Publication 550
taxmap/pubs/p550-026.htm#en_us_publink100010476Words you may need to know (see Glossary)
This section discusses the tax treatment of gains and losses from different types of investment
transactions.
taxmap/pubs/p550-026.htm#en_us_publink100010477You need to classify your gains and losses as either ordinary or capital gains or losses. You then need to classify your capital gains and losses as either short term or long term. If you have long-term gains and losses, you must identify your 28% rate gains and losses. If you have a net capital gain, you must also identify any unrecaptured section 1250
gain.
The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. For information about determining whether your capital gain or loss is short term or long term, see
Holding Period, later. For information about 28% rate gain or loss and unrecaptured section 1250 gain, see
Capital Gain Tax Rates under
Reporting Capital Gains and Losses, later.
If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. A sale or trade of a noncapital asset generally results in ordinary gain or loss. Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. In some situations, part of your gain or loss may be a capital gain or loss, and part may be an ordinary gain or loss.
taxmap/pubs/p550-026.htm#en_us_publink100010479For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. Some examples are:
- Stocks or bonds held in your personal account,
- A house owned and used by you and your family,
- Household furnishings,
- A car used for pleasure or commuting,
- Coin or stamp collections,
- Gems and jewelry, and
- Gold, silver, or any other metal.
Any property you own is a capital asset, except the following noncapital assets.
- Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. For an exception see
Capital asset treatment for self-created musical works, later.
- Depreciable property used in your trade or business, even if fully depreciated.
- Real property used in your trade or business.
- A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that
is:
- Created by your personal efforts,
- Prepared or produced for you (in the case of a letter, memorandum, or similar property),
or
- Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or
produced.
For an exception to this rule, see
Capital asset treatment for self-created musical works, later.
- Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1).
- U.S. Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price.
- Certain commodities derivative financial instruments held by commodities derivatives dealers. For more information, see section 1221 of the Internal Revenue
Code.
- Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. For more information, see the definition of
hedging transaction, earlier, and the discussion of
hedging transactions under
Commodity Futures, later.
- Supplies of a type you regularly use or consume in the ordinary course of your trade or
business.
Investment property is a capital asset. Any gain or loss from its sale or trade generally is a capital gain or loss.
taxmap/pubs/p550-026.htm#en_us_publink100010481These are capital assets except when they are held for sale by a dealer. Any gain or loss from their sale or trade generally is a capital gain or
loss.
taxmap/pubs/p550-026.htm#en_us_publink100010482taxmap/pubs/p550-026.htm#en_us_publink100010483Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. However, you cannot deduct a loss from selling personal use property.
taxmap/pubs/p550-026.htm#en_us_publink100010484You can elect to treat musical compositions and copyrights in musical works as capital assets when you sell or exchange them
if:
- Your personal efforts created the property, or
- You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or
produced.
You must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. You must make the election on or before the due date (including extensions) of the income tax return for the tax year of the sale or exchange. You must make the election on Form 8949 by treating the sale or exchange as the sale or exchange of a capital asset, according to the Instructions for Form 8949 and Instructions for Schedule D (Form
1040).
You can revoke the election if you have IRS approval. To get IRS approval, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. See, for example, Revenue Procedure 2012-1, 2012-1 I.R.B. 1, available at
www.irs.gov/irb/2012-01_IRB/ar06.html. Alternatively, you are granted an automatic 6-month extension from the due date of your income tax return (excluding extensions) to revoke the election, provided you timely file your income tax return, and within this 6-month extension period, you file Form 1040X that treats the sale or exchange as the sale or exchange of property that is not a capital
asset.
Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions.
taxmap/pubs/p550-026.htm#en_us_publink100057897Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. This treatment applies to obligations with a fixed maturity date not more than 1 year from the date of issue. Acquisition discount is the stated redemption price at maturity minus your basis in the obligation.
However, do not treat these gains as income to the extent you previously included the discount in income. See
Discount on Short-Term Obligations in chapter 1 for more information.
Treat gains on short-term nongovernment obligations as ordinary income up to your ratable share of OID. This treatment applies to obligations with a fixed maturity date of not more than 1 year from the date of issue.
However, to the extent you previously included the discount in income, you do not have to include it in income again. See
Discount on Short-Term Obligations in chapter 1 for more information.
If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of OID as tax-exempt interest. To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID.
If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. For more information on the basis of these bonds, see
Discounted tax-exempt obligations under
Stocks and Bonds, earlier in this chapter.
Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. If you bought the bonds after April 30, 1993, the gain from market discount is ordinary income.
You figure market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. For more information, see
Market Discount Bonds in chapter 1.
A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss.
taxmap/pubs/p550-026.htm#en_us_publink100057900If a state or local bond issued before June 9, 1980, is redeemed before it matures, the OID is not taxable to
you.
If a state or local bond issued after June 8, 1980, is redeemed before it matures, the part of OID earned while you hold the bond is not taxable to you. However, you must report the unearned part of OID as a capital
gain.
taxmap/pubs/p550-026.htm#en_us_publink100057901On July 2, 2001, the date of issue, you bought a 20-year, 6% municipal bond for $800. The face amount of the bond was $1,000. The $200 discount was OID. At the time the bond was issued, the issuer had no intention of redeeming it before it matured. The bond was callable at its face amount beginning 10 years after the issue
date.
The issuer redeemed the bond at the end of 11 years (July 2, 2012) for its face amount of $1,000 plus accrued annual interest of $60. The OID earned during the time you held the bond, $73, is not taxable. The $60 accrued annual interest also is not taxable. However, you must report the unearned part of OID ($127) as a capital
gain.
taxmap/pubs/p550-026.htm#en_us_publink100057902If you sell, trade, or redeem for a gain one of these debt instruments, the part of your gain that is not more than your ratable share of OID at the time of sale or redemption is ordinary income. The rest of the gain is capital gain. If, however, there was an intention to call the debt instrument before maturity, all of your gain that is not more than the entire OID is treated as ordinary income at the time of the sale. This treatment of taxable gain also applies to corporate instruments issued after May 27, 1969, under a written commitment that was binding on May 27, 1969, and at all times thereafter.
taxmap/pubs/p550-026.htm#en_us_publink100057903You bought a 30-year, 6% government bond for $700 at original issue on April 5, 1982, and sold it for $900 on October 18, 2012, for a $200 gain. The redemption price is $1,000. At the time of original issue, there was no intention to call the bond before maturity. You have held the bond for 336 full months. Do not count the additional days that are less than a full month. The number of complete months from date of issue to date of maturity is 360 (30 years). The fraction 336/360 multiplied by the discount of $300 ($1,000 − $700) is equal to $280. This is your ratable share of OID for the period you owned the bond. You must treat any part of the gain up to $280 as ordinary income. As a result, the entire $200 gain is treated as ordinary
income.
taxmap/pubs/p550-026.htm#en_us_publink100057904If you hold one of these debt instruments, you must include a part of OID in your gross income each year you own the instrument. Your basis in that debt instrument is increased by the amount of OID that you have included in your gross income. See
Original Issue Discount (OID) in chapter 1.
If you sell or trade the debt instrument before maturity, your gain is a capital gain. However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. In this case, the rest of the gain is capital gain.
An intention to call a debt instrument before maturity means there is a written or oral agreement or understanding not provided for in the debt instrument between the issuer and original holder that the issuer will redeem the debt instrument before maturity. In the case of debt instruments that are part of an issue, the agreement or understanding must be between the issuer and the original holders of a substantial amount of the debt instruments in the issue.
taxmap/pubs/p550-026.htm#en_us_publink100057905On February 5, 2010, you bought at original issue for $7,600, Jones Corporation's 10-year, 5% bond which has a stated redemption price at maturity of $10,000. On February 6, 2012, you sold the bond for $9,040. Assume you have included $334 of OID in your gross income (including the amount accrued for 2012) and increased your basis in the bond by that amount. Your basis is now $7,934. If at the time of the original issue there was no intention to call the bond before maturity, your gain of $1,106 ($9,040 amount realized minus $7,934 adjusted basis) is capital gain.
taxmap/pubs/p550-026.htm#en_us_publink100057906If, in
Example 1, at the time of original issue there was an intention to call the bond before maturity, your entire gain is ordinary income. You figure this as follows:
| 1)
| Entire OID ($10,000 stated redemption price at maturity minus $7,600 issue price)
| $2,400
|
| 2)
| Minus: Amount previously included
in income
| 334 |
| 3)
| Maximum amount of ordinary income
| $2,066 |
Because the amount in (3) is more than your gain of $1,106, your entire gain is ordinary income.
If the debt instrument has market discount and you chose to include the discount in income as it accrued, increase your basis in the debt instrument by the accrued discount to figure capital gain or loss on its disposition. If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. See
Market Discount Bonds in chapter 1. The rest of the gain is capital gain.
However, a different rule applies if you dispose of a market discount bond that was:
- Issued before July 19, 1984, and
- Purchased by you before May 1, 1993.
In that case, any gain is treated as interest income up to the amount of your deferred interest deduction for the year you dispose of the bond. The rest of the gain is capital gain. (The limit on the interest deduction for market discount bonds is discussed in chapter 3 under
When To Deduct Investment Interest.)
Report the sale or trade of a market discount bond in Form 8949, Part I or Part II, whichever is appropriate. If the sale or trade results in a gain and you did not choose to include market discount in income currently, enter "O" in column (f) and in column (g) enter the amount of the accrued market discount as a negative number. Also report the amount of accrued market discount in column (g) as interest income on Schedule B (Form 1040A or 1040), line 1, and identify it as "Accrued Market
Discount."
 | Report your sales or trades of a market discount bond on Form 8949 with the correct box checked for these transactions. See Form 8949 and the Instructions for Form
8949. |
taxmap/pubs/p550-026.htm#en_us_publink100057908Any amount you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument.
taxmap/pubs/p550-026.htm#en_us_publink100057909If you hold an obligation of an individual issued with OID after March 1, 1984, you generally must include the OID in your income currently, and your gain or loss on its sale or retirement is generally capital gain or loss. An exception to this treatment applies if the obligation is a loan between individuals and all the following requirements are met.
- The lender is not in the business of lending money.
- The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or
less.
- Avoiding federal tax is not one of the principal purposes of the
loan.
If the exception applies, or the obligation was issued before March 2, 1984, you do not include the OID in your income currently. When you sell or redeem the obligation, the part of your gain that is not more than your accrued share of OID at that time is ordinary income. The rest of the gain, if any, is capital gain. Any loss on the sale or redemption is capital loss.
taxmap/pubs/p550-026.htm#en_us_publink100057910You cannot deduct any loss on an obligation required to be in registered form that is instead held in bearer form. In addition, any gain on the sale or other disposition of the obligation is ordinary income. However, if the issuer was subject to a tax when the obligation was issued, then you can deduct any loss, and any gain may qualify for capital gain treatment.
taxmap/pubs/p550-026.htm#en_us_publink100057911Any obligation must be in registered form unless:
- It is issued by a natural person,
- It is not of a type offered to the public,
- It has a maturity at the date of issue of not more than 1 year,
or
- It was issued before 1983.
If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways.
- Ordinary loss.
- Casualty loss.
- Nonbusiness bad debt (short-term capital loss).
If you can reasonably estimate your loss, you can choose to treat the estimated loss as either an ordinary loss or a casualty loss in the current year. Either way, you claim the loss as an itemized deduction.
If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. Your loss is subject to the 2%-of-adjusted-gross-income limit. You cannot choose to claim an ordinary loss if any part of the deposit is federally
insured.
If you claim a casualty loss, attach Form 4684 to your return. Each loss must be reduced by $100. Your total casualty losses for the year are reduced by 10% of your adjusted gross
income.
You cannot choose either of these methods if:
- You own at least 1% of the financial institution,
- You are an officer of the institution, or
- You are related to such an owner or officer. You are related if you and the owner or officer are "related parties," as defined earlier under
Related Party Transactions, or if you are the aunt, uncle, nephew, or niece of the owner or officer.
If the actual loss that is finally determined is more than the amount you deducted as an estimated loss, you can claim the excess loss as a bad debt. If the actual loss is less than the amount deducted as an estimated loss, you must include in income (in the final determination year) the excess loss claimed. See
Recoveries in Publication
525.
If you do not choose to deduct your estimated loss as a casualty loss or an ordinary loss, you wait until the year the amount of the actual loss is determined and deduct it as a nonbusiness bad debt in that year. Report it as a short-term capital loss on Form 8949, Part I, line 1, as explained under
How to report bad debts in
Nonbusiness Bad Debts, later.
The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income.
taxmap/pubs/p550-026.htm#en_us_publink100057916Generally, all or part of a gain on a conversion transaction is treated as ordinary income. This applies to gain on the disposition or other termination of any position you held as part of a conversion transaction you entered into after April 30, 1993.
A conversion transaction is any transaction that meets both of these tests.
- Substantially all of your expected return from the transaction is due to the time value of your net investment. In other words, the return on your investment is, in substance, like interest on a loan.
- The transaction is one of the following.
- A straddle as defined under
Straddles, later, but including any set of offsetting positions on stock established before October 22, 2004.
- Any transaction in which you acquire property (whether or not actively traded) at substantially the same time that you contract to sell the same property, or substantially identical property, at a price set in the contract.
- Any other transaction that is marketed or sold as producing capital gains from a transaction described in (1).
The amount of gain treated as ordinary income is the smaller of:
- The gain recognized on the disposition or other termination of the position,
or
- The "applicable imputed income amount."
Figure this amount as follows.
- Figure the amount of interest that would have accrued on your net investment in the conversion transaction for the period ending on the earlier
of:
- The date you dispose of the position, or
- The date the transaction stops being a conversion transaction.
To figure this amount, use an interest rate equal to 120% of the "applicable rate," defined
later.
- Subtract from (1) the amount treated as ordinary income from any earlier disposition or other termination of a position held as part of the same conversion transaction.
If the term of the conversion transaction is indefinite, the applicable rate is the federal short-term rate in effect under section 6621(b) of the Internal Revenue Code during the period of the conversion transaction, compounded daily.
In all other cases, the applicable rate is the "applicable federal rate" determined as if the conversion transaction were a debt instrument and compounded
semi-annually.
The rates discussed above are published by the IRS in the Internal Revenue Bulletin. Or, you can contact the IRS to get these rates. See
chapter 5 for information on contacting the IRS.
To determine your net investment in a conversion transaction, include the fair market value of any position at the time it becomes part of the transaction. This means your net investment generally will be the total amount you invested, less any amount you received for entering into the position (for example, a premium you received for writing a call).
taxmap/pubs/p550-026.htm#en_us_publink100057921A special rule applies when a position with a built-in loss becomes part of a conversion transaction. A built-in loss is any loss you would have realized if you had disposed of or otherwise terminated the position at its fair market value at the time it became part of the conversion transaction.
When applying the conversion transaction rules to a position with a built-in loss, use the position's fair market value at the time it became part of the transaction. But, when you dispose of or otherwise terminate the position in a transaction in which you recognize gain or loss, you must recognize the built-in loss. The conversion transaction rules do not affect whether the built-in loss is treated as an ordinary or capital loss.
taxmap/pubs/p550-026.htm#en_us_publink100057922Before determining the amount of gain treated as ordinary income, you can net certain gains and losses from positions of the same conversion transaction. To do this, you have to dispose of all the positions within a 14-day period that is within a single tax year. You cannot net the built-in loss against the gain.
 | You can net gains and losses only if you identify the conversion transaction as an identified netting transaction on your books and records. Each position of the conversion transaction must be identified before the end of the day on which the position becomes part of the conversion transaction. For conversion transactions entered into before February 20, 1996, this requirement is met if the identification was made by that date.
|
taxmap/pubs/p550-026.htm#en_us_publink100057924These rules do not apply to options dealers and commodities traders.
taxmap/pubs/p550-026.htm#en_us_publink100057925Use Form 6781 to report conversion transactions. See the instructions for lines 11 and 13 of Form 6781.
taxmap/pubs/p550-026.htm#en_us_publink100057926A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed
price.
The termination of a commodity futures contract generally results in capital gain or loss unless the contract is a hedging transaction.
taxmap/pubs/p550-026.htm#en_us_publink100057927
A futures contract that is a hedging transaction generally produces ordinary
gain or loss. A futures contract is a hedging transaction if you enter into the
contract in the ordinary course of your business primarily to manage the risk of
interest rate or price changes or currency fluctuations on borrowings, ordinary
property, or ordinary obligations. (Generally, ordinary property or obligations
are those that cannot produce capital gain or loss under any circumstances.) For
example, the offset or exercise of a futures contract that protects against
price changes in your business inventory results in an ordinary gain or loss.
For more information about hedging transactions, see Regulations section 1.1221-2. Also, see
Hedging Transactions under
Section 1256 Contracts Marked to Market, earlier.
| If you have multiple transactions in the commodity futures market during the year, the burden of proof is on you to show which transactions are hedging transactions. Clearly identify any hedging transactions on your books and records before the end of the day you entered into the transaction. It may be helpful to have separate brokerage accounts for your hedging and nonhedging transactions. For specific requirements concerning identification of hedging transactions and the underlying item, items, or aggregate risk being hedged, see Regulations section 1.1221-2(f).
|
taxmap/pubs/p550-026.htm#en_us_publink100057929If you have a gain from a constructive ownership transaction entered into after July 11, 1999, involving a financial asset (discussed later) and the gain normally would be treated as long-term capital gain, all or part of the gain may be treated instead as ordinary income. In addition, if any gain is treated as ordinary income, your tax is increased by an interest charge.
taxmap/pubs/p550-026.htm#en_us_publink100057930The following are constructive ownership transactions.
- A notional principal contract in which you have the right to receive all or substantially all of the investment yield on a financial asset and you are obligated to reimburse all or substantially all of any decline in value of the financial
asset.
- A forward or futures contract to acquire a financial asset.
- The holding of a call option and writing of a put option on a financial asset at substantially the same strike price and maturity
date.
This provision does not apply if all the positions are marked to market. Marked to market rules for section 1256 contracts are discussed in detail under
Section 1256 Contracts Marked to Market, earlier.
A financial asset, for this purpose, is any equity interest in a pass-through entity. Pass-through entities include partnerships, S corporations, trusts, regulated investment companies, and real estate investment trusts.
taxmap/pubs/p550-026.htm#en_us_publink100057932Long-term capital gain is treated as ordinary income to the extent it is more than the net underlying long-term capital gain. The net underlying long-term capital gain is the net capital gain you would have realized if you acquired the asset for its fair market value on the date the constructive ownership transaction was opened and sold the asset for its fair market value on the date the transaction was closed. If you do not establish the amount of net underlying long-term capital gain by clear and convincing evidence, it is treated as zero.
taxmap/pubs/p550-026.htm#en_us_publink100057933For more information about constructive ownership transactions, see section 1260 of the Internal Revenue
Code.
taxmap/pubs/p550-026.htm#en_us_publink100057934Subject to the limitations discussed under
Ordinary loss limit, later, you can deduct as an ordinary loss, rather than as a capital loss, a loss on the sale, trade, or worthlessness of section 1244 stock. Report the loss on Form 4797, line 10. Any loss in excess of the amounts described in
Ordinary loss limit, should be reported on Form 8949.
Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. Do not offset gains against losses that are within the ordinary loss limit, explained later in this discussion, even if the transactions are in stock of the same company. Report the gain on Form
8949.
If you must figure a net operating loss, any ordinary loss from the sale of section 1244 stock is a business loss.
taxmap/pubs/p550-026.htm#en_us_publink100057935The amount you can deduct as an ordinary loss is limited to $50,000 each year. On a joint return the limit is $100,000, even if only one spouse has this type of loss. If your loss is $110,000 and your spouse has no loss, you can deduct $100,000 as an ordinary loss on a joint return. The remaining $10,000 is a capital loss.
taxmap/pubs/p550-026.htm#en_us_publink100057936This is stock issued for money or property (other than stock and securities) in a domestic small business corporation. During its 5 most recent tax years before the loss, this corporation must have derived more than 50% of its gross receipts from other than royalties, rents, dividends, interest, annuities, and gains from sales and trades of stocks or securities. If the corporation was in existence for at least 1 year, but less than 5 years, the 50% test applies to the tax years ending before the loss. If the corporation was in existence less than 1 year, the 50% test applies to the entire period the corporation was in existence before the day of the loss. However, if the corporation's deductions (other than the net operating loss and dividends received deductions) were more than its gross income during this period, this 50% test does not apply.
The corporation must have been largely an operating company for ordinary loss treatment to apply.
If the stock was issued before July 19, 1984, the stock must be common stock. If issued after July 18, 1984, the stock may be either common or preferred. For more information about the requirements of a small business corporation or the qualifications of section 1244 stock, see section 1244 of the Internal Revenue Code and its regulations.
taxmap/pubs/p550-026.htm#en_us_publink100057937You must be the original owner of the stock to be allowed ordinary loss treatment. To claim a deductible loss on stock issued to your partnership, you must have been a partner when the stock was issued and have remained so until the time of the loss. You add your distributive share of the partnership loss to any individual section 1244 stock loss you may have before applying the ordinary loss limit.
taxmap/pubs/p550-026.htm#en_us_publink100057938If your partnership distributes the stock to you, you cannot treat any later loss on that stock as an ordinary loss.
taxmap/pubs/p550-026.htm#en_us_publink100057939Stock sold through an underwriter is not section 1244 stock unless the underwriter only acted as a selling agent for the corporation.
taxmap/pubs/p550-026.htm#en_us_publink100057940Stock you receive as a stock dividend qualifies as section 1244 stock if:
- You receive it from a small business corporation in which you own stock,
and
- The stock you own meets the requirements when the stock dividend is
distributed.
If you trade your section 1244 stock for new stock in the same corporation in a reorganization that qualifies as a recapitalization or that is only a change in identity, form, or place of organization, the new stock is section 1244 stock if the stock you trade meets the requirements when the trade occurs.
If you hold section 1244 stock and other stock in the same corporation, not all of the stock you receive as a stock dividend or in a reorganization will qualify as section 1244 stock. Only that part based on the section 1244 stock you hold will qualify.
taxmap/pubs/p550-026.htm#en_us_publink100057941Your basis for 100 shares of X common stock is $1,000. These shares qualify as section 1244 stock. If, as a nontaxable stock dividend, you receive 50 more shares of common stock, the basis of which is determined from the 100 shares you own, the 50 shares are also section 1244
stock.
If you also own stock in the corporation that is not section 1244 stock when you receive the stock dividend, you must divide the shares you receive as a dividend between the section 1244 stock and the other stock. Only the shares from the former can be section 1244
stock.
taxmap/pubs/p550-026.htm#en_us_publink100057942To determine ordinary loss on section 1244 stock you receive in a trade for property, you have to reduce the basis of the stock if:
- The adjusted basis (for figuring loss) of the property, immediately before the trade, was more than its fair market value,
and
- The basis of the stock is determined by the basis of the property.
Reduce the basis of the stock by the difference between the adjusted basis of the property and its fair market value at the time of the trade. You reduce the basis only to figure the ordinary loss. Do not reduce the basis of the stock for any other purpose.
You transfer property with an adjusted basis of $1,000 and a fair market value of $250 to a corporation for its section 1244 stock. The basis of your stock is $1,000, but to figure the ordinary loss under these rules, the basis of your stock is $250 ($1,000 minus $750). If you later sell the section 1244 stock for $200, your $800 loss is an ordinary loss of $50 and a capital loss of $750.
taxmap/pubs/p550-026.htm#en_us_publink100057944If the basis of your section 1244 stock has increased, through contributions to capital or otherwise, you must treat this increase as applying to stock that is not section 1244 stock when you figure an ordinary loss on its sale.
taxmap/pubs/p550-026.htm#en_us_publink100057945You buy 100 shares of section 1244 stock for $10,000. You are the original owner. You later make a $2,000 contribution to capital that increases the total basis of the 100 shares to $12,000. You then sell the 100 shares for $9,000 and have a loss of $3,000. You can deduct only $2,500 ($3,000 × $10,000/$12,000) as an ordinary loss under these rules. The remaining $500 is a capital loss.
| Recordkeeping.
You must keep records sufficient to show your stock qualifies as section 1244
stock. Your records must also distinguish your section 1244 stock from any other
stock you own in the corporation.
|
taxmap/pubs/p550-026.htm#en_us_publink100057947A small business investment company (SBIC) is one that is licensed and operated under the Small Business Investment Act of 1958.
If you are an investor in SBIC stock, you can deduct as an ordinary loss, rather than a capital loss, a loss from the sale, trade, or worthlessness of that stock. A gain from the sale or trade of that stock is a capital gain. Do not offset your gains and losses, even if they are on stock of the same company.
taxmap/pubs/p550-026.htm#en_us_publink100057948You report this type of ordinary loss on Form 4797, Part II, line 10. In addition to the information required by the form, you must include the name and address of the company that issued the stock. If applicable, also include the reason the stock is worthless and the approximate date it became worthless. Report a capital gain from the sale of SBIC stock on Form 8949.
taxmap/pubs/p550-026.htm#en_us_publink100057949If you close a short sale of SBIC stock with other SBIC stock you bought only for that purpose, any loss you have on the sale is a capital loss. See
Short Sales, later in this chapter, for more information.
If you sold or traded investment property, you must determine your holding period for the property. Your holding period determines whether any capital gain or loss was a short-term or a long-term capital gain or loss.
taxmap/pubs/p550-026.htm#en_us_publink100010541If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss.
To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.
taxmap/pubs/p550-026.htm#en_us_publink100010542If you bought investment property on February 7, 2011, and sold it on February 7, 2012, your holding period is not more than 1 year and you have a short-term capital gain or loss. If you sold it on February 8, 2012, your holding period is more than 1 year and you have a long-term capital gain or
loss.
taxmap/pubs/p550-026.htm#en_us_publink100010543For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them.
 | Do not confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be
made. |
taxmap/pubs/p550-026.htm#en_us_publink100010545You are a cash method, calendar year taxpayer. You sold stock at a gain on December 28, 2012. According to the rules of the stock exchange, the sale was closed by delivery of the stock 3 trading days after the sale, on January 3, 2013. You received payment of the sale price on that same day. Report your gain on your 2012 return, even though you received the payment in 2013. The gain is long term or short term depending on whether you held the stock more than 1 year. Your holding period ended on December 28. If you had sold the stock at a loss, you would also report it on your 2012
return.
taxmap/pubs/p550-026.htm#en_us_publink100010546The holding period of U.S. Treasury notes and bonds sold at auction on the basis of yield starts the day after the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. The holding period of U.S. Treasury notes and bonds sold through an offering on a subscription basis at a specified yield starts the day after the subscription is submitted.
taxmap/pubs/p550-026.htm#en_us_publink100010547
In determining your holding period for shares bought by the bank or other agent,
full shares are considered bought first and any fractional shares are considered
bought last. Your holding period starts on the day after the bank's purchase
date. If a share was bought over more than one purchase date, your holding
period for that share is a split holding period. A part of the share is
considered to have been bought on each date that stock was bought by the bank
with the proceeds of available funds.
taxmap/pubs/p550-026.htm#en_us_publink100010548If you acquire investment property in a trade for other investment property and your basis for the new property is determined, in whole or in part, by your basis in the old property, your holding period for the new property begins on the day following the date you acquired the old property.
taxmap/pubs/p550-026.htm#en_us_publink100010549If you receive a gift of property and your basis is determined by the donor's adjusted basis, your holding period is considered to have started on the same day the donor's holding period started.
If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift.
taxmap/pubs/p550-026.htm#en_us_publink100010550If you inherited property from someone who died before or after 2010, or from someone who died in 2010 and the executor of the decedent's estate did not elect to file Form 8939, your capital gain or loss on any later disposition of that property is treated as long-term gain or loss, regardless of how long you held the property. If you acquired the property from someone who died in 2010 and the executor made the election to file Form 8939, see Publication
4895 to determine your holding period.
To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. The holding period cannot start until there is an actual contract of sale. The holding period of the seller cannot end before that time.
taxmap/pubs/p550-026.htm#en_us_publink100010552If you sell real property but keep a security interest in it, and then later repossess the property under the terms of the sales contract, your holding period for a later sale includes the period you held the property before the original sale and the period after the repossession. Your holding period does not include the time between the original sale and the repossession. That is, it does not include the period during which the first buyer held the property.
taxmap/pubs/p550-026.htm#en_us_publink100010553The holding period for stock you received as a taxable stock dividend begins on the date of distribution.
The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. This rule also applies to stock acquired in a spin-off, which is a distribution of stock or securities in a controlled corporation.
taxmap/pubs/p550-026.htm#en_us_publink100010554Your holding period for nontaxable stock rights includes the holding period of the underlying stock. The holding period for stock acquired through the exercise of stock rights begins on the date the right was exercised.
taxmap/pubs/p550-026.htm#en_us_publink100010555Gains or losses on section 1256 contracts open at the end of the year, or terminated during the year, are treated as 60% long term and 40% short term, regardless of how long the contracts were held. See
Section 1256 Contracts Marked to Market, earlier.
Your holding period for property you acquire when you exercise an option begins the day after you exercise the option.
taxmap/pubs/p550-026.htm#en_us_publink100010557Your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities.
taxmap/pubs/p550-026.htm#en_us_publink100010558Your holding period for stock you acquired in a tax-free rollover of gain from a sale of qualified small business stock, described later under
Gains on Qualified Small Business Stock, includes the period you held the old stock.
Futures transactions in any commodity subject to the rules of a board of trade or commodity exchange are long term if the contract was held for more than 6
months.
Your holding period for a commodity received in satisfaction of a commodity futures contract, other than a regulated futures contract subject to Internal Revenue Code section 1256, includes your holding period for the futures contract if you held the contract as a capital asset.
taxmap/pubs/p550-026.htm#en_us_publink100010560Your holding period for a security received in satisfaction of a securities futures contract, other than one that is a section 1256 contract, includes your holding period for the futures contract if you held the contract as a capital
asset.
Your holding period for a security received in satisfaction of a securities futures contract to sell, other than one that is a section 1256 contract, is determined by the rules that apply to short sales, discussed later under
Short Sales.
If you hold stock in a mutual fund (or other regulated investment company) or real estate investment trust (REIT) for 6 months or less and then sell it at a loss (other than under a periodic liquidation plan), special rules may
apply.
taxmap/pubs/p550-026.htm#en_us_publink100010562The loss (after reduction for any exempt-interest dividends you received, as explained later) is treated as a long-term capital loss up to the total of any capital gain distributions you received and your share of any undistributed capital gains. Any remaining loss is short-term capital loss.
taxmap/pubs/p550-026.htm#en_us_publink1000250038If your dividends and capital gain distributions are reinvested in new shares, the holding period of each new share begins the day after that share was purchased. Therefore, if you sell both the new shares and the original shares, you might have both short-term and long-term gains and losses.
taxmap/pubs/p550-026.htm#en_us_publink1000250039On April 3, 2012, you bought a mutual fund share for $20. On June 19, 2012, the mutual fund paid a capital gain distribution of $2 a share, which is taxed as a long-term capital gain. On July 17, 2012, you sold the share for $17.50. If it were not for the capital gain distribution, your loss would be a short-term loss of $2.50 ($20 − $17.50). However, the part of the loss that is not more than the capital gain distribution ($2) must be reported as a long-term capital loss. The remaining $0.50 of the loss can be reported as a short-term capital
loss.
taxmap/pubs/p550-026.htm#en_us_publink100010563If you received exempt-interest dividends on the stock, at least part of your loss is disallowed. You can deduct only the amount of loss that is more than the exempt-interest dividends. Report the loss as a short-term capital loss. On Form 8949, Part I, line 1, column (d), increase the sales price by the amount of exempt-interest dividends, but do not increase it to more than the cost or other basis shown in column (e).
| For more information on Form 8949 and Schedule D (Form 1040), see the Instructions for Form 8949 and the Instructions for Schedule D (Form
1040). |
taxmap/pubs/p550-026.htm#en_us_publink1000250040On January 9, 2012, you bought a mutual fund share for $40. On February 6, 2012, the mutual fund paid a $5 dividend from tax-exempt interest, which is not taxable to you. On February 13, 2012, you sold the share for $34. If it were not for the tax-exempt dividend, your loss would be $6 ($40 − $34). However, you must increase the sales price from $34 to $39 (to account for the $5 portion of the loss that is not deductible). You can deduct only $1 as a short-term capital
loss.
taxmap/pubs/p550-026.htm#en_us_publink100010564Any loss on the sale or trade of stock must be treated as a long-term capital loss to the extent you received, from that stock,
qualified dividends
(defined in chapter 1) that are extraordinary dividends. This is true regardless
of how long you actually held the stock. Generally, an extraordinary dividend is
a dividend that equals or exceeds 10% (5% in the case of preferred stock) of
your adjusted basis in the stock.
If someone owes you money that you cannot collect, you have a bad debt. You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless.
There are two kinds of bad debts—business and nonbusiness. A business bad debt, generally, is one that comes from operating your trade or business and is deductible as a business loss. All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses.
taxmap/pubs/p550-026.htm#en_us_publink100010566An architect made personal loans to several friends who were not clients. She could not collect on some of these loans. They are deductible only as nonbusiness bad debts because the architect was not in the business of lending money and the loans do not have any relationship to her
business.
taxmap/pubs/p550-026.htm#en_us_publink100010567For information on business bad debts of an employee, see Publication
529, Miscellaneous Deductions. For information on other business bad debts, see chapter 10 of Publication
535.
To be deductible, nonbusiness bad debts must be totally worthless. You cannot deduct a partly worthless nonbusiness debt.
taxmap/pubs/p550-026.htm#en_us_publink100010569A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money.
taxmap/pubs/p550-026.htm#en_us_publink100010570For a bad debt, you must show there was an intention at the time of the transaction to make a loan and not a gift. If you lend money to a relative or friend with the understanding that it may not be repaid, it is considered a gift and not a loan. You cannot take a bad debt deduction for a gift. There cannot be a bad debt unless there is a true creditor-debtor relationship between you and the person or organization that owes you the money.
When minor children borrow from their parents to pay for their basic needs, there is no genuine debt. A bad debt cannot be deducted for such a loan.
taxmap/pubs/p550-026.htm#en_us_publink100010571To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. If you are a cash method taxpayer (most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items.
taxmap/pubs/p550-026.htm#en_us_publink100010572You can take a bad debt deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. A debt becomes worthless when there is no longer any chance that the amount owed will be paid.
It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You must only show that you have taken reasonable steps to collect the debt. Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt.
taxmap/pubs/p550-026.htm#en_us_publink100010573If you do not deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. To do this, use Form 1040X to amend your return for the year the debt became worthless. You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. (Claims not due to bad debts or worthless securities generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later.) For more information about filing a claim, see Publication
556.
If you guarantee a debt that becomes worthless, you cannot take a bad debt deduction for your payments on the debt unless you can show either that your reason for making the guarantee was to protect your investment or that you entered the guarantee transaction with a profit motive. If you make the guarantee as a favor to friends and do not receive any consideration in return, your payments are considered a gift and you cannot take a deduction.
taxmap/pubs/p550-026.htm#en_us_publink100010575Henry Lloyd, an officer and principal shareholder of the Spruce Corporation, guaranteed payment of a bank loan the corporation received. The corporation defaulted on the loan and Henry made full payment. Because he guaranteed the loan to protect his investment in the corporation, Henry can take a nonbusiness bad debt
deduction.
taxmap/pubs/p550-026.htm#en_us_publink100010576Milt and John are co-workers. Milt, as a favor to John, guarantees a note at their local credit union. John does not pay the note and declares bankruptcy. Milt pays off the note. However, since he did not enter into the guarantee agreement to protect an investment or to make a profit, Milt cannot take a bad debt
deduction.
taxmap/pubs/p550-026.htm#en_us_publink100010577Unless you have rights against the borrower, discussed next, a payment you make on a loan you guaranteed is deductible in the year you make the payment.
taxmap/pubs/p550-026.htm#en_us_publink100010578When you make payment on a loan you guaranteed, you may have the right to take the place of the lender (the right of subrogation). The debt is then owed to you. If you have this right or some other right to demand payment from the borrower, you cannot take a bad debt deduction until these rights become totally worthless.
taxmap/pubs/p550-026.htm#en_us_publink100010579You cannot take a nonbusiness bad debt deduction for any worthless debt owed to you by:
- A political party;
- A national, state, or local committee of a political party;
or
- A committee, association, or organization that either accepts contributions or spends money to influence
elections.
Workers and material suppliers may file liens against property because of debts owed by a builder or contractor. If you pay off the lien to avoid foreclosure and loss of your property, you are entitled to repayment from the builder or contractor. If the debt is uncollectible, you can take a bad debt deduction.
taxmap/pubs/p550-026.htm#en_us_publink100010581You can take a bad debt deduction for the amount you deposit with a contractor if the contractor becomes insolvent and you are unable to recover your deposit. If the deposit is for work unrelated to your trade or business, it is a nonbusiness bad debt deduction.
taxmap/pubs/p550-026.htm#en_us_publink100010582If the buyer of your home assumes your mortgage, you may remain secondarily liable for repayment of the mortgage loan. If the buyer defaults on the loan and the house is then sold for less than the amount outstanding on the mortgage, you may have to make up the difference. You can take a bad debt deduction for the amount you pay to satisfy the mortgage, if you cannot collect it from the buyer.
taxmap/pubs/p550-026.htm#en_us_publink100010583If you own securities that become totally worthless, you can take a deduction for a loss, but not for a bad debt. See
Worthless Securities under
What Is a Sale or Trade, earlier in this chapter.
If you deducted a bad debt and in a later tax year you recover (collect) all or part of it, you may have to include the amount you recover in your gross income. However, you can exclude from gross income the amount recovered up to the amount of the deduction that did not reduce your tax in the year deducted. See
Recoveries in Publication
525.
Deduct nonbusiness bad debts as short-term capital losses on Form
8949.
On Form 8949, Part I, line 1, enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d). Use a separate line for each bad
debt.
| Make sure you report your bad debt(s) (and any other short-term transactions for which you did not receive a Form 1099-B or substitute statement) on Form 8949 with box C
checked. |
For each bad debt, attach a statement to your return that contains:
- A description of the debt, including the amount, and the date it became
due;
- The name of the debtor, and any business or family relationship between you and the
debtor;
- The efforts you made to collect the debt; and
- Why you decided the debt was worthless. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt.
A short sale occurs when you agree to sell property you do not own (or own but do not wish to sell). You make this type of sale in two steps.
- You sell short. You borrow property and deliver it to a buyer.
- You close the sale. At a later date, you either buy substantially identical property and deliver it to the lender or make delivery out of property you held at the time of the sale. Delivery of property borrowed from another lender does not satisfy this
requirement.
You do not realize gain or loss until delivery of property to close the short sale. You will have a capital gain or loss if the property used to close the short sale is a capital asset.
As a general rule, if you enter into a short sale on or after January 2012, your short sale will be reported on Form 1099-B for the year in which you deliver the security to satisfy the short sale obligation. For short sales entered into before 2012, your broker should have reported your short sale on a Form 1099-B in the year in which the short sale was
opened.
taxmap/pubs/p550-026.htm#en_us_publink1000267399Report any short sale on Form 8949 in the year it closes. If a short sale closed in 2012 but you did not get Form 1099-B (or substitute statement) for it because you entered into it before 2012, report it on a Form 8949 with box C checked. In column (a), enter (for example) "100 sh. XYZ Co. — 2012 short sale
closed."
taxmap/pubs/p550-026.htm#en_us_publink100010587A different rule applies if the property sold short becomes substantially worthless. In that case, you must recognize gain as if the short sale were closed when the property became substantially worthless.
taxmap/pubs/p550-026.htm#en_us_publink100010588taxmap/pubs/p550-026.htm#en_us_publink100010589On May 7, 2012, you bought 100 shares of Baker Corporation stock for $1,000. On September 10, 2012, you sold short 100 shares of similar Baker stock for $1,600. You made no other transactions involving Baker stock for the rest of 2012 and the first 30 days of 2013. Your short sale is treated as a constructive sale of an appreciated financial position because a sale of your Baker stock on the date of the short sale would have resulted in a gain. You recognize a $600 short-term capital gain from the constructive sale and your new holding period in the Baker stock begins on September 10.
taxmap/pubs/p550-026.htm#en_us_publink100010590As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you actually hold the property eventually delivered to the lender to close the short sale.
taxmap/pubs/p550-026.htm#en_us_publink100010591Even though you do not own any stock of Ace Corporation, you contract to sell 100 shares of it, which you borrow from your broker. After 13 months, when the price of the stock has risen, you buy 100 shares of Ace Corporation stock and immediately deliver them to your broker to close out the short sale. Your loss is a short-term capital loss because your holding period for the delivered property is less than 1
day.
taxmap/pubs/p550-026.htm#en_us_publink100010592Special rules may apply to gains and losses from short sales of stocks, securities, and commodity and securities futures (other than certain straddles) if you held or acquired property substantially identical to property that sold short. But if the amount of property you sold short is more than the amount of that substantially identical property, the special rules do not apply to the gain or loss on the
excess.
taxmap/pubs/p550-026.htm#en_us_publink100010593If you held the substantially identical property for 1 year or less on the date of the short sale, or if you acquired the substantially identical property after the short sale and by the date of closing the short sale, then:
- Rule 1.
Your gain, if any, when you close the short sale is a short-term capital gain,
and
- Rule 2.
The holding period of the substantially identical property begins on the date of the closing of the short sale or on the date of the sale of this property, whichever comes
first.
If, on the date of the short sale, you held substantially identical property for more than 1 year, any loss you realize on the short sale is a long-term capital loss, even if you held the property used to close the sale for 1 year or less. Certain losses on short sales of stock or securities are also subject to wash sale treatment. For information, see
Wash Sales, later.
Under certain elections, you can avoid the treatment of loss from a short sale as long term under the special rule. These elections are for positions that are part of a mixed straddle. See
Other elections under
Mixed Straddle Elections, later, for more information about these elections.
If any broker transferred your securities for use in a short sale or similar transaction and received certain substitute dividend payments on your behalf while the short sale was open, that broker must give you a Form 1099-MISC or a similar statement reporting the amount of these payments. Form 1099-MISC must be used for those substitute payments totaling $10 or more that are known on the payment's record date to be in lieu of an exempt-interest dividend, a capital gain dividend, a return of capital distribution, or a dividend subject to a foreign tax credit, or that are in lieu of tax-exempt interest. Do not treat these substitute payments as dividends or interest. Instead, report the substitute payments shown on Form 1099-MISC as "Other income" on line 21 of Form 1040.
taxmap/pubs/p550-026.htm#en_us_publink100010597A substitute payment means a payment in lieu of:
- Tax-exempt interest (including OID) accrued while the short sale was open,
and
- A dividend, if the ex-dividend date is after the transfer of stock for use in a short sale and before the closing of the short sale.
If you borrow stock to make a short sale, you may have to remit to the lender payments in lieu of the dividends distributed while you maintain your short position. You can deduct these payments only if you hold the short sale open at least 46 days (more than 1 year in the case of an extraordinary dividend as defined later) and you itemize your deductions.
You deduct these payments as investment interest on Schedule A (Form 1040). See
Interest Expenses in chapter 3 for more information.
If you close the short sale by the 45th day after the date of the short sale (1 year or less in the case of an extraordinary dividend), you cannot deduct the payment in lieu of the dividend you make to the lender. Instead, you must increase the basis of the stock used to close the short sale by that amount.
To determine how long a short sale is kept open, do not include any period during which you hold, have an option to buy, or are under a contractual obligation to buy substantially identical stock or securities.
If your payment is made for a liquidating distribution or nontaxable stock distribution, or if you buy more shares equal to a stock distribution issued on the borrowed stock during your short position, you have a capital expense. You must add the payment to the cost of the stock sold short.
taxmap/pubs/p550-026.htm#en_us_publink100010599If you close the short sale within 45 days, the deduction for amounts you pay in lieu of dividends will be disallowed only to the extent the payments are more than the amount you receive as ordinary income from the lender of the stock for the use of collateral with the short sale. This exception does not apply to payments in place of extraordinary dividends.
taxmap/pubs/p550-026.htm#en_us_publink100010600If the amount of any dividend you receive on a share of preferred stock equals or exceeds 5% (10% in the case of other stock) of the amount realized on the short sale, the dividend you receive is an extraordinary dividend.
taxmap/pubs/p550-026.htm#en_us_publink100010601You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
- Buy substantially identical stock or securities,
- Acquire substantially identical stock or securities in a fully taxable
trade,
- Acquire a contract or option to buy substantially identical stock or securities,
or
- Acquire substantially identical stock for your individual retirement account (IRA) or Roth
IRA.
If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.
If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.
taxmap/pubs/p550-026.htm#en_us_publink100010602You buy 100 shares of X stock for $1,000. You sell these shares for $750 and within 30 days from the sale you buy 100 shares of the same stock for $800. Because you bought substantially identical stock, you cannot deduct your loss of $250 on the sale. However, you add the disallowed loss of $250 to the cost of the new stock, $800, to obtain your basis in the new stock, which is
$1,050.
taxmap/pubs/p550-026.htm#en_us_publink100010603You are an employee of a corporation with an incentive pay plan. Under this plan, you are given 10 shares of the corporation's stock as a bonus award. You include the fair market value of the stock in your gross income as additional pay. You later sell these shares at a loss. If you receive another bonus award of substantially identical stock within 30 days of the sale, you cannot deduct your loss on the sale.
taxmap/pubs/p550-026.htm#en_us_publink100010604The wash sale rules apply to losses from sales or trades of contracts and options to acquire or sell stock or securities. They do not apply to losses from sales or trades of commodity futures contracts and foreign currencies. See
Coordination of Loss Deferral Rules and Wash Sale Rules under
Straddles, later, for information about the tax treatment of losses on the disposition of positions in a straddle.
Losses from the sale, exchange, or termination of a securities futures contract to sell generally are treated in the same manner as losses from the closing of a short sale, discussed later in this section under
Short sales.
taxmap/pubs/p550-026.htm#en_us_publink100010606The wash sale rules apply if you sell common stock at a loss and, at the same time, buy warrants for common stock of the same corporation. But if you sell warrants at a loss and, at the same time, buy common stock in the same corporation, the wash sale rules apply only if the warrants and stock are considered substantially identical, as discussed next.
taxmap/pubs/p550-026.htm#en_us_publink100010607In determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case. Ordinarily, stocks or securities of one corporation are not considered substantially identical to stocks or securities of another corporation. However, they may be substantially identical in some cases. For example, in a reorganization, the stocks and securities of the predecessor and successor corporations may be substantially identical.
Similarly, bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation. However, where the bonds or preferred stock are convertible into common stock of the same corporation, the relative values, price changes, and other circumstances may make these bonds or preferred stock and the common stock substantially identical. For example, preferred stock is substantially identical to the common stock if the preferred stock:
- Is convertible into common stock,
- Has the same voting rights as the common stock,
- Is subject to the same dividend restrictions,
- Trades at prices that do not vary significantly from the conversion ratio,
and
- Is unrestricted as to convertibility.
If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.
taxmap/pubs/p550-026.htm#en_us_publink100010609You bought 100 shares of M stock on September 26, 2011, for $5,000. On December 19, 2011, you bought 50 shares of substantially identical stock for $2,750. On December 27, 2011, you bought 25 shares of substantially identical stock for $1,125. On January 9, 2012, you sold for $4,000 the 100 shares you bought in September. You have a $1,000 loss on the sale. However, because you bought 75 shares of substantially identical stock within 30 days before the sale, you cannot deduct the loss ($750) on 75 shares. You can deduct the loss ($250) on the other 25 shares. The basis of the 50 shares bought on December 19, 2011, is increased by two-thirds (50 ÷ 75) of the $750 disallowed loss. The new basis of those shares is $3,250 ($2,750 + $500). The basis of the 25 shares bought on December 27, 2011, is increased by the rest of the loss to $1,375 ($1,125 + $250).
taxmap/pubs/p550-026.htm#en_us_publink100010610You bought 100 shares of M stock on September 26, 2011. On February 6, 2012, you sold those shares at a $1,000 loss. On each of the 4 days from February 13, 2012, to February 16, 2012, you bought 50 shares of substantially identical stock. You cannot deduct your $1,000 loss. You must add half the disallowed loss ($500) to the basis of the 50 shares bought on February 13. Add the other half ($500) to the basis of the shares bought on February 14.
taxmap/pubs/p550-026.htm#en_us_publink100010611Loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day.
taxmap/pubs/p550-026.htm#en_us_publink100010612During 2006, you bought 100 shares of X stock on each of three occasions. You paid $158 a share for the first block of 100 shares, $100 a share for the second block, and $95 a share for the third block. On December 27, 2011, you sold 300 shares of X stock for $125 a share. On January 9, 2012, you bought 250 shares of identical X stock. You cannot deduct the loss of $33 a share on the first block because within 30 days after the date of sale you bought 250 identical shares of X stock. In addition, you cannot reduce the gain realized on the sale of the second and third blocks of stock by this
loss.
taxmap/pubs/p550-026.htm#en_us_publink100010613The wash sale rules do not apply to a dealer in stock or securities if the loss is from a transaction made in the ordinary course of business.
taxmap/pubs/p550-026.htm#en_us_publink100010614The wash sale rules apply to a loss realized on a short sale if you sell, or enter into another short sale of, substantially identical stock or securities within a period beginning 30 days before the date the short sale is complete and ending 30 days after that date.
For purposes of the wash sale rules, a short sale is considered complete on the date the short sale is entered into, if:
- On that date, you own stock or securities identical to those sold short (or by that date you enter into a contract or option to acquire that stock or those securities),
and
- You later deliver the stock or securities to close the short
sale.
Otherwise, a short sale is not considered complete until the property is delivered to close the sale.
This treatment also applies to losses from the sale, exchange, or termination of a securities futures contract to
sell.
taxmap/pubs/p550-026.htm#en_us_publink100010615On June 4, you buy 100 shares of stock for $1,000. You sell short 100 shares of the stock for $750 on October 15. On October 16, you buy 100 shares of the same stock for $750. You close the short sale on November 19 by delivering the shares bought on June 4. You cannot deduct the $250 loss ($1,000 − $750) because the date of entering into the short sale (October 15) is considered the date the sale is complete for wash sale purposes and you bought substantially identical stock within 30 days from that
date.
taxmap/pubs/p550-026.htm#en_us_publink100010616The wash sale rules generally will apply to the sale of your residual interest in a real estate mortgage investment conduit (REMIC) if, during the period beginning 6 months before the sale of the interest and ending 6 months after that sale, you acquire any residual interest in any REMIC or any interest in a taxable mortgage pool that is comparable to a residual interest. REMICs are discussed in chapter 1.
taxmap/pubs/p550-026.htm#en_us_publink1000267956If you received a Form 1099-B (or substitute statement), box 5 of that form will show any nondeductible wash sale loss
if:
- The stock or securities sold were covered securities, and
- The substantially identical stock or securities you bought had the same CUSIP numbers as the stock or securities you sold and were bought in the same account as the stock or securities you sold.
However, you cannot deduct a loss from a wash sale even if it is not reported on Form 1099-B (or substitute
statement).
taxmap/pubs/p550-026.htm#en_us_publink1000267959Report a wash sale transaction in Part I or Part II of Form 8949 with the appropriate box checked. Complete all columns. Enter "W" in column (f). Enter as a positive number in column (g) the amount of the loss not allowed. See the Instructions for Form
8949.
taxmap/pubs/p550-026.htm#en_us_publink100010618A securities futures contract is a contract of sale for future delivery of a single security or of a narrow-based security index.
Gain or loss from the contract generally will be treated in a manner similar to gain or loss from transactions in the underlying security. This means gain or loss from the sale, exchange, or termination of the contract will generally have the same character as gain or loss from transactions in the property to which the contract relates. Any capital gain or loss on a sale, exchange, or termination of a contract to sell property will be considered short term, regardless of how long you hold the contract. These contracts are not section 1256 contracts (unless they are dealer securities futures
contracts).
taxmap/pubs/p550-026.htm#en_us_publink100010619Options are generally subject to the rules described in this section. If the option is part of a straddle, the
loss deferral rules covered later under
Straddles
may also apply. For special rules that apply to nonequity options and dealer
equity options, see
Section 1256 Contracts Marked to Market, earlier.
Gain or loss from the sale or trade of an option to buy or sell property that is a capital asset in your hands, or would be if you acquired it, is capital gain or loss. If the property is not or would not be a capital asset, the gain or loss is ordinary gain or loss.
taxmap/pubs/p550-026.htm#en_us_publink100010620You purchased an option to buy 100 shares of XYZ Company stock. The stock increases in value, and you sell the option for more than you paid for it. Your gain is capital gain because the stock underlying the option would have been a capital asset in your
hands.
taxmap/pubs/p550-026.htm#en_us_publink100010621The facts are the same as in
Example 1, except the stock decreases in value and you sell the option for less than you paid for it. Your loss is a capital
loss.
taxmap/pubs/p550-026.htm#en_us_publink100010622If you have a loss because you did not exercise an option to buy or sell, you are considered to have sold or traded the option on the date it expired.
taxmap/pubs/p550-026.htm#en_us_publink100010623If you write (grant) an option, how you report your gain or loss depends on whether it was
exercised.
If you are not in the business of writing options and an option you write on stocks, securities, commodities, or commodity futures is not exercised (or repurchased), the amount you receive is a short-term capital gain.
taxmap/pubs/p550-026.htm#en_us_publink100010624taxmap/pubs/p550-026.htm#en_us_publink100010625A cash settlement option is treated as an option to buy or sell property. A cash settlement option is any option that on exercise is settled in, or could be settled in, cash or property other than the underlying property.
taxmap/pubs/p550-026.htm#en_us_publink100010626Report on Form 8949 gain or loss from the closing or expiration of an option that is not a section 1256 contract but is a capital asset in your hands. If an option you purchased expired, enter the expiration date in column (c) and enter "Expired" in column (d). If an option that was granted (written) expired, enter the expiration date in column (b) and enter "Expired" in column (e). Fill in the other columns as
appropriate.
If a call option you sold was exercised and the option premium you received was not reflected in the sales price shown on the Form 1099-B (or substitute statement) you received, enter the premium as a positive number in column (g) of Form 8949 and enter "E" in column (f).
taxmap/pubs/p550-026.htm#en_us_publink100010627Puts and calls are options on securities and are covered by the rules just discussed for options. The following are specific applications of these rules to holders and writers of options that are bought, sold, or "closed out" in transactions on a national securities exchange, such as the Chicago Board Options Exchange. (But see
Section 1256 Contracts Marked to Market, earlier, for special rules that may apply to nonequity options and dealer equity options.) These rules are also presented in Table 4-3.
Puts and calls are issued by writers (grantors) to holders for cash premiums. They are ended by exercise, closing transaction, or lapse.
A "put option" is the right to sell to the writer, at any time before a specified future date, a stated number of shares at a specified price. Conversely, a "call option" is the right to buy from the writer of the option, at any time before a specified future date, a stated number of shares of stock at a specified
price.
taxmap/pubs/p550-026.htm#en_us_publink100010628If you buy a put or a call, you may not deduct its cost. It is a capital expenditure.
If you sell the put or the call before you exercise it, the difference between its cost and the amount you receive for it is either a long-term or short-term capital gain or loss, depending on how long you held it.
If the option expires, its cost is either a long-term or short-term capital loss, depending on your holding period, which ends on the expiration date.
If you exercise a call, add its cost to the basis of the stock you bought. If you exercise a put, reduce your amount realized on the sale of the underlying stock by the cost of the put when figuring your gain or loss. Any gain or loss on the sale of the underlying stock is long term or short term depending on your holding period for the underlying stock.
taxmap/pubs/p550-026.htm#en_us_publink100010629Buying a put option is generally treated as a short sale, and the exercise, sale, or expiration of the put is a closing of the short sale. See
Short Sales, earlier. If you have held the underlying stock for 1 year or less at the time you buy the put, any gain on the exercise, sale, or expiration of the put is a short-term capital gain. The same is true if you buy the underlying stock after you buy the put but before its exercise, sale, or expiration. Your holding period for the underlying stock begins on the earliest of:
- The date you dispose of the stock,
- The date you exercise the put,
- The date you sell the put, or
- The date the put expires.
If you write (grant) a put or a call, do not include the amount you receive for writing it in your income at the time of receipt. Carry it in a deferred account until:
- Your obligation expires;
- You buy, in the case of a put, or sell, in the case of a call, the underlying stock when the option is exercised;
or
- You engage in a closing transaction.
If your obligation expires, the amount you received for writing the call or put is short-term capital gain.
If a put you write is exercised and you buy the underlying stock, decrease your basis in the stock by the amount you received for the put. Your holding period for the stock begins on the date you buy it, not on the date you wrote the put.
If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock.
If you enter into a closing transaction by paying an amount equal to the value of the put or call at the time of the payment, the difference between the amount you pay and the amount you receive for the put or call is a short-term capital gain or loss.
taxmap/pubs/p550-026.htm#en_us_publink100010631- Expiration.
Ten JJJ call options were issued on April 9, 2012, for $4,000. These equity options expired in December 2012, without being exercised. If you were a holder (buyer) of the options, you would recognize a short-term capital loss of $4,000. If you were a writer of the options, you would recognize a short-term capital gain of
$4,000.
- Closing transaction.
The facts are the same as in (1), except that on May 8, 2012, the options were sold for $6,000. If you were the holder of the options who sold them, you would recognize a short-term capital gain of $2,000. If you were the writer of the options and you bought them back, you would recognize a short-term capital loss of
$2,000.
- Exercise.
The facts are the same as in (1), except that the options were exercised on May 22, 2012. The buyer adds the cost of the options to the basis of the stock bought through the exercise of the options. The writer adds the amount received from writing the options to the amount realized from selling the stock to figure gain or loss. The gain or loss is short term or long term depending upon the holding period of the
stock.
- Section 1256 contracts.
The facts are the same as in (1), except the options were nonequity options,
subject to the rules for section 1256 contracts. If you were a buyer of the
options, you would recognize a short-term capital loss of $1,600, and a
long-term capital loss of $2,400. If you were a writer of the options, you would
recognize a short-term capital gain of $1,600, and a long-term capital gain of
$2,400. See
Section 1256 Contracts Marked to Market, earlier, for more information.
Table 4-3. Puts and Calls | Puts
| | When a put:
| If you are the holder: | If you are the writer: | | Is exercised
| Reduce your amount realized from sale of the underlying stock by the cost of the
put. | Reduce your basis in the stock you buy by the amount you received for the
put. | | Expires | Report the cost of the put as a capital loss on the date it
expires.* | Report the amount you received for the put as a short-term capital
gain. | | Is sold by the holder | Report the difference between the cost of the put and the amount you receive for it as a capital gain or
loss.* | This does not affect you. (But if you buy back the put, report the difference between the amount you pay and the amount you received for the put as a short-term capital gain or loss.)
|
| Calls
| | When a call:
| If you are the holder: | If you are the writer: | | Is exercised
| Add the cost of the call to your basis in the stock purchased. | Increase your amount realized on sale of the stock by the amount you received for the
call. | | Expires | Report the cost of the call as a capital loss on the date it
expires.* | Report the amount you received for the call as a short-term capital
gain. | | Is sold by the holder | Report the difference between the cost of the call and the amount you receive for it as a capital gain or
loss.* | This does not affect you. (But if you buy back the call, report the difference between the amount you pay and the amount you received for the call as a short-term capital gain or loss.)
| | *See
Holders of puts and calls and
Writers of puts and calls
in the accompanying text to find whether your gain or loss is short term or long
term.
|
|
taxmap/pubs/p550-026.htm#en_us_publink100010632This section discusses the loss deferral rules that apply to the sale or other disposition of positions in a straddle. These rules do not apply to the straddles described under
Exceptions, later.
A straddle is any set of offsetting positions on personal property. For example, a straddle may consist of a purchased option to buy and a purchased option to sell on the same number of shares of the security, with the same exercise price and period.
taxmap/pubs/p550-026.htm#en_us_publink100010633This is any actively traded property. It includes stock options and contracts to buy stock but generally does not include stock.
taxmap/pubs/p550-026.htm#en_us_publink100010634Although stock is generally excluded from the definition of personal property when applying the straddle rules, it is included in the following two situations.
- The stock is of a type which is actively traded, and at least one of the offsetting positions is a position on that stock or substantially similar or related
property.
- The stock is in a corporation formed or availed of to take positions in personal property that offset positions taken by any
shareholder.
Note.For positions established before October 22, 2004, condition (1) earlier does not apply. Instead, personal property includes stock if condition (2) above applies or the stock was part of a straddle in which at least one of the offsetting positions
was:
- An option to buy or sell the stock or substantially identical stock or
securities,
- A securities futures contract on the stock or substantially identical stock or securities,
or
- A position on substantially similar or related property (other than
stock).
taxmap/pubs/p550-026.htm#en_us_publink100010636A position is an interest in personal property. A position can be a forward or futures contract or an option.
An interest in a loan denominated in a foreign currency is treated as a position in that currency. For the straddle rules, foreign currency for which there is an active interbank market is considered to be actively-traded personal property. See also
Foreign currency contract under
Section 1256 Contracts Marked to Market, earlier.
This is a position that substantially reduces any risk of loss you may have from holding another position. However, if a position is part of a straddle that is not an identified straddle (described later), do not treat it as offsetting to a position that is part of an identified straddle.
taxmap/pubs/p550-026.htm#en_us_publink100010638Two or more positions will be presumed to be offsetting if:
- The positions are established in the same personal property (or in a contract for this property), and the value of one or more positions varies inversely with the value of one or more of the other
positions;
- The positions are in the same personal property, even if this property is in a substantially changed form, and the positions' values vary inversely as described in the first
condition;
- The positions are in debt instruments with a similar maturity, and the positions' values vary inversely as described in the first
condition;
- The positions are sold or marketed as offsetting positions, whether or not the positions are called a straddle, spread, butterfly, or any similar name;
or
- The aggregate margin requirement for the positions is lower than the sum of the margin requirements for each position if held
separately.
To determine if two or more positions are offsetting, you will be treated as holding any position your spouse holds during the same period. If you take into account part or all of the gain or loss for a position held by a flowthrough entity, such as a partnership or trust, you are also considered to hold that position.
taxmap/pubs/p550-026.htm#en_us_publink100010640Generally, you can deduct a loss on the disposition of one or more positions only to the extent the loss is more than any unrecognized gain you have on offsetting positions. Unused losses are treated as sustained in the next tax year.
taxmap/pubs/p550-026.htm#en_us_publink100010641This is:
- The amount of gain you would have had on an open position if you had sold it on the last business day of the tax year at its fair market value,
and
- The amount of gain realized on a position if, as of the end of the tax year, gain has been realized but not
recognized.
On July 9, 2012, you entered into a straddle. On December 10, 2012, you closed one position of the straddle at a loss of $15,000. On December 31, 2012, the end of your tax year, you have an unrecognized gain of $12,750 in the offsetting open position. On your 2012 return, your deductible loss on the position you closed is limited to $2,250 ($15,000 − $12,750). You must carry forward to 2013 the unused loss of
$12,750.
Note.If you physically settle a position established after October 21, 2004, that is part of a straddle by delivering property to which the position relates (and you would realize a loss on that position if you terminated it), you are treated as having terminated the position for its fair market value immediately before the settlement and as having sold the property used to physically settle the position at its fair market
value.
taxmap/pubs/p550-026.htm#en_us_publink100010644The loss deferral rules do not apply to:
- Positions established after October 21, 2004, comprising an identified straddle,
- Certain straddles consisting of qualified covered call options and the stock to be purchased under the options,
- Hedging transactions, described earlier under
Section 1256 Contracts Marked to Market, and
- Straddles consisting entirely of section 1256 contracts, as described earlier under
Section 1256 Contracts Marked to Market (but see
Identified straddle, later).
Note.For positions established before October 22, 2004, the loss deferral rules also do not apply to a straddle that is an identified straddle at the end of the tax
year.
taxmap/pubs/p550-026.htm#en_us_publink100010646Any straddle (other than a straddle described in (2) or (3) above) is an identified straddle if all the following conditions exist.
- You clearly identified the straddle on your records before the close of the day on which you acquired
it.
- For straddles acquired after December 29, 2007, you identified the positions in the straddle that are offsetting with respect to one another (for example, position A offsets position D, and position B offsets position
C).
- The straddle is not part of a larger straddle.
If there is a loss from any position in an identified straddle, you must increase the basis of each of the positions that offset the loss position in the identified straddle. The increase is the loss multiplied by the following
fraction:
| | Unrecognized gain (if any) on the offsetting position
| |
| | The total unrecognized gain on all positions that offset the loss position in the identified
straddle | |
For this purpose, your unrecognized gain is the excess of the fair market value of the position that is part of an identified straddle at the time you incur a loss on another position in the identified straddle, over the fair market value of that position when you identified it as a position in the
straddle.
If the application of the above rule does not result in the increase in basis of any offsetting position in the identified straddle, you must increase the basis of each of the offsetting positions in the straddle in a manner
that:
- Is reasonable,
- Is consistently applied by you,
- Is consistent with the purposes of the identified straddle rules,
and
- Results in a total increase in the basis of those offsetting positions equal to the
loss.
If you adopt an allocation method under this rule, you must describe that method in your books and
records.
The identified straddle rules also apply to positions that are or have been a liability or obligation to you (for example, a debt obligation you issued, a written option, or a notional principal contract you entered into).
Neither you nor anyone else can take into account any loss on a position that is part of an identified straddle to the extent the loss increases the basis of any positions that offset the loss position in the identified
straddle.
Note.For positions established before October 22, 2004, identified straddles have to meet two additional
conditions.
- All the original positions that you identify were acquired on the same
day.
- All the positions included in item (1) were disposed of on the same day during the tax year, or none of the positions were disposed of by the end of the tax
year.
Also, the losses from positions are deferred until you dispose of all the positions in the straddle. The rule discussed above for increasing the basis of each of the positions does not
apply.
taxmap/pubs/p550-026.htm#en_us_publink100010648A straddle is not subject to the loss deferral rules for straddles if both of the following are true.
- All the offsetting positions consist of one or more qualified covered call options and the stock to be purchased from you under the
options.
- The straddle is not part of a larger straddle.
But see
Special year-end rule, later, for an exception.
A qualified covered call option is any option you grant to purchase stock you hold (or stock you acquire in connection with granting the option), but only if all the following are true.
- The option is traded on a national securities exchange or other market approved by the Secretary of the
Treasury.
- The option is granted more than 30 days before its expiration
date.For covered call options entered into after July 28, 2002, the option is granted not more than 12 months before its expiration date or satisfies term limitation and qualified benchmark requirements published in the Internal Revenue
Bulletin.
- The option is not a deep-in-the-money option.
- You are not an options dealer who granted the option in connection with your activity of dealing in
options.
- Gain or loss on the option is capital gain or loss.
A deep-in-the-money option is an option with a strike price lower than the
lowest qualified benchmark (LQB). The strike price is the price at which the
option is to be exercised. Strike prices are listed in the financial section of
many newspapers. The LQB is the highest available strike price that is less than
the applicable stock price. However, the LQB for an option with a term of more
than 90 days and a strike price of more than $50 is the second highest available
strike price that is less than the applicable stock price.
The availability of strike prices for equity options with flexible terms does not affect the determination of the LQB for an option that is not an equity option with flexible terms.
The applicable stock price for any stock for which an option has been granted is:
- The closing price of the stock on the most recent day on which that stock was traded before the date on which the option was granted;
or
- The opening price of the stock on the day on which the option was granted, but only if that price is greater than 110% of the price determined in (1).
If the applicable stock price is $25 or less, the LQB will be treated as not less than 85% of the applicable stock price. If the applicable stock price is $150 or less, the LQB will be treated as not less than an amount that is $10 below the applicable stock price.
taxmap/pubs/p550-026.htm#en_us_publink1000273696On May 15, 2012, you held XYZ stock and you wrote an XYZ/September call option with a strike price of $120. The closing price of one share of XYZ stock on May 14, 2012, was $130.25. The strike prices of all XYZ/September call options offered on May 15, 2012, were as follows: $110, $115, $120, $125, $130, and $135. Because the option has a term of more than 90 days, the LQB is $125, the second highest strike price that is less than $130.25, the applicable stock price. The call option is a deep-in-the-money option because its strike price is lower than the LQB. As a result, the option is not a qualified covered call option, and the loss deferral rules apply if you closed out the option or the stock at a loss during the
year.
taxmap/pubs/p550-026.htm#en_us_publink100010650If you hold stock and you write a qualified covered call option on that stock with a strike price less than the applicable stock price, treat any loss from the option as long-term capital loss if, at the time the loss was realized, gain on the sale or exchange of the stock would be treated as long-term capital gain. The holding period of the stock does not include any period during which you are the writer of the option.
taxmap/pubs/p550-026.htm#en_us_publink100010651The loss deferral rules for straddles apply if all the following are true.
- The qualified covered call options are closed, or the stock is disposed of at a loss during any tax
year.
- Gain on disposition of the stock or gain on the options is includible in gross income in a later tax
year.
- The stock or options were held less than 30 days after the closing of the options or the disposition of the stock.
As a general rule, report each position (whether or not it is part of a straddle) on which you have unrecognized gain at the end of the tax year and the amount of this unrecognized gain in Part III of Form 6781. Use Part II of Form 6781 to figure your gains and losses on straddles. See the Form 6781 instructions for how to report these gains and
losses.
taxmap/pubs/p550-026.htm#en_us_publink100010653Rules similar to the wash sale rules apply to any disposition of a position or positions of a straddle. First apply Rule 1, explained next, then apply Rule 2. However, Rule 1 applies only if stocks or securities make up a position that is part of the straddle. If a position in the straddle does not include stock or securities, use Rule 2.
taxmap/pubs/p550-026.htm#en_us_publink100010654You cannot deduct a loss on the disposition of shares of stock or securities that make up the positions of a straddle if, within a period beginning 30 days before the date of that disposition and ending 30 days after that date, you acquired substantially identical stock or securities. Instead, the loss will be carried over to the following tax year, subject to any further application of Rule 1 in that year. This rule will also apply if you entered into a contract or option to acquire the stock or securities within the time period described above. See
Loss carryover, later, for more information about how to treat the loss in the following tax year.
If you are a dealer in stock or securities, this loss treatment will not apply to any losses you sustained in the ordinary course of your business.
taxmap/pubs/p550-026.htm#en_us_publink100010656You are not a dealer in stock or securities. On December 3, 2012, you bought stock in XX Corporation (XX stock) and an offsetting put option. On December 10, 2012, there was $20 of unrealized gain in the put option and you sold the XX stock at a $20 loss. By December 17, 2012, the value of the put option had declined, eliminating all unrealized gain in the position. On December 17, you bought a second XX stock position that is substantially identical to the XX stock you sold on December 10. At the end of the year, there is no unrecognized gain in the put option or in the XX stock. Under these circumstances, the $20 loss will be disallowed for 2012 under Rule 1 because, within a period beginning 30 days before December 10, and ending 30 days after that date, you bought stock substantially identical to the XX stock you sold.
taxmap/pubs/p550-026.htm#en_us_publink100010657You cannot deduct a loss on the disposition of less than all the positions of a straddle (your loss position) to the extent that any unrecognized gain at the close of the tax year in one or more of the following positions is more than any loss disallowed under Rule 1.
- Successor positions.
- Offsetting positions to the loss position.
- Offsetting positions to any successor position.
A successor position is a position that is or was at any time offsetting to a second position, if both the following conditions are met.
- The second position was offsetting to the loss position that was
sold.
- The successor position is entered into during a period beginning 30 days before, and ending 30 days after, the sale of the loss position.
On November 5, 2012, you entered into offsetting long and short positions in non-section 1256 contracts. On November 13, 2012, you disposed of the long position at a $10 loss. On November 19, 2012, you entered into a new long position (successor position) that is offsetting to the retained short position, but not substantially identical to the long position disposed of on November 13. You held both positions through year end, at which time there was $10 of unrecognized gain in the successor long position and no unrecognized gain in the offsetting short position. Under these circumstances, the entire $10 loss will be disallowed for 2012 because there is $10 of unrecognized gain in the successor long position.
taxmap/pubs/p550-026.htm#en_us_publink100010660The facts are the same as in
Example 1, except that at year end you have $4 of unrecognized gain in the successor long position and $6 of unrecognized gain in the offsetting short position. Under these circumstances, the entire $10 loss will be disallowed for 2012 because there is a total of $10 of unrecognized gain in the successor long position and offsetting short position.
taxmap/pubs/p550-026.htm#en_us_publink100010661The facts are the same as in
Example 1, except that at year end you have $8 of unrecognized gain in the successor long position and $8 of unrecognized loss in the offsetting short position. Under these circumstances, $8 of the total $10 realized loss will be disallowed for 2012 because there is $8 of unrecognized gain in the successor long position.
taxmap/pubs/p550-026.htm#en_us_publink100010662If you have a disallowed loss that resulted from applying Rule 1 and Rule 2, you must carry it over to the next tax year and apply Rule 1 and Rule 2 to that carryover loss. For example, a loss disallowed in 2011 under Rule 1 will not be allowed in 2012, unless the substantially identical stock or securities (which caused the loss to be disallowed in 2011) were disposed of during 2012. In addition, the carryover loss will not be allowed in 2012 if Rule 1 or Rule 2 disallows it.
taxmap/pubs/p550-026.htm#en_us_publink100010663The facts are the same as in the example under Rule 1. On December 27, 2013, you sell the second XX stock at a $20 loss and there is $40 of unrecognized gain in the put option. Under these circumstances, you cannot deduct in 2013 either the $20 loss disallowed in 2012 or the $20 loss you incurred for the December 27, 2013, sale of XX stock. Rule 1 does not apply because the substantially identical XX stock was sold during the year and no substantially identical stock or securities were bought within the 61-day period. However, Rule 2 does apply because there is $40 of unrecognized gain in the put option, an offsetting position to the loss positions.
taxmap/pubs/p550-026.htm#en_us_publink100010664If the sale of a loss position would have resulted in a capital loss, you treat the carryover loss as a capital loss on the date it is allowed, even if you would treat the gain or loss on any successor positions as ordinary income or loss. Likewise, if the sale of a loss position (in the case of section 1256 contracts) would have resulted in a 60% long-term capital loss and a 40% short-term capital loss, you treat the carryover loss under the 60/40 rule, even if you would treat any gain or loss on any successor positions as 100% long-term or short-term capital gain or loss.
taxmap/pubs/p550-026.htm#en_us_publink100010665The rules for coordinating straddle losses and wash sales do not apply to the following loss situations.
- Loss on the sale of one or more positions in a hedging transaction.
(Hedging transactions are described under
Section 1256 Contracts Marked to Market, earlier.)
- Loss on the sale of a loss position in a mixed straddle account. (See
Mixed straddle account (Election C), later.)
- Loss on the sale of a position that is part of a straddle consisting only of section 1256 contracts.
The holding period of a position in a straddle generally begins no earlier than the date on which the straddle ends (the date you no longer hold an offsetting position). This rule does not apply to any position you held more than 1 year before you established the straddle. But see
Exceptions, later.
On March 7, 2011, you acquired gold. On January 9, 2012, you entered into an offsetting short gold forward contract (nonregulated futures contract). On April 2, 2012, you disposed of the short gold forward contract at no gain or loss. On April 9, 2012, you sold the gold at a gain. Because the gold had been held for 1 year or less before the offsetting short position was entered into, the holding period for the gold begins on April 2, 2012, the date the straddle ended. Gain recognized on the sale of the gold will be treated as short-term capital gain.
taxmap/pubs/p550-026.htm#en_us_publink100010668Treat the loss on the sale of one or more positions (the loss position) of a straddle as a long-term capital loss if both the following are true.
- You held (directly or indirectly) one or more offsetting positions to the loss position on the date you entered into the loss
position.
- You would have treated all gain or loss on one or more of the straddle positions as long-term capital gain or loss if you had sold these positions on the day you entered into the loss position.
Special rules apply to a loss position that is part of a mixed straddle and that is a non-section 1256 position. A mixed straddle is a straddle:
- That is not part of a larger straddle,
- In which all positions are held as capital assets,
- In which at least one (but not all) of the positions is a section 1256 contract,
and
- For which the mixed straddle election (Election A, discussed later) has not been made.
Treat the loss as 60% long-term capital loss and 40% short-term capital loss, if all the following conditions apply.
- Gain or loss from the sale of one or more of the straddle positions that are section 1256 contracts would be considered gain or loss from the sale or exchange of a capital
asset.
- The sale of no position in the straddle, other than a section 1256 contract, would result in a long-term capital gain or
loss.
- You have not made a straddle-by-straddle identification election (Election B) or mixed straddle account election (Election C), both discussed later.
On March 5, 2012, you entered into a long gold forward contract. On July 16, 2012, you entered into an offsetting short gold regulated futures contract. You did not make an election to offset gains and losses from positions in a mixed straddle. On August 6, 2012, you disposed of the long forward contract at a loss. Because the gold forward contract was part of a mixed straddle and the disposition of this non-section 1256 position would not result in long-term capital loss, the loss recognized on the termination of the gold forward contract will be treated as a 60% long-term and 40% short-term capital loss.
taxmap/pubs/p550-026.htm#en_us_publink100010671The special holding period and loss treatment for straddle positions does not apply to positions that:
- Constitute part of a hedging transaction,
- Are included in a straddle consisting only of section 1256 contracts,
or
- Are included in a mixed straddle account (Election C), discussed later.
If you disposed of a position in a mixed straddle and make one of the elections described in the following discussions, report your gain or loss as indicated in those discussions. If you do not make any of the elections, report your gain or loss in Part II of Form 6781. If you disposed of the section 1256 component of the straddle, enter the recognized loss (line 10, column (h)) or your gain (line 12, column (f)) in Part I of Form 6781, on line 1. Do not include it on line 11 or 13 (Part II).
taxmap/pubs/p550-026.htm#en_us_publink100010673You can elect out of the marked to market rules, discussed under
Section 1256 Contracts Marked to Market, earlier, for all section 1256 contracts that are part of a mixed straddle. Instead, the gain and loss rules for straddles will apply to these contracts. However, if you make this election for an option on a section 1256 contract, the gain or loss treatment discussed earlier under
Options will apply, subject to the gain and loss rules for straddles.
You can make this election if:
- At least one (but not all) of the positions is a section 1256 contract,
and
- Each position forming part of the straddle is clearly identified as being part of that straddle on the day the first section 1256 contract forming part of the straddle is
acquired.
If you make this election, it will apply for all later years as well. It cannot be revoked without the consent of the IRS. If you made this election, check box A of Form 6781. Do not report the section 1256 component in Part
I.
taxmap/pubs/p550-026.htm#en_us_publink100010674You can avoid the 60% long-term capital loss treatment required for a non-section 1256 loss position that is part of a mixed straddle, described earlier, if you choose either of the two following elections to offset gains and losses for these positions.
- Election B.
Make a separate identification of the positions of each mixed straddle for which you are electing this treatment (the straddle-by-straddle identification method).
- Election C.
Establish a mixed straddle account for a class of activities for which gains and losses will be recognized and offset on a periodic
basis.
These two elections are alternatives to the mixed straddle election. You can choose only one of the three elections. Use Form 6781 to indicate your election choice by checking box A, B, or C, whichever
applies.
Under this election, you must clearly identify each position that is part of the identified mixed straddle by the earlier of:
- The close of the day the identified mixed straddle is established,
or
- The time the position is disposed of.
If you dispose of a position in the mixed straddle before the end of the day on which the straddle is established, this identification must be made by the time you dispose of the position. You are presumed to have properly identified a mixed straddle if independent verification is used.
The basic tax treatment of gain or loss under this election depends on which side of the straddle produced the total net gain or loss. If the net gain or loss from the straddle is due to the section 1256 contracts, gain or loss is treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. Enter the net gain or loss in Part I of Form 6781 and identify the election by checking box B.
If the net gain or loss is due to the non-section 1256 positions, gain or loss is short-term capital gain or loss. See the Form 6781 instructions for how to report the net gain or
loss.
For the specific application of the rules of this election, see Regulations section
1.1092(b)-3T.
taxmap/pubs/p550-026.htm#en_us_publink100010676On April 2, 2012, you entered into a non-section 1256 position and an offsetting section 1256 contract. You also made a valid election to treat this straddle as an identified mixed straddle. On April 9, 2012, you disposed of the non-section 1256 position at a $600 loss and the section 1256 contract at an $800 gain. Under these circumstances, the $600 loss on the non-section 1256 position will be offset against the $800 gain on the section 1256 contract. The net gain of $200 from the straddle will be treated as 60% long-term capital gain and 40% short-term capital gain because it is due to the section 1256 contract.
taxmap/pubs/p550-026.htm#en_us_publink100010677You may elect to establish one or more accounts for determining gains and losses from all positions in a mixed straddle. You must establish a separate mixed straddle account for each separate designated class of activities.
Generally, you must determine gain or loss for each position in a mixed straddle account as of the close of each business day of the tax year. You offset the net section 1256 contracts against the net non-section 1256 positions to determine the "daily account net gain or loss."
If the daily account amount is due to non-section 1256 positions, the amount is treated as short-term capital gain or loss. If the daily account amount is due to section 1256 contracts, the amount is treated as 60% long-term and 40% short-term capital gain or loss.
On the last business day of the tax year, you determine the "annual account net gain or loss" for each account by netting the daily account amounts for that account for the tax year. The "total annual account net gain or loss" is determined by netting the annual account amounts for all mixed straddle accounts that you had established.
The net amounts keep their long-term or short-term classification. However, no more than 50% of the total annual account net gain for the tax year can be treated as long-term capital gain. Any remaining gain is treated as short-term capital gain. Also, no more than 40% of the total annual account net loss can be treated as short-term capital loss. Any remaining loss is treated as long-term capital loss.
The election to establish one or more mixed straddle accounts for each tax year must be made by the due date (without extensions) of your income tax return for the immediately preceding tax year. If you begin trading in a new class of activities during a tax year, you must make the election for the new class of activities by the later of either:
- The due date of your return for the immediately preceding tax year (without extensions),
or
- 60 days after you entered into the first mixed straddle in the new class of activities.
You make the election on Form 6781 by checking box C. Attach Form 6781 to your income tax return for the immediately preceding tax year, or file it within 60 days, if that applies. Report the annual account net gain or loss from a mixed straddle account in Part II of Form 6781. In addition, you must attach a statement to Form 6781 specifically designating the class of activities for which a mixed straddle account is established.
For the specific application of the rules of this election, see Regulations section
1.1092(b)-4T.
taxmap/pubs/p550-026.htm#en_us_publink100010678You cannot deduct interest and carrying charges that are allocable to any positions held in a mixed straddle account. Treat these charges as an adjustment to the annual account net gain or loss and allocate them proportionately between the net short-term and the net long-term capital gains or
losses.
To find the amount of interest and carrying charges that is not deductible and that must be added to the annual account net gain or loss, apply the rules described earlier to the positions held in the mixed straddle account. See
Interest expense and carrying charges on straddles in chapter 3 under
Nondeductible Expenses.
If you sold qualified securities held for at least 3 years to an employee stock ownership plan (ESOP) or eligible worker-owned cooperative, you may be able to elect to postpone all or part of the gain on the sale if you bought qualified replacement property (certain securities) within the period that began 3 months before the sale and ended 12 months after the sale. If you make the election, you must recognize gain on the sale only to the extent the proceeds from the sale exceed the cost of the qualified replacement property.
You must reduce the basis of the replacement property by any postponed gain. If you dispose of any replacement property, you may have to recognize all of the postponed gain.
Generally, to qualify for the election the ESOP or cooperative must own at least 30% of the outstanding stock of the corporation that issued the qualified securities. Also, the qualified replacement property must have been issued by a domestic operating
corporation.
taxmap/pubs/p550-026.htm#en_us_publink100010680You must make the election no later than the due date (including extensions) for filing your tax return for the year in which you sold the stock. If your original return was filed on time, you may make the election on an amended return filed no later than 6 months after the due date of your return (excluding extensions). Enter "Filed pursuant to section 301.9100-2" at the top of the amended return and file it at the same address you used for your original
return.
taxmap/pubs/p550-026.htm#en_us_publink100010681Report the sale in Part II of Form 8949 as you would if you were not making the election. Then enter "R" in column (f). Enter the amount of the postponed gain as a negative number in column (g). Put it in parentheses to show it is negative. Complete all remaining columns. If the actual postponed gain is different from the amount you report, file an amended
return.
| Report your sales of stock to ESOPs or certain cooperatives on Form 8949 with the correct box checked for these transactions. See Form 8949 and the Instructions for Form
8949. |
Also attach the following statements.
- A "statement of election" that indicates you are making an election under section 1042(a) of the Internal Revenue Code and that includes the following
information.
- A description of the securities sold, the date of the sale, the amount realized on the sale, and the adjusted basis of the
securities.
- The name of the ESOP or cooperative to which the qualified securities were
sold.
- For a sale that was part of a single, interrelated transaction under a prearranged agreement between taxpayers involving other sales of qualified securities, the names and identifying numbers of the other taxpayers under the agreement and the number of shares sold by the other
taxpayers.
- A notarized "statement of purchase" describing the qualified replacement property, date of purchase, and the cost of the property and declaring the property to be qualified replacement property for the qualified stock you sold. The statement must have been notarized no later than 30 days after the purchase. If you have not yet purchased the qualified replacement property, you must attach the notarized "statement of purchase" to your income tax return for the year following the election year (or the election will not be
valid).
- A verified written statement of the domestic corporation whose employees are covered by the ESOP acquiring the securities, or of any authorized officer of the cooperative, consenting to the taxes under sections 4978 and 4979A of the Internal Revenue Code on certain dispositions, and prohibited allocations of the stock purchased by the ESOP or
cooperative.
For details, see section 1042 of the Internal Revenue Code and Regulations section
1.1042-1T.
taxmap/pubs/p550-026.htm#en_us_publink100010683You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your
gain.
You postpone the gain by adjusting the basis of the replacement property as described in
Basis of replacement property, later. This postpones your gain until the year you dispose of the replacement property.
You qualify to make this choice if you meet all the following tests.
- You sell publicly traded securities at a gain. Publicly traded securities are securities traded on an established securities market.
- Your gain from the sale is a capital gain.
- During the 60-day period beginning on the date of the sale, you buy replacement property. This replacement property must be either common stock of, or a partnership interest in a specialized small business investment company (SSBIC). This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993.
If you make the choice described in this section, you must recognize gain only up to the following amount:
- The amount realized on the sale, minus
- The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of publicly traded
securities).
If this amount is less than the amount of your gain, you can postpone the rest of your gain, subject to the limit described next. If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain.
The amount of gain you can postpone each year is limited to the smaller of:
- $50,000 ($25,000 if you are married and file a separate return),
or
- $500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier
years.
You must subtract the amount of postponed gain from the basis of your replacement property.
taxmap/pubs/p550-026.htm#en_us_publink100010687Report the entire gain realized from the sale in Part I or Part II of Form 8949. To make the election to postpone gain, report the gain as you would if you were not making the election. Enter "R" in column (f). Enter the amount of the postponed gain as a negative number in column (g). Put it in parentheses to show it is negative. Complete all remaining
columns.
| Report these transactions on Form 8949 with the correct box checked. See Form 8949 and the Instructions for Form
8949. |
Also attach a schedule showing how you figured the postponed gain, the name of the SSBIC in which you purchased common stock or a partnership interest, the date of that purchase, and your new basis in that SSBIC stock or partnership
interest.
You must make the choice to postpone gain no later than the due date (including extensions) for filing your tax return for the year in which you sold the securities. If your original return was filed on time, you may make the choice on an amended return filed no later than 6 months after the due date of your return (excluding extensions). Enter "Filed pursuant to section 301.9100-2" at the top of the amended return and file it at the same address you used for your original
return.
Your choice is revocable with the consent of the IRS.
taxmap/pubs/p550-026.htm#en_us_publink100010688This section discusses two provisions of the law that may apply to gain from the sale or trade of qualified small business stock. You may qualify for a tax-free rollover of all or part of the gain. You may be able to exclude part of the gain from your
income.
taxmap/pubs/p550-026.htm#en_us_publink100010689This is stock that meets all the following tests.
- It must be stock in a C corporation.
- It must have been originally issued after August 10, 1993.
- The corporation must have total gross assets of $50 million or less at all times after August 9, 1993, and before it issued the stock. Its total gross assets immediately after it issued the stock must also be $50 million or
less.When figuring the corporation's total gross assets, you must also count the assets of any predecessor of the corporation. In addition, you must treat all corporations that are members of the same parent-subsidiary controlled group as one corporation.
- You must have acquired the stock at its original issue, directly or through an underwriter, in exchange for money or other property (not including stock), or as pay for services provided to the corporation (other than services performed as an underwriter of the stock). In certain cases, your stock may also meet this test if you acquired it from another person who met this test, or through a conversion or trade of qualified small business stock that you held.
- The corporation must have met the active business test, defined next, and must have been a C corporation during substantially all the time you held the stock.
- Within the period beginning 2 years before and ending 2 years after the stock was issued, the corporation cannot have bought more than a
de minimis amount of its stock from you or a related party.
- Within the period beginning 1 year before and ending 1 year after the stock was issued, the corporation cannot have bought more than a
de minimis
amount of its stock from anyone, unless the total value of the stock it bought
is 5% or less of the total value of all its stock.
For more information about tests 6 and 7, see the regulations under section 1202 of the Internal Revenue
Code.
A corporation meets this test for any period of time if, during that period, both the following are true.
- It was an eligible corporation, defined below.
- It used at least 80% (by value) of its assets in the active conduct of at least one qualified trade or business, defined below.
Any specialized small business investment company (SSBIC) is treated as meeting the active business test. An SSBIC is an eligible corporation licensed to operate under section 301(d) of the Small Business Investment Act of 1958 as in effect on May 13, 1993.
taxmap/pubs/p550-026.htm#en_us_publink100010692This is any U.S. corporation other than:
- A Domestic International Sales Corporation (DISC) or a former
DISC,
- A corporation that has made, or whose subsidiary has made, an election under section 936 of the Internal Revenue
Code,
- A regulated investment company,
- A real estate investment trust (REIT),
- A real estate mortgage investment conduit (REMIC),
- A financial asset securitization investment trust (FASIT),
or
- A cooperative.
This is any trade or business other than:
- One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage
services;
- One whose principal asset is the reputation or skill of one or more
employees;
- Any banking, insurance, financing, leasing, investing, or similar
business;
- Any farming business (including the business of raising or harvesting
trees);
- Any business involving the production or extraction of products for which percentage depletion can be claimed;
or
- Any business of operating a hotel, motel, restaurant, or similar
business.
You may qualify for a tax-free rollover of capital gain from the sale of qualified small business stock held more than 6 months. This means that, if you buy certain replacement stock and make the choice described in this section, you postpone part or all of your gain.
You postpone the gain by adjusting the basis of the replacement stock as described in
Basis of replacement stock, later. This postpones your gain until the year you dispose of the replacement stock.
You can make this choice if you meet all the following tests.
- You buy replacement stock during the 60-day period beginning on the date of the
sale.
- The replacement stock is qualified small business stock.
- The replacement stock continues to meet the active business requirement for small business stock for at least the first 6 months after you buy
it.
If you make the choice described in this section, you must recognize the capital gain only up to the following amount:
- The amount realized on the sale, minus
- The cost of any qualified small business stock you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of qualified small business
stock).
If this amount is less than the amount of your capital gain, you can postpone the rest of that gain. If this amount equals or is more than the amount of your capital gain, you must recognize the full amount of your gain.
You must subtract the amount of postponed gain from the basis of your replacement stock.
taxmap/pubs/p550-026.htm#en_us_publink100010697Your holding period for the replacement stock includes your holding period for the stock sold, except for the purpose of applying the 6-month holding period requirement for choosing to roll over the gain on its sale.
taxmap/pubs/p550-026.htm#en_us_publink100010698A pass-through entity (a partnership, S corporation, or mutual fund or other regulated investment company) also may make the choice to postpone gain. The benefit of the postponed gain applies to your share of the entity's postponed gain if you held an interest in the entity for the entire period the entity held the
stock.
If a pass-through entity sold qualified small business stock held for more than 6 months and you held an interest in the entity for the entire period the entity held the stock, you also may choose to postpone gain if you, rather than the pass-through entity, buy the replacement stock within the 60-day
period.
taxmap/pubs/p550-026.htm#en_us_publink100010699Report the entire gain realized from the sale in Part I or Part II of Form 8949. To make the election to postpone gain, report the gain as you would if you were not making the election. Enter "R" in column (f). Enter the amount of the postponed gain as a negative number in column (g). Put it in parentheses to show it is negative. Complete all remaining
columns.
| Report these transactions on Form 8949 with the correct box checked. See Form 8949 and the Instructions for Form
8949. |
You must make the choice to postpone gain no later than the due date (including extensions) for filing your tax return for the year in which you sold the stock. If your original return was filed on time, you may make the choice on an amended return filed no later than 6 months after the due date of your return (excluding extensions). Enter "Filed pursuant to section 301.9100-2" at the top of the amended return and file it at the same address you used for your original
return.
taxmap/pubs/p550-026.htm#en_us_publink100010700You generally can exclude from your income up to 50% of your gain from the sale or trade of qualified small business stock held by you for more than 5 years. The exclusion can be up to 75% for stock acquired after February 17, 2009, and no later than September 27, 2010, and up to 100% for stock acquired after September 27, 2010, and before January 1, 2012. The exclusion can be up to 60% for certain empowerment zone business stock. See
Empowerment zone business stock, later. The eligible gain minus your section 1202 exclusion is a 28% rate gain. See
Capital Gain Tax Rates, later.
If the stock is specialized small business investment company (SSBIC) stock you bought as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock by the amount of any postponed gain on that earlier sale, as explained earlier under
Rollover of Gain From Publicly Traded Securities. But do not reduce your basis by that amount when figuring your section 1202 exclusion.
The amount of your gain from the stock of any one issuer that is eligible for the exclusion in 2011 is limited to the greater of:
- Ten times your basis in all qualified stock of the issuer you sold or exchanged during the year,
or
- $10 million ($5 million for married individuals filing separately) minus the amount of gain from the stock of the same issuer you used to figure your exclusion in earlier
years.
Report the sale or exchange in Form 8949, Part II, with the appropriate box checked, as you would if you were not taking the exclusion. Then enter "S" in column (f) and enter the amount of the excluded gain as a negative number in column (g). Put it in parentheses to show it is negative. Complete all remaining columns. If you are completing line 18 of Schedule D (Form 1040), enter as a positive number the amount of the exclusion on line 2 of the 28% Rate Gain Worksheet in the Schedule D (Form 1040) instructions. But if you exclude 60% of the gain, enter
2/3 of the exclusion.
| Report these transactions on Form 8949 with the correct box checked. See Form 8949 and the Instructions for Form
8949. |
taxmap/pubs/p550-026.htm#en_us_publink100010704For information about additional requirements that may apply, see section 1202 of the Internal Revenue
Code.
taxmap/pubs/p550-026.htm#en_us_publink100010705You can exclude up to 60% of your gain if you meet all the following additional
requirements.
- You sell or trade stock in a corporation that qualifies as an empowerment zone business during substantially all of the time you held the stock,
and
- You acquired the stock after December 21, 2000, and before February 18,
2009.
Condition (1) will still be met if the corporation ceased to qualify after the 5-year period that begins on the date you acquired the stock. However, the gain that qualifies for the 60% exclusion cannot be more than the gain you would have had if you had sold the stock on the date the corporation ceased to
qualify.
You may qualify for a tax-free rollover of certain gains from the sale of qualified empowerment zone assets. This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of the recognition of your
gain.
You qualify to make this choice if you meet all the following
tests.
- You hold a qualified empowerment zone asset for more than 1 year and sell it at a
gain.
- Your gain from the sale is a capital gain.
- During the 60-day period beginning on the date of the sale, you buy a replacement qualified empowerment zone asset in the same zone as the asset
sold.
| Any part of the gain that is ordinary income cannot be postponed and must be
recognized. |
taxmap/pubs/p550-026.htm#en_us_publink100010708This means certain stock or partnership interests in an enterprise zone business. It also includes certain tangible property used in an enterprise zone business. You must have acquired the asset after December 21, 2000 and before
2010.
taxmap/pubs/p550-026.htm#en_us_publink100010709If you make the choice described in this section, you must recognize gain only up to the following
amount:
- The amount realized on the sale, minus
- The cost of any qualified empowerment zone asset that you bought during the 60-day period beginning on the date of sale (and did not previously take into account in rolling over gain on an earlier sale of qualified empowerment zone
assets).
If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain. If this amount is less than the amount of your gain, you can postpone the rest of your gain by adjusting the basis of your replacement property as described
next.
You must subtract the amount of postponed gain from the basis of the qualified empowerment zone assets you bought as replacement
property.
taxmap/pubs/p550-026.htm#en_us_publink100010711
Report the entire gain realized from the sale in Part II of Form 8949. To make
the election to postpone gain, report the gain as you would if you were not
making the election. Enter "R" in column (f). Enter the amount of the postponed
gain as a negative number in column (g). Put it in parentheses to show it is
negative. Complete all remaining columns.
taxmap/pubs/p550-026.htm#en_us_publink100010712For more information about this rollover of gain, see section 1397B of the Internal Revenue
Code.
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