VITA

1. VITA Capital Gain/Loss Form 8949 and Schedule D

2. 1040 – Capital Gain or Loss

3. What is a Capital Gain/Loss? • Capital assets • Investment property and personal use property • Ex: Stocks & bonds, shares of mutual funds • Amount invested (cost) is the basis • How much did the investor invest? • Adjustments to basis • Broker fees or other costs to make the investment • Depreciation, improvements for some assets • Selling the asset results in a realized gain or loss • Amount of gain/loss is the selling price (less selling costs) minus the adjusted basis

4. Gain/Loss - Illustration • Shares of stock purchased for 10,000 and sold for 11,000: Sale price $11,000 Less: Adjusted Basis 10,000 Gain: $ 1,000 • Shares of stock purchased for 10,000 with a broker fee of 25, and sold for 9,000: Sale price $ 9,000 Less: Adjusted basis 10,025 Loss: $- 1,025

5. Stella’s cost basis for 600 shares of KLM Corporation stock she purchased was $2,400. After holding the stock for seven years, Stella sold the 600 shares for $4,400 and paid a $100 commission. Her broker reported the gross proceeds of $4,400 on Form 1099-B. What was the sales price for the shares and the amount of capital gain? A. $4,400 sales price and $2,000 gain B. $4,400 sales price and $1,900 gain C. $4,500 sales price and $2,100 gain D. $4,300 sales price and $1,900 gain B. The sales price was $4,400, which was $1,900 more than the adjusted basis of $2,500 ($2,400 cost + $100 commission) of the shares.

6. Tax Treatment of Gains & Losses • Most gains are reported as income on Form 1040 in the year of the sale • Gains are categorized by holding period: • Short-term: The asset was held one year or less • Ordinary income, taxed at ordinary rates • Long-term: The asset was held more than one year • Capital gain income, taxed at preferential (lower) rates • There are restrictions on reporting losses, because they lower taxable income • Generally, taxpayers may deduct up to $3,000 in capital loss each year • Remaining capital loss may be carried over to claim in the next year, indefinitely

7. Reporting Forms for Capital Gains & Losses • Taxpayer receives: • Form 1099-B, which reports gross proceeds from broker transactions • 1099-B might be included with other 1099 forms, in a combined statement • Form 1099-DIV, which reports capital gain distributions from a mutual fund (as well as dividends) • Taxpayer reports on: • Form 8949, giving details of the sale transactions • Schedule D, summarizing the short- and long-term gains and losses • Form 1040, Line 13, where the net capital gain or loss is reported

8. 1099-B

9. Kevin paid his broker a $75 fee on the sale of his stock. His Form 1099-B shows $925, and the box next to sales price is checked. What is the amount Kevin reports as his sales price? A. $925 B. $1,000 C. $850 D. $75 A. Never change the sales price. If Form 1099-B shows sales price (gross proceeds), enter that number in the software. Then include the broker’s fee in the basis amount entered on the Capital Gain or Loss Transactions Worksheet.

10. Form 8949 • Brokers are required to provide, on the 1099-B, the basis for “covered” transactions since 2011 • Check boxes at the top of Parts I & II indicate whether the transactions were reported on 1099-B • Part I – list short-term transactions • Check box to indicate whether basis was reported on 1099-B • Use additional form(s) 8949 if another check box applies to other transactions • Part II – list long-term transactions • Again, use the check boxes and extra forms as appropriate • The input sheets in the software, if completed correctly, will populate Form 8949, Schedule D, and Form 1040 correctly

11. Form 8949 • Information to enter on Form 8949: • Description of property • Number of shares, company, etc. • Date acquired • Date sold • The holding period will be calculated based on dates acquired and sold • Proceeds • Basis • If the broker (or fund) did not provide the basis, the taxpayer must provide it • If the taxpayer cannot provide the basis, the basis is deemed to be 0 • Maximum gain will result • Adjustments • For corrections, etc. – See Form 8949 instructions • Gain or loss

12. Other Gain-Loss Information • Mutual fund investments may have capital gain distributions • Reported to taxpayer on Form1099-DIV • Taxpayer reports on Schedule D, line 13, if there are also sales transactions to report • If there are no sales transactions to report, the capital gain distributions are reported on Form 1040, line 13, with the box checked indicating that Schedule D is not required • Reinvested dividends increase the number of shares owned • Each reinvestment is treated as a new investment with its own basis and holding period • Before the sale, taxpayer may specify which shares are being sold • If taxpayer does not specify, the broker or fund usually sells on a first-in, first-out (FIFO) basis, or an average cost basis • Affects amount of basis, and therefore amount of gain/loss

13. Which of the following taxpayers is required to file Form 8949 and Schedule D? A. Marriah, who received one Form 1099-B and no Forms 1099-DIV B. Lorraine, who received Forms 1099-DIV for capital gain distributions from three different mutual funds C. Both of the above A. Only Marriah sold stock and received Form 1099-B. She is required to file Schedule D. Lorraine would report the total amount of capital gain distributions directly on Form 1040, line 13, and check the box indicating Schedule D is not required.

14. Other Gain-Loss Information • Basis of inherited property – the fair market value (FMV) on the date of death, unless the estate uses a different date • Capital loss carryover is calculated on a capital loss carryover worksheet • Total capital loss less $3,000 recognized in current year = capital loss carryover • Taxpayer should bring capital loss carryover worksheet with them • If taxpayer is already in system, the capital loss carryover will automatically carry over to the current year