A capital gain or loss arises from the sale or exchange of a capital asset. The tax code defines a capital asset by defining what is not a capital asset—this is what makes the tax code so much fun.
A capital asset means property except the following:
- inventory;
- property held primarily for sale to customers;
- a note or account receivable acquired in the ordinary course of trade or business;
- depreciable business property;
- real property used in a trade or business; and
- stocks, bonds, etc., held by a brokerage house and sold in their ordinary course of business.
What does that leave us? Most of us automatically think of stocks, bonds and mutual funds that we own. However, this also includes:
- Collectibles such as stamps, antiques, gems and coins;
- Our home, household furnishings and car are also capital assets. These items are given special consideration in the tax code. Part or all of the gain on the sale of a home, under certain circumstances, is exempt from capital gains tax, and losses on these items are never deductible; and
- Non-business bad debts are short-term capital losses if the debt becomes entirely worthless during the tax year.
You can also have a capital gain to report on your tax return without selling a thing. If you own mutual funds and they sell some of their holdings during the year, you are required to report “your share.” This is called a Capital Gains Distribution and is reported to you on Form 1099-DIV, Dividends and Distributions.
How to Report Gains and Losses
Beginning with the 2011 tax year, capital gains and losses are to be reported on two forms. First, the transactions are detailed on Form 8949, Sales and Other Dispositions of Capital Assets, and then the subtotals are transferred to Schedule D, Capital Gains and Losses.
How to Complete Form 8949
Effective January 1, 2012, brokerage houses will be required to report stock transactions differently on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. The required information includes date of sale, date of acquisition, gross proceeds, cost basis, federal income tax withheld, and type of gain or loss.
Short-Term Gains and Losses
Those items held one year or less and non-business bad debts are reported on Part I.
Long-Term Gains and Losses
Those items held more than one year are reported on Part II.
For both Parts I and II, you must check one of the options below to tell the IRS how you determined your transactions.
- Transactions reported on Form 1099-B with basis reported to the IRS;
- Transactions reported on Form 1099-B but basis not reported to the IRS; or
- Neither.
Note: You must check one of the boxes mentioned above. Complete a separate Form 8949 for each box that is checked for both Parts I and II.
In each case, record the description of the property, date acquired, date sold, the sales price, and the cost or other basis of the property sold.
In the case of stocks and bonds, the amount reported to you on Form 1099-B as the sales price is reported net of any commission. The price you paid for it should be found on your trade confirmation and should include the commission paid to purchase the stock. For instance, you may have paid $25 per share for 100 shares, and were also charged $25 to make the purchase. Your cost basis is then $2,525.
Total the amounts for the sales price and cost basis columns at the bottom of each page. This information will be transferred to Schedule D.
How to Complete Schedule D
Report the amounts from Form 8949 in the applicable rows and columns in Parts I and II for both short-term and long-term capital gains and losses.
On page 2 of Schedule D, combine your short-term and long-term totals. If the net amount is a gain, record it on page 1 of Form 1040.
If you had long-term gains included in the above total, go to the Qualified Dividends and Capital Gains Tax Worksheet. This is where you determine what portion of the long-term gain is taxed at 0%, 15% or 20%.
If the net amount is a loss and is less than $3,000 ($1,500 if married filing separately), then record that net loss on page 1 of Form 1040.
If the net amount is a loss and is greater than $3,000 ($1,500 if married filing separately), then record a $3,000 ($1,500) loss on page 1 of Form 1040. The balance of the loss will be carried forward to next year.
If you would like any further information regarding this issue as well as any other tax related issue, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures:
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
