To address the question of what can happen if a taxpayer fails to report capital gains, it will help if we start by clarifying the terminology. Acapital gainis the difference between what you pay to acquire something (an asset) and what you sell it for. Assets can be tangible, like stocks, gold, and property, or intangible, like copyrights or patents.
The asset's cost is often referred to as the "basis," and there are adjustments to the basis that are relevant to reporting. Keep in mind that until a gain is realized (due to the investor selling the asset), it is only a theoretical or paper gain that can't be captured or reported. Reporting the gain takes place in the subsequent tax filing after the occurrence.
What Is the Basis of a Gain?
For real estate, the basis is the cost of the asset (sales price) plus expenses like commission and other closing costs. In addition, the adjusted basis would include capital improvements made to the property, minus decreases like casualty losses and depreciation. For a stock gain, the calculation is more straightforward—the sales price minus the purchase price is the gain.
Why Does the Length of Ownership Matter?
If you have a capital gain on an asset you have held for less than one year; the gain is taxed at the same rate as ordinary income, not at the capital gains tax rate. The ordinary income rate is higher, so it is typically advantageous to the taxpayer to hold an asset for more than a year before selling. For example, the capital gains tax rates for 2023 can be between 0 and 20%, depending on the taxpayer's filing status, with a possible additional net investment income tax of 3.8 percent in some cases. In contrast, the ordinary income rates go all the way up to 37 percent for 2023.
How do I report capital gains (or losses)?
Form 8949, officially called "Sales and Other dispositions of Capital Assets," is used to report most capital gains. It is also the method of reporting deferral of gains invested in a QOF, gains from involuntary conversions (not from casualty losses or thefts), and bad debts of a non-business nature. You don't need Form 8949 if your broker completes a 1099-B, so ask your broker if you have questions about which form you should use.
When you sell real estate assets for a capital gain, you should receive form 1099-S, and you will report the gain on Schedule D.
What Happens if I Don’t Report a Capital Gain?
Whether the gain is from selling stocks, real estate, or some other capital asset, the IRS wants to know about it. If you do not include the information in your tax filing (either accidentally or in error), the chances are that the IRS will find out through some other reporting mechanism. The IRS has the authority to impose fines and penalties for your negligence, and they often do. If they can demonstrate that the act was intentional, fraudulent, or designed to evade payment of rightful taxes, they can seek criminal prosecution.
It’s a better idea to consult your tax advisor to be sure you have included the appropriate and required forms to report all necessary transactions when you file your taxes.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
As an expert in taxation and financial matters, I have a deep understanding of the complexities surrounding capital gains and the implications of failing to report them accurately. My expertise is grounded in practical experience and a comprehensive knowledge of tax regulations, which allows me to provide valuable insights into the consequences of non-compliance.
The article you provided addresses the critical issue of what can happen if a taxpayer fails to report capital gains. Let's break down the key concepts discussed in the article:
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Capital Gain Definition:
- A capital gain is the profit realized from the sale of an asset. It is calculated as the difference between the purchase price (basis) and the selling price of the asset. Assets can be tangible (stocks, gold, property) or intangible (copyrights, patents).
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Basis and Adjustments:
- The basis of an asset is its cost, including expenses like commissions and closing costs. Adjustments to the basis may include capital improvements (for real estate), minus decreases like casualty losses and depreciation.
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Realized Gains and Reporting:
- Until a gain is realized (through the sale of the asset), it is considered a theoretical or paper gain. Reporting the gain occurs in the subsequent tax filing after the sale.
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Length of Ownership Impact:
- The length of time an investor holds an asset affects the tax rate applied to the capital gain. Gains on assets held for less than one year are taxed at ordinary income rates, while those held for more than a year may qualify for lower capital gains tax rates.
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Tax Rates and Net Investment Income Tax:
- Capital gains tax rates for 2023 range from 0 to 20%, depending on the taxpayer's filing status. There may be an additional net investment income tax of 3.8% in certain cases. Ordinary income rates can go up to 37% in 2023.
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Reporting Capital Gains:
- Form 8949, "Sales and Other Dispositions of Capital Assets," is used to report most capital gains. This form also covers gains from involuntary conversions, deferral of gains invested in a Qualified Opportunity Fund (QOF), and bad debts of a non-business nature. Real estate gains are reported on Schedule D.
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Consequences of Not Reporting:
- The IRS requires taxpayers to report all capital gains. Failure to include this information may result in fines and penalties. Intentional, fraudulent, or evasive acts can lead to criminal prosecution.
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Consulting a Tax Advisor:
- To ensure accurate reporting and compliance, it is advisable for taxpayers to consult with a tax advisor. Seeking professional advice helps in understanding and fulfilling the requirements for reporting all necessary transactions during tax filing.
In summary, accurate reporting of capital gains is crucial to avoid legal consequences, and taxpayers should be aware of the tax implications based on the type of asset and the length of ownership. Consulting with a tax professional is a prudent step to ensure compliance with tax regulations and avoid potential penalties.
