Lesson 12
Sale of Stock & Other Investment Property
Objectives
• Compute adjusted basis of stock or other investment property
• Determine if an asset’s holding period is long-term or short-term
• Calculate the taxable gain or deductible loss using the Schedule D
• Calculate the correct tax liability
Intake/Interview Process
Form 13614 – Intake and Interview Sheet - Income Section
Investment Property
Property that produces investment income
•Stocks•Bonds•Mutual Funds•Treasury Bills & Notes
Basis of Investment Property
• The basis of an asset is usually its cost• Basis is +/- by certain events, resulting
in adjusted basis• Adjustments Include:
• Brokerage commissions paid (buying & selling)
• Stock splits & tax-fee stock dividends• Reinvested dividends• Reinvested capital gain distributions
Sale of Investment Property
Capital gains or losses are only reported when a sale, exchange, or other disposition of investment property occurs.
•Redemption of Stock or Bonds•Sale/Exchange of Mutual Fund Shares•Worthless Securities•Other Sales & Trades
Identifying Shares Sold
•Specific Identification•Identification Not Possible•Mutual Fund Shares
− Cost Basis− Average Basis
Holding Period
• Stock held for more than 12 months is considered long-term property
• Stock held for 1 year or less has a short-term holding period
• Inherited property (long-term property)• Nontaxable stock dividends and stock
splits (same holding period as the original stock)
Determining Gain or Loss
• Amount realized – adjusted basis = gain/loss reported on Schedule D
• What You Will Need−Form 1099-B, Proceeds From Broker
and Barter Exchange Transactions or consolidated brokerage statement
−Date property was acquired−Taxpayer’s records of basis
Commissions and Fees
• Commissions paid when investment property is purchased - add to basis
• Commissions paid at the time of sale may increase basis
− If 1099-B shows gross proceeds, add the commission to the basis
− If 1099-B shows net proceeds, no adjustment to basis is necessary
Reporting Transactions on the Tax Return
• Capital gains & losses are reported on Schedule D
• Schedule D has three sections − Part I - Short-term transactions− Part II - Long-term transactions− Part III – Summary
• If space is needed to report additional transactions, use Schedule D-1
Reporting Transactions on the Tax Return - cont’d
Combine net S-T capital gain/loss with net L-T capital gain/loss (Part III)• If losses exceed gains, the taxpayer
has a total net capital loss• If gains exceed losses, the taxpayer
has a total net capital gain;
Capital Gain Distributions
13
Reported on Form 1099-DIV, box 2a
•If taxpayer received only capital gain distributions, Schedule D not required
•If taxpayer sold investment property or had unused capital loss carryovers, report capital gain distributions on line 13 of Schedule D
Total Net Capital Loss
• If taxpayer has a net capital loss, claim the lesser of:
1. The total net loss or2. $3,000 ($1,500 – if MFS)
• Capital Loss Carryovers1.Carryover until used up2.Retain character
Total Net Capital Gain
• If taxpayer has a net capital gain, apply capital gains tax rates
• Capital Gains Tax Rates: 5% - 28%
• To figure Capital Gains Tax use:− Schedule D Tax Worksheet or− Qualified Dividends & Capital
Gains Tax Worksheet
Quality Review (QR)
Form 8158 – Quality Review Checklist -
Income Section
Lesson Summary
• Basis of investment property is cost
− Adjusted basis is cost +/- adjustments such as commissions
• Holding period is classified as either
– Short-term (one year or less) or– Long-term (more than one year)
Lesson Summary – cont’d
• Capital gain or loss is computed as: Amount Realized minus Adjusted Basis
• Capital Gains/Losses are reported on Schedule D, Form 1040
• Net capital losses are deductible up to a yearly limitation, the lesser of:
− the loss amount or− $3,000 ($1,500 if MFS)
Lesson Summary – cont’d
• Net capital gains are taxed at a lower, capital gains tax rates computed on
− Schedule D Tax Worksheet, or− Qualified Dividends & Capital Gains
Tax Worksheet• Schedule D is not required if the
taxpayer has only capital gain distributions from 1099-DIV to report