What Is Schedule D?
Schedule D is one of the many schedules provided by the IRS and attached to U.S. Individual Income Tax Return Form 1040, which you must complete to report any gains or losses you realize from the sale of your capital assets. Your capital assets are, pretty much, everything you own and use for pleasure or investment purposes. The capital assets you are most likely to report on Schedule D are the stocks, bonds, and homes you sell.
- Schedule D is a form provided by the IRS to help taxpayers computer their capital gains or losses and the corresponding taxes due.
- The calculations from Schedule D are combined with individual tax return form 1040, where it will affect the adjusted gross income amount.
- Capital losses that exceed the current year's gains may be carried forward as well using Schedule D.
The Basics of Schedule D
Investments or assets that are sold must be recorded for tax purposes. This includes realized capital losses, which can be deducted from your income tax bill if the shares sold were owned for investment purposes. Capital gains or losses are broken down into either short-term capital gains/losses (disposed after less than 12-months from purchase date) or long-term capital gains/losses (disposed after 12 months or more from purchase). Long-term capital gains tax is often more favorable (0%–20% depending on one's income tax bracket) than short-term gains that are taxed as ordinary income.
All versions of Schedule D are available on the IRS website.
Schedule D has instructions that help you collect information about the current year capital asset sales and prior year capital loss carry-forwards. Depending on your tax situation, Schedule D may instruct you to prepare and bring over information from other tax forms.
- Form 8949 if you sell investments or your home
- Form 4797 if you sell a business property
- Form 6252 if you have installment sale income
- Form 4684 if you have a casualty or theft loss
- Form 8824 if you made a like-kind exchange
Ultimately, the capital gain or loss you compute on Schedule D is combined with your other income and loss to figure your tax on Form 1040. Schedule D and Form 8949 are included with Form 1040 when you file your federal tax return.
Example of Using Schedule D
Taking a simple example, assume the only property you sold during the tax year was stock and you received a Form 1099-B from your broker that reports a $4 net short-term capital gain and a net $8 long-term capital gain from the following sales:
- Stock acquired on 1/1/17 for $4 and sold on 4/27/17 for $6, resulting in a short-term capital gain of $2.
- Stock acquired on 1/1/17 for $3 and sold on 4/28/17 for $7, resulting in a short-term capital gain of $4.
- Stock acquired on 1/1/17 for $9 and sold on 4/29/17 for $8, resulting in a short-term capital loss of $1.
- Stock acquired on 1/1/17 for $9 and sold on 4/30/17 for $8, resulting in a short-term capital loss of $1.
- Stock acquired on 1/1/15 for $1 and sold on 12/31/17 for $9, resulting in a long-term capital gain of $8.
- Stock acquired on 1/2/15 for $1 and sold on 12/30/17 for $3, resulting in a long-term capital gain of $2.
- Stock acquired on 1/3/15 for $4 and sold on 4/29/17 for $3, resulting in a long-term capital loss of $1.
- Stock acquired on 1/4/15 for $4 and sold on 4/30/17 for $3, resulting in a long-term capital loss of $1.
These stock sales are sales of capital assets that you must report on Schedule D. Schedule D instructs you to first complete Form 8949. Sales of stock you own for less than a year are sales of short-term capital assets reported on Part I of Form 8949 and sales of stock you held for more than a year are sales of long-term capital assets reported on Part II of Form 8949. Conveniently, the categories on Form 1099-B correspond to those on Form 8949. You compute each stock sale’s gain or loss by subtracting its cost basis from its proceeds.
A tally of gains and losses gives a total Part I, net short-term capital gain of $4 to transfer to Part I of Schedule D. The total Part II, net long-term capital gain of $8 will transfer to Part II of Schedule D. Schedule D, Part III uses this information to compute your net allowable capital gain or loss. You have a $12 capital gain.
If instead, you had a capital loss and, due to limitations on its deductibility, you had an excess capital loss to carry forward to the next year, make sure to keep your records so you can accurately input your capital loss carryforward on next year’s Schedule D.