Tax guide

Investment Income

Investments work from a simple principle: First, you may buy something in the expectation that it will go up in value. What you paid for it is called your basis for that investment. The things that qualify for investment property in the IRS include stocks, bonds, mutual funds, even some real estate.

If the worth of that investment does go up over time, you may decide to sell it. The amount of money you make on that investment beyond your basis is your profit.

When reporting the sale of investment property – those stocks, bonds, mutual funds and other financial instruments – if the sale was conducted through a broker, you’ll get a Form 1099-B from the broker, listing each sale. For example, if your broker sold 10 shares of a stock at $10 per share, and five shares of another at $7 per share, each of those would be considered a separate transaction and would appear on its own 1099-B. And that always raises a question at tax time: Do you have to report each of those 1099-Bs on your income tax return?

Yes – and no.

Yes, in that the IRS requires all investment income to be reported when your income tax return is filed. And no, because if you have multiple transactions to report, you are allowed to send in the sum total of those transactions with the return. You can put your totals on our Form 1099-B/8949 screen on your return.

Gain or Loss?

Before you can figure gain or loss on any sale of investment property, you may need to adjust the basis of that property up or down, depending on the circumstances surrounding its purchase. If you had to incur other related costs in buying the property, for example, those costs could be included in the adjusted basis. Commissions, transfer fees and similar fees are examples of extra costs included in adjusted basis.

Let’s say you bought 100 shares of a mutual fund for $10 a share. You paid a $50 commission to the broker for the purchase. Therefore, your cost basis for each share is $10.50 ($1,050 ÷ 100).

Sometimes, securities we buy become worthless due to bankruptcy or other reasons. Worthless stocks, stock rights and bonds (other than those held for sale by a securities dealer) are reported on Form 8949. They are treated as though they were sold on the last day of the tax year. This can, in turn, affect whether your capital loss is short-term or long-term.

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A Capital Idea

If there’s a taxable gain or a deductible loss from a transaction, it could be a capital gain or loss, or an ordinary gain or loss, depending on the circumstances. Generally, a sale or trade of a capital asset results in a capital gain or loss. Just about everything we think of as investment property – stocks, bonds, mutual funds and the like – fall under capital assets.

For a list of non-capital assets, check out IRS Publication 550 – Investment Income and Expenses.

To determine whether your gain or loss is long-term or short-term, you need to know how long you’ve held (owned) that particular security or property. The holding period determines which way the transaction will be reported. If you held the investment property for more than one year, the gain or loss is long-term. If you held it one year or less, it’s short-term. To determine how long you held the investment property, count from the day after you acquired the property through the day you disposed of the property.

In the case of securities, the holding period begins the day after the trade date you bought the securities and ends on the trade date you sold them. Don’t confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment made.

If your transactions produce a net capital loss, your deduction is limited to the lesser of:

  • $3,000 ($1,500 if married filing separately), or
  • Your total net loss

If your transaction results in a capital gain, the amount of tax you’ll be assessed will vary. The highest rate of 28 percent is reserved for collectibles, which the IRS considers to be art, rugs, antiques, gold and silver (and other metals), gems, stamps, coins or alcoholic beverages (such as vintage wines). The gain on sales of some qualified small business stock also qualify for the 28 percent rate.

Other types of gain depend on the regular tax rate that is applicable to figure the capital gain for the transaction.

To post your investment gains or losses on your return, use our Form 1099-B screen. This form will automatically calculate your capital gains or loss and post the result on Line 13 of your Form 1040.


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