulations, unforeseen circumstances. (see below)
(2) Your exclusion would have been disallowed because of the rule on selling more
than one home in a two year period, except you sold the home due to:
. health reasons
. a change in place of employment
. to the extent provided by regulations, unforeseen circumstances. (see below)
Use the worksheet in Publication 523, Selling Your Home, to figure
your reduced exclusion.
The IRS has issued temporary regulations. These regulations provide guidelines
for taxpayers with reduced maximum exclusion circumstances. Temp: reg. 1.121-3T (e)
details the "unforeseen circumstances" guidelines. See Temp reg 1.121-3T and Publication 523, Selling Your Home.
References:
I lived in a home as my principal residence for the first 2 of the last
5 years. For the last 3 years, the home was a rental property before selling it. Can
I still avoid the capital gains tax and, if so, how should I deal with the depreciation
I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the home for
at least 2 years and lived in it as your main home for at least 2 years, you can exclude
up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you
cannot exclude the portion of the gain equal to depreciation allowed or allowable
for periods after May 6, 1997. This gain is reported on Form 4797. If you can show
by adequate records or other evidence that the depreciation allowed was less than
the amount allowable, the amount you cannot exclude is the amount allowed. Refer toPublication 523 , Selling Your Main Home and Form 4797 (PDF), Sale of Business Property for specifics on calculating and
reporting the amount of the eligible exclusion.
References:
How do you report the sale of a second residence?
Your second home is considered a capital asset. Use Form 1040, Schedule D (PDF) to report sales, exchanges, and other dispositions of capital
assets.
References:
10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
I received stock as a gift from my grandparents. I am selling the stock
this year. How can I figure the basis of the gifted stock?
To figure the basis of property you receive as a gift, you must know its adjusted
basis to the donor just before it was given to you, its fair market value (FMV) at
the time it was given to you, and the amount of any gift tax paid on it.
If the FMV of the property was less than the donor's adjusted basis, your basis
for figuring gain on its sale or other disposition is the same as the donor's adjusted
basis plus or minus any required adjustment to basis during the period you held the
property. Your basis for figuring loss on its sale or other disposition is its FMV
at the time you received the gift plus or minus any required adjustment to basis during
the period you held the property.
If the FMV of the property was equal to or greater than the donor's adjusted basis,
your basis for figuring gain or loss on its sale or other disposition is the same
as the donor's adjusted basis at the time you received the gift. Increase your basis
by all or part of any gift tax paid, depending on the date of the gift.
For further complete information, refer to Publication 17, chapter 14, Basis
of Property.
For additional information on this subject see Gifts.
References:
When I sell shares of stock in a company that merged with the company I
originally invested in, do I use the basis and holding periods based on the purchase
of shares in the original company?
When you trade stock in one corporation for stock in another as part of a merger
or other qualifying reorganization, you may have a nontaxable exchange. The basis
of the stock you received is generally the same as the basis of the old stock, increased
by any gain recognized on the exchange (including gain that is treated as a dividend)
and decreased by the value of property or money received.
You may receive cash or something of value instead of a fractional share if the
number of shares of new stock doesn't divide evenly into the number of shares of the
old stock. You treat this as a sale of the fractional share.
Your basis in the new stock is determined, in whole or in part, by your basis in
the old stock. Your holding period for the new stock will include the holding period
for the old stock, provided that the old stock was held as a capital asset at the
time of the exchange. For special basis rules relating to incentive stock options
and options granted under employee stock purchase plan see Revenue Ruling 80-244,
in IRS 1980-2 Cumulative Bulletin at page 235.
Refer to Publication 550, Investment Income and Expenses.
References:
How do I figure the cost basis of stock that has split, giving me more of
the same stock, so I can figure my capital gain (or loss) on the sale of the stock?
When the old stock and the new stock are identical the basis of the old shares
must be allocated to the old and new shares. Thus, you generally divide the adjusted
basis of the old stock by the number of shares of old and new stock. The result is
your new basis per share of stock. If the old shares were purchased in separate lots
for differing amounts of money, the adjusted basis of the old stock must be allocated
between the old and new stock on a lot by lot basis.
References:
When my stock split, the stock distributed to me was different than my original
shares. How do I figure the basis of the shares of the two different kinds of stock?
Usually, the company issuing the new type of stock will send you a letter explaining
the tax consequences of the stock distribution, including how to calculate the basis
in the two different types of stock.
If you did not get such a letter or would like further assistance, call IRS customer
service at 1-800-829-1040 or refer to Publication 550, Investment Income
and Expense : Stock dividends under Basis
of Investment Property .
References:
How do I calculate the cost basis of the shares that have split and are
later sold from my employee stock purchase plan?
You need to determine what your basis is in the company stock on the date of the
split. The new shares assume part of your basis in the company stock on that date.
You must divide the adjusted basis in the old stock by the number of shares of old
and new stock. The result is your basis for each share of stock.
For example, if you owned two shares of company stock with a basis in one at $30
and the other $45, and the company declares a three for one stock split, you now have
six shares of stock. Three of the shares will have a basis of $10, and three will
have a basis of $15.
Because this is an Employee Stock Option Plan, you may have to report some or all
of the gain on the sale of this stock as ordinary income (wages). For more information
about employee stock option plans, see Publication 525 , Taxable
and Nontaxable Income.
References:
Do I report the buying of stock?
Ordinarily, you do not have to report the purchase of stock, only the sale of stock.
However, if you exercise a nonstatutory stock option, a type of stock option granted
by an employer, you may have income to report in the year of exercise (the excess
of the fair market purchase value of the stock less the exercise price) if your rights
in the stock are substantially vested at the time of exercise, see Publication 525, Taxable
and Nontaxable Income, for further information.
References:
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:
How do we show on our tax form where dividends are reinvested?
Some corporations allow investors to choose to use their dividends to buy more
shares of stock in the corporation instead of receiving the dividends in cash. If
you are a member of this type of plan, you must report the fair market value on the
dividend payment date of the dividends that are reinvested as income on your tax return.
You do not actually show that the dividends were reinvested on your return. Keep good
records of the dollar amount of the reinvested dividends, the number of additional
shares purchased, and the purchase dates. You will need this information when you
sell the shares.
Report the dividends that were reinvested with your other dividends, if any, on
line 9 of Form 1040 or Form 1040A. If your total income from ordinary dividends is
over $1,500.00, you also must file either Form 1040, Schedule B (PDF) or Form 1040A, Schedule 1 (PDF).
For more information on this and other types of dividend reinvestment plans, refer
to Ordinary Dividends in Chapter 1 of Publication 550, Investment
Income and Expenses.
References:
How do I compute the basis for stock I sold, when I received the stock over
several years through a dividend reinvestment plan?
The basis of the stock you sold is the cost of the shares plus any adjustments,
such as sales commissions. If you have not kept detailed records of your dividend
reinvestments, you may be able to reconstruct those records with the help of public
records from sources such as the media, your broker, or the company that issued the
dividends.
If you cannot specifically identify which shares were sold, you must use the first-in
first-out rule. This means that you deem that you sold the oldest shares first, then
the next oldest, then the next-to-the-next oldest, until you have accounted for the
number of shares in the sale. In order to establish the basis of these shares, you
need to have kept adequate documentation of all your purchases, including those that
were through the dividend reinvestment plan. You may not use an average cost basis.
Only mutual fund shares may have an average cost basis.
Refer to Publication 550, Investment Income and Expenses, and Publication 551, Basis of Assets.
References:
I know the basis of stock includes the cost of the original purchase, but
does it also include the value of stock acquired through a dividend reinvestment plan?
Unless you sell all of your shares at one time, your total basis, which includes
both your original purchase and any purchases through a dividend reinvestment, is
not the figure used to report the sale of shares. If you sell less than all of your
shares at one time, you need to have kept adequate documentation of all your purchases,
including those that were through the dividend reinvestment plan in order to establish
the basis of the shares sold. You may not use an average cost basis. Only mutual fund
shares may have an average cost basis.
When reporting the sale of shares of stocks, the basis for the calculation of gain
or loss is the actual cost (plus adjustments, such as sales commissions) of those
shares. If you cannot specifically identify which of your shares were sold, you must
use the first-in first-out rule.
For more information, refer to Publication 550, Investment Income and
Expenses, and Publication 551, Basis of Assets.
References:
Do I have to pay taxes again on the stock acquired through a dividend reinvestment
plan when I sell them?
After you report the dividends as income, you have basis in the shares acquired
through dividend reinvestment. When you report the sale of the shares, you will be
taxed only on the amount that the sales proceeds (minus commissions) exceed your cost
basis (in this case, the amount of the dividends reinvested).
References:
Would the shares acquired by stock dividends have a shorter holding period
than the original shares purchased?
Yes, if they were taxable stock dividends, the holding period begins on the date
the new shares were distributed by the corporation. For nontaxable stock dividends,
the holding period is the same as the underlying stock.
When you purchase additional mutual shares with reinvested dividends, the dividends
are generally taxable. You thus have a holding period starting on the date of the
transaction, as reported in your statements, just as you do for shares that you purchase
outright.
References:
Would shares in mutual fund acquired through dividend reinvestment in prior
years be long-term capital gains while shares acquired through dividend reinvestment
in the year of sale be treated as short-term capital gains?
Any shares or fractional shares purchased and sold during the current tax year
are short-term capital assets. For shares purchased in the year previous to the tax
year to be considered long-term, the holding period must be more than one year.
References:
How do I report incentive stock options on my tax return?
If your option is an incentive stock option, you do not include any amount in your
gross income at the time the option is granted, or at the time you exercise it. However,
you may have income for Alternative Minimum Tax in the year you exercise the option.
If the special holding periods requirements are met, any income or loss from the
sale of the stock is treated as a capital gain or loss. However, if you do not meet
the special holding period requirements, you may have compensation income when you
sell the stock. For further information, refer to Publication 525, Taxable
and Nontaxable Income and Form 6251 (PDF), Alternative
Minimum Tax-Individuals.
References:
How do I report a nonstatutory stock option on my tax return?
Generally, if you have a nonstatutory option, you do not include any amount in
income on the date of grant. (or otherwise dispose of) the nonstatutory option in
an amount equal to the FMV of the stock less the exercise price. However, if you have
nonstatutory option with a readily ascertainable FMV, different rules apply. See Publication 525, Taxable and Nontaxable Income.
References:
How do I report an employee stock purchase plan on my tax return?
If your stock option is granted under an employee stock purchase plan, you do not
include any amount in your gross income as a result of the grant or exercise of your
option. When you sell the stock that you purchased by exercising the option, you may
have to report compensation and capital gain or capital loss. For additional information
on tax treatment and holding period requirements, refer to Publication 525, Taxable
and Nontaxable Income.
References:
How do I determine the cost basis of stock bought through an employee stock
purchase plan (ESPP)?
Your starting basis is what you paid to buy the shares (option or exercise price).
This amount is increased by the compensation income amount, if any, you must declare
on your income tax return when the stock is sold. Sales commissions can also increase
the basis in your stock but will not affect the amount of compensation that must be
declared.
Under the employee stock purchase plan rules, if you had an option to purchase
the stock at a discount, the amount of compensation income realized when you sell
the stock depends on whether holding periods are met and whether you purchased the
stock at a discount.
To satisfy the holding period requirements, you must hold the stock for at least
one year after its transfer to you upon purchase and for two years after the option
is granted. If either of these holding periods are not met, then you have not met
the holding period requirements.
If the holding periods are met, the compensation income is the lesser of:
the amount by which the fair market value of the stock at the time you are granted
the option exceeds the option price, or
The amount by which the fair market value of the stock at the time you sell it
exceeds what you paid for it.
If they are not met, the compensation income is the amount by which the fair market
value of the stock, when vested, exceeds what you paid for it. The compensation income
should be included as wages on your Form W-2.
For more information, refer to Publication 525, Taxable and Non-Taxable
Income.
References:
I received an incentive stock option from my company, is this taxable?
If your option is an incentive stock option, you do not include any amount in your
gross income at the time the option is granted, or at the time you exercise it. However,
you may have income for Alternative Minimum Tax in the year you exercise the option.
If the special holding period requirements are met, income or loss from the sale of
the stock is treated as a capital gain or loss. However, if you do not meet the special
holding period requirements, you may have compensation income. For further information,
refer to Publication 525, Taxable and Nontaxable Income
References:
I purchased stock from my employer under an employee stock purchase plan.
Now I have received a From 1099-B from selling it. How do I report this?
If the special holding periods are met, generally treat gain or loss from the sale
of the stock as capital gain or loss. However, you may have compensation income if:
The option price of the stock was below the stock's fair market value at the time
the option was granted, or
You did not meet the holding period requirement.
The holding period requirement is that you must hold the stock for more than 2
years from the time the stock is granted to you and for more than 1 year from when
the stock was transferred to you. If you do not meet these holding period requirements,
there is a disqualifying disposition of the option. The compensation income that you
should report in the year of the disposition is the excess of the fair market value
of the fair market of the stock on the date the stock was transferred to you less
the amount paid for the shares.
If the holding period requirement is met, but the option price is below the fair
market value of the stock at the time the option was granted, you report the difference
as compensation income (wages) when you sell the stock. Generally, this compensation
income is the lesser of the excess of the fair market value on the date of the disposition
less the exercise price OR the excess of the fair market value of the option when
granted less the exercise price.
If your gain is more than the amount you report as compensation income, the remainder
is a capital gain reported on Form 1040, Schedule D (PDF).
If you sell the stock for less than the amount you paid for it, your
loss is a capital loss, and you do not have ordinary income.
For more information, refer to Publication 525, Taxable and
Nontaxable Income, and Publication 551, Basis of Assets.
References:
Where on the tax return do I enter the compensation income I had from the
sale of stock that I purchased under my employer's stock purchase program?
The compensation income is reported on line 7 (wages, salaries, tips, etc.) of
Form 1040. It is added to the stock's basis used when determining capital gain or
loss on the sale of the stock. Any capital gain or loss on the stock sale is reported
on Form 1040, Schedule D (PDF), Capital Gains and
Losses.
References:
Is the Internal Revenue Code limit of $25,000 per calendar year for stock
bought through an employee stock purchase program (ESPP) based on the discounted purchase
price or the higher stock value?
Under the terms of an employee stock purchase plan, you cannot accrue the right
to purchase more than $25,000 of stock, valued at fair market value on the day the
option is granted, in any one calendar year. The limit is not based on the purchase
price.
References:
- Internal Revenue Code section 423 (b)(8)
Are incentive stock options subject to alternative minimum tax, and if so,
how do I determine the basis for the stock?
A taxpayer generally must include in alternative minimum taxable income the amount
by which the price paid for stock received pursuant to the exercise of an incentive
stock option is exceeded by the stock's fair market value at the time his rights the
stock are freely transferable or are not subject to a substantial risk of forfeiture.
Increase your alternative minimum tax basis by the amount of the adjustment. Your
basis for regular tax is not affected by the adjustment.
If a taxpayer acquires stock pursuant to the exercise of an incentive stock option
and disposes of the stock in a disqualifying disposition in the same taxable year,
the transaction is subject to regular tax, and the alternative minimum tax does not
apply. Refer to Internal Revenue Code 83, Internal Revenue Code 56(b)(3), and Internal
Revenue Code 422(c)(2). For more information, refer to
Instructions for Form 6251, Alternative Minimum Tax- Individuals.
References:
-
Instructions for Form 6251, Alternative Minimum
Tax- Individuals
- Internal Revenue Code 83
- Internal Revenue Code 56(b)(3)
- Internal Revenue Code 422(c)(2)
Can I take a long-term capital loss (up to the $3,000 limit) against my
ordinary income without any long-term capital gain?
Yes. You can use your total net loss to reduce your income dollar for dollar,
up to the $3000 limit ($1,500 if you are married and file a separate return).
For more information on capital gains and losses and capital loss carryovers, refer
to Chapter 4 of Publication 550, Investment Income and Expenses.
References:
Can I use a long-term capital loss carried over from a prior year to offset
a short-term capital gain?
A loss carryover maintains its character as long-term or short-term and must first
be used against gains, if any, in its own category, but can then offset net gains
from the other category, as well as up to $3,000 ($1,500 if married filing separate)
of ordinary income. If, for example, your only long-term gain or loss is the long-term
capital loss carryover, then line 17 of Form 1040, Schedule D (PDF),
which nets the net short-term gain or loss against the net long-term gain or loss,
will apply your loss carryover against your short-term gain. After that, any remaining
net loss will be allowable as a deduction against up to $3,000 ($1,500 if married
filing separate return) of your ordinary income. The remainder will be available to
be carried over to the following year as long-term loss.
References:
Can I use a long-term capital loss to offset a short-term capital gain before
using it to offset a long-term gain?
No, long-term capital gains and losses must first be combined to arrive at net
long-term gain or loss before the result can be netted against the net short-term
gain or loss. If you follow the Form 1040, Schedule D (PDF), Capital
Gains and Losses, Parts 1 and 2, line-by-line, the form will perform the netting
for you in this order.
References:
Can short-term capital gains be offset with long-term capital losses?
Before a loss from one category, short or long term, can offset gain from the other
category, the losses and gains from each category must be combined to arrive at a
net gain or loss from that category. Then, the net gain or loss from each category
is combined.
When you carry a capital loss over to the following year, it retains its character
as long-term or short-term and must be first combined with the other entries in its
category. There is a capital loss carryover worksheet each year in the
Instructions for Form 1040, Schedule D .
Refer to Reporting Capital Gains and Losses in Publication 550, Investment
Income and Expenses .
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:
How will the IRS know my stock split?
The IRS is not notified of a stock split.
It is your responsibility to accurately report your income on your return in the
year you sell shares of stock and to fully disclose details of the sale on Schedule
D. Part of that disclosure is to state the per share basis of the stock sold, which
should take into account a stock split.
The broker of the sale reports the proceeds of the sale to the IRS on Form 1099-B
The 1099-B also shows the recipient's identity, the payer's identity, and the CUSIP
Number that identifies the securities sold.
References:
Does the holding period for new shares I received as a result of a stock
split start on the purchase date of the original stock or on the date of the stock
split?
The holding period of the stock you received as a result of the stock split begins
on the same day as the holding period of the original stock.
References:
I purchased stock through an employee stock purchase plan at my work which
split three months later. Three months after that, I sold the stock at a gain. How
does the split affect how I report the stock sale on my tax return?
With either of the two types of statutory employee stock option plans, there is
no income as a result of the granting of the option or the exercising of the option
(purchasing stock). These two types of plans are the employee stock purchase plan
and the incentive stock option plan. However, if you don't hold the stock long enough
to meet the holding period requirements, when the stock is sold you may have to report
compensation income (wages). The split will affect the computation of capital gain
and compensation income, if any.
For the stock purchased under an employee stock purchase plan to receive favorable
tax treatment, it must be held for at least two years after the stock is granted and
at least one year after the stock is transferred to you. If the holding periods are
not met, the lesser of the fair market value of the stock on the grant date minus
the option price or the fair market value on the sale date minus the amount you paid
for the stock is compensation income (wages). To the extent that the gain is being
taxed as wages on your return, it becomes part of your adjusted basis in the stock
sold. When determining basis, the amount you paid for the stock is divided equally
among the shares received in the split.
For information on incentive stock option plans and nonstatutory stock options,
or more information on employee stock purchase plans, refer to Publication 525, Taxable
and Nontaxable Income
References:
How do I calculate the sale of a stock that had a reverse split?
Reverse splits are where your number of shares in a company's stock decreases.
Your total basis remains the same; it is your per share basis that increases. You
must divide your basis in the old shares by the number of new shares. For example,
you own 4 shares of stock. Two of these shares have a basis of $15; each of the other
two have a basis of $20 each. There is now a one for two reverse split. Now you have
two shares. One has a basis of $30 the other has a basis of $40. If your receive cash
because of the sale of a fractional share you have a capital gain or loss that is
reported on Form 1040, Schedule D (PDF) , Capital
Gains and Losses . Please see Fractional Shares in Publication 550, Investment
Income and Expenses , for further information on the sale of a fractional share.
References:
Do I need to pay taxes on that portion of stock I gained as a result of
a split?
No, you generally do not need to pay tax on the additional shares of stock you
received due to the stock split. You will need to adjust your per share cost of the
stock. Your overall cost basis has not changed, but your per share cost has changed.
You will have to pay taxes if you have gain when you sell the stock. Gain is the
amount of the proceeds from the sale, minus sales commissions, that exceeds the adjusted
basis of the stock sold.
References:
I buy and sell stocks as a day trader using an online brokerage firm. Can
I treat this as a business and report my gains and losses on Schedule C?
A business is generally an activity carried on for a livelihood or in good faith
to make a profit. Rather than being defined in the tax code, exactly what activities
are considered business activities has long been the subject of court cases. The facts
and circumstances of each case determine whether or not an activity is a trade or
business. Basically, if your day trading activity goal is to profit from short-term
swings in the market rather than from long-term capital appreciation of investments,
and is expected to be your primary income for meeting your personal living expenses,
i.e. you do not have another regular job, your trading activity might be a business.
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 mark to market under Internal Revenue Code Section 475 (f).
If your trading activity is a business and you 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. An election
to mark to market generally must be made by the due date of the prior year's return.
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Commissioner. Though there is no
publication specific to day traders, the details for traders information for securities
and commodities is covered in Internal Revenue Code Section 475(f) and Revenue Procedure
99-17, and as modified by Rev. Proc. 200-19 .
References:
Is there any publication that explains the proper way to file a Schedule
C as a day trader?
There is no publication specific to DayTraders. But see the
Instructions for Form 1040, Schedule D . The section "Traders in Securities" has information for
DayTraders.
Internal Revenue Code section 475(f) and Revenue Procedure 99-17 apply only to
traders who elect to use mark-to-market method of Accounting.
References:
I am a stock day trader. I understand I have the option of electing the
mark-to-market method of accounting which would preclude application of the wash sale
rule. What forms and publications do I need?
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
to the mark-to-market method of accounting.
See Publication 550, Investment Income and Expenses (p. 68) for
guidance on how to make the mark-to-market election. You need Form 3115 (PDF), Application for Change in Accounting Method. The mark-to-market
method of accounting cannot be revoked without the consent of the Secretary.
If you qualify and elect to change to the mark-to-market method of accounting,
you would report your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property .
References:
I have expenses associated with my day trading business, but I am unsure
about how to report my gains and losses. How do I file as a day trader and how do
I use the mark-to-market accounting method?
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 pursue the activity 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 for 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, the details
for traders in securities and commodities are covered in Internal Revenue Code section
475(f) and Revenue Procedure 99-17.
If you elect to use the mark-to-market method of accounting, a security that you
hold at the end of the tax year will generally be treated as sold at its fair market
value on the last business day of the tax year. Any gain or loss must be recognized.
That gain or loss is taken into account as an adjustment in figuring your gain and
loss when you later dispose of the security. See Publication 550, Investment
Income and Expenses, for general information on mark-to-market accounting rules.
References:
- Publication 535, Business Expenses
- Publication 550, Investment Income and Expenses
- Form 3115 (PDF), Application for Change
in Accounting Method
- Form 4797 (PDF), Sales of Business Property
- Internal Revenue Code Section 475(f)
- Revenue Procedure 99-17
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.)
If I sell one mutual fund and use the proceeds to buy another, do I have
to report the capital gains or can I wait until I sell and don't buy another fund?
Does it matter if I stay within the same family of funds?
You would have to report any capital gains realized on the sale. Even assuming
this transaction meets the requirements of an exchange, rather than a sale, the exchange
of shares of one fund for those of another is a taxable exchange. This is true even
if both funds are within the same family of funds.
References:
If my children have mutual funds, how are the dividends and capital gains
reported?
If a child is 14 years old or older and has a requirement to file an income tax
return, he or she would report dividends and capital gains no differently than any
other taxpayer. If the child is under age 14 and his or her only income is from interest
and dividends (including capital gain distributions), the child's parents can make
an election to include the income on the parent's return. If the parents make this
election, then the child does not have to file a return. The election is made on Form 8814 (PDF), Parent's Election To Report Child's Interest
and Dividends.
In order to make the election under Form 8814,
the child must be required to file a return,
the dividend and interest income cannot exceed $7,500
there must be no estimated tax payment made for the year and no prior overpayment
applied to the tax year under the child's name and social security number,
there must be no federal tax taken out of the child's income under the backup
withholding rules, and
the parent must be the parent whose return is used for the special tax rules for
children under 14.
If a child under the age of 14 has investment income and the parents do not make
the above election, the child reports the income as any other taxpayer would. Special
rules on how the investment income is taxed, however, may apply. A child under the
age of 14 with investment income (interest, dividends, capital gains, etc.) of more
than $1,500 may be subject to the parents' tax rate. The special tax computation is
figured on Form 8615 (PDF), Tax for Children Under
Age 14 Who Have Investment Income of More Than $1,500.
For more information, refer to Publication 929, Tax Rules for Children
and Dependents
References:
- Form 8814 (PDF), Parent's Election To
Report Child's Interest and Dividends
- Form 8615 (PDF), Tax for Children Under
Age 14 Who Have Investment Income of More Than $1,400
- Publication 929, Tax Rules for Children and Dependents
I have both purchased and sold shares in a money-market mutual fund. The
fund is managed so the share price is constant. All gain is reported as dividends.
Do I have to report the sale of these shares?
Yes, you report the sale of your shares on Form 1040, Schedule D (PDF), Capital
Gains and Losses. Generally, whenever you sell, exchange, or otherwise dispose
of a capital asset, you report it on Schedule D.
If the share price were constant, you would have neither a gain nor a loss when
you sell shares because you are selling the shares for the same price you purchased
them.
If you actually owned shares that were later sold, the fund or the broker should
have issued a Form 1099-B There is no requirement with that form that there be gain
or loss on the sale, only a sale or exchange of an investment asset and sales proceeds.
References:
How do I find out my cost basis for mutual funds if I do not have all of
the records?
You need to reconstruct your records the best that you can. Contact your broker
or the mutual fund company for assistance.
Another source of information is your prior year tax returns. If your mutual fund
has been reinvesting dividends, those reinvested dividends (which have been used to
purchase additional shares in the fund) should have been reported as dividend income
on your tax return each year. To compute your total basis, add to the cost of the
original shares purchased the amount of all dividends automatically reinvested that
were previously reported as income on your prior tax returns and any shares you subsequently
purchased.
You can usually also add acquisition fees and load charges you've paid to your
basis in your mutual fund shares. If you sell your shares and the sales commission
is not subtracted from the sales proceeds on Form 1099-B, Broker and Barter Exchanges,
you can add the commission to the basis of the shares sold. If you receive a distribution
that is identified as a return of capital, you must reduce your total basis by that
amount.
Refer to Keeping Track of Your Basis in Publication 564, Mutual
Fund Distributions.
References:
If I do not have the records showing each dividend reinvestment, how do
I calculate the basis of my shares in a mutual fund that I acquired years ago?
Unless you have acquired shares through gifts or inheritances, your basis is what
the shares cost you. Your mutual fund company can often provide you with this information
upon request. Another source of information is your broker, if the fund was purchased
through a broker. You cannot calculate your basis in your mutual fund shares accurately
without this information. You can only claim the amount of basis that you can establish
and substantiate with records. You may lose a large part of your basis if you cannot
establish the amount of dividends that were reinvested. This is why keeping records
is so important.
Another source of information on reinvested dividends is your prior year tax returns.
If your mutual fund has been reinvesting dividends, those reinvested dividends should
have been reported as dividend income on your tax return each year.
For more information, refer to Publication 564, Mutual Fund Distributions.
References:
Do the dividends and/or capital gains I report affect my cost basis of the
individual mutual fund shares I own?
They would affect your total basis and total number of shares if they were reinvested
in the mutual fund. Add the reinvested dividends and capital gains that you have reported
as income on your tax return to your total basis. You will also own additional shares
in the fund because the dividends and capital gains have been used to purchase shares.
Keep good records. If you are going to be using an average basis method to determine
per-share basis on sales, be sure and keep records of all your mutual fund activity
until you no longer own any shares in that fund.
There is a worksheet to help you keep track of your number of shares and your basis
in Publication 564, Mutual Fund Distributions.
References:
How do return of principal payments affect my cost basis when I sell mutual
funds?
A return of principal (or return of capital) reduces your basis in your mutual
fund shares. Unlike a dividend or a capital gain distribution, a return of capital
is a return of part of your investment (cost). However, basis cannot be reduced below
zero. Once your basis reaches zero, any return of principal is capital gain and must
be reported on Form 1040 Schedule D (PDF), Capital
Gains and Losses.
References:
How do I show a return of principal payment from my Form 1099-DIV on my
tax return?
You do not normally have to report a return of principal (or return of capital)
on your tax return. You must reduce your basis in the fund, which should be recorded
in your records. However, basis cannot be reduced below zero. Once your basis reaches
zero, any return of principal is capital gain and must be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses.
References:
Do I have to specify to my broker which specific shares to sell in order
to use specific share identification to determine cost basis for mutual funds? Do
I need confirmation from my broker?
You are referring to meeting the requirement for "adequate identification." If
you can definitively identify the shares sold, you do not need to use the adequate
identification rules. You can use the adjusted basis of those particular shares to
figure your gain or loss.
The "adequate identification" rules allow you to control which shares are considered
sold, even though you may not control which shares are actually sold. If you specify
to your broker which shares you want sold prior to or at the time of the sale and
they confirm within a reasonable time in writing, then you are considered to be able
to "adequately identify" the shares sold, even if the broker actually sells different
shares. The confirmation by the mutual fund must be given to you within a reasonable
period of time and state that you instructed the broker to sell particular shares.
If you cannot identify the specific shares and you do not want to use an average
basis, then you must use the first-in first-out method (FIFO). These two methods are
both cost basis methods. You may not use either cost basis method if you have previously
used an average basis method for that mutual fund on a tax return. Refer to Publication 564, Mutual Fund Distributions.
References:
I have used the FIFO method to determine the cost basis for a sale of a
portion of a mutual fund holding. Must I continue to use this method for all future
sales of this fund?
No. If you subsequently sell some shares in that mutual fund and can identify the
shares sold, you can switch to the specific share identification method. Both of these
methods are cost basis methods.
To switch to an average basis method, you must have acquired the shares at various
times and prices, and left the shares on deposit in an account handled by a custodian
or agent who acquires or redeems those shares. Once you elect to use an average basis
method, you must continue to use it for all accounts in the same fund. However, you
may use a different method for shares in other funds, even those within the same family
of funds.
Before using an average basis, be sure your records reflect the disposition of
the shares that were reported using the cost basis method (FIFO).
References:
If I previously sold shares of a mutual fund and reported the gains or losses
using the FIFO method, can I switch to an average basis method?
Yes, you can. The only requirement for using an average basis is that you acquired
the shares at various times and prices, and you left the shares on deposit in an account
handled by a custodian or agent who acquires or redeems those shares. An average basis
method, once adopted, must be disclosed on your tax return and the method cannot be
changed back without permission from the Commissioner of the Internal Revenue Service.
Before computing the basis of shares sold using an average basis, ensure that you
have reduced your previous total basis by the cost of the shares accounted for using
the FIFO method.
References:
If I previously reported my mutual fund sales using the FIFO method and
switched to an average basis method, do I include only those shares remaining after
the previous sales to determine the average cost?
Yes. You would include in your average basis calculations only those shares that
were still held at the time of the sale you are reporting.
References:
How do I calculate the average basis for the sale of mutual fund shares?
In order to figure your gain or loss using an average basis, you must have acquired
the shares at various times and prices and have left them on deposit in a managed
account.
There are two average basis methods:
Single-category method, and
Double-category method.
Single-category method. First, add up the cost of all the shares you own in the
mutual fund. Divide that result by the total number of shares you own. This gives
you your average per share. Multiply that number by the number of shares sold.
Double-category method. First, divide your shares into two categories, long-term
and short-term. Then use the steps above to get an average basis for each category.
The average basis for that category is then the basis of each share in the sale from
that category.
Once you elect to use an average basis method, you must continue to use it for
all accounts in the same fund. You must clearly identify on your tax return the average
basis method that you have elected to use. You do this identification by including
"AVGB" in column (a) of Form 1040, Schedule D (PDF) .
Refer to Publication 564 , Mutual Fund Distributions, Sales,
Exchanges and Redemptions .
References:
If I own some mutual fund shares less than a year and other shares more
than a year, do I need to do two separate computations for an average basis method?
If you are electing or have previously elected to use the double-category method
for that mutual fund, you need to do two separate computations; one for long-term
and one for short-term-only. The single-category method requires only one computation
of average basis.
For more information, refer to Publication 564, Mutual Fund Distributions, Sales, Exchanges, and Redemptions.
References:
How do I tell the IRS I used an average basis method in reporting the gain
or loss from my mutual funds?
Either write the name of the average basis method used as a notation on Form 1040, Schedule D (PDF), Capital Gains and Losses ,
or attach a sheet to the Schedule D showing in detail how you computed the basis of
the shares sold. Whenever you attach a statement to your return, include your name(s)
and social security number(s). Also include "AVGB" in column (a) of Schedule D.
References:
If I used an average basis method for shares of one mutual fund I sold,
do I have to use it for all mutual funds I sell?
No, you may use a different method, as long as you have not used an average basis
method for that fund previously. Once you have elected to use an average basis method
to compute the gain or loss on shares in a mutual fund, you must use that same method
for the sale of shares from any account in that same fund.
References:
If I use an average basis method for computing basis of mutual fund shares
upon sale, how do I determine the holding period for those shares?
How you determine the holding period of mutual fund shares you sold depends on
which of the two average basis methods you are electing to use. Once you have elected
a method, you must use that method for determining the basis of any shares sold in
the future from that fund.
You may specify top your broker the category from which the deemed shares are sold.
Shares will be deemed sold from that category so long as your broker provides you
with confirmation of the sale. If you do not specify or if the broker fails to provide
confirmation shares will be deemed sold first from the long-term category.
References:
After the first partial sale of mutual fund shares, are the sold shares
no longer used when updating an average basis method for future sales?
If you used the single-category method, the average per-share basis is the same
for the shares you still hold as the ones you sold. The next time you sell shares,
the per-share basis will remain the same unless you acquired additional shares in
the meantime.
If you subsequently sell some shares and have acquired additional shares since
the last sale, you recompute the average basis. Divide the total cost of the shares
that you hold at the time of sale by the number of shares you hold at the time of
sale.
If you previously used the double-category method to compute an average basis,
you need to transfer from the short-term category to the long-term category any shares
that have been held longer than one year at the time of a subsequent sale. Transfer
the shares at the per-share basis for the short-term category computed at the time
of the last sale, then recompute the average basis for the two categories. Use the
new total cost and total number of shares for each category.
For more information, refer to Publication 564, Mutual Funds.
References:
How do I calculate the average cost method of a mutual fund if the fund
price splits?
If your mutual fund splits, or adjusts its price, it is treated like a stock split.
Your total basis doesn't change after the split, but since you now own more shares
without paying any more money, your per-share basis will decrease. To calculate your
per-share basis, divide the total cost that you have invested in the fund (minus any
shares previously sold) by the current number of shares that you hold.
References:
What affect does a stock split for a stock in my mutual fund have on my
cost basis when I am using an average basis method?
If a stock within your mutual fund splits, it has no affect on your basis because
the shares you own are shares in the mutual fund, not in the stock that split.
References:
How do I receive permission to change my cost basis calculation to adopt
an average basis method?
You do not need permission to elect an average basis method for a particular mutual
fund when you have used a cost basis previously to report the sale of shares in the
fund. If you meet the conditions to use an average basis, then you just need to clearly
indicate on the return for which you want the election to be in effect that you are
making the election. You also need to indicate which average basis method you are
using and that none of the shares are gift shares. If there are gift shares in the
account and the fair market value of the shares at the time of the gift was not more
than the donor's basis, you must include a statement that the basis for gift shares
when figuring the average basis is the fair market value at the time of the gift.
If you have already reported the sale using a cost basis, you cannot make this
election unless you can do it on an amended return before the due date of the tax
return being amended.
However, you do need the consent of the IRS to use a cost basis or to change your
average basis method once you have made this election to use an average basis method.
This would be considered a change in an accounting method. You would need to request
consent to change your method on Form 3115 (PDF), Application
for Change in Accounting Method.
For more information, refer to Publication 564, Mutual Fund Distributions, Publication 538, Accounting Periods and Methods,
Instructions for Form 3115, Application for Change in Accounting Method, Revenue Procedure
97-27, and Section 9.03 of Revenue Procedure 2003-1.
References:
I received a 1099-DIV showing a capital gain. Why do I have to report capital
gains from my mutual funds if I never sold any shares?
A mutual fund is a regulated investment company that pools funds of investors allowing
them to take advantage of a diversity of investments and professional asset management.
You own shares in the fund, but the fund owns assets such as shares of stock, corporate
bonds, government obligations, etc. One of the ways the fund makes money for its investors
is to sell these assets at a gain. If the asset was held by the mutual fund for more
than one year, the nature of the income is capital gain, which gets passed on to you.
These are called capital gain distributions, which are distinguished on Form 1099-DIV (PDF) , from income that is from other profits, called
ordinary dividends.
Capital gains distribution are taxed as long term capital gains regardless of how
long you have owned the shares in the mutual fund. If your capital gains distribution
is automatically reinvested, the reinvested amount is the basis of the additional
shares purchased.
References:
Where are mutual fund short-term capital gain distributions reported?
Capital gain distributions from a mutual fund are by definition long-term. That's
why they appear only in Part II of Form 1040, Schedule D (PDF), Capital
Gains and Losses. The annual statement you receive from your mutual fund may
list short-term capital gains, but your Form 1099-DIV will show those amounts as ordinary
dividends in box 1a.
Ordinary dividends (which include the mutual fund's profits from short term capital
gains) are reported on Form 1040, Schedule B (PDF), Interest
& Dividend Income , or Form 1040A, Schedule 1 (PDF), Interest
and Ordinary Dividends, if the total is over $1500. In addition, you enter the
total ordinary dividends on line 9a of Form 1040 or line 9a of Form 1040A.
The 2003 Form 1099-DIV has added box 1b "Qualified Dividends." This box shows the
portion of the amount in box 1a may be eligible for the new 15%
or 5% capital gains rates. See the instructions for Form 1040/1040A for how to determine
the eligible amount and report this amount on line 9b of your Form 1040 or 1040A .
Refer to the line 13 instructions of Form 1040 for exceptions when you can enter
capital gain distributions directly on line 13 of Form 1040 without having to file
Schedule D.
References:
My end-of-year statement from a mutual fund company showed amounts in 4
categories: (1) capital gains, (2) short-term capital gains, and (3) ordinary dividend
and (4) qualified dividends. When my Form 1099-DIV came, the short-term capital gains
were lumped in with ordinary dividends. Which is correct and where do I list the short-term
capital gains?
Your Form 1099-DIV is correct, but so is your annual statement. For the purpose
of reporting taxable income on your tax return, capital gain distributions are defined
as long-term capital gains only. Short-term capital gains are taxed as ordinary income
and are therefore treated as ordinary dividends on Form 1099-DIV (PDF) .
Box 1b of your Form 1099-DIV shows the portion of the amount in box 1a that may
be eligible for the new 15% or 5% capital gain rates. See the
Instructions for Form 1040 and
Instructions for Form 1040A for how to determine
the eligible amount and report this amount on line 9b of your, Form 1040 (PDF) Form 1040A (PDF) .
The short-term capital gains will be in box 1a "ordinary dividends" on 1099-DIV.
These will be reported on line 9a of 1040/1040A.
Report the fund's short-term capital gains as part of your total ordinary dividends
on line 9 of your Form 1040 or 1040A. (You may have to also report them on Form 1040, Schedule B (PDF), Interest & Dividend Income or Form 1040A, Schedule 1 (PDF), Interest and Ordinary Dividends .
Refer to the instructions to the schedule.)
References:
How can I use mutual fund short-term capital gains, which are reported on
Form 1099-DIV in Box 1a as "Ordinary Dividends," to help offset short-term capital
losses?
You cannot. You did not sell the assets that produced this income, the mutual fund
did. All income that is taxed as ordinary income flows through to you as ordinary
dividends, whether the income is from interest, dividends, or the sales of short-term
capital assets.
In the same manner, you report capital gain distributions as long-term capital
gains on your return regardless of how long you have owned the shares in the mutual
fund. This is because the asset was held and then sold by, the mutual fund, not by
you.
Report your total ordinary dividends (including the short-term capital gains in
your mutual fund) on Form 1040, line 9a, or Form 1040A, line 9a, with your other ordinary
dividends, if any. You may also have to file Form 1040, Schedule B (PDF) , Interest
& Dividend Income or Form 1040A, Schedule 1 (PDF), Interest
and Ordinary Dividends.
References:
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:
If a mutual fund's assets earned tax-free dividends, are capital gains tax
free when the fund is sold?
No. The kind of income the assets in the fund earn is tax-free. When you sell your
shares in the fund, a taxable gain or deductible loss is realized on the sale. This
is the true also for the sale of tax-exempt securities such as municipal bonds.
References:
On December 20, I received a large mutual fund distribution. Due to the
large distribution I'm going to owe $7000 when I file my return. Is it okay to just
pay the $7000 when I file my return?
If the $7,000 in tax is a result of a distribution not covered by prepayments of
tax, either through income tax withholding or estimated tax payments, you should make
an estimated tax payment by January 15th of the next year. If you wait to pay the
$7,000 with your return, you may be penalized for an underpayment of estimated taxes.
Even if you make an adequate payment of tax by January 15th, you may be assessed an
estimated tax penalty by the IRS service center when your return is processed. This
is because estimated tax payments are normally made in four equal installments and
the IRS will not know your liability occurred in the fourth quarter unless you file Form 2210 (PDF), Underpayment of Estimated Tax by Individuals,
Estates and Trusts.
You may be subject to the penalty if you owe at least $1,000 in tax after subtracting
your withholding from your estimated tax liability, and you did not prepay at least
90% of your current year's tax or an amount equal to 100% of your previous year's
tax. (The latter percentage is higher for higher-income taxpayers with adjusted gross
incomes from the previous year of more than $150,000.)
If you make an adequate payment by January 15th but made no earlier estimated tax
payments, use Form 2210 (PDF), Underpayment of Estimated
Tax by Individuals, Estates and Trusts, to compute your penalty. Check the box
on the front page selecting the Annualized Income Installment method, and then complete
Schedule AI on page 3. When you compute the penalty on page 2 of that form using the
numbers from Schedule AI, your penalty will be $0. Even if you did not make the January
15th payment, the annualized income method on Form 2210 may significantly reduce the
estimated tax penalty if the income for which there was no prepayment of tax was earned
in the third or fourth quarters of the year.
For more information on estimated tax payments and the underpayment of estimated
tax penalty, refer to Publication 505, Tax Withholding and Estimated Tax.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment of Estimated
Tax by Individuals, Estates and Trusts
10.4 Capital Gains, Losses/Sale of Home: Losses (Homes, Stocks, Other Property)
How much am I allowed to deduct as a capital loss this year?
Your allowable capital loss deduction for any tax year, figured on Form 1040, Schedule D (PDF), is limited to the lesser of:
$3,000 ($1,500 if you are married and file a separate return), or
Your capital loss as shown on line 17 of Schedule D.
If you have a capital loss on line 17 of Schedule D that is more than the yearly
limit on capital loss deductions, you can carry over the unused part to later years
until it is completely used up. Refer to Publication 17, Your Federal Income
Tax, or Tax Topic 409, Capital Gains and Losses, for additional
information.
References:
I have capital losses of $4,000. How much may I deduct this year?
Your allowable capital loss deduction for any tax year, figured on Form 1040, Schedule D (PDF), is limited to the lesser of:
$3,000 ($1,500 if you are married and file a separate return), or
Your total net loss as shown on line 17 of Schedule D
If you have a total net loss on line 17 of Schedule D that is more than the yearly
limit on capital loss deductions, you can carry over the unused part to later years
until it is completely used up.
For more information about capital gains and losses, refer to Publication 544, Sales
and Other Dispositions of Assets.
References:
Is the loss on the sale of your home deductible?
The loss on the sale of a personal residence is a nondeductible personal loss.
References:
As a result of a bankruptcy, the bank foreclosed on my house. Can you tell
me where and how to report this loss on my taxes?
The foreclosure or repossession is treated as a sale or exchange from which you,
the borrower, may realize gain or loss. However, if you realize a loss on personal
use property, such as your residence, the loss is not deductible. Refer to Publication 544, Sales and other Dispositions of Assets, and Publication 908 (PDF), Bankruptcy Tax Guide, for more information.
References:
I own stock which became worthless last year. Can I take a bad debt deduction
on my tax return?
If you own securities and they become totally worthless, you can take a deduction
for a loss, but not for a bad debt.
The worthless securities are treated as though they were capital assets sold on
the last day of the tax year if they were capital assets in your hands. Report worthless
securities on line 1 or line 8 of Form 1040, Schedule D (PDF),
whichever applies. In columns (c) and (d), write "Worthless." For
additional information, refer to Publication 550, Investment Income and Expenses (Including
Capital Gains and Losses). For more information on bad debts, refer to Tax Topic 453, Bad
Debt Deduction.
References:
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