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).

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.

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).

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:

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.

Add the following amounts reported to you for 2003 on Forms 1099–B and 1099–S (or on substitute statements):

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.

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.

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.

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) and/or column (g) 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 7b of Schedule D.

A capital gain or loss on the sale or trade of investment 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 you report in column (f) or column (g) is a loss, show it in parentheses.

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

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).

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

If all the above statements are true, report your capital gain distributions directly on line 13a of Form 1040 and check the box on line 13a. Enter post-May 5 capital gain distributions on line 13b. Also, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax.

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

Enter post-May 5 capital gain distributions on line 10b.

To figure your total net gain or loss, combine your net short-term capital gain or loss (line 7b) with your net long-term capital gain or loss (line 16). Enter the result on line 17a, Part III of Schedule D. If your losses are more than your gains, see Capital Losses, next. If both lines 16 and 17a are gains and line 40 of Form 1040 is more than zero, see Capital Gain Tax Rates, later.

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

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

If you have a total net loss on line 17a 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.

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

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 Publication 550 to determine the part of your capital loss for 2003 that you can carry over to 2004.

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 the short-term capital loss, use the long-term capital losses until you reach the limit.

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.

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.

The 10% maximum capital gain rate is lowered to 8% for “qualified 5-year gain.”

This is long-term capital gain from the sale of property that you held for more than 5 years and sold before May 6, 2003.

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 24–26 of Schedule D, lines 4–6 of the Qualified Dividends and Capital Gain Tax Worksheet, or lines 3–10 of the Schedule D Tax Worksheet. For more information about the limit on investment interest, see chapter 3 of Publication 550.

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.

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.

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 Unrecaptured Section 1250 Gain 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.

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.

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 20 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.

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

Emily sold stock in two different companies that she held for less than a year. In June, she sold 100 shares of Trucking Co. stock that she had bought in February. She had an adjusted basis of $650 in the stock and sold it for $900, for a gain of $250. In July, she sold 25 shares of Computer Co. stock that she bought in June. She had an adjusted basis in the stock of $2,500 and she sold it for $2,000, for a loss of $500. She reports these short-term transactions on line 1 in Part I of Schedule D.

Emily had three other stock sales that she reports as long-term transactions on line 8 in Part II of Schedule D. In February, she sold 60 shares of Car Co. for $2,100. She had inherited the Car Co. stock from her father. Its fair market value at the time of his death was $2,500, which became her basis. Her loss on the sale is $400. Because she had inherited the stock, her loss is a long-term loss, regardless of how long she and her father actually held the stock. She enters the loss in column (f) of line 8.

In June, she sold 500 shares of Furniture Co. stock for $14,000. She had bought 100 of those shares in 1992, for $1,000. She had bought 100 more shares in 1994 for $2,200, and an additional 300 shares in 1997 for $1,500. Her total basis in the stock is $4,700. She has a $9,300 ($14,000 - $4,700) gain on this sale, which she enters in columns (f) and (g) of line 8.

In December, she sold 20 shares of Toy Co. for $4,100. This was qualified small business stock that she had bought in September 1998. Her basis is $1,100, so she has a $3,000 gain which she enters in column (f) of line 8. Because she held the stock more than 5 years, she has a $1,500 section 1202 exclusion. She claims the exclusion on the line below by entering $1,500 as a loss in column (f). She also enters the exclusion as a positive amount on line 2 of the 28% Rate Gain Worksheet.

She received a Form 1099–B (not shown) from her broker for each of these transactions.

Emily has a capital loss carryover to 2003 of $800, of which $300 is short-term capital loss, and $500 is long-term capital loss. She enters these amounts on lines 6 and 14 of Schedule D. She also enters the $500 long-term capital loss carryover on line 5 of the 28% Rate Gain Worksheet. Her filled-in 28% Rate Gain Worksheet is shown here.

She kept the completed Capital Loss Carryover Worksheet in her 2002 Schedule D instructions (not shown), so she could properly report her loss carryover for the 2003 tax year without refiguring it.

Because Emily has gains on both lines 16 and 17a of Schedule D and has taxable income, she goes to Part IV of Schedule D to figure her tax. But because line 20 of Schedule D is more than zero (due to her section 1202 gain from selling qualified small business stock), she must use the Schedule D Tax Worksheet to figure her tax.

After entering the gain from line 17a on line 13 of her Form 1040, she completes the rest of Form 1040 through line 40. She enters the amount from that line, $30,000, on line 1 of the Schedule D Tax Worksheet. After filling out the rest of that worksheet, she figures her tax is $3,651. This is less than the $4,316 tax she would have figured without the capital gain tax rates.

Emily makes sure that the total of the amounts reported in column (d) of lines 3 and 10 of Schedule D is not less than the total of the amounts shown on the Forms 1099–B she received from her broker. For 2003, the total is $23,100.

28% Rate Gain Worksheet for Emily Jones—Line 20

Keep for your Records

1.	Enter the total of all collectibles gain or (loss) from items you reported on line 8, column (f), of Schedules D and D-1							1.	0
2.	Enter as a positive number the amount of any section 1202 exclusion you reported on line 8, column (f), of Schedules D and D-1							2.	1,500
3.	Enter the total of all collectibles gain or (loss) from Form 4684, line 4 (but only if Form 4684, line 15, is more than zero); Form 6252; Form 6781, Part II; and Form 8824							3.
4.	Enter the total of any collectibles gain reported to you on: Form 1099-DIV, box 2f; Form 2439, box 1f; and Schedule K-1 from a partnership, S corporation, estate, or trust.							4.
5.	Enter your long-term capital loss carryovers from Schedule D, line 14, and Schedule K-1 (Form 1041), line 13c							5.	(500)
6.	If Schedule D, line 7b, is a (loss), enter that (loss) here. Otherwise, enter -0-							6.	(550)
7.	Combine lines 1 through 6. If zero or less, enter -0-. If more than zero, also enter this amount on Schedule D, line 20							7.	450