Use Schedule D to report sales, exchanges, and other dispositions
of capital assets.
Before completing Schedule D (Form 1040), you may have to complete
other forms as shown below.
- For a sale, exchange, or involuntary conversion of business
property, complete Form 4797.
- For a like-kind exchange, complete Form 8824. (See
Reporting the exchange under Like-Kind Exchanges
in chapter 1.)
- For an installment sale, complete Form 6252. (See
Publication 537.)
- For an involuntary conversion due to casualty or theft,
complete Form 4684. (See Publication 547,
Casualties, Disasters,
and Thefts.)
- For a disposition of an interest in, or property used in, an
activity to which the at-risk rules apply, complete Form 6198,
At-Risk Limitations. (See Publication 925,
Passive
Activity and At-Risk Rules.)
- For a disposition of an interest in, or property used in, a
passive activity, complete Form 8582, Passive Activity Loss
Limitations. (See Publication 925.)
Personal-use property.
Report gain on the sale or exchange of property held for personal
use (such as your home) on Schedule D. Loss from the sale or exchange
of property held for personal use is not deductible. But if you had a
loss from the sale or exchange of real estate held for personal use
for which you received a Form 1099-S, report the transaction on
Schedule D, even though the loss is not deductible. Complete columns
(a) through (e) and enter -0- in column (f).
Long and Short Term
Where you report a capital gain or loss depends on how long you own
the asset before you sell or exchange it. The time you own an asset
before disposing of it is the holding period.
If you hold a capital asset 1 year or less, the gain or loss from
its disposition is short term. Report it in Part I of Schedule D. If
you hold a capital asset longer than 1 year, the gain or loss from its
disposition is long term. Report it in Part II of Schedule D (Form
1040).
Table 4-1. Do I Have a Short-Term
or Long-Term Gain or Loss?
| IF you hold the property... |
THEN you have
a... |
| 1 year or less, |
Short-term capital gain
or
loss. |
| More than 1 year, |
Long-term capital gain or
loss. |
These distinctions are essential to correctly arrive at your net
capital gain or loss. Capital losses are allowed in full against
capital gains plus up to $3,000 of ordinary income. The tax rate for
capital gains is explained later under Capital Gain Tax Rates.
Holding period.
To figure if you held property longer than 1 year, start counting
on the day following the day you acquired the property. The day you
disposed of the property is part of your holding period.
Example.
If you bought an asset on June 19, 2000, you should start counting
on June 20, 2000. If you sold the asset on June 19, 2001, your holding
period is not longer than 1 year, but if you sold it on June 20, 2001,
your holding period is longer than 1 year.
Patent property.
If you dispose of patent property, you are generally considered to
have held the property longer than 1 year, no matter how long you
actually held it. For more information, see Patents in
chapter 2.
Inherited property.
If you inherit property, you are considered to have held the
property longer than 1 year, regardless of how long you actually held
it.
Installment sale.
The gain from an installment sale of an asset qualifying for
long-term capital gain treatment in the year of sale continues to be
long term in later tax years. If it is short term in the year of sale,
it continues to be short term when payments are received in later tax
years.
Nontaxable exchange.
If you acquire an asset in exchange for another asset and your
basis for the new asset is figured, in whole or in part, by using your
basis in the old property, the holding period of the new property
includes the holding period of the old property. That is, it begins on
the same day as your holding period for the old property.
Example.
You bought machinery on December 4, 2000. On June 4, 2001, you
traded this machinery for other machinery in a nontaxable exchange. On
December 5, 2001, you sold the machinery you got in the exchange. Your
holding period for this machinery begins on December 5, 2000.
Therefore, you will have a long-term gain or loss.
Corporate liquidation.
The holding period for property you receive in a liquidation
generally starts on the day after you receive it if gain or loss is
recognized.
Profit-sharing plan.
The holding period of common stock withdrawn from a qualified
contributory profit-sharing plan begins on the day following the day
the plan trustee delivered the stock to the transfer agent with
instructions to reissue the stock in your name.
Gift.
If you receive a gift of property and your basis in it is figured
using the donor's basis, your holding period includes the donor's
holding period. For more information on basis, see Publication 551,
Basis of Assets.
Real property.
To figure how long you held real property, start counting on the
day after you received title to it or, if earlier, the day after you
took possession of it and assumed the burdens and privileges of
ownership.
However, taking possession of real property under an option
agreement is not enough to start the holding period. The holding
period cannot start until there is an actual contract of sale. The
holding period of the seller cannot end before that time.
Repossession.
If you sell real property but keep a security interest in it and
then later repossess it, your holding period for a later sale includes
the period you held the property before the original sale, as well as
the period after the repossession. Your holding period does not
include the time between the original sale and the repossession. That
is, it does not include the period during which the first buyer held
the property.
Nonbusiness bad debts.
Nonbusiness bad debts are short-term capital losses. For
information on nonbusiness bad debts, see chapter 4 of Publication 550.
Net Gain or Loss
The totals for short-term capital gains and losses and the totals
for long-term capital gains and losses must be figured separately.
Net short-term capital gain or loss.
Combine your short-term capital gains and losses, including your
share of short-term capital gains or losses from partnerships, S
corporations, and fiduciaries and any short-term capital loss
carryover. Do this by adding all your short-term capital gains. Then
add all your short-term capital losses. Subtract the lesser total from
the other. The result is your net short-term capital gain or loss.
Net long-term capital gain or loss.
Follow the same steps to combine your long-term capital gains and
losses. Include the following items.
- Net section 1231 gain from Part I, Form 4797, after any
adjustment for nonrecaptured section 1231 losses from prior tax
years.
- Capital gain distributions from regulated investment
companies (mutual funds) and real estate investment trusts.
- Your share of long-term capital gains or losses from
partnerships, S corporations, and fiduciaries.
- Any long-term capital loss carryover.
The result from combining these items with other long-term
capital gains and losses is your net long-term capital gain or loss.
Net gain.
If the total of your capital gains is more than the total of your
capital losses, the difference is taxable. However, the part that is
not more than your net capital gain may be taxed at a rate that is
lower than the rate of tax on your ordinary income. See Capital
Gain Tax Rates, later.
Net loss.
If the total of your capital losses is more than the total of your
capital gains, the difference is deductible. But there are limits on
how much loss you can deduct and when you can deduct it. See
Treatment of Capital Losses, next.
Treatment of Capital Losses
If your capital losses are more than your capital gains, you must
deduct the difference even if you do not have ordinary income to
offset it. The yearly limit on the amount of the capital loss you can
deduct is $3,000 ($1,500 if you are married and file a separate
return).
Capital loss carryover.
Generally, you have a capital loss carryover if either of the
following situations applies to you.
- Your net loss on line 17 of Schedule D is more than the
yearly limit.
- The amount shown on line 37, Form 1040 (your taxable income
without your deduction for exemptions), is less than zero.
If either of these situations applies to you for 2001, complete
the Capital Loss Carryover Worksheet in the instructions
for Schedule D to figure the amount you can carry over to 2002.
In 2002, you will treat the carryover loss as if it occurred in
that year. It will be combined with any capital gains and losses you
have in 2002, and any net loss will be subject to the limit for that
year. Any loss not used in 2002 will be carried over to 2003.
Example.
Bob and Gloria Sampson sold property in 2001. The sale resulted in
a capital loss of $7,000. The Sampsons had no other capital
transactions. On their joint 2001 return, the Sampsons deduct $3,000,
the yearly limit. They had taxable income of $2,000. The unused part
of the loss, $4,000 ($7,000 - $3,000), is carried over to 2002.
The allowable $3,000 deduction is considered used in 2001.
If the Sampsons' capital loss had been $2,000, it would not have
been more than the yearly limit. Their capital loss deduction would
have been $2,000. They would have no carryover to 2002.
Short-term and long-term losses.
When you carry over a loss, it retains its original character as
either long term or short term. A short-term loss you carry over to
the next tax year is added to short-term losses occurring in that
year. A long-term loss you carry over to the next tax year is added to
long-term losses occurring in that year. A long-term capital loss you
carry over to the next year reduces that year's long-term gains before
its short-term gains.
If you have both short-term and long-term losses, your short-term
losses are used first against your allowable capital loss deduction.
If, after using your short-term losses, you have not reached the limit
on the capital loss deduction, use your long-term losses until you
reach the limit. This computation of your short-term capital loss
carryover or your long-term capital loss carryover is made on the
Capital Loss Carryover Worksheet provided in the
instructions for Schedule D.
Joint and separate returns.
On a joint return, the capital gains and losses of a husband and
wife are figured as the gains and losses of an individual. If you are
married and filing a separate return, your yearly capital loss
deduction is limited to $1,500. Neither you nor your spouse can deduct
any part of the other's loss.
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 jointly and are now filing
separately, any capital loss carryover from the joint return can be
deducted only on the return of the spouse who actually had the loss.
Death of taxpayer.
Capital losses cannot be carried over after a taxpayer's death.
They are deductible only on the final income tax return filed on the
decedent's behalf. The yearly limit discussed earlier still applies in
this situation. Even if the loss is greater than the limit, the
decedent's estate cannot deduct the difference or carry it over to
following years.
Corporations.
A corporation can deduct capital losses only up to the amount of
its capital gains. In other words, if a corporation has a net capital
loss, it cannot be deducted in the current tax year. It must be
carried to other tax years and deducted from capital gains occurring
in those years. For more information, see Publication 542.
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.
You will need to use Part IV of Schedule D (Form 1040), and the
Schedule D Tax Worksheet in certain cases, to figure your tax using
the capital gain rates if both of the following are true.
- Both lines 16 and 17 of Schedule D are gains.
- Your taxable income on Form 1040, line 39, is more than
zero.
The maximum capital gain rate can be 8%, 10%, 20%, 25%, or 28%. See
Table 4-3.
The maximum capital gain rate does not apply if it is higher than
your regular tax rate.
Using the Capital Gain Rates
The part of a net capital gain subject to each rate is determined
by first netting long-term capital gains with long-term capital losses
in the following tax rate groups.
- A 28% group, consisting of all the following gains and
losses.
- Collectibles gains and losses.
- The part of the gain on qualified small business stock equal
to the section 1202 exclusion.
- Any long-term capital loss carryover.
- A 25% group, consisting of unrecaptured section 1250
gain.
- A 20% group, consisting of gains and losses not in the 28%
or 25% group.
If any group has a net loss, the following rules apply.
- A net loss from the 28% group reduces any gain from the 25%
group, and then any net gain from the 20% group.
- A net loss from the 20% group reduces any net gain from the
28% group, and then any gain from the 25% group.
If you have a net short-term capital loss, it reduces any net gain
from the 28% group, then any gain from the 25% group, and finally any
net gain from the 20% group.
The resulting net gain (if any) from each group is subject to the
tax rate for that group. (The 10% rate applies to a net gain from the
20% group to the extent that, if there were no capital gain rates, the
net capital gain would be taxed at the 15% regular tax rate.)
Collectibles gain or loss.
This is gain or loss from the sale or exchange of a work of art,
rug, antique, metal, gem, stamp, coin, or alcoholic beverage held
longer than 1 year. Collectibles gain includes gain from the sale of
an interest in a partnership, S corporation, or trust attributable to
unrealized appreciation of collectibles.
Gain on qualified small business stock.
If you realized a gain from qualified small business stock you held
longer than 5 years, you exclude up to one-half your gain from your
income. The taxable part of your gain equal to your section 1202
exclusion is a 28% rate gain. See Sales of Small Business Stock
in chapter 1.
Unrecaptured section 1250 gain.
This is the part of any long-term capital gain on section 1250
property (real property) that is due to depreciation minus any net
loss in the 28% group. Unrecaptured section 1250 gain cannot be more
than the net section 1231 gain or include any gain otherwise treated
as ordinary income. Use the worksheet in the Schedule D instructions
to figure your unrecaptured section 1250 gain. For more information
about section 1250 property and net section 1231 gain, see chapter 3.
Qualified 5-Year Gain
Lower capital gain tax rates apply to a gain that is "qualified
5-year gain." Qualified 5-year gain is long-term capital gain from
the sale of property you held longer than 5 years that would otherwise
be subject to the 10% or 20% capital gain rate. The 10% and 20% rates
are lowered in 2001 and 2006, respectively.
2001.
Beginning in 2001, the 10% capital gain rate will be lowered to 8%
for qualified 5-year gain.
2006.
Beginning in 2006, the 20% capital gain rate will be lowered to 18%
for qualified 5-year gain from property with a holding period that
begins after 2000.
Election to recognize gain on assets held on January 1, 2001.
Taxpayers (other than corporations) can elect to treat certain
assets held on January 1, 2001, as sold and then reacquired on the
same date but they must pay tax for 2001 on any resulting gain. The
purpose of the election is to make any future gain on the asset
eligible for the 18% rate by giving the asset a new holding period.
You make this election for either of the following types of assets.
- Readily tradable stock that is a capital asset
you held on January 1, 2001, and did not sell before January 2,
2001. If you make the election, you treat this stock as sold on
January 2, 2001, at its closing market price on that date. You then
treat it as reacquired on that date for the same amount. Readily
tradable stock is any stock which is readily tradable on an
established securities market after December 31, 2000.
- Any other capital asset or property used in a trade or
business you held on January 1, 2001. If you make the election,
you treat this type of asset as sold on January 1, 2001, for its fair
market value on that date. You then treat it as reacquired on that
date for the same amount.
Any gain on a deemed sale resulting from this election must be
recognized. However, any loss is not allowed.
For the election to apply, you cannot dispose of the asset (in a
transaction in which gain or loss is recognized in whole or in part)
within the 1-year period beginning on the date the asset would have
been treated as sold under the election.
How to make the election.
Report the deemed sale on your tax return for the tax year that
includes the date of the deemed sale. If you are a calendar year
taxpayer, this is your 2001 tax return. Attach a statement to the
return stating that you are making an election under section 311 of
the Taxpayer Relief Act of 1997 and specifying the assets for which
you are making the election. Once made, the election is irrevocable.
Net Capital Gain From Disposition of Investment Property
If you choose to include any part of a net capital gain from a
disposition of investment property in investment income for figuring
your investment interest deduction, you must reduce the net capital
gain eligible for the capital gain tax rates by the same amount. You
make this choice on Form 4952, Investment Interest Expense
Deduction, line 4e. For information on making this choice, see
the instructions for Form 4952. For information on the investment
interest deduction, see chapter 3 in Publication 550.
Table 4-3. 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 gain1, and the regular tax rate that would apply is 27.5% or higher |
20% |
| Other gain1, and the regular tax rate that would apply is lower than 27.5% |
8%2 or 10% |
| 1"Other gain" means any gain that is not collectibles
gain, gain on qualified small business stock, or unrecaptured section
1250 gain. |
|
2The rate is 8% only for qualified 5-year gain. |
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