Guide to Schedule D: Capital Gains and Losses

Most people use the Schedule D form to report capital gains and losses that result from the sale or trade of certain property during the year. As of 2011, however, the Internal Revenue Service created a new form, Form 8949, that most taxpayers will have to file along with their Schedule D and 1040 forms.

Capital assets include all personal property, such as your home, car, artwork and collectibles, to name a few. It also includes your investments, such as stocks and bonds. Whenever you sell a capital asset, you need to calculate how much money you gained or lost and report it on a Schedule D and Form 8949.

If you made money on the sale, the gains you report are subject to income tax, but the rate of tax you’ll pay depends on how long you hold the asset before selling. If you lost money on the sale, you can use any losses you incur to offset any current and future capital gains. Capital gains and losses are always calculated as the difference between what you bought the asset for (the IRS calls this the “tax basis”) and what you sold the asset for (the sale proceeds).

The initial section of Schedule D is used to report your total short-term gains and losses. Any asset you hold for one year or less at the time of sale is considered “short term” by the IRS. For example, if you purchase 100 shares of Disney stock on April 1 and sold them on August 8, you report the transaction on Schedule D and Form 8949 as short term. When your short-term gains exceed your short-term losses, you pay tax on the net gain at the same ordinary income tax rates you pay on most of your other income, such as your wages.

All other capital assets that you hold for more than one year are classified as long-term on your Schedule D and Form 8949. The advantage to reporting a net long-term gain is that generally these gains are taxed at a lower rate than short-term gains. The precise rate depends on the tax bracket you’re in.

Any year that you have to report a capital asset transaction, you’ll need to prepare Form 8949 before filling out Schedule D. Form 8949 requires the details of each capital asset transaction. For example, if you execute four separate stock trades during the year, some of the information you must report includes the name of the company to which the stock relates, the date you acquired and sold the stock, your purchase price and the sales price. Also, just like the Schedule D, there are two sections that cover your long-term and short-term transactions. You then compute the total gain or loss for each category and transfer those amounts to your Schedule D and then to your 1040.

When you use TurboTax to prepare your taxes, we’ll do these calculations and fill in all the right forms for you. We can even directly import stock transactions from many brokerages and financial institutions, right into your tax return.