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