If you’re new to investing, you want to make sure you’re aware of how you need to report capital gains or losses on your tax return. Prior to 2012, Schedule D was the only form you needed to complete to report gains and losses from sales of stocks, bonds, and other capital assets. However, the IRS now requires taxpayers to list detailed information for most transactions on Form 8949 and carry the totals to Schedule D.
It’s a bit complicated to get started, but once you’re organized, you’ll be able to fill out Form 8949 and Schedule D very quickly.
What Are Capital Gains and Losses?
When you sell a capital asset — which is pretty much anything you own, including your stocks, bonds, collectibles, real estate, vehicles, and even personal possessions — you generate a capital gain if you make money on the transaction and a capital loss if you lose money on the transaction.
Every capital asset has a “basis,” which is usually what you paid for the asset plus any money you put into improving it. For example, say you purchase a painting at an art auction for $1,000, spend $500 having it restored, and later sell it for $5,000. Your capital gain would be $3,500 — $5,000 less your $1,500 basis.
The IRS requires you to report the income from all capital gains so that you can pay the proper amount of income tax, but also allows you to take a tax deduction on certain types of capital losses. Simply put, you can take a capital loss if you lose money on the sale of investment assets, but you cannot claim a capital loss if you lose money on the sale of most personal-use assets, such as your car or primary residence.
Capital gains and losses come in two varieties — short-term and long-term. Short-term refers to an asset you owned for one year or less, and long-term refers to an asset you owned for more than one year (365 days). If you own a share of stock for less than a year and sell it for a profit, that’s a short-term capital gain. If you hold onto a share of stock for more than one year and sell it for a profit, that’s a long-term capital gain.
Pro tip: If you need more information about how capital gains taxes will affect your overall tax planning, make sure you consult with an accountant. H&R Block has live CPAs available to answer any questions you might have.
Basis Reporting Forms
Prior to 2012, it was the taxpayer’s responsibility to track their own basis and holding periods. In the case of big-ticket items like a piece of land, that might be easy. But some investors buy and sell stocks and other investments daily. The IRS was worried that unsophisticated investors weren’t reporting capital gains and losses correctly, so they recruited brokers to help taxpayers calculate gains and losses.
Now, if you buy and sell stocks, bonds, mutual funds, or other items through a broker, the broker reports sends you and the IRS Form 1099-B including the following information:
- The date you purchased the asset
- The date you sold the asset
- The price you paid for the item — your basis
- The proceeds you received from the sale
If you inherited the asset or purchased it prior to 2011, the broker might not have your basis, so they won’t include it on your 1099-B. In this case, you’ll need to check your own records to determine the proper basis and holding period.
On Form 8949, you’ll be asked to group your items by whether the broker reported the basis to the IRS or not. If the basis is reported for some transactions but not others, you may end up filing several 8949 forms.
Reporting Capital Gains and Losses on Form 8949
The actual information you’ll report on Form 8949 isn’t complicated, but organizing what page you’ll put it on might be. Before filling out the forms, make a list of all your gains and losses. Then, determine if you have a 1099-B for each of the transactions. Next, divide your transactions into six separate groups as shown below.
- Short-term transactions reported on a 1099-B, where the basis was reported to the IRS
- Short-term transactions reported on a 1099-B, where the basis was not reported to the IRS
- Short-term transactions that don’t have a 1099-B
- Long-term transactions reported on a 1099-B, where the basis was reported to the IRS
- Long-term transactions reported on a 1099-B, where the basis was not reported to the IRS
- Long-term transactions that don’t have a 1099-B
If your brokerage reported all of your capital gains and losses for the year on Form 1099-B with the correct basis, and you don’t need to enter any adjustments (column g) or any codes (column f), you don’t need to file Form 8949. You can simply enter the totals on Schedule D.
If you do need to complete Form 8949, report short-term transactions in Part I and long-term transactions in Part II. However, you must fill out a separate Form 8949 for transactions that would be reported on the same page, but do not fall in the same category.
For example, if you received Forms 1099-B for three short-term transactions, but your broker didn’t have basis information for one of them, you must fill out a separate Form 8949 for the transaction for which your broker didn’t report basis information to the IRS. If you have a number of capital gains or losses to report, you could easily end up filing multiple forms. For this reason, it’s imperative to be organized before you start.
Information You Need for Each Transaction
Once you’ve sorted your transactions, you can begin completing the form. Each transaction requires several specific pieces of information:
- Box A: Provide a description of the property. For example, “100 shares of Apple.”
- Box B: Enter the date acquired — the date that you purchased or were given the property.
- Box C: Enter the date you sold the property.
- Box D: Enter your proceeds. This is the amount that you sold the property for. If your broker reported the sales price to the IRS on your 1099-B with commissions or other fees already subtracted, report that price.
- Box E: Enter your cost basis. This is the amount that you paid for the property plus any commissions or other fees. If you received the property as a gift, your basis is what the previous owner paid for it. If you received it as an inheritance, its basis is its value on the day the previous owner passed away.
If anything other than a simple purchase and sale happened with the property, you may need to mark the transaction with a special code. For example, you’re required to report a code for wash sales by entering “W” in box f, as well as the nondeductible part of the wash sale in box g. If your broker reported the basis incorrectly on Form 1099-B, you need to enter code B in box f. Check the instructions for Form 8949 and the Schedule D instructions for more information.
Many transactions won’t need any code. After you have completed a Form 8949 for each group, complete Schedule D with the information from the forms to arrive at a total gain or loss for each group. From there you will determine the total gain or loss from short-term transactions and long-term transactions and ultimately adjust your income accordingly.
Keeping good records of all of your investment transactions will make it easier to handle tax reporting as well. Just make sure that every 1099-B you receive matches up to transactions on your Form 8949 to avoid hassles. Once you’re finished, it’ll be a snap to complete your schedule D.