In the United States, individual income tax payers are required to report gains or losses from the sale or other disposition of capital assets, including stock, during the tax year on Internal Revenue Service (IRS) Schedule D, Capital Gains and Losses. Schedule D is filed with the IRS as part of Form 1040, U.S. Individual Income Tax Return.
Taxpayers who have sold or exchanged stock during the tax year will typically receive a copy of U.S. Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. Form 1099-B is to be filed by a broker or other processor of the sale of stock and contains pertinent information necessary for the taxpayer to complete Schedule D, including personal identifying information of the seller, including name, address and social security number. Form 1099-B also includes the date of the sale or disposition and the gross proceeds received from the sale of the stock. A copy of Form 1099-B is sent both to the seller of stock and to the IRS.
Taxpayers preparing Schedule D must first determine the holding period of all stocks sold during the tax year. A holding period describes the period of time between when the taxpayer first purchased the stock and when the taxpayer sold the stock. Certain purchase and sale transactions that do not transfer the economic risks of ownership do not count as purchases or sales. For example, if a taxpayer sells a stock but enters into a simultaneous agreement with the purchaser that would transfer substantially all the future proceeds to the seller but not the economic risk of ownership, then a sale has not occurred. A holding period of one year or less is considered a “short-term” holding period, while a holding period of more than a year is considered a “long-term” holding period.
For both short-term gains and losses from the sale of stock and long-term gains and losses from the sale of stock, the taxpayer is required to supply the IRS with mandated information on each stock sale. The IRS requires that the taxpayer include a description of the stock sold, such as “100 shares of ABC Corp.,” the date the stock was acquired, the date the stock was sold, the sales price of the stock and the cost or other basis of the stock. The IRS allows the taxpayer to either deduct any broker fees or commissions from the reported sales price of the stock or add them to the cost or other basis of the stock.
Gain or Loss
For each individual sale of stock reported on Schedule D, the taxpayer computes the gain or loss by subtracting the cost or other basis of the stock from the sales price. A positive result indicates a gain from the holding of the stock while a negative result indicates a loss from the holding of the stock. The taxpayer then must aggregate all gains and losses from short-term assets and then aggregate all gains and losses from long-term assets. The portion of gains, if any, from the sale of long-term assets that is in excess of any losses generated from the sale of short-term assets qualifies for special, reduced rate long-term capital gains tax. The rate for long-term capital gains tax is less than the rate the taxpayer must pay on other forms of ordinary income.