Reporting Capital
Gains and Losses(p68)

Report capital gains and losses on Form 8949. Complete Form 8949 before you complete line 1, 2, 3, 8, 9, or 10 of Schedule D (Form 1040).

Use Form 8949 to report:

• The sale or exchange of a capital asset not reported on another form or schedule,
• Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit, and
• Nonbusiness bad debts.

Use Schedule D (Form 1040):

• To figure the overall gain or loss from transactions reported on Form 8949,
• To report a gain from Form 2439 or 6252 or Part I of Form 4797,
• To report a gain or loss from Form 4684, 6781, or 8824,
• To report a gain or loss from a partnership, S corporation, estate or trust,
• To report capital gain distributions not reported directly on Form 1040, line 13 (or effectively connected capital gain distributions not reported directly on Form 1040NR, U.S. Nonresident Alien Income Tax Return, line 14), and
• To report a capital loss carryover from 2011 to 2012.

On Form 8949, enter all sales and exchanges of capital assets, including stocks, bonds, etc., and real estate (if not reported on Form 4684, 4797, 6252, 6781, or 8824). Include these transactions even if you did not receive a Form 1099-B or Form 1099-S, Proceeds From Real Estate Transactions, (or substitute statement) for the transaction. Report short-term gains or losses in Part I. Report long-term gains or losses in Part II. Use as many Forms 8949 as you need.

There are certain situations where you may not have to file Form 8949 and/or Schedule D (Form 1040).

You do not have to file Form 8949 or Schedule D (Form 1040) if both of the following apply.

1. You have no capital losses, and your only capital gains are capital gain distributions from Form(s) 1099-DIV, box 2a (or substitute statements).
2. None of the Form(s) 1099-DIV (or substitute statements) have an amount in box 2b (unrecaptured section 1250 gain), box 2c (section 1202 gain), or box 2d (collectibles (28%) gain).

You must file Schedule D (Form 1040), but generally do not have to file Form 8949, if Exception 1 does not apply and your only capital gains and losses are:

• Capital gain distributions,
• A capital loss carryover from 2011,
• A gain from Form 2439 or 6252 or Part I of Form 4797,
• A gain or loss from Form 4684, 6781, or 8824, or
• A gain or loss from a partnership, S corporation, estate, or trust.

You cannot use the installment method to report a gain from the sale of stock or securities traded on an established securities market. You must report the entire gain in the year of sale (the year in which the trade date occurs).

Special at-risk rules apply to most income-producing activities. These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. The at-risk rules also apply to a loss from the sale or trade of an asset used in an activity to which the at-risk rules apply. For more information, see Publication 925. Use Form 6198, At-Risk Limitations, to figure the amount of loss you can deduct.

If you have gains or losses from a passive activity, you may also have to report them on Form 8582. In some cases, the loss may be limited under the passive activity rules. Refer to Form 8582 and its separate instructions for more information about reporting capital gains and losses from a passive activity.

If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B or substitute statement from the broker. Use the Form 1099-B or substitute statement to complete Form 8949.

Report the gross proceeds shown in box 2a of Form 1099-B as the sales price in column (d) of either Part I or Part II of Form 8949, whichever applies. However, if the broker advises you, in box 2a of Form 1099-B, that gross proceeds (sales price) less commissions and option premiums were reported to the IRS, enter that net sales price in column (d) of either Part I or Part II of Form 8949, whichever applies.

Include in column (g) any expense of sale, such as broker's fees, commissions, state and local transfer taxes, and option premiums, unless you reported the net sales price in column (d). If you include an expense of sale in column (g), enter "E" in column (f).

You sold 100 shares of Fund HIJ for $2,500. You paid a $75 commission to the broker for handling the sale. Your Form 1099-B shows that the net sales proceeds, $2,425 ($2,500 − $75), were reported to the IRS. Report $2,425 in column (d) of Form 8949. Complete columns (a), (b), (c), and (e).

You sold 200 shares of Fund KLM for $10,000. You paid a $100 commission at the time of the sale. You bought the shares for $5,000. The broker reported the gross proceeds to the IRS on Form 1099-B, so on Form 8949, you enter "E" in column (f), $10,000 in column (d) and $100 in column (g). Complete all remaining columns.

Use Form 6781 to report gains and losses from section 1256 contracts and straddles before entering these amounts on Schedule D (Form 1040). Include a copy of Form 6781 with your income tax return.

Report the sale or trade of a market discount bond on Part I or Part II of Form 8949, 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 as interest income on Schedule B (Form 1040A or 1040), line 1, and identify it as "Accrued Market Discount."

If a corporation in which you own stock has had a change in control or a substantial change in capital structure, you should receive Form 1099-CAP, Changes in Corporate Control and Capital Structure, or substitute statement from the corporation. Use the Form 1099-CAP or substitute statement to fill in Form 8949. If your computations show that you would have a loss because of the change, do not enter any amounts on Form 8949 or Schedule D (Form 1040) as a result of this transaction.

Report the aggregate amount received shown in box 2 of Form 1099-CAP as the sales price in column (d) of either Part I or Part II of Form 8949, whichever applies.

If you sold or traded reportable real estate, you generally should receive from the real estate reporting person a Form 1099-S showing the gross proceeds.

"Reportable real estate" is defined as any present or future ownership interest in any of the following:

• Improved or unimproved land, including air space;
• Inherently permanent structures, including any residential, commercial, or industrial building;
• A condominium unit and its accessory fixtures and common elements, including land; and
• Stock in a cooperative housing corporation (as defined in section 216 of the Internal Revenue Code).

A "real estate reporting person" could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property.

Your Form 1099-S will show the gross proceeds from the sale or exchange in box 2. See the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040) for how to report these transactions and include them in Part I or Part II of Form 8949 as appropriate. However, report like-kind exchanges on Form 8824 instead.

It is unlawful for any real estate reporting person to separately charge you for complying with the requirement to file Form 1099-S.

If you receive gross proceeds as a nominee (that is, the gross proceeds are in your name but actually belong to someone else), see the Instructions for Form 8949 for how to report these amounts on Form 8949.

If you received gross proceeds as a nominee in 2012, you must file a Form 1099-B or Form 1099-S for those proceeds with the IRS. Send the Form 1099-B or Form 1099-S with a Form 1096 to your Internal Revenue Service Center by February 28, 2013 (April 1, 2013, if you file Form 1099-B or Form 1099-S electronically). Give the actual owner of the proceeds Copy B of the Form 1099-B or Form 1099-S by February 15, 2013. On Form 1099-B, you should be listed as the "Payer." The other owner should be listed as the "Recipient." On Form 1099-S, you should be listed as the "Filer." The other owner should be listed as the "Transferor." You do not, however, have to file a Form 1099-B or Form 1099-S to show proceeds for your spouse. For more information about the reporting requirements and the penalties for failure to file (or furnish) certain information returns, see the General Instructions for Certain Information Returns.

If you sell a block of stock or other property that you bought at various times, report the short-term gain or loss from the sale on one line in Part I of Form 8949 and the long-term gain or loss on one line in Part II of Form 8949. Enter "Various" in column (b) for the "Date acquired."

On Form 8949, include in column (g) any expense of sale, such as broker's fees, commissions, state and local transfer taxes, and option premiums, unless you reported the net sales price in column (d). If you include an expense of sale in column (g), enter "E" in column (f).

Capital gain or loss on the sale or trade of investment property held 1 year or less is a short-term capital gain or loss. You report it in Part I of Form 8949.

You combine your share of short-term capital gain or loss from partnerships, S corporations, and fiduciaries, and any short-term capital loss carryover, with your other short-term capital gains and losses to figure your net short-term capital gain or loss on line 7 of Schedule D (Form 1040).

A capital gain or loss on the sale or trade of investment property held more than 1 year is a long-term capital gain or loss. You report it in Part II of Form 8949.

You also report the following in Part II of Schedule D (Form 1040):

• Undistributed long-term capital gains from a mutual fund (or other regulated investment company) or real estate investment trust (REIT);
• Your share of long-term capital gains or losses from partnerships, S corporations, and fiduciaries;
• All capital gain distributions from mutual funds and REITs not reported directly on line 10 of Form 1040A or line 13 of Form 1040; and
• Long-term capital loss carryovers.

The result after combining these items with your other long-term capital gains and losses is your net long-term capital gain or loss (line 15 of Schedule D (Form 1040)).

To figure your total net gain or loss, combine your net short-term capital gain or loss (Schedule D (Form 1040), line 7) with your net long-term capital gain or loss (Schedule D (Form 1040), line 15). Enter the result on Schedule D (Form 1040), Part III, line 16. If your losses are more than your gains, see Capital Losses, next. If both lines 15 and 16 of your Form 1040 are gains and your Taxable Income on your Form 1040 is greater than zero, see Capital Gain Tax Rates, later.

If your capital losses are more than your capital gains, you can claim a capital loss deduction. Report the deduction on line 13 of Form 1040, enclosed in parentheses.

Your allowable capital loss deduction, figured on Schedule D (Form 1040), is the lesser of:

• $3,000 ($1,500 if you are married and file a separate return), or
• Your total net loss as shown on line 16 of Schedule D (Form 1040).

You can use your total net loss to reduce your income dollar for dollar, up to the $3,000 limit.

If you have a total net loss on line 16 of Schedule D (Form 1040) that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up.

When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it and whether or not you filed a return for the current year.

When you carry over a loss, it remains long term or short term. A long-term capital loss you carry over to the next tax year will reduce that year's long-term capital gains before it reduces that year's short-term capital gains.

The amount of your capital loss carryover is the amount of your total net loss that is more than the lesser of:

1. Your allowable capital loss deduction for the year, or
2. Your taxable income increased by your allowable capital loss deduction for the year and your deduction for personal exemptions.

If your deductions are more than your gross income for the tax year, use your negative taxable income in computing the amount in item (2).

Complete Worksheet 4-1 to determine the part of your capital loss for 2012 that you can carry over to 2013.

Bob and Gloria sold securities in 2012. The sales resulted in a capital loss of $7,000. They had no other capital transactions. Their taxable income was $26,000. On their joint 2012 return, they can deduct $3,000. The unused part of the loss, $4,000 ($7,000 − $3,000), can be carried over to 2013.

If their capital loss had been $2,000, their capital loss deduction would have been $2,000. They would have no carryover.

When you figure your capital loss carryover, use your short-term capital losses first, even if you incurred them after a long-term capital loss. If you have not reached the limit on the capital loss deduction after using the short-term capital losses, use the long-term capital losses until you reach the limit.

A capital loss sustained by a decedent during his or her last tax year (or carried over to that year from an earlier year) can be deducted only on the final income tax return filed for the decedent. The capital loss limits discussed earlier still apply in this situation. The decedent's estate cannot deduct any of the loss or carry it over to following years.

If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. However, if you and your spouse once filed a joint return and are now filing separate returns, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss.

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.

The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

For 2012, the maximum capital gain rates are 0%, 15%, 25%, and 28%. See Table 4-4 for details.

All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. Because you are single and your taxable income is $25,000, none of your taxable income will be taxed above the 15% rate. The 28% rate does not apply.

If you claim a deduction for investment interest, you may have to reduce the amount of your net capital gain that is eligible for the capital gain tax rates. Reduce it by the amount of the net capital gain you choose to include in investment income when figuring the limit on your investment interest deduction. This is done on the Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet. For more information about the limit on investment interest, see Interest Expenses in chapter 3.

This gain includes gain or loss from the sale of collectibles and the eligible gain from the sale of qualified small business stock minus the section 1202 exclusion.

This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year.

Collectibles gain includes gain from the sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles.

If you realized a gain from qualified small business stock that you held more than 5 years, you generally can exclude up to 50% of your gain from your income. The exclusion can be up to 75% for stock acquired after February 17, 2009 (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. The eligible gain minus your section 1202 exclusion is a 28% rate gain. See Gains on Qualified Small Business Stock, earlier in this chapter.

Generally, this is any part of your capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than your net section 1231 gain), reduced by any net loss in the 28% group. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions to figure your unrecaptured section 1250 gain. For more information about section 1250 property and section 1231 gain, see chapter 3 of Publication 544.

Use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet (whichever applies) to figure your tax if you have qualified dividends or net capital gain. You have net capital gain if Schedule D (Form 1040), lines 15 and 16, are both gains.

Use the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions to figure your tax if:

• You have to file Schedule D (Form 1040), and
• Schedule D (Form 1040), line 18 (28% rate gain) or line 19 (unrecaptured section 1250 gain), is more than zero.

If you do not have to use the Schedule D Tax Worksheet (as explained above) and any of the following apply, use the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040 or Form 1040A (whichever you file) to figure your tax.

• You received qualified dividends. (See Qualified Dividends in chapter 1.)
• You do not have to file Schedule D (Form 1040) and you received capital gain distributions. (See Exceptions to filing Form 8949 and Schedule D (Form 1040), earlier.)
• Schedule D (Form 1040), lines 15 and 16, are both more than zero.

These capital gain rates are also used in figuring alternative minimum tax.