Selling Investment Property
Property held for investment purposes may include:
- Stocks, bonds, mutual funds, land, art, gems, coins, and stamps.
1) Gains or losses on the sale of investment property are classified as:
- Capital gains or
- Capital losses
2) Holding period:
Your holding period determines whether a gain receives short-term or long-term
capital gains tax treatment.
- Long-term capital gain or loss:
- Property held over one year before being sold receives long-term gain treatment.
- This means the lower capital gains rates apply to the gain.
- Short-term capital gain or loss:
- Property held one year or less before being sold receives short-term gain treatment.
- This means, ordinary income tax rates apply.
Ordinary income tax rates are the regular federal income tax rates that apply to ordinary income such as, wages, self-employment income, interest, dividends.
Qualified dividends are taxed at the capital gains rates. Qualified dividends are reported on Form 1099-DIV in box 1b.
3) Capital losses:
Capital losses are deducted from capital gains. If capital losses exceed capital gains, the excess loss is deductible up to a maximum of $3,000 per year ($1,500 if married filing separately).
A capital loss is deducted on Form 1040 from other sources of income.
4) Where to report capital gains and losses:
Form 8949, Sales and Other Dispositions of Capital Assets:
- Prior to the introduction of IRS Form 8949 in 2011, capital asset transactions, such as the sale of stocks and bonds, were entered directly on Schedule D.
Beginning in 2011 and beyond, when Form 8949 was introduced, instead of entering capital asset transactions directly on Schedule D, you must now enter them on Form 8949. Then, you carry the results to Schedule D.
Schedule D, Capital Gains and Losses:
- Report capital gains and losses on Schedule D.
Form 4797, Sales of Business Property:
- A trader in securities who makes the mark-to-market election uses Form 4797 to report gains and losses.
- The gain or loss from each security or commodity held in connection with your trading business (including those marked to market) is reported on Form 4794, line 10.
- Under the mark-to-market accounting rules, any security or commodity held at the end of the tax year is treated as sold (and reacquired) at its fair market value on the last business day of that year.