Reporting Capital Gains or Losses
Revised By: Sue Kieval, E.A.
The Henssler Financial Group Position Paper

A capital gain or loss arises from the sale or exchange of a capital asset. The tax code defines a capital asset by defining what is not a capital asset — this is what makes the tax code so much fun.

A capital asset means property except the following:

• inventory;
• property held primarily for sale to customers;
• a note or account receivable acquired in the ordinary course of trade or business;
• depreciable business property;
• real property used in a trade or business; and
• stocks, bonds, etc., held by a brokerage house and sold in their ordinary course of business.

What does that leave us? Most of us automatically think of stocks, bonds and mutual funds that we own, however this also includes:

You can also have a capital gain to report on your tax return without selling a thing. If you own mutual funds, and they sell some of their holdings during the year, you are required to report "your share." This is called a Capital Gains Distribution and is reported to you on Form 1099-DIV.

How To Report These Gains and Losses

Capital gains and losses are reported on Schedule D - Capital Gains and Losses.

Short-term gains and losses
Those items held one year or less are reported on Part I. Non-business bad debts are also reported on Part I.

Long-term gains and losses
Those items held more than one year are reported on Part II.

In both cases, you record what you sold, when you bought it, when you sold it, how much you sold it for, what you paid for it, and the net gain or loss.

In the case of stocks and bonds, the amount reported to you on Form 1099-B as the sale price is reported net of any commission. The price you paid for it should be found on your trade confirmation and should include the commission paid to purchase the stock. For instance, you may have paid $25 per share for 100 shares, and were also charged $25 to make the purchase. Your "cost basis" is then $2,525.

Part III of Schedule D (summary portion) has an additional line for 28% gains. If you sold a collectible or certain qualified small business stock, you must pay 28% capital gains tax. These items are not eligible for the 5% or 15% rate.

If you have Capital Gains Distributions, in addition to other capital gains or losses to report, they are reported on Line 13 of Schedule D and are considered long-term gains. If you have no other gains or losses to report, except those from Capital Gains Distributions, you can now include that total on Page 1 of Form 1040 — on line 13 and check the box indicating that Schedule D is not required.

You have now finished Page 1, and the fun is just beginning:

Schedule D - Page Two

Combine your short-term and long-term totals.

If the net amount is a gain, record it on Page 1 of Form 1040. If you had long-term gains included in that total, go to the Qualified Dividends and Capital Gains Tax Worksheet.

• This is where you determine what portion of the long-term gain is taxed at 5% and 15%.

If the net amount is a loss and is less than $3,000 ($1,500 if married filing separately), then record that net loss on Page 1 of Form 1040.

If the net amount is a loss and is greater than $3,000 ($1,500 if married filing separately), then record a $3,000 ($1,500) loss on Page 1 of Form 1040. The balance of the loss will be carried forward to next year.

Schedule D - Page Two - Part IV

This is difficult for even a C.P.A. to explain, but here it goes:

If you are married filing jointly and your taxable income, without the capital gains, is less than $65,100 (the 2008 breakpoint for the 15% tax bracket), the portion of the gain that keeps you under $65,100 is taxed at 5%. The portion of the gain that pushes you above $65,100 is taxed at 15%. There are different 15% breakpoints for each filing status — MFJ is used here as an example.

If your taxable income is over the 15% breakpoint, then the long-term gain is taxed at 15%.