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After a short interlude meant to raise your interest for other hot topics, we are ready to resume our incursion into the more traditional schedules for Form 1040 and the changes brought to them by the Tax Cuts and Jobs Act.
Our next stop is Schedule D which is used to report the following tax-worthy events.
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- The sale or exchange of a capital asset not reported on another form or schedule.
- Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit.
- Capital gain distributions not reported directly on Form 1040 (or effectively connected capital gain distributions not reported directly on Form 1040-NR).
- Nonbusiness bad debts.
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Let us first clarify some of the terms specific to this topic.
Most property you own and use for personal purposes or investment is a capital asset. For example, your house, furniture, car, stocks, and bonds are capital assets. A capital asset is any property owned by you except the items below. |
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- Stock in trade or other property included in inventory or held mainly for sale to customers. (You can elect to treat as capital assets certain musical compositions or copyrights you sold or exchanged.)
- Accounts or notes receivable: for services rendered in the ordinary course of your trade or business, for services rendered as an employee, or from the sale of stock in trade or other property included in inventory or held mainly for sale to customers.
- Depreciable property used in your trade or business, even if it is fully depreciated.
- Real estate used in your trade or business.
- For dispositions after December 31, 2017, certain patents, inventions, models, or designs (whether or not patented); secret formulas or processes; or similar property.
- A U.S. Government publication, including the Congressional Record, that you received from the government for less than the normal sales price, or that you received under circumstances that entitle you to the basis of someone who received the publication for less than the normal sales price.
- A copyright; a literary, musical, or artistic composition; a letter or memorandum; or similar property that is: created by your personal efforts; prepared or produced for you (in the case of a letter, memorandum, or similar property); or received under circumstances (such as by gift) that entitle you to the basis of the person who created the property or for whom the property was prepared or produced.
- Certain commodities derivative financial instruments held by a dealer and connected to the dealer's activities as a dealer.
- Certain hedging transactions entered into in the normal course of your trade or business.
- Supplies regularly used in your trade or business.
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To determine a capital gain or loss on an asset, sellers must compute the difference between the basis, usually what they paid for the property, and what they received for it.
Capital gains and losses are either long- or short-term, depending on how long you hold the property. The gain or loss is short-term if you hold it for one year or less.
If your capital losses are more than your capital gains, you can deduct the difference as losses on your tax return, up to $3,000 per year, or $1,500 if married and filing a separate return.
When your total net capital loss is more than the limit you can deduct, you can carry it over to next year’s tax return.
Capital loss deductions are applicable to the sale of investment property, but not on the sale of property held for personal use. |
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If your long-term gains are more than your long- term losses, the difference between the two is a net long-term capital gain.
If the net long-term capital gain is more than the net short-term capital loss, it’s a net capital gain. |
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Every year, usually sometime in February, the brokerage holding your investments will send you a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, that provides tax info on all your transactions from the previous year.
Some brokerages will combine Form 1099-B with your 1099-DIV and 1099-INT forms, which contain information on the dividends and interest you received during the year, respectively.
The tax rate on a net capital gain usually depends on income. The maximum tax rate on a net capital gain is 20 percent, but for most taxpayers a zero percent or 15 percent rate will apply.
Under the Tax Cuts and Jobs Act, the three capital gains income thresholds don't match up perfectly with the tax brackets, instead, they are applied to maximum taxable income levels.
Short-term capital gains are taxed as ordinary income.
In addition, capital gains may be subject to the net investment income tax of 3.8 percent when income is above certain amounts. |
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If you have to report a capital asset transaction, you will need to prepare Form 8949, Sales and other Dispositions of Capital Assets, before filling out Schedule D, unless an exception applies. Form 8949 requires the details of each capital asset transaction.
In some situations, you do not need to fill out Form 8949. Generally, the use of Form 8949 is based upon the number of reported transactions and is intended to minimize paperwork by organizing otherwise unorganized information.
The totals for all your short-term capital gains and losses will go on row 1a of Part I, and the totals for your long-term capital gains and losses will go on row 8a of Part II of Schedule D. |
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Part III of Schedule D is where you summarize all your capital gains and losses so that you can determine whether or not you had an overall gain or loss for the year, and how much it was. The form includes the tax computation using maximum capital gain rates.
Changes to Schedule D for tax year 2018 and beyond include the following.
Rollover of empowerment zone assets. The election to rollover gain from an empowerment zone asset has expired for 2018. |
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Rollovers into specialized small business investment companies (SSBICs). Tax- free rollovers of publicly traded securities gains into SSBICs are no longer available for sales after December 31, 2017.
Capital assets. For dispositions after 2017, certain patents, inventions, models, or designs (whether or not patented); secret formulas or processes; or similar property are not capital assets.
Special rules for capital gains invested in qualified opportunity funds (QOFs). In 2018, if you have eligible gains and invested the gains into a QOF, you may be able to elect to postpone part or all of the gain that you would otherwise include in income. You may also be able to permanently exclude the gain from the sale or exchange of an investment in the QOF if the investment is held for at least 10 years.
Three-year holding period for applicable partnership interests. For tax years beginning after 2017, the long-term capital gains holding period for an applicable partnership interest increased from more than 1 year to more than 3 years. The new holding period applies only to partnership interest held in connection with the performance of services as defined in section 1061. |
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Excess business loss limitation. If you report a loss on line 7 or line 15 of your Schedule D, you may be subject to the new business loss limitation.
The disallowed loss resulting from the limitation will not be reflected on Schedule D. Instead, use new Form 461, Limitation on Business Losses, to figure the amount to include as income on Schedule 1, line 21. Any disallowed loss resulting from this limitation will be treated as a net operating loss that must be carried forward and deducted in a subsequent tax year.
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| Clearly, Schedule D can be very confusing, with lots of exceptions and special provisions involving other forms you may have to file, like Form 461 to figure your excess business loss; Form 4797 to report the sale or exchange of: real property used in your trade or business; Form 8824 to report like-kind exchanges; Form 8960 to figure any net investment income tax relating to gains and losses reported on Schedule D, including gains and losses from a securities trading activity. You can find more details in the Instructions for Schedule D on the IRS webpage. |
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| It is our firm recommendation that you seek advice and help from a tax professional to be able to navigate through all the meanders of the tax law and the new tax law, as well as for all your dealings with the IRS. |
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