Schedule D

Report capital gains and losses on Schedule D (Form 1040). Enter your sales and trades of stocks, bonds, etc., and real estate (if not required to be reported on another form) on line 1 of Part I or line 8 of Part II, as appropriate. Include all these transactions even if you did not receive a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or Form 1099-S, Proceeds From Real Estate Transactions (or substitute statement). You can use Schedule D-1 as a continuation schedule to report more transactions.

Installment sales. You cannot use the installment method to report a gain from the sale of stock or securities traded on an established securities market. You must report the entire gain in the year of sale (the year in which the trade date occurs).

Passive activity gains and losses. If you have gains or losses from a passive activity, you may also have to report them on Form 8582. In some cases, the loss may be limited under the passive activity rules. Refer to Form 8582 and its separate instructions for more information about reporting capital gains and losses from a passive activity.

Form 1099-B transactions. If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B or equivalent statement from the broker. Use the Form 1099-B or the equivalent statement to complete Schedule D.

Report the gross proceeds shown in box 2 of Form 1099-B as the gross sales price in column (d) of either line 1 or line 8 of Schedule D, whichever applies. However, if the broker advises you, in box 2 of Form 1099-B, that gross proceeds (gross sales price) less commissions and option premiums were reported to the IRS, enter that net sales price in column (d) of either line 1 or line 8 of Schedule D, whichever applies. If the net amount is entered in column (d), do not include the commissions and option premiums in column (e).

Form 1099-S transactions. If you sold or traded reportable real estate, you generally should receive from the real estate reporting person a Form 1099-S showing the gross proceeds.

"Reportable real estate" is defined as any present or future ownership interest in any of the following:

1. Improved or unimproved land, including air space,
2. Inherently permanent structures, including any residential, commercial, or industrial building,
3. A condominium unit and its accessory fixtures and common elements, including land, and
4. Stock in a cooperative housing corporation (as defined in section 216 of the Internal Revenue Code).

A "real estate reporting person" could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property.

Your Form 1099-S will show the gross proceeds from the sale or exchange in box 2. Follow the instructions for Schedule D to report these transactions and include them on line 1 or 8 as appropriate.

Reconciling Forms 1099 with Schedule D. Add the following amounts reported to you for 2001 on Forms 1099-B and 1099-S (or on substitute statements):

1. Proceeds from transactions involving stocks, bonds, and other securities, and
2. Gross proceeds from real estate transactions (other than the sale of your main home if you had no taxable gain) not reported on another form or schedule.

If this total is more than the total of lines 3 and 10 of Schedule D, attach a statement to your return explaining the difference.

Sale of property bought at various times. If you sell a block of stock or other property that you bought at various times, report the short-term gain or loss from the sale on one line in Part I of Schedule D and the long-term gain or loss on one line in Part II. Write "Various" in column (b) for the "Date acquired." See the Comprehensive Example later in this chapter.

Sale expenses. Add to your cost or other basis any expense of sale such as brokers' fees, commissions, state and local transfer taxes, and option premiums. Enter this adjusted amount in column (e) of either Part I or Part II of Schedule D, whichever applies, unless you reported the net sales price amount in column (d).

For more information about adjustments to basis, see chapter 14.

Property held for personal use only, rather than for investment, is a capital asset and you must report a gain from its sale as a capital gain. However, you cannot deduct a loss from selling personal use property.

Short-term gains and losses. Capital gain or loss on the sale or trade of investment property held 1 year or less is a short-term capital gain or loss. You report it in Part I of Schedule D. If the amount you report in column (f) is a loss, show it in parentheses.

You combine your share of short-term capital gains or losses from partnerships, S corporations, and fiduciaries, and any short-term capital loss carryover, with your other short-term capital gains and losses to figure your net short-term capital gain or loss on line 7 of Schedule D.

Long-term gains and losses. A capital gain or loss on the sale or trade of property held more than 1 year is a long-term capital gain or loss. You report it in Part II of Schedule D. If the amount in column (f) is a loss, show it in parentheses.

You also report the following in Part II of Schedule D:

1. Undistributed long-term capital gains from a regulated investment company (mutual fund) or real estate investment trust (REIT),
2. Your share of long-term capital gains or losses from partnerships, S corporations, and fiduciaries,
3. All capital gain distributions from mutual funds and REITs not reported directly on line 10 of Form 1040A or line 13 of Form 1040, and
4. Long-term capital loss carryovers.

The result after combining these items with your other long-term capital gains and losses is your net long-term capital gain or loss ( line 16 of Schedule D).

28% rate gain or loss. Enter in column (g) the amount, if any, from column (f) that is a 28% rate gain or loss. Enter any loss in parentheses.

A 28% rate gain or loss is:

• Any collectibles gain or loss, or
• The part of your gain on qualified small business stock that is equal to the section 1202 exclusion.

For more information, see Capital Gain Tax Rates, later.

Capital gain distributions only. You do not have to file Schedule D if all of the following are true.

1. The only amounts you would have to report on Schedule D are capital gain distributions from box 2a of Form 1099-DIV (or substitute statement).
2. You do not have an amount in box 2b, 2c, 2d, or 2e of any Form 1099-DIV (or substitute statement).
3. You do not file Form 4952 or, if you do, the amount on line 4e of that form is not more than zero.

If all the above statements are true, report your capital gain distributions directly on line 13 of Form 1040 and check the box on that line. Also, use the Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax.

You can report your capital gain distributions on line 10 of Form 1040A, instead of on Form 1040, if both of the following are true.

1. None of the Forms 1099-DIV (or substitute statements) you received have an amount in box 2b, 2c, 2d, or 2e.
2. You do not have to file Form 1040 for any other capital gains or any capital losses.

Total net gain or loss. To figure your total net gain or loss, combine your net short-term capital gain or loss (line 7) with your net long-term capital gain or loss ( line 16). Enter the result on line 17, Part III of Schedule D. If your losses are more than your gains, see Capital Losses, next. If both lines 16 and 17 are gains and line 39 of Form 1040 is more than zero, see Capital Gain Tax Rates, later.

Capital Losses

If your capital losses are more than your capital gains, you can claim a capital loss deduction. Report the deduction on line 13 of Form 1040, enclosed in parentheses.

Limit on deduction. Your allowable capital loss deduction, figured on Schedule D, is the lesser of:

1. $3,000 ($1,500 if you are married and file a separate return), or
2. Your total net loss as shown on line 17 of Schedule D.

You can use your total net loss to reduce your income dollar for dollar, up to the $3,000 limit.

Capital loss carryover. If you have a total net loss on line 17 of Schedule D that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up.

When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it.

When you carry over a loss, it remains long term or short term. A long-term capital loss you carry over to the next tax year will reduce that year's long-term capital gains before it reduces that year's short-term capital gains.

Figuring your carryover. The amount of your capital loss carryover is the amount of your total net loss that is more than the lesser of:

1. Your allowable capital loss deduction for the year, or
2. Your taxable income increased by your allowable capital loss deduction for the year and your deduction for personal exemptions.

If your deductions are more than your gross income for the tax year, use your negative taxable income in computing the amount in item (2).

Complete the Capital Loss Carryover Worksheet in the Schedule D (Form 1040) instructions to determine the part of your capital loss for 2001 that you can carry over to 2002.

Example. Bob and Gloria sold securities in 2001. The sales resulted in a capital loss of $7,000. They had no other capital transactions. Their taxable income was $26,000. On their joint 2001 return, they can deduct $3,000. The unused part of the loss, $4,000 ($7,000 - $3,000), can be carried over to 2002.

If their capital loss had been $2,000, their capital loss deduction would have been $2,000. They would have no carryover.

Use short-term losses first. When you figure your capital loss carryover, use your short-term capital losses first, even if you incurred them after a long-term capital loss. If you have not reached the limit on the capital loss deduction after using short-term losses, use the long-term losses until you reach the limit.

Decedent's capital loss. A capital loss sustained by a decedent during his or her last tax year (or carried over to that year from an earlier year) can be deducted only on the final income tax return filed for the decedent. The capital loss limits discussed earlier still apply in this situation. The decedent's estate cannot deduct any of the loss or carry it over to following years.

Joint and separate returns. If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. However, if you and your spouse once filed a joint return and are now filing separate returns, any capital loss carryover from the joint return can be deducted only on the return of the person who actually had the loss.

Capital Gain Tax Rates

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.

The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

The maximum capital gain rate can be 8%, 10%, 20%, 25%, or 28%. See Table 17-1 for details.

The maximum capital gain rate does not apply if it is higher than your regular tax rate.

Example. You have a net capital gain from selling collectibles, so the capital gain rate would be 28%. Because you are single and your taxable income is $25,000, your regular tax rate is 15%. All your taxable income will be taxed at the 15% rate. The 28% rate does not apply.

Investment interest deducted. If you claim a deduction for investment interest, you may have to reduce the amount of your net capital gain that is eligible for the capital gain tax rates. Reduce it by the amount of the net capital gain you choose to include in investment income when figuring the limit on your investment interest deduction. This is done on lines 21-23 of Schedule D. For more information about the limit on investment interest, see chapter 3 of Publication 550.

8% rate. Beginning in 2001, the 10% capital gain rate is lowered to 8% for "qualified 5-year gain."

Qualified 5-year gain. This is long-term capital gain from the sale of property that you held for more than 5 years and that would otherwise be subject to the 10% capital gain rate.

Table 17-1. What Is Your Maximum Capital Gain Rate?

IF your net capital gain is from ...	THEN your maximum capital gain rate is ...
Collectibles gain	28%
Gain on qualified small business stock equal to the section 1202 exclusion	28%
Unrecaptured section 1250 gain	25%
Other gain, 1 and the regular tax rate that would apply is 27.5% or higher	20%
Other gain, 1 and the regular tax rate that would apply is lower than 15%	8% or 10% 2

__________________________________________________________________________________ 1 "Other gain" means any gain that is not collectibles gain, gain on qualified small business stock, or unrecaptured   section 1250 gain.

2 The rate is 8% only for qualified 5-year gain. __________________________________________________________________________________

Collectibles gain or loss. This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year.

Gain on qualified small business stock. If you realized a gain from qualified small business stock that you held more than 5 years, you generally can exclude one-half of your gain from income. The taxable part of your gain equal to your section 1202 exclusion is a 28% rate gain. See Gains on Qualified Small Business Stock in chapter 4 of Publication 550.

Unrecaptured section 1250 gain. Generally, this is any part of your capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than your net section 1231 gain), reduced by any net loss in the 28% group. Use the worksheet in the Schedule D instructions to figure your unrecaptured section 1250 gain. For more information about section 1250 property and section 1231 gain, see chapter 3 of Publication 544.

Using Schedule D. You apply these rules by using Part IV of Schedule D (Form 1040) to figure your tax. Use Part IV if both of the following are true.

1. You have a net capital gain. You have a net capital gain if both lines 16 and 17 of Schedule D are gains. ( Line 16 is your net long-term capital gain or loss. Line 17 is your net long-term capital gain or loss combined with any net short-term capital gain or loss.)
2. Your taxable income on Form 1040, line 39, is more than zero.

If you have any collectibles gain, gain on qualified small business stock, or unrecaptured section 1250 gain, you may have to use the Schedule D Tax Worksheet in the Schedule D instructions to figure your tax. See the directions below line 19 of Schedule D.

See the Comprehensive Example, later, for an example of how to figure your tax on Schedule D using the capital gain rates.

Using Capital Gain Tax Worksheet. If you have capital gain distributions but do not have to file Schedule D (Form 1040), figure your tax using the Capital Gain Tax Worksheet in the instructions for Form 1040A or Form 1040. For more information, see Capital gain distributions only, earlier.

New 18% rate beginning in 2006. Beginning in 2006, the 20% maximum capital gain rate will be lowered to 18% for qualified 5-year gain from property with a holding period that begins after 2000. See chapter 4 of Publication 550 for more information.

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