Schedule D and Form 8949

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July 25, 2018

Each year the Internal Revenue service adds more complexity to the filing of the required annual income tax returns. In an effort to reduce the amount of correspondence through generated when taxpayers sell a capital asset and that sale is not reported because the taxpayer knew they had a capital loss and that loss would not impact their tax return or they had no idea what they paid for the asset.

There is a phase in on how the sale of a capital is to be reported on their returns. The reporting of the sale of capital assets on Schedule D did not provide enough information with which the Internal Revenue Service could verify the correctness of the sale or other disposition. The Internal Revenue Service instituted the use of Form 8949 for reporting the sale or disposition of a capital asset with the filing of the 2010 Individual Income Tax return.

Before we discuss the reporting of capital gains and losses let us visit why the Internal Revenue Service is requiring this information. Basically we look to the Rules of Evidence in Civil tax proceedings. The Internal Revenue Service must prove the amount of the Taxpayer’s income while the Taxpayer must prove his basis or expenses. To enable the Internal Revenue Service to know the amount of income the taxpayer has earned the IRS has put together a formidable series of forms on which payors report to the IRS the amount paid to the taxpayer. Forms W-2, 1099-B, 1099-C, 1099-DIV, 1099-INT, 1099-Misc to name only a few. The sale, exchange or disposition of a capital asset is reported on Form 1099-B by Brokerage Houses.

What is a Capital Asset? Interestingly the 986 Internal Revenue Code as Amended does not define what a capital asset is but what it isn’t. A capital asset is any property that you own except:

1) Stock in trade or other property included in inventory or held mainly for sale to customers
2) Accounts or notes receivable for services performed in the ordinary course of your trade or business or as an employee, or from the sale of stock in trade or other property held mainly for the to customers.
3) Depreciable property used in your trade or business, even if it is fully depreciated.
4) Real estate used in trade or business.
5) Copyrights, literary, musical, or artistic compositions, letters or memoranda or similar property; a) created by your personal efforts; b) prepared or produced for you (in the case of letters, memoranda, or similar property); or c) that you received from someone who created them or for whom they were created as mentioned in a) or b), in a way (such as by gift) that entitled you to the basis of previous owner. However, there is a special election that can be made to treat item as a capital asset on the return for the year of sale by the due date of that return including extensions. An automatic 6-month extension is granted to revoke the election. Permission must be obtained from the IRS to make the revocation.
6) U. S. Government publications, including the Congressional Record, that you received from the Government, other than by purchase at the normal sales price, or that you got from someone who had received it in a similar way, if your basis is determined by reference to the previous owner’s basis.
7) Certain commodities derivative financial instruments held by a dealer and not connected to the dealer’s activities as a dealer. (Section 1221(a)(6).
8) Certain hedging transactions entered into in the normal course of your trade or Business. (Section 1221(a)(7).
9) Supplies regularly used in your trade or business.

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A short term asset is an asset that has a holding period of less than 12 months. The holding period begins on the day after the asset is acquired and ends on the day the is sold, exchanged or disposed of. Along term asset is any asset disposed of, sold or exchanged more than 12 months after being acquired. An exception to this rule is an asset received through an inheritance. That asset receives long term treatment even if held for less than 12 months. Care must be taken to be sure the asset was listed in the decedent’s estate inventory. Often assets are bought and sold through the estate. A nonbusiness bad debt receives short term treatment subject to several restrictions. The debt has to be evidenced by a valid enforceable document. The debt has to Arise through the exchange of some form of asset, usually money, for a promise to pay at some point in the future. All avenues of collecting the debt have to be exhausted before it will qualify a short term capital asset.

Beginning with the 2011 tax year capital transactions are reported on the Form 8949. A covered transaction is a transaction which the Brokerage House reported both the purchase and the sale are reported on the Form 1099-B or substitute statement filed with the Internal Revenue Service. A noncovered transaction is a transaction which the Brokerage House reported only the sale of the asset to the Internal Revenue Service. Care must be taken to be sure that the Brokerage House did not report the sale to the IRS even though the purchase information is reported on the Form 1099-B or a substitute statement.

A short term covered transaction is reported on Form 8949 on page 1 line 1 with a check in box A. Only covered transactions are reported on this Form 8949. Should the Brokerage statement or substitute have additional uncovered transaction being reported then a separate Form 8949 is used with box B being checked. Any short term capital transaction which was not reported on a Form 1099-B or substitute is also reported on a separate Form 8949 with a check in box C. A nonbusiness bad debt would be an example of a short term capital transaction not on a Form 1099-B or substitute.

Long term covered transactions are reported on page 2 of Form 8949 checking box A. Uncovered long term transaction are reported on page 2 line 3 with a check in Box B. Long term transaction not on a 1009-B or substitute are reported on page 2 with a check in box C.

Example 1 John Q Public bought 50 shares of ABC Company on January 1, 2012 He sold the 50 shares on May 10, 2012. He sold the 50 shares on May 10,2012. Both the purchase date and amount along with the sale date and amount were reported on the brokers statement. Mr. Public also purchased 100 shares of Growing Stock on May 15, 2012 for $1,500 he sold 100 shares on October 10, 2012. The broker’s statement reported both the date of purchase, cost and the sale date and proceeds. These transactions are covered short term transactions with box A page 1 of Form 8949 being checked. On May 15, 2010 Mr. Public purchased 100 shares of ABC Company which he sold the same date as the 50 shares of stock, May 10, 2012. Mr. Public purchased 100 shares of Halt Trucking on April 1, 2000 and sold those shares on November 15. The broker’s statement reported both the date of purchase, cost and the sale date and proceeds. These are covered long term transactions with the box A checked on page 2 of Form 8949. On March 25, 1995 Mr. Public purchased 10 shares of General Motors Corp stock. He sold that stock on August 5,2012.

How is a covered capital transaction reported when the basis reported is incorrect. This happens often when a person passes away and the Brokerage House is not informed of the date of death.

Example 2; Ed Public passed away on November 9, 2012. He purchased 50 shares of Occidental Petroleum Corp on July 12, 2012 for $105.00 per share. On November 9, 2012 Occidental Petroleum Corp was trading for $108.50 per share. On December 20, 2012 Mr. Ed Public’s Personal Representative sold the 50 shares for $125.00 per share. On the Form 8949 this transaction is reported on page 2 and a check is placed in box A. This is because all assets owned by the decedent are treat as long term no matter when they were purchased before the date of death. On line 3 the 50 shares of Occidental Petroleum Corp is entered in column a and the letter B is entered in column b. The purchase date is entered in column c, the sale date is reported in column d, the sales price of $6,250.00 is reported in column d.

The basis reported on the brokers 1099-B of $5,250.00 is reported in column f, the difference between the purchase price and the date and the date of death value of $175.00 is reported in column g.

The same procedure is followed if the basis is less than the Purchase price on the Broker’s 1099-B except that the difference is reported as a negative amount in column g.

One of the most common transactions not reported on Form 1099-B is a Capital Gain distribution from a mutual fund, a regulated investment company or a real estate investment trust. Capital gain distributions are entered directly on Schedule D line 13. This is regardless whether the holding period for the investment generating the capital gain distribution is short term or long term. When a corporation liquidates the payments to the stockholder redeeming the stock are reported on the Form 1099-DIV. The holding period of the stock being redeemed determines the treatment of being long term or short term. Sales or dispositions of partnership interests receive capital gain or loss treatment but are not reported on the form 1099-B. Typically the transaction is reported on the partnership’s K-1 in the capital reconciliation section. Sale of your principal residence is not reported on Form1099-B but may be on Form 1099-S, however, if at some time the office in the home deduction was claimed then the Section 1250 recapture provision comes into play. The recapture is reported on Form 4797 in Part III.

To determine the amount of any Capital Loss to carried over to a subsequent year a series of netting gains (if any) with losses, First short term gains are netted with short term losses. Then the long-term gains are netted with the long-term losses. Finally the short term gains or losses are netted with the long-term gains or losses. Capital losses, which exceed the lesser of $3,000 or taxable income, are carried forward to subsequent years until used up by gains or taxable income of $3,000 or less.

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