If you have long-term capital gains from the sale of stocks or other capital assets, you must report those gains to the Internal Revenue Service as income by filing form Schedule D to U.S. Form 1040. The IRS defines long-term capital gains any profit made on a capital investment that was held for longer than one year. Long-term capital gains are taxed at a lower rate than short-term capital games and regular income.
Schedule D is used to report the capital gain or loss from the disposition of capital assets, which include stocks, bonds, mutual funds and investment property, among other investments. You will have to provide a description of the disposed asset, list the date acquired, the date sold, the sales price, the cost or other tax basis of the asset, and to compute the gain or loss from the holding of the asset. Additionally, Schedule D requires the taxpayer separate short-term capital assets and long-term capital assets, based on whether the holding period is greater than a year for long-term gains, or one year or less for short-term gains.
The various gains and losses are aggregated and then reported by the taxpayer on U.S. Form 1040 as gross income. For example, a taxpayer selling a stock for a gain of $4,000 and a second stock for a loss of $1,500 would report a net capital gain of $2,500 as gross income on Form 1040. This amount of gross income is then added with other forms of income, such as wages, interest, and dividends, to arrive at the taxpayer’s adjusted gross income for the tax year. The amount of capital gain income is also used to calculated modified adjustment gross income for purposes of computing eligibility for certain deductions.
Preferential Tax Rate
While the amount of income reported as gross income from capital gains does not differentiate between short- or long-term capital gains, the net income from long-term capital gains qualifies for a special reduced tax rate, which is taken into account when the taxpayer’s income is calculated. Currently, long-term capital gains from the sale of stock are taxed at 15 percent for taxpayers with ordinary marginal income tax rates of 25 percent or greater. Taxpayers with ordinary marginal income tax rate of 10 percent or 15 percent do not pay any tax on long-term capital gains from the sale of stock.
The IRS requires taxpayers to file Schedule D with Form 1040 three and a half months after the end of the calendar year, typically April 15. The IRS grants taxpayers an automatic six month extension upon the taxpayer’s request. This effectively extends the deadline for filing from April 15 to October 15 of the subsequent calendar year.
Michael Dreiser started writing professionally in 2010. He is a certified public accountant with experience working for a large New York City accountancy and expertise in areas ranging from private equity taxation to investment management. He holds a Master of Business Administration in international finance from l’École Nationale des Ponts et Chaussées in Paris.