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Reporting Stock Sales on Your Tax Return
Is stock a capital asset?
Generally, property owned and used by an individual for personal or investment purposes is a capital asset. Some examples are houses, furniture, cars, stocks and bonds. Sales of most capital assets must be reported to the Internal Revenue Service (IRS) on your tax return. Losses on the sale of an item owned for personal use, such as a car, furniture or personal residence, are not deductible.
What is a "holding period"?
Gains and losses on sales of stock are categorized as having either long-term or short-term holding periods depending upon the length of time you owned the stock. The date of disposition, called the trade date, is the date of the actual sale. For tax purposes, gain or loss is recognized on the trade date.
To determine how many months you have held the stock, begin counting on the day after the purchase date. The same day of each succeeding month begins a new month. The date of disposition is considered the last day of the holding period.
Short-term or long-term?
The IRS Restructuring and Reform Act of 1998 eliminated the mid-term holding period that was instituted by the Taxpayer Relief Act of 1997. Effective January 1, 1998, capital gains are once again characterized as either short-term (held one year or less) or long-term (held more than one year). Short-terms gains are taxed as ordinary income (the rates could be as high as 39.6%) while long-term gains are taxed at a maximum of 20%. There are some exceptions such as collectible art or coins, which do not qualify for the special treatment.
What is the basis of my stock?
The cost of your stock is usually the basis. Certain costs of purchase, such as commissions and recording or transfer fees should also be included. The basis of inherited stock is its fair market value (FMV) at the date of the decedent's death (unless a federal estate tax return was filed and an alternate valuation date chosen). To determine the basis of stock you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you and the amount of gift tax, if any, paid on it.
Is it important to save the purchase confirmations when I buy stock?
Yes! Without confirmations showing the purchase date, price and expenses, it will be next to impossible to determine your basis and possibly your holding period. Due to changes in capital gains law, taxpayers with capital gains on mutual funds must file Schedule D, even if they have no other investments. It is important to keep the last statement of the year for each fund. The year-end statement shows the transactions for the entire year.
What amount do I report as my sales price?
If you sold your stock through a broker, you should receive Form 1099-B, Statement for Recipients of Proceeds From Broker and Barter Exchange Transactions, by February 1 of the year following the year the transaction occurred. Unless special circumstances apply, the sales price you list on your tax return will be the amount reported to you on Form 1099-B as Gross Proceeds. Gross Proceeds usually consists of the total proceeds of the sale less any commissions or fees incurred on the sale. If the amount reported as Gross Proceeds does not take into account any commissions or fees paid, you should add these selling expenses to the basis of the stock sold.
How important is Form 1099-B?
Because the amount reported on Form 1099-B is entered into the IRS computer and "matched" against the amount reported on your tax return, Form 1099-B is very important. If for some reason the amount you list on your tax return as Sales Price does not equal the amount reported on Form 1099-B, you should attach an explanation to your return explaining the difference. Otherwise, the IRS computer will detect that a different amount was reported on your return and you will receive a letter proposing an adjustment to your return.
Where do I report my gain or loss?
Stock sales and other capital transactions are reported on Schedule D (Form 1040), Capital Gains and Losses. It is important to separate your transactions by holding periods: short- or long-term.
What is a wash sale?
A wash sale occurs when you sell a particular stock and, within 30 days before or after the sale, you purchase substantially identical stock. Losses from wash sales are not deductible, but are used to figure the basis of the new stock. Any gain, however, is taxable.
Is there a limit on the amount of capital loss I can deduct?
Yes. If after combining all your capital gains and losses for the year you end up with a net capital loss, the maximum loss you may deduct is limited to $3,000 per year ($1,500 if you are married and file a separate return). Net losses in excess of $3,000 can be carried forward to the following years until they are used up.
I frequently switch from one mutual fund to another. Do I have to report these transactions on my tax return?
Yes! If you sell or exchange shares of a mutual fund with a fluctuating share price, the IRS considers the transaction a taxable event. You must calculate a capital gain or loss for each sale or exchange - whether made by telephone, wire, mail or check. You should receive a Form 1099-B for each transaction. Calculating gain or loss on the sale of mutual fund shares can be quite complex and is beyond the scope of this publication.
Capital Gains laws become more complex every year. If you need assistance in this area, consult your local Enrolled Agent for help.
Tax laws are subject to change at any time.
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