Individuals who own stock in companies sell shares for a wide variety of reasons. Tax filers who have sold stock must report the transaction on their individual tax returns to determine if there is any taxable gain or loss.
Corporate stock owned by an individual is referred to as a capital asset. A capital asset is an asset owned for personal use or for investment purposes. The designation as a capital asset is important because some gains on the sale of investment assets receive preferential tax treatment.
Brokerage firms maintain detailed records and are required to provide a statement to their clients to summarize stock sales. Your brokerage statement is the starting point to reporting stock transactions on your income tax return.
After the end of each year, brokerage firms issue IRS Form 1099-B to clients who have sold stock during the year. Form 1099-B usually includes all the information necessary to report the stock sale on your tax return, including the following:
- Dates of acquisition and disposition
- Acquisition cost
- Sale proceeds
Stock that you own for more than one year creates a long-term capital gain or loss when sold. Stock that is owned for a year or less creates a short-term gain or loss when sold. Some investors conduct numerous stock sales during the year. Because of the differing tax treatment, multiple 1099-B statements must be separated into two categories, short-term and long-term.
IRS Form 8949 is used to report the details of your stock transactions. Form 8949 contains separate sections for short-term transactions and long-term transactions. The information from each 1099-B form is entered into the appropriate section of Form 8949.
There are exceptions for situations in which Form 8949 is not required. If your 1099-B forms indicate that the basis of all of your sold stock has already been reported to the IRS, you may be able to report your sales directly on IRS Schedule D.
The detailed information on Form 8949 is only a supporting form for IRS Schedule D. The purpose of Schedule D is to combine short-term and long-term gains from all sources. The net gain or loss from Schedule D is entered on Form 1040.
The tax rate on a net long-term capital gain is lower than the tax rate on ordinary income. If you have a net loss, up to $3,000 of the loss may be used to reduce your other taxable income. The remaining portion of a loss may be carried over to the next year. Contact an accountant for additional information on stock transactions.
For more information, contact The Callen Accounting Group, PLLC or a similar firm.