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5.8 Sample Entries of Capital Asset Sales on Form 8949 and on Schedule D

You report 2012 sales and other dispositions of capital assets on Form 8949. This includes sales of securities, redemptions of mutual-fund shares, worthless personal loans, sales of stock rights and warrants, sales of land held for investment, and sales of personal residences where part of the gain does not qualify for the home sale exclusion (29.1). After entering your short-term transactions in Part I of Form 8949 and long-term transactions in Part II, the total sales price and basis amounts are transferred to Schedule D where net gain or loss is figured.

Although capital gain distributions from mutual funds and REITs are generally reported as long-term capital gains on Line 13 of Schedule D, investors who receive such distributions but have no other capital gains or losses to report may generally report the distributions directly on Form 1040 or 1040A without having to file Schedule D; see 32.8 for details.

For 2012, the favorable maximum capital gain rates (5.3) apply to net capital gain (net long-term capital gain in excess of net short-term capital loss) from Schedule D, and also to qualified dividends (4.1). Although qualified dividends are subject to the same favorable maximum rates as net capital gain, they are not entered as long-term gains in Part II of Schedule D. The favorable rates are applied to qualified dividends when tax liability is computed on either the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. The Schedule D Tax Worksheet in the Schedule D instructions is used only if you have a net 28% rate gain or unrecaptured Section 1250 gain (5.3). If you do not have a net 28% rate gain or unrecaptured Section 1250 gain, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions. The applicable Worksheet must be used to obtain the benefit of the favorable maximum capital gain rates for your net capital gain and qualified dividends.

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Caution

Sale Details Reported to IRS on Form 1099-B

If you sold stocks, bonds, or other investment property through a broker in 2012, the sale is reported to the IRS on Form 1099-B. You are sent Copy B of Form 1099-B or a substitute statement. In Box 3 of Form 1099-B, the broker must report your basis for stock acquired after 2010, and for mutual fund shares acquired after 2011. Basis for the sold stock may be reported in Box 3 even if you acquired the stock before 2011. You report basis for the asset in column (f) of Form 8949. The IRS can use the basis information from Box 3 to check your computation of gain or loss on Schedule D..

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Reporting transactions on Form 8949 and Schedule D.

Use Form 8949 to report your 2012 sales of capital assets. Part I of Form 8949 is for short-term gains and losses (assets held one year or less) and Part II is for long-term gains and losses (assets held more than one year). You may have to file more than one Form 8949 depending on how the sale was reported on Form 1099-B. In Parts I and II of Form 8949, you must check a box to indicate whether your basis for sold securities was reported to you by your broker in Box 3 of Form 1099-B: check box A if Form 1099-B shows basis; check box B if Form 1099-B does not show basis, and check box C if you did not receive Form 1099-B for the sale. A separate form must be used for each code, so if you had some box A transactions and some box B (or C) transactions, you must complete a separate Form 8949 for each type

In the columns of Form 8949, you report transaction details. You report your sales price in column (e) and your basis in column (f). Report adjustments to gain or loss in column (g). Broker’s fees, commissions, transfer taxes and other sale expenses should not be added to your basis in column (f) of Form 8949. If the broker included the expenses in reporting the net sales price on Form 1099-B, you enter that net sales price in column (e) of Form 8949. If the gross sales price was reported by the broker on Form 1099-B, you enter the gross sales price in column (e) and enter your sales expenses as a negative adjustment in column (g) of Form 8949, with code “O” entered in column (b). You can enter other negative adjustments in column (g) of Form 8949, such as the exclusion for gain on the sale of your principal residence (29.1), or the exclusion for gain on the sale of qualified small business stock (5.7); you enter the excluded amount as a negative amount in column (g) and enter the designated code in column (b); see the Form 8949/Schedule D instructions for details.

Form 8949 must be attached to Schedule D. The totals from columns (e), (f), and (g) of Form 8949 are transferred to the appropriate lines of Schedule D (depending on whether box A, B, or C is checked on Form 8949).

The Example below for John and Karen Taylor and accompanying worksheets illustrate how transactions are entered on Form 8949 and Schedule D.

EXAMPLE

For 2012, John and Karen Taylor report one short-term transaction in Part I of Form 8949 and three long-term transactions in Part II of Form 8949. For each transaction, they check Box B on Form 8949 to indicate that basis is not reported in Box 3 of the the Forms 1099-B they received. For each stock sale, the broker reported on Form 1099-B the net proceeds (gross sales price minus broker’s commissions on the sale and state and local transfer taxes, if any), and the Taylors report that net sales price in column (e) of Form 8949. As shown below on John and Karen’s sample Form 8949 and Schedule D, the total sales prices and basis amounts from Form 8949 are transferred to the applicable lines of Schedule D. They also report on Schedule D capital gain distributions received in 2012 from their mutual funds as well as a long-term loss carryover from 2011.

1. Sale of mutual-fund shares (short-term gain)—The Taylors bought 200 shares of the XYZ Mutual Fund on February 9, 2011, for $9,000. On August 11, 2011, they bought another 200 shares for $10,280. They sell 200 of the shares on January 6, 2012, for $9,600. They decide to use the average basis method (single-category method) to figure the basis of the sold shares. Their average basis is $48.20 per share, the total cost basis of $19,280 divided by 400 shares. Thus, their basis for the 200 sold shares is $9,640 (200 × $48.20). In column (a) of Line 1 of Form 8949, they enter “AVGB” to indicate that they are using an average basis. See Chapter 32 for further details on determining basis of mutual-fund shares (32.10).

2. Sale of stock (long-term gain)—The Taylors bought 100 shares of Acme Steel stock on October 1, 1991, for $6,000. On April 26, 2012, they sold the 100 shares for $13,000.

3. Sale of stock (long-term loss)—The Taylors bought 200 shares of Zero Computer Co. stock for $5,000 on July 10, 1997. On March 14, 2012, they sold the shares for $2,000.

4. Sale of mutual-fund shares (long-term gain)—The Taylors bought 1,435 shares of the ABC Mutual Fund between 1996 and 2001, including reinvested dividends. On July 18, 2012, they sold 500 of the shares for $21,500. The statement from the ABC Fund shows that their average basis (single-category method) is $24.50 per share. Thus, their basis for the 500 sold shares is $12,250 (500 × $24.50). In column (a) of Line 3, Form 8949, they enter “AVGB” to indicate that they are using the average basis method (32.10).

5. Capital gain distributions—The Taylors received capital gain distributions of $1,050 in December 2012 from mutual funds (32.4, 32.8).

6. Long-term capital loss carryover—The Taylors had a long-term capital loss carryover of $950 from their 2011 return.

Because the Taylors do not have a net 28% rate gain or unrecaptured Section 1250 gain, they are directed by Line 20 of Schedule D to use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to compute their regular income tax liability for 2012; see the sample worksheet below. If they did have a net 28% rate gain or unrecaptured Section 1250 gain, the Taylors would use the Schedule D Tax Worksheet in the Schedule D instructions to figure their tax.

For purposes of the tax computation on the Qualified Dividends and Capital Gain Tax Worksheet, we have assumed that John and Karen file a joint return and have taxable income of $83,000 for 2012. In addition to the long-term gains reported in Part II of Schedule D, the Taylors have $1,200 of qualified dividends (4.1) that are eligible for the favorable capital gain rates (5.3). The qualified dividends are reported on Line 2 of the Qualified Dividends and Capital Gain Tax Worksheet.

Under this set of facts, the Taylors have total tax liability of $11,249, as shown on Line 19 of the Qualified Dividends and Capital Gain Tax Worksheet. This is $1,561 less than the $12,810 liability that would apply (Line 18 of the Worksheet) if there were no favorable rates for net capital gain and qualified dividends. Note that on Line 11 of the Worksheet, $2,210 of the Taylors’ $14,510 in qualified dividends plus net capital gain escapes tax completely. The $2,210 is eligible for the 0% rate because it falls within the 15% bracket: $2,210 is the excess of $70,700, the top of the 15% joint return bracket, over $68,490, the Taylors’ “ordinary income” as shown on Line 7 of the Worksheet. The balance of their qualifying dividends and long-term gain, or $12,300, is taxed at the 15% capital gain rate on Line 15 of the Worksheet. The Taylors enter their $11,249 liability from the Worksheet on Line 44 of their Form 1040. This is their regular tax for 2012.

Sample Form 8949—Sales and Other Dispositions of Capital Assets

(This sample is subject to change; see the e-Supplement at jklasser.com )