Anytime you sell or exchange capital assets, such as stocks, land and artworks, you must report the transaction on your federal income tax return. You may have gains, you may have losses, the transactions may be short-term or long-term, and this information must be broken down in order to apply the correct tax treatment for the net results. Schedule D of Form 1040 is used to report most capital gain (or loss) transactions. However, before you can enter your net gain or loss on Schedule D, you have to complete Form 8949, Sales and Other Dispositions of Capital Assets. 

Overview of the Form

The two-page form consists of two parts: Part I for short-term transactions and Part II for long-term transactions. A sale or taxable exchange that occurs more than 12 months from the date the asset was acquired is long term; a sale within 12 months or less is short term.

The form reflects information about transactions that you receive on Form 1099-B, Proceeds from Broker and Barter Transactions, as well as from your own records.

Reporting Short-term Transactions

There are three boxes used to denote whether the transaction was reported to the IRS and how you derived the tax basis for your asset. Tax basis typically is your cost, but may be something else if you received property by gift, inheritance or in some other fashion. The three boxes are:

  • Transactions and your basis reported to the IRS (Box A). You know this because the Form 1099-B that you received indicates this information.

  • Transactions (but not basis) reported to the IRS (Box B). For example, if you sell realty, it may be reported to the IRS on Form 1099-B (but without basis) or Form 1099-S, Proceeds from Real Estate Transactions. You have to figure your basis based on your own records (e.g., sales receipts, confirmation statements).

  • Transactions not reported to the IRS (Box C). For example, if you sold a painting to a private collector for cash, the transaction is not reported to the IRS.

You must use a separate Form 8949 for each box you check. Thus, if you check all three boxes, you report short-term transactions on three separate forms. Each form has space for 14 transactions, so if you have more than 14, you need additional forms.

Information for each transaction. For each transaction, you need to provide seven pieces of information: 

  • A description of the property (column a). For example, if you sold stock, enter 100 sh. X Corp.

  • The date you acquired it (month, day, year) (column b). For example, if you bought stock on August 12, 2015, enter 08-12-15.

  • The date that the property was sold or otherwise disposed of (column c). Enter the date in the same fashion as above.

  • The proceeds received on the sale (column d). Usually, this is the sales price.

  • Cost or other basis (column e). As described earlier, basis usually is what you paid for the asset. However, it can be something else. Basis is explained in detail in IRS Publication 551, Basis of Assets.

  • Adjustment to gain or loss (columns f and g). There may be none, but if there is an adjustment, enter the code from the instructions to Form 8949 and the amount of the adjustment. For example, if you checked Box A but the IRS reported your basis incorrectly, you can enter the IRS’s reported basis in column e, Code B in column f, and report the correct basis in column g; the correct basis is used to figure gain or loss (below).

  • Gain or loss (column h). This is the difference between the proceeds and basis. If the proceeds are greater than your tax basis, you have a gain. If the proceeds are less than your tax basis, you have a loss.

Once the form(s) have been populated, amounts in each column are totaled. The net result is entered on Schedule D as follows:

  • If Box A is checked: line 1b of Schedule D

  • If Box B is checked: line 2 of Schedule D

  • If Box C is checked: line 3 of Schedule D

Reporting Long-term Transactions

Part II for long-term transactions is a mirror image of Part I for short-term transactions.

Again, you need to use a separate Form 8949 for each box checked regarding transactions and basis reported to the IRS.

  • Transactions and your basis reported to the IRS (Box D). You know this because the Form 1099-B that you received indicates this information.

  • Transactions (but not basis) reported to the IRS (Box E). You have to figure your basis based on your own records (e.g., sales receipts, confirmation statements).

  • Transactions not reported to the IRS (Box F). For example, if you sold a vacant lot for cash, the transaction is not reported to the IRS.

Information for each transaction is then reported in columns a through h in the same manner as you used for short-term transactions.

Once the form(s) have been populated, amounts in each column are totaled. The net result is entered on Schedule D as follows:

  • If Box D is checked: line 8b of Schedule D

  • If Box E is checked: line 9 of Schedule D

  • If Box F is checked: line 10 of Schedule D

Completing the Electronic Form

If you use software to prepare Form 1040 (or you use a paid preparer), information from brokerage firms, mutual funds and other financial institutions may be transferred to your tax return, saving you the time entering the information and avoiding the possibility of making errors when you input the information. The software prompts you for the necessary information (your password or other log-in information) in order for the transactions to be retrieved and reported on your form(s).

The Bottom Line

Reporting capital gains and losses on Form 8949 is not necessarily straightforward. Find more information about capital gains and losses in IRS Publication 544, Sales and Other Dispositions of Assets. When in doubt, consult with a tax advisor.

You may also be interested in reading: The Purpose Of The IRS W-4 FormThe Purpose of IRS Form 941The Purpose of IRS Form 1065 and The Purpose of IRS Form 5498.

 

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