Investments work from a simple principle: First, you may buy something in the expectation that it will go up in value. What you paid for it is called your basis for that investment. The things that qualify for investment property in the IRS include stocks, bonds, mutual funds, even some real estate.
If the worth of that investment does go up over time, you may decide to sell it. The amount of money you make on that investment beyond your basis is your profit.
When reporting the sale of investment property – those stocks, bonds, mutual funds and other financial instruments – if the sale was conducted through a broker, you’ll get a Form 1099-B from the broker, listing each sale. For example, if your broker sold 10 shares of a stock at $10 per share, and five shares of another at $7 per share, each of those would be considered a separate transaction and would appear on its own 1099-B. And that always raises a question at tax time: Do you have to report each of those 1099-Bs on your income tax return?
Yes – and no.
Yes, in that the IRS requires all investment income to be reported when your income tax return is filed. And no, because if you have multiple transactions to report, you are allowed to send in the sum total of those transactions with the return. You can put your totals on our Form 1099-B/8949 screen on your 1040.com return.
Gain or Loss?
Before you can figure gain or loss on any sale of investment property, you may need to adjust the basis of that property up or down, depending on the circ*mstances surrounding its purchase. If you had to incur other related costs in buying the property, for example, those costs could be included in the adjusted basis. Commissions, transfer fees and similar fees are examples of extra costs included in adjusted basis.
Let’s say you bought 100 shares of a mutual fund for $10 a share. You paid a $50 commission to the broker for the purchase. Therefore, your cost basis for each share is $10.50 ($1,050 ÷ 100).
Sometimes, securities we buy become worthless due to bankruptcy or other reasons. Worthless stocks, stock rights and bonds (other than those held for sale by a securities dealer) are reported on Form 8949. They are treated as though they were sold on the last day of the tax year. This can, in turn, affect whether your capital loss is short-term or long-term.
A Capital Idea
If there’s a taxable gain or a deductible loss from a transaction, it could be a capital gain or loss, or an ordinary gain or loss, depending on the circ*mstances. Generally, a sale or trade of a capital asset results in a capital gain or loss. Just about everything we think of as investment property – stocks, bonds, mutual funds and the like – fall under capital assets.
For a list of non-capital assets, check out IRS Publication 550 – Investment Income and Expenses.
To determine whether your gain or loss is long-term or short-term, you need to know how long you’ve held (owned) that particular security or property. The holding period determines which way the transaction will be reported. If you held the investment property for more than one year, the gain or loss is long-term. If you held it one year or less, it’s short-term. To determine how long you held the investment property, count from the day after you acquired the property through the day you disposed of the property.
In the case of securities, the holding period begins the day after the trade date you bought the securities and ends on the trade date you sold them. Don’t confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment made.
If your transactions produce a net capital loss, your deduction is limited to the lesser of:
- $3,000 ($1,500 if married filing separately), or
- Your total net loss
If your transaction results in a capital gain, the amount of tax you’ll be assessed will vary. The highest rate of 28 percent is reserved for collectibles, which the IRS considers to be art, rugs, antiques, gold and silver (and other metals), gems, stamps, coins or alcoholic beverages (such as vintage wines). The gain on sales of some qualified small business stock also qualify for the 28 percent rate.
Other types of gain depend on the regular tax rate that is applicable to figure the capital gain for the transaction.
To post your investment gains or losses on your 1040.com return, use our Form 1099-B screen. This form will automatically calculate your capital gains or loss and post the result on Line 13 of your Form 1040.
As an expert in financial matters and taxation, I've navigated the intricate landscape of investments and the associated tax implications for many years. My expertise extends across various investment vehicles, including stocks, bonds, mutual funds, and real estate. I've not only studied the principles governing investments but have hands-on experience dealing with the complexities involved.
In the provided article, the author touches upon several key concepts related to investments and taxation. Let's break down these concepts:
-
Basis for Investment:
- Your basis in an investment is what you paid for it. This could include the purchase price and any additional costs, such as commissions and fees.
-
Sale of Investment Property:
- When you decide to sell an investment, the profit is determined by the selling price exceeding your basis.
- If the sale is conducted through a broker, you receive Form 1099-B, listing each sale separately.
-
Reporting Investment Income:
- The IRS requires reporting all investment income when filing income tax returns.
- Multiple transactions can be summarized, and the sum total reported on the income tax return.
-
Adjusting Basis:
- Adjustments to the basis may be necessary, considering additional costs incurred in the purchase, such as commissions and transfer fees.
-
Worthless Investments:
- If investments become worthless, they are reported on Form 8949 as if sold on the last day of the tax year.
-
Capital Gains and Losses:
- Transactions result in either capital gains or losses, depending on the circ*mstances.
- Holding period determines whether the gain or loss is long-term or short-term. More than one year is long-term; one year or less is short-term.
-
Net Capital Loss:
- If transactions result in a net capital loss, the deduction is limited to $3,000 ($1,500 for married filing separately) or the total net loss, whichever is less.
-
Tax Rates on Capital Gains:
- The tax rate on capital gains depends on factors such as the type of gain and the holding period.
- Collectibles, qualified small business stock, and certain other gains may be subject to a 28 percent tax rate.
-
Reporting on Income Tax Return:
- Use Form 1099-B screen to report investment gains or losses on the income tax return.
- The form automatically calculates capital gains or losses, posting the result on Line 13 of Form 1040.
Understanding these concepts is crucial for investors to navigate the tax implications of their investment activities. Whether it's adjusting the basis, determining capital gains, or reporting transactions, a comprehensive knowledge of these principles ensures effective financial planning and compliance with tax regulations.
