3 What is a Capital Gain/Loss? Capital assetsInvestment property and personal use propertyEx: Stocks & bonds, shares of mutual fundsAmount invested (cost) is the basisHow much did the investor invest?Adjustments to basisBroker fees or other costs to make the investmentDepreciation, improvements for some assetsSelling the asset results in a realized gain or lossAmount of gain/loss is the selling price (less selling costs) minus the adjusted basis
4 Gain/Loss - Illustration Shares of stock purchased for 10,000 and sold for 11,000:Sale price $11,000Less: Adjusted Basis 10,000Gain: $ 1,000Shares of stock purchased for 10,000 with a broker fee of 25, and sold for 9,000:Sale price $ 9,000Less: Adjusted basis 10,025Loss: $- 1,025
5 Stella’s cost basis for 600 shares of KLM Corporation stock she purchased was $2,400. After holding the stock for seven years, Stella sold the 600 shares for $4,400 and paid a $100 commission. Her broker reported the gross proceeds of $4,400 on Form 1099-B. What was the sales price for the shares and the amount of capital gain?A. $4,400 sales price and $2,000 gainB. $4,400 sales price and $1,900 gainC. $4,500 sales price and $2,100 gainD. $4,300 sales price and $1,900 gainB. The sales price was $4,400, which was $1,900 more than the adjusted basis of $2,500 ($2,400 cost + $100 commission) of the shares.
6 Tax Treatment of Gains & Losses Most gains are reported as income on Form in the year of the saleGains are categorized by holding period:Short-term: The asset was held one year or lessOrdinary income, taxed at ordinary ratesLong-term: The asset was held more than one yearCapital gain income, taxed at preferential (lower) ratesThere are restrictions on reporting losses, because they lower taxable incomeGenerally, taxpayers may deduct up to $3,000 in capital loss each yearRemaining capital loss may be carried over to claim in the next year, indefinitely
7 Reporting Forms for Capital Gains & Losses Taxpayer receives:Form 1099-B, which reports gross proceeds from broker transactions1099-B might be included with other 1099 forms, in a combined statementForm 1099-DIV, which reports capital gain distributions from a mutual fund (as well as dividends)Taxpayer reports on:Form 8949, giving details of the sale transactionsSchedule D, summarizing the short- and long-term gains and lossesForm 1040, Line 13, where the net capital gain or loss is reported
9 Kevin paid his broker a $75 fee on the sale of his stock Kevin paid his broker a $75 fee on the sale of his stock. His Form 1099-B shows $925, and the box next to sales price is checked. What is the amount Kevin reports as his sales price?A. $925B. $1,000C. $850D. $75A. Never change the sales price. If Form 1099-B shows sales price (gross proceeds), enter that number in the software. Then include the broker’s fee in the basis amount entered on the Capital Gain or Loss Transactions Worksheet.
10 Form 8949Brokers are required to provide, on the 1099-B, the basis for “covered” transactions since 2011Check boxes at the top of Parts I & II indicate whether the transactions were reported on 1099-BPart I – list short-term transactionsCheck box to indicate whether basis was reported on BUse additional form(s) 8949 if another check box applies to other transactionsPart II – list long-term transactionsAgain, use the check boxes and extra forms as appropriateThe input sheets in the software, if completed correctly, will populate Form 8949, Schedule D, and Form 1040 correctly
11 Form 8949 Information to enter on Form 8949: Description of property Number of shares, company, etc.Date acquiredDate soldThe holding period will be calculated based on dates acquired and soldProceedsBasisIf the broker (or fund) did not provide the basis, the taxpayer must provide itIf the taxpayer cannot provide the basis, the basis is deemed to be 0Maximum gain will resultAdjustmentsFor corrections, etc. – See Form 8949 instructionsGain or loss
12 Other Gain-Loss Information Mutual fund investments may have capital gain distributionsReported to taxpayer on Form1099-DIVTaxpayer reports on Schedule D, line 13, if there are also sales transactions to reportIf there are no sales transactions to report, the capital gain distributions are reported on Form 1040, line 13, with the box checked indicating that Schedule D is not requiredReinvested dividends increase the number of shares ownedEach reinvestment is treated as a new investment with its own basis and holding periodBefore the sale, taxpayer may specify which shares are being soldIf taxpayer does not specify, the broker or fund usually sells on a first-in, first-out (FIFO) basis, or an average cost basisAffects amount of basis, and therefore amount of gain/loss
13 Which of the following taxpayers is required to file Form 8949 and Schedule D? A. Marriah, who received one Form 1099-B and no Forms 1099-DIVB. Lorraine, who received Forms 1099-DIV for capital gain distributions from three different mutual fundsC. Both of the aboveA. Only Marriah sold stock and received Form 1099-B. She is required to file Schedule D. Lorraine would report the total amount of capital gain distributions directly on Form 1040, line 13, and check the box indicating Schedule D is not required.
14 Other Gain-Loss Information Basis of inherited property – the fair market value (FMV) on the date of death, unless the estate uses a different dateCapital loss carryover is calculated on a capital loss carryover worksheetTotal capital loss less $3,000 recognized in current year = capital loss carryoverTaxpayer should bring capital loss carryover worksheet with themIf taxpayer is already in system, the capital loss carryover will automatically carry over to the current year