Do you buy and sell stocks, bonds, mutual funds, and other investment property? If so, you need to familiarize yourself with IRS Schedule D, the form used to report capital gains and losses resulting from the sale of investment property.
When Is Schedule D Required?
When you sell a capital asset, you need to calculate how much money you gained or lost on the sale and report it on Schedule D. Capital assets can include:
- Precious metals
- Real estate
Our guide on how to reduce or avoid capital gains taxes has tips on how to keep these taxes at a minimum.
How to Complete the Schedule D Tax Form
The IRS Schedule D Instructions provide a line-by-line explanation for how to complete Schedule D. However, the following overview can help you get started.
Step 1: Separate Short-Term & Long-Term Sales
You need to report short-term and long-term sales separately because different tax rates apply. The IRS taxes short-term gains at your ordinary income tax rate. Long-term transactions qualify for a lower capital gains tax rate of 15%.
Gains or losses from the sale of assets you owned for one year (365 days) or less are considered short-term. The sale of assets that you held for more than one year qualifies as a long-term gain or loss.
If you sold the assets through a broker or financial institution, you should receive a Form 1099-B in early February of the following year. This form includes details on each transaction and whether the sale was short-term or long-term. Otherwise, you’ll need to gather information on each transaction from your own records.
Step 2: Fill Out Form 8949
Most people who need to report capital gains and losses on their tax return need to complete Form 8949 before filling out Schedule D. However, if your 1099-B indicated that cost basis was sent to the IRS and you don’t need to make any adjustments to the amounts reported on Form 1099-B, you can just enter the totals from Form 1099-B on Schedule D and skip completing Form 8949.
Form 8949 provides several rows for you to list the details of each transaction. For example, if you sold 1,000 shares of Apple stock during the year, on Form 8949 you would enter:
- A description of the property sold — in this case, “1,000 shares AAPL”
- The date you purchased or acquired the shares
- The date you sold the shares
- Proceeds from the sale
- Your cost basis of the shares — usually what you paid for the shares, although it may be adjusted for dividends
- Any adjustments to your basis in the asset (see the Instructions for Form 8949 for more information on basis adjustments)
- Your calculated gain or loss
Short-term sales should be reported on Part I of Form 8949. Long-term sales go on Part II of Form 8949. Each section includes 14 lines for reporting short-term and long-term transactions. If you need more room, you can fill out as many Form 8949s as you need and attach them all to your tax return.
The bottom of each section includes a row for totaling your short-term and long-term transactions. Once you’ve calculated the totals, you carry the result to Schedule D.
Step 3: Enter Totals on Schedule D
Schedule D is used to summarize the transaction detail reported on Form 8949. Like Form 8949, it includes separate sections for reporting short-term and long-term transactions.
Each section also includes lines for reporting other kinds of gains and losses, such as:
- Sales of business property reported on Form 4797
- Gains and losses from a pass-through entity that appear on Schedule K-1
- Capital gain distributions from Form 1099-DIV
If you had any unused capital loss carryovers from a prior year, enter them on lines 6 and 14. They will help offset this year’s capital gains.
Step 4: Fill out Form 1040
Part III of Schedule D is for summarizing all the information contained in Parts I and II. If your result is a net gain, you’ll enter the amount on line 6 of your Form 1040. If the result is a loss, follow the instructions on line 21 of Schedule D to calculate your deduction and enter the result on line 6 of Form 1040.
You’ll need to attach Schedule D and Form 8949 to your Form 1040.
Filling out IRS forms can be confusing, but remember, if you use online tax preparation software like H&R Block or TurboTax, the software will fill in all the correct forms for you. It may even be able to import stock transactions from many brokerages and financial institutions right into your tax return.
Still, it’s smart to understand when you need to complete Schedule D and what information belongs on the form. That way, you’ll know what you’re looking at when you review your return.
Do you buy and sell stocks, bonds, or other investments? How do you track your capital gains and losses?