In the U.S., tax forms and schedules are presented to taxpayers, many of which don't need to be filled out and filed with your tax returns unless certain conditions are met.
In the case of capital gains or losses (from selling stocks, options, or crypto), or if you sold your home, you'll use Schedule D: Capital Gains and Losses. However, you may not be familiar with it. Here's everything you need to know about Schedule D.
What Is Schedule D: Capital Gains and Losses?
Form 1040, your individual income tax return, includes Schedule D, one of many schedules provided by the IRS and required to report your capital gains or losses from the sale of your assets.
For tax purposes, your capital assets are everything you own and use for pleasure or investment. You are most likely to report capital assets on Schedule D when you sell stocks, bonds, and homes.
Assets or investments that are sold must be recorded for tax purposes. Tax deductions include realized capital losses. If the shares sold were owned for investment purposes, the losses can be deducted from your tax bill.
Gains and losses from capital transactions have two classifications: short-term gains and losses (disposed within 12 months of the purchase date) and long-term gains and losses (disposed within 12 months of the purchase date). It is often more favorable to pay long-term capital gains tax (0%-20%) than short-term gains that are taxed as ordinary income.
Helpful Resource: Long Term vs Short Term Capital Gains Tax Guide
Who Needs to File Schedule D: Capital Gains and Losses?
Schedule D is an IRS form that accompanies form 1040 and requires taxpayers who have short-term capital gains, short-term capital losses, long-term capital gains, or long-term capital losses to report this information. A capital gain or loss from investments is not the only thing that is reported on Schedule D.
Capital gains and losses from ownership in a partnership, S corporation, estate, or trust are also reported on Schedule D. Taxpayers who have capital loss carryovers from previous years also report this information on Schedule D. An accountant or tax professional can help you determine whether Schedule D is required and to complete it if it is.
IRS distinguishes between short-term and long-term capital gains or losses. Short-term gains or losses are those held for less than one year, whereas long-term gains or losses are those held for more than one year. To offset short-term gains, only short-term losses can be used, and long-term losses for long-term gains. It is possible to carry forward losses that exceed any gains for the next year's taxes.
Report the following on Schedule D (Form 1040):
- Capital asset sales or exchanges are not reported on any other form or schedule.
- Gains resulting from involuntary conversions of capital assets (other than losses or theft).
- Distributions of capital gains that are not reported on Form 1040 (or effectively connected distributions of capital gains that are not reported on Form 1040-NR).
- Bad debts incurred by non-business entities.
Helpful Resource: Taxes on Stocks - What You Need to Pay
Preparing Schedule D and Form 8949
Schedule D totals are transferred to form 1040, where they are combined with other data on the form to determine the taxpayer's total tax liability.
The instructions in Schedule D help you gather information about the current year's capital asset sales and the prior year's capital loss carry-forwards. These instructions, as well as a blank form, are available on the IRS website.
Scheduling D may require you to prepare and transfer information from other tax forms, depending on your tax situation.
- Form 8949 if you sell investments or your home
- Form 4797 if you sell a business property
- Form 6252 if you have installment sale income
- Form 4684 if you have a casualty or theft loss
- Form 8824 if you made a like-kind exchange
Schedule D is most commonly used to report gains and losses from the sale or trade of certain properties during the year. However, since 2011, the Internal Revenue Service has created a new form, Form 8949, that some taxpayers are required to file with their Schedule D and 1040 forms.
When you need to report a capital asset transaction, you must prepare Form 8949 before filling out Schedule D unless an exception applies.
Each capital asset transaction must be detailed on Form 8949. As an example, if you execute four separate stock trades during the year, some of the information you must report includes:
- company name to which the stock belongs
- when you bought and sold the stock
- its purchase price (or adjusted basis)
- the selling price
On Form 8949, you will also find two sections covering long-term and short-term transactions. In your 1040, you will then enter the total gain or loss for each category on Schedule D.
Individuals and most small businesses are exempt from having to include transactions on Form 8949. You can attach a separate statement with the details of a transaction in a format that meets Form 8949's requirements.
Form 8949 can be omitted if:
- A Form 1099-B was received showing that the cost basis had been reported to the IRS.
- In the form, there is no indication of a nondeductible wash sale loss or adjustments to basis, gain, loss, or type of gain (short-term vs. long-term).
As long as one of the exceptions applies, a summary of short-term and long-term transactions can be reported on Schedule D without using Form 8949.
Exceptions do not apply to all transactions. You can still voluntarily report them on Form 8949 if you have some transactions that meet the exception requirements and some that do not. It is best to consult with a professional to ensure that you are using the correct forms.
Format of Schedule D
There are three parts to IRS Schedule D (1040), each with its own label. The first part consists of gains and losses based on assets held for less than one year. The second part includes long-term gains and losses held over a period of more than one year. The final section is a summary.
Gains from short-term investments are taxed at your ordinary income tax rate. Depending on your income, long-term gains are taxed at 0%, 15%, and 20%. As your income increases, so will your taxes. Single filers who make $0–$39,375 and married couples who make $0–$78,750 are subject to the 0% rate.
Helpful Resource: How to Choose the Right Filing Status
Schedule D Instructions
Schedule D instructions state that if capital assets are sold, you need to complete Form 8949, Sales and Dispositions of Capital Assets first. The information on Form 8949 will be used to complete Schedule D.
Part I should be used for sales of short-term assets - those held for less than one year.
Part II is used to report the sale of long-term assets that have been held for more than one year.
For Form 8949, you'll need the following information:
- Description of the property
- Purchase price
- Purchase date
- Selling price
- Selling date
When you enter these details, the loss or gain will be calculated in the last column. Totals should be entered at the bottom of each part. Fill in the results on the Schedule D tax form, on lines 1, 2, 3, 8, 9, or 10. Enter the amounts that correspond to Part I (short-term) and Part II (long-term), in Parts I and II. You will combine Parts I and II into Part III of Schedule D.
You will then calculate which tax calculation form should be used and how much capital gain or loss should be reported on Form 1040.
After that, you must fill out the Schedule D tax form with other relevant information. Examples include gains and losses from other forms - like Forms 4797, 6252, 8824, etc., gains and losses from Schedule K-1, and loss carryovers.
Declaring Losses on Schedule D
Losses up to $3,000 can be claimed on Schedule D, line 21 ($1,500 for married individuals filing separately).
If your losses exceed $3,000, you can carry the remainder forward for future years. Take, for instance, a $5,000 loss on your stock trading for the year. Schedule D can be used to report $3,000 and $2,000 can be carried forward. In the following year, the $2,000 loss will offset your income.
The results of Schedule D are transferred to Form 1040 after completion. The amount of adjusted gross income on Form 1040 will depend on the results of Schedule D. Like many other 1040 forms, it's important to keep your cost basis and any losses correct to ensure that your income is reduced and you're not taxed on unearned income.
Filing Your Taxes with Schedule D
Tax software and accountants can help most people fill out this form. You may have questions, however, about how it works, where to find it, or even what the tax implications are.
If you don't file your taxes by hand, you won't have to worry about Schedule D. Your tax software program or accountant will take care of the details.
The fact is, however, that capital gains and losses will probably result in higher tax preparation costs, either as a result of choosing a more comprehensive tax software or as a result of paying a tax preparer. Whether you are filing your taxes or need help finding a tax professional, we can help.
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