In general, taxpayers who have short-term capital gains, short-term capital losses, long-term capital gains or long-term capital losses must report this information on Schedule D, an IRS form that accompanies form 1040. Schedule D is not just for reporting capital gains and losses from investments; it is also used to report capital gains or losses from ownership in a partnership, S corporation, estate or trust. Also, taxpayers who have capital loss carryovers from previous years use Schedule D to report this information. Using tax software can make it easy to figure out whether Schedule D is required and to complete it if so. The totals from Schedule D are transferred to form 1040, where they are used along with form 1040’s other data to determine the taxpayer’s total annual tax liability.
For the purposes of Schedule D, the IRS considers a capital asset to be almost any personal (i.e., non-business) property, such as a house, furniture, vehicle, stocks or bonds. However, the IRS does not require taxpayers to use Schedule D to report the capital gain or loss from the sale of their home if they lived in the home as their primary residence for two out of the five years preceding the sale and if the capital gain was $250,000 or less for single taxpayers or $500,000 or less for taxpayers married filing jointly.
Schedule D requires taxpayers to report the sales price of their investment or ownership interest, its cost or other basis and any adjustments to the gain or loss. Taxpayers can usually get this information from Form 1099-B, which the payer must file with the IRS for reporting purposes and send a copy to the payee. Schedule D categorizes transactions according to whether they are short-term (held for one year or less) or long-term (held for longer than one year) since the two categories of transactions are taxed at different rates, with long-term capital gains having a lower rate.