Stock options capital gains tax
Various types of transactions involving business property, discussed in Pub. What Is a Sale or Trade? Basis of Investment Property. How To Figure Gain or Loss. Transfers Between Spouses. Related Party Transactions. Capital Gains and Losses. Reporting Capital Gains and Lossesand. Special Rules for Traders in Securities. Schedule D Form Capital Gains and Losses. See chapter 5, How To Get Tax Helpfor information about getting these publications and forms. This section explains what is a sale or trade. It also explains certain transactions and events that are treated as sales or trades. A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. The redemption is not essentially equivalent to a dividend—see Dividends and Other Distributions in chapter 1. Stocks, stock rights, and bonds other than those held for sale by a securities dealer that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. This affects whether your capital loss is long term or short term. See Holding Periodlater. Worthless securities also include securities that you abandon after March 12, To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. Do not deduct them in the year the stock became worthless. You are treated as having made a constructive sale when you enter into certain transactions involving an appreciated financial position defined later in stock, a partnership interest, or certain debt instruments. You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. This gives you a new holding period for the position that begins on the date of the constructive sale. Then, when you close the transaction, you reduce your gain or increase your loss by the gain recognized on the constructive sale. Enter into an offsetting notional principal contract relating to the same or substantially identical property. Enter into a futures or forward contract to deliver the same or substantially identical property including a forward contract that provides for cash settlementor. Acquire the same or substantially identical property if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract. You held the appreciated financial position throughout the day period beginning on the date you closed the transaction. Your risk of loss was not reduced at any time during that day period by holding certain other positions. Any position from which all of the appreciation is accounted for under marked-to-market rules, including section contracts described later under Section Contracts Marked to Market. The interest payments or other similar amounts with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. The position is not convertible, either directly or indirectly, into stock of the issuer or any related person. If you hold a section contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year. Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions a system of marking to marketand. Is traded on, or subject to the rules of, a qualified board of exchange. A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission. Requires delivery of a foreign currency that has positions traded through regulated futures contracts or settlement of which depends on the value of that type of foreign currency. Is entered into at arm's length at a price determined by reference to the price in the interbank market. Warrants based on a stock index that are economically, substantially identical in all material respects to options based on a stock index are treated as options based on a stock index. Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and. Is entered into by the dealer or, in the case of an option, is purchased or granted by the dealer in the normal course of the dealer's activity of dealing in this type of contract or option ; and. Is traded on a qualified board or exchange as defined under Regulated futures contractearlier. A section contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. The net capital loss for your capital year determined by taking into account only the gains and losses from section contracts, or. The capital gain net income for the carryback year determined by taking into account only gains and losses from section contracts, or. If you disposed of regulated futures or foreign currency contracts in or had unrealized profit or loss on these contracts that were open at the end of oryou should receive Form B from your broker. The marked-to-market rules, described earlier, do not apply to hedging transactions. A transaction is a hedging transaction if both of the following conditions are met. You entered into the transaction in the normal course of your trade or business primarily to manage the risk of:. Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. This hedging transaction exception does not apply to transactions entered into by or for any syndicate. A limited entrepreneur is a person who has an interest in an enterprise but not as a limited partner and who does not actively participate in its management. However, an interest is not considered held by a limited partner or entrepreneur if the interest holder actively participates or did so for at least 5 full years in the management of the entity, or is the spouse, child including a legally adopted childgrandchild, or parent of an individual who actively participates in the management of the entity. Gains and losses derived in the ordinary course of a commodity or option dealer's trading in section contracts and property related to these contracts are included in net earnings from self-employment. See the Instructions for Schedule SE Form In addition, the rules relating to contributions to self-employment retirement plans apply. For information on retirement plan contributions, see Pub. Basis is a way of measuring your investment in property for tax purposes. You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. Investment property you buy normally has an original basis equal to its cost. If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, or other property or services. There are times when you must use a basis other than cost. In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. If you receive investment property for services, you must include the property's fair market value in income. The amount you include in income then becomes your basis in the property. If the services were performed for a price that was agreed to beforehand, this price will be accepted as the fair market value of the property if there is no evidence to the contrary. If you received investment property in trade for other property, the basis of the new property is its fair market value at the time of the trade unless you received the property in a nontaxable trade. If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the property you received in the trade. See Nontaxable Tradeslater. The basis of property you received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property you gave up. Increase this amount by any cash you paid, additional costs you had, and any gain recognized. Reduce this amount by any cash or unlike property you received, any loss recognized, and any liability of yours that was assumed or treated as assumed. If property is transferred to you from your spouse or former spouse, if the transfer is incident to your divorceyour basis is the same as your spouse's or former spouse's adjusted basis just before the transfer. See Transfers Between Spouseslater. The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you. You have neither gain nor loss. You were given XYZ Company stock in Inyou received a gift of property from your mother. You figure your basis in the following way:. The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or amortization, you usually must make certain adjustments increases and decreases to the basis of the property. The result of these adjustments to the basis is the adjusted basis. Adjustments to the basis of stocks and bonds are explained in the following discussion. For information about other adjustments to basis, see Pub. The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted basis as discussed earlier under Basis Other Than Cost. The basis of stock must be adjusted for certain events that occur after purchase. For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. You must also reduce your basis when you receive nondividend distributions discussed in chapter 1. These distributions, up to the amount of your basis, are a nontaxable return of capital. The IRS partners with companies that offer Form and Schedule D Form software that can import trades from many brokerage firms and accounting software to help you keep track of your adjusted basis in securities. To find out more, go to www. Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and. Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and. In July you gave your son 50 shares. In April you sold shares. You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. You figure the basis of the shares of stock you sold in as follows:. You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the original shares. This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. This worksheet will help you figure the adjusted basis when you sell or redeem shares. The corporation distributed two new shares of common stock for each share held. You then had three shares of common stock. You owned two shares of common stock. Later, the corporation distributed a share of preferred stock for each share of common stock held. You figure the basis of the rights and the basis of the old stock as follows:. All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. The amount of the deduction for depletion other than oil and gas depletion that is more than the basis of the property being depleted. All loss and deduction items of the S corporation that are separately stated and passed through to you. Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted basis of the wells. You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficult. However, shares are generally acquired at various times, in various quantities, and at various prices. Therefore, figuring your basis can be more difficult. You can choose to use either a cost basis or an average basis to figure your gain or loss. You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund. Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer, and. Receive confirmation in writing from your broker or other agent within a reasonable time of your specification of the particular shares sold or transferred. You can use the average basis method to determine the basis of shares of stock if the shares are identical to each other, you acquired them at different times and different prices and left them in an account with a custodian or agent, and either:. They are shares you hold in connection with a dividend reinvestment plan DRPand all the shares you hold in connection with the DRP are treated as covered securities defined later ; or. Average basis is determined by averaging the basis of all shares of identical stock in an account regardless of how long you have held the stock. However, shares of stock in a dividend reinvestment plan are not identical to shares of stock with the same CUSIP number that are not in a dividend reinvestment plan. The basis of each share of identical stock in the account is the aggregate basis of all shares of that stock in the account divided by the aggregate number of shares. You may be able to find the average basis of your shares from information provided by the fund. You bought identical shares in the LJO Mutual Fund: On November 16,you sold shares. The basis of all shares sold is the same, but you held shares for more than 1 year, so your gain or loss on those shares is long term. You held shares for 1 year or less, so your gain or loss on those shares is short term. You bought identical shares in the LJP Mutual Fund: On May 9,you sold shares. The facts are the same as in Example 1except that you sold an additional 50 shares on December 12, You do not need to recompute the average basis of the shares you owned at that time because you acquired or sold no shares, and had no other adjustments to basis, since the last sale. This section discusses trades that generally do not result in a taxable gain or a deductible loss. For more information on nontaxable trades, see chapter 1 of Pub. If you trade business or investment property for other business or investment property of a like kind, you do not pay tax on any gain or deduct any loss until you sell or dispose of the property you receive. To be nontaxable, a trade must meet all six of the following conditions. The property must be business or gains property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car. The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise. The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, see Special rules for mutual ditch, reservoir, or irrigation company stocklater. Also, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later under Corporate Stocks. There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. The trade of a piece of machinery for a store building is not a trade of like property. Real property located in the United States and real property located outside the United States are not like property. Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property. The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade. If you received the replacement property before the end of the day period, you automatically are treated as having met the day written notice requirement. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs. If you trade property with a related party in a like-kind exchange, a special rule may apply. See Related Party Transactionslater in this chapter. Also, see chapter 1 of Pub. The mutual ditch, reservoir, or irrigation company is an organization described in section c 12 A of the Internal Revenue Code determined without regard to the percentage of its income that is collected from its members for the purpose of meeting losses and expenses. The shares in the company have been recognized by the highest court of the state in which the company was organized or by applicable state statute as constituting or representing real property or an interest in real property. The following trades of corporate stocks generally do not result in a taxable gain or a deductible loss. On April 14,KP1 Corporation was acquired by KP2 Corporation. As a result of the acquisition, you received 70 shares of KP2 stock in exchange for your KP1 stock. You do not recognize gain or loss on the transaction. On July 21,RGB Corporation divests itself of SFH Corporation. You receive 25 shares of SFH stock as a result of the spin-off. You do not recognize any gain or loss on the transaction. You receive information from RGB Corporation that your basis in SFH stock is equal to In the case of a spin-off, the divesting corporation should send you information that includes details on how to allocate basis between the old and new stock. Keep this information until the period of limitations expires for the year in which you dispose of the stock in a taxable disposition. Usually, this is 3 years from the date the return was due or filed, or 2 years from the date the tax was paid, whichever is later. The holder has the right to require the issuer or a related person to redeem or purchase the stock. The issuer or a related person has the right to redeem the stock, and on the issue date, it is more likely than not that the right will be exercised. The dividend rate on the stock varies with reference to interest rates, commodity prices, or similar indices. On December 5, you subscribed to the bond, which was issued on December You did not have a recognized gain or loss. Your holding period is split. Any exchange of shares in one fund for shares in another fund is a taxable exchange. This is true even if you exchange shares in one fund for shares in another fund within the same family of funds. Report any gain or loss on the shares you gave up as a capital gain or loss in the year in which the exchange occurs. Usually, you can add any service charge or fee paid in connection with an exchange to the cost of the shares acquired. For an exception, see Commissions and load chargesearlier. You will not have a recognized gain or loss if the insured or annuitant is the same under both contracts and capital trade:. A life insurance contract for another life insurance contract or for an endowment or annuity contract or for a qualified long-term care insurance contract. An endowment contract for another endowment contract that provides for regular payments beginning at a date no later than the beginning date under the old contract or for annuity contract or for a qualified long-term insurance contract. An annuity contract for annuity contract or for a qualified long-term care insurance contract, or. You also may not have to recognize gain or loss from an exchange of a portion of an annuity contract for another annuity contract. For transfers completed before October 24,see Revenue Ruling and Revenue Procedure in Internal Revenue Bulletin Revenue Ruling is available at www. Revenue Procedure is available at www. For transfers completed on or after October 24,see Revenue Rulingabove, and Revenue Procedurein Internal Revenue Bulletin For tax years beginning afteramounts received as an annuity for a period of 10 years or more, or for the lives of one or more individuals, under any portion of an annuity, endowment, or life insurance contract, are treated as a separate contract and are considered partial annuities. A portion of an annuity, endowment, or life insurance contract may be annuitized, provided that the annuitization period is for 10 years or more or for the lives of one or more individuals. The investment in the contract is allocated between the part of the contract from which amounts are received as an annuity and the part of the contract from which amounts are not received as an annuity. Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable. A life insurance company may change from a mutual company to a stock company. This is commonly called demutualization. If you were a policyholder or annuitant of the mutual company, you may have received either stock in the stock company or cash in exchange for your equity interest in the mutual company. If the demutualization transaction qualifies as a tax-free reorganization under section a 1 of the Internal Revenue Code, no gain or loss is recognized on the exchange. Your holding period for the new stock includes the period you held an equity interest in the mutual company as a policyholder or annuitant. If the demutualization transaction does not qualify as a tax-free reorganization under section a 1 of the Internal Revenue Code, you must recognize a capital gain or loss. Your holding period for the stock does not include the period you held an equity interest in the mutual company. If you received cash in exchange for your equity interest, you must recognize a capital gain. If you held an equity interest for more than 1 year, your gain is long term. You can trade certain issues of U. Treasury obligations for other issues, designated by the Secretary of the Treasury, with no gain or loss recognized on the trade. See the discussion in chapter 1 under U. Treasury Bills, Notes, and Bonds for information about income from these investments. Generally, no gain or loss is recognized on a transfer of property from an individual to or in trust for the benefit of a spouse or, if incident to a divorce, a former spouse. This nonrecognition rule does not apply in the following situations. Property is transferred in trust and liability exceeds basis. Gain must be recognized to the extent the amount of the liabilities assumed by the trust, plus any liabilities on the property, exceed the adjusted basis of the property. An installment obligation is transferred in trust. For information on the disposition of an installment obligation, see Pub. Certain stock redemptions, which are taxable to a spouse under the tax law, a divorce or separation instrument, or a valid written agreement, discussed in Regulations section 1. Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is treated by the recipient as a gift and is not considered a sale or exchange. The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its fair market value at the time of transfer or any consideration paid by the recipient. This rule applies for purposes of determining loss as well as gain. Any gain recognized on a transfer in trust increases the basis. A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending options the marriage. For more information, see Property Settlements in Pub. Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. See chapter 3 in Pub. Generally, if you trade business or investment property for other business or investment property of a like kind, no gain or loss is recognized. See Like-Kind Exchangesearlier, under Nontaxable Trades. This rule also applies to trades of property between related parties, defined next under Losses on Sales or Trades of Property. However, if either you or the related party disposes of the like property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return for the year in which the later disposition occurs. If a property holder's risk of loss on the property is substantially diminished during any period, that period is not counted in determining whether the property was disposed of within 2 years. The property holder's risk of loss is substantially diminished by:. You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties. Members of your family. This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors parents, grandparents, etc. A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties. Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. An executor and a beneficiary of an estate except in the case of a sale or trade to satisfy a pecuniary bequest. Two corporations that are members of the same controlled group under certain conditions, however, these losses are not disallowed but must be deferred. You cannot deduct the loss that was not allowed to your brother. This section discusses the tax treatment of gains and losses from different types of investment transactions. If you have a taxable gains or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. Generally, a sale or trade of a capital asset defined next results in a capital gain or loss. A sale or trade of a noncapital asset generally results in ordinary gain or loss. Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Pub. In some situations, part of your gain or loss may be a capital gain or loss, and part may be an ordinary gain or loss. For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. For an exception, see Capital asset treatment for self-created musical workslater. A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that is:. Acquired under circumstances for example, by gift entitling you to the basis of the person who created the property or for whom it was prepared or produced. For an exception to this rule, see Capital asset treatment for self-created musical workslater. Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in 1. Certain commodities derivative financial instruments held by commodities derivatives dealers. For more information, see section of the Internal Revenue Code. Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. For more information, see capital definition of hedging transactionearlier, and the discussion of hedging transactions under Commodity Futureslater. Supplies of a type you regularly use or consume in the ordinary course of your trade or business. You acquired the property under circumstances for example, by gift entitling you to the basis of the person who created the property or for whom it was prepared or produced. Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions. At the time the bond was issued, the issuer had no intention of redeeming it before it matured. The bond was callable at its face amount beginning 10 years after the issue date. At the time of original issue, there was no intention to call the bond before maturity. You have held the bond for full months. Do not count the additional days that are less than a full month. The number of complete months from date of issue to date of maturity is 30 years. This is your ratable share of OID for the period you owned the bond. If, in Example 1at the time of original issue there was an intention to call the bond before maturity, your entire gain is ordinary income. You figure this as follows:. You cannot deduct any loss on an obligation required to be in registered form that is instead held in bearer form. In addition, any gain on the sale or other disposition of the obligation is ordinary income. However, if the issuer was subject to a tax when the obligation was issued, then you can deduct any loss, and any gain may qualify for capital gain treatment. If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways. You are related to such an owner or officer. The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income. Generally, all or part of a gain on a conversion transaction is treated as ordinary income. This applies to gain on the disposition or other termination of any position you held as part of a conversion transaction you entered into after April 30, Substantially all of your expected return from the transaction is due to the time value of your net investment. In other words, the return on your investment is, in substance, like interest on a loan. A straddle as defined under Straddleslater, but including any set of offsetting positions on stock established before October 22, Any transaction in which you acquire property whether or not actively traded at substantially the same time that you contract to sell the same property, or substantially identical property, at a price set in the contract. Any other transaction that is marketed or sold as producing capital gains from a transaction described in 1. Figure the amount of interest that would have accrued on your net investment in the conversion transaction for the period ending on the earlier of:. Subtract from 1 the amount treated as ordinary income from any earlier disposition or other termination of a position held as part of the same conversion transaction. A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. If the contract is a regulated futures contract, the rules described earlier under Section Contracts Marked to Market apply to it. The termination of a commodity futures contract generally results in capital gain or loss unless the contract is a hedging transaction. If you have multiple transactions in the commodity futures market during the year, the burden of proof is on you to show which transactions are hedging transactions. Clearly identify any hedging transactions on your books and records before the end of the day you entered into the transaction. It may be helpful to have separate brokerage accounts for your hedging and nonhedging transactions. For specific requirements concerning identification of hedging transactions and the underlying item, items, or aggregate risk being hedged, see Regulations section 1. If you have a gain from a constructive ownership transaction entered into after July 11,involving a financial asset discussed later and the gain normally would be treated as long-term capital gain, all or part of the gain may be treated instead as ordinary income. In addition, if any gain is treated as ordinary income, your tax is increased by an interest charge. A notional principal contract in which you have the right to receive all or substantially all of the investment yield on a financial asset and you are obligated to reimburse all or substantially all of any decline in value of the financial asset. The holding of a call option and writing of a put option on a financial asset at substantially the same strike price and maturity date. Subject to the limitations discussed under Ordinary loss limitlater, you can deduct as an ordinary loss, rather than as a capital loss, a loss on the sale, trade, or worthlessness of section stock. Report the loss on Formline Any loss in excess of the amounts described in Ordinary loss limitlater, should be reported on Form Any gain on section stock is a capital gain if the stock is a capital asset in your hands. Do not offset gains against losses that are within the ordinary loss limit, explained later in this discussion, even if the transactions are in stock of the same company. Report the gain on Form If you must figure a net operating loss, any ordinary loss from the sale of section stock is a business loss. These shares qualify as section stock. If, as a nontaxable stock dividend, you receive 50 more shares of common stock, the basis of which is determined from the shares you own, the 50 shares are also section stock. If you also own stock in the corporation that is not section stock when you receive the stock dividend, you must divide the shares you receive as a dividend between the section stock and the other stock. Only the shares from the former can be section stock. The adjusted basis for figuring loss of the property, immediately before the trade, was more than its fair market value; and. You are the original owner. You must keep records sufficient to show your stock qualifies as section stock. Your records must also distinguish your section stock from any other stock you own in the corporation. A small business investment company SBIC is one that is licensed and operated under the Small Business Investment Act of If you are an investor in SBIC stock, you can deduct as an ordinary loss, rather than a capital loss, a loss from the sale, trade, or worthlessness of that stock. A gain from the sale or trade of that stock is a capital gain. Do not offset your gains and losses, even if they are on stock of the same company. If you sold or traded investment property, you must determine your holding period for the property. Your holding period determines whether any capital gain or loss was a short-term or a long-term capital gain or loss. If you bought investment property on February 3,and sold it on February 3,your holding period is not more than 1 year and you have a short-term capital gain capital loss. If you sold it on February 4,your holding period is more than 1 year and you have a long-term capital gain or loss. You are a cash method, calendar year taxpayer. You sold stock on December 30, According to the rules of the stock exchange, the sale was closed by delivery of the stock and payment of the sale price in January You received payment of the sale price on that same day. Report your gain or loss on your return, even though you received the payment in The gain or loss is long term or short term depending on whether you held the stock more than 1 year. Your holding period ended on December If someone owes you money that you cannot collect, you have a bad debt. You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless. There are two kinds of bad debts—business and nonbusiness. A business bad debt, generally, is one that comes from operating your trade or business and is deductible as a business loss. All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses. An architect made personal loans to several friends who were not clients. She could not collect on some of these loans. They are deductible only as nonbusiness bad debts because the architect was not in the business of lending money and the loans do not have any relationship to her business. Henry Lloyd, an officer and principal shareholder of the Spruce Corporation, guaranteed payment of a bank loan the corporation received. The corporation defaulted on the loan and Henry made full payment. Because he guaranteed the loan to protect his investment in the corporation, Henry can take a nonbusiness bad debt deduction. Milt and John are co-workers. Milt, as a favor to John, guarantees a note at their local credit union. John does not pay the note and declares bankruptcy. Milt pays off the note. However, since he did not enter into the guarantee agreement to protect an investment or to make a profit, Milt cannot tax a bad debt deduction. A committee, association, or organization that either accepts contributions or spends money to influence elections. Why you decided the debt was worthless. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt. A short sale occurs when you agree to sell property you do not own or own but do not wish to sell. You make this type of sale in two steps. You close the sale. At a later date, you either buy substantially identical property and deliver it to the lender or make delivery out of property you held at the time of the sale. Delivery of property borrowed from another lender does not satisfy this requirement. You do not realize gain gains loss until delivery of property to close the short sale. You will have a capital gain or loss if the property used to close the short sale is a capital asset. The Instructions for Form B discuss when you should receive a Form B for short sales. For more information, see the Instructions for Form B. You made no other transactions involving Baker stock for the rest of and the first 30 days of Your short sale is treated as a constructive sale of an appreciated financial position because a sale of your Baker stock on the date of the short sale would have resulted in a gain. As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you actually hold the property eventually delivered to the lender to close the short sale. Even though you do not own any stock of Ace Corporation, you contract to sell shares of it, which you borrow from your broker. After 13 months, when the price of the stock has risen, you buy shares of Ace Corporation stock and immediately deliver them to your broker to close out the short sale. Your loss is a short-term capital loss because your holding period for the delivered property is less than 1 day. Your gain, if any, when you close the short sale is a short-term capital gain, and. The holding period of the substantially identical property begins on the date of the closing of the short sale or on the date of the sale of this property, whichever comes first. If any broker transferred your securities for use in a short sale or similar transaction and received certain substitute dividend payments on your behalf while the short sale was open, that broker must give you a Form MISC or a similar statement reporting the amount of these payments. Do not treat these substitute payments as dividends or interest. A dividend, if the ex-dividend date is after the transfer of stock for use in a short sale and before the closing of the short sale. You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities. A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:. If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale. If your loss was disallowed because of the wash sale rules, add stock disallowed loss to the cost of the new stock or securities except in 4 above. The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold. You are an employee of a corporation with an incentive pay plan. Under this plan, you are given 10 shares of the corporation's stock as a bonus award. You include the fair market value of the stock in options gross income as additional pay. You later sell these shares at a loss. If you receive another bonus award of substantially identical stock within 30 days of the sale, you cannot deduct your loss on the sale. You bought shares of M stock on September 21, On each of the 4 days from February 9,to February 12,you bought 50 shares of substantially identical stock. Duringyou bought shares of X stock on each of three occasions. On January 11,you bought shares of identical X stock. In addition, you cannot reduce the gain realized on the sale of the second and third blocks of stock by this loss. On that date, you own stock or securities identical to those sold short or by that date you enter into a contract or option to acquire that stock or those securitiesand. You close the short sale on November 19 by delivering the shares bought on June 4. The substantially identical stock or securities you bought had the same CUSIP numbers as the stock or securities you sold and were bought in the same account as the stock or securities you sold. A securities futures contract is a contract of sale for future delivery of a single security or of a narrow-based security index. Gain or loss from the contract generally will be treated in a manner similar to gain or loss from transactions in the underlying security. This means gain or loss from the sale, exchange, or termination of the contract will generally have the same character as gain or loss from transactions in the property to which the contract relates. Any capital gain or loss on a sale, exchange, or termination of a contract to sell property will be capital short term, regardless of how long you hold the contract. These contracts are not section contracts unless they are dealer securities futures contracts. Options are generally subject to the rules described in this section. If the option is part of a straddle, the Loss Deferral Rules covered later under Straddles may also apply. For special rules that apply to nonequity options and dealer equity options, see Section Contracts Marked to Marketearlier. Gain or loss from the sale or trade of an option to buy or sell property that is a capital asset in your hands, or would be if you acquired it, is capital gain or loss. If the property is not or would not be a capital asset, the gain or loss is ordinary gain or loss. You purchased an option to buy shares of XYZ Company stock. The stock increases in value, and you sell the option for more than you paid for it. Your gain is capital gain because the stock underlying the option would have been a capital asset in your hands. The facts are the same as in Example 1except the stock decreases in value and you sell the option for less than you paid for it. Your loss is a capital loss. If an option requiring you to buy or sell property is exercised, see Writers of puts and callslater. Puts and calls are options on securities and are covered by the rules just discussed for options. But see Section Contracts Marked to Marketearlier, for special rules that may apply to nonequity options and dealer equity options. These rules are also presented in Table Puts and calls are issued by writers grantors to holders for cash premiums. They are ended by exercise, closing transaction, or lapse. You buy, in the case of a put, or sell, in the case of a call, the underlying stock when the option is exercised; or. These equity options expired in Decemberwithout being exercised. The facts are the same as in 1except that the options were exercised on May 23, The buyer adds the cost of the options to the basis of the stock bought through the exercise of the options. The writer adds the amount received from writing the options to the amount realized from selling the stock to figure gain or loss. The gain or loss is short term or long term depending upon the holding period of the stock. The facts are the same as in 1except the options were nonequity options, subject to the tax for section contracts. See Section Contracts Marked to Marketearlier, for more information. This section discusses the loss deferral rules that apply to the sale or other disposition of positions in a straddle. These rules do not apply to the straddles described under Exceptionslater. A straddle is any set of offsetting positions on personal property. For example, a straddle may consist of a purchased option to buy and a purchased option to sell on the same number of shares of the security, with the same exercise price and period. The stock is of a type which is actively traded, options at least one of the offsetting positions is a position on that stock or substantially similar or related property. The stock is in a corporation formed or availed of to take positions in personal property that offset positions taken by any shareholder. For positions established before October 22,condition 1 earlier does not apply. Instead, personal property includes stock if condition 2 above applies or the stock was part of a straddle in which at least one of the offsetting positions was:. The positions are established in the same personal property or in a contract for this propertyand the value of one or more positions varies inversely with the value of one or more of the other positions. The positions are in the same personal property, even if this property is in a substantially changed form, and the positions' values vary inversely as described in the first condition. The positions are in debt instruments with a similar maturity, and the positions' values vary inversely as described in the first condition. The positions are sold or marketed as offsetting positions, whether or not the positions are called a straddle, spread, butterfly, or any similar name; or. The aggregate margin requirement for the positions is lower than the sum of the margin requirements for each position if held separately. Generally, you can deduct a loss on the disposition of one or more positions only to the extent the loss is more than any unrecognized gain you have on offsetting positions. Unused losses are treated as sustained in the next tax year. The amount of gain you would have had on an open position if you had sold it on the last business day of the tax year at its fair market value, and. The amount of gain realized on a position if, as of the end of the tax year, gain has been realized but not recognized. On July 11,you entered into a straddle. If you physically settle a position established after October 21,that is part of a straddle by delivering property to which the position relates and you would realize a loss on that position if you terminated ityou are treated as having terminated the position for its fair market value immediately before the settlement and as having sold the property used to physically settle the position at its fair market value. Certain straddles consisting of qualified covered call options and the stock to be purchased under the options. Hedging transactionsdescribed earlier under Section Contracts Marked to Marketand. Straddles consisting entirely of section contracts, as described earlier under Section Contracts Marked to Market but see Identified straddlelater. For positions established before October 22,the loss deferral rules also do not apply to a straddle that is an identified straddle at the end of the tax year. You clearly identified the straddle on your records before the close of the day on which you acquired it. For straddles acquired after December 29,you identified the positions in the straddle that are offsetting with respect to one another tax example, position A offsets position D, and position B offsets position C. For positions established before October 22,identified straddles have to meet two additional conditions. All the positions included in item 1 were disposed of on the same day during the tax year, or none of the positions were disposed of by the end of the tax year. Also, the losses from positions are deferred until you dispose of all the positions in the straddle. The rule discussed above for increasing the basis of each of the positions does not apply. All the offsetting positions consist of one or more qualified covered call options and the stock to be purchased from you under the options. The option is traded on a national securities exchange or other market approved by the Secretary of the Treasury. For covered call options entered into after July 28,the option is granted not more than 12 months before its expiration date or satisfies term limitation and qualified benchmark requirements published in the Internal Revenue Bulletin. You are not an options dealer who granted the option in connection with your activity of dealing in options. The closing price of the stock on the most recent day on which that stock was traded before the date on which the option was granted; or. The call option is a deep-in-the-money option because its strike price is lower than the LQB. As a result, the option is not a qualified covered call option, and the loss deferral rules apply if you closed out the option or the stock at a loss during the year. The qualified covered call options are closed, or the stock is disposed of at a loss during any tax year. Gain on disposition of the stock or gain on the options is includible in gross income in a later tax year. The stock or options were held less than 30 days after the closing of the options or the disposition of the stock. As a general rule, report each position whether or not it is part of a straddle on which you have unrecognized gain at the end of the tax year and the amount of this unrecognized gain in Part III of Form Use Part II of Form to figure your gains and losses on straddles. See the Form instructions for how to report these gains and losses. Rules similar to the wash sale rules apply to any disposition of a position or positions of a straddle. First apply Rule 1, explained next, then apply Rule 2. However, Rule 1 applies only if stocks or securities make up a position that is part of the straddle. If a position in the straddle does not include stock or securities, use Rule 2. You are not a dealer in stock or securities. On December 5,you bought stock in XX Corporation XX stock and an offsetting put option. By December 19,the value of the put option had declined, eliminating all unrealized gain in the position. On December 19, you bought a second XX stock position that is substantially identical to the XX stock you sold on December At the end of the year, there is no unrecognized gain in the put option or in the XX stock. The successor position is entered into during a period beginning 30 days before, and ending 30 days after, the sale of the loss position. On November 7,you entered into offsetting long and short positions in non-section contracts. On November 21,you entered into a new long position successor position that is offsetting to the retained short position, but not substantially identical to the long position disposed of on November The facts are the same as in the example under Rule 1. Rule 1 does not apply because the substantially identical XX stock was sold during the year and no substantially identical stock or securities were bought within the day period. Loss on the sale of one or more positions in a hedging transaction. Hedging transactions are described under Section Contracts Marked to Marketearlier. Loss on the sale of a loss position in a mixed straddle account. See Mixed straddle account Election Clater. Loss on the sale of a position that is part of a straddle consisting only of section contracts. The holding period of a position in a straddle generally begins no earlier than the date on which the straddle ends the date you no longer hold an offsetting position. This rule does not apply to any position you held more than 1 year before you established the straddle. But see Exceptionslater. On March 9,you acquired gold. On January 11,you entered into an offsetting short gold forward contract nonregulated futures contract. On April 4,you disposed of the short gold forward contract at no gain or loss. On April 11,you sold the gold at a gain. Because the gold had been held for 1 year or less before the offsetting short position was entered into, the holding period for the gold begins on April 4,the date the straddle ended. Gain recognized on the sale of the gold will be treated as short-term capital gain. You held directly or indirectly one or more offsetting positions to the loss position on the date you entered into the loss position. You would have treated all gain or loss on one or more of the straddle positions as long-term capital gain or loss if you had sold these positions on the day you entered into the loss position. Gain or loss from the sale of one or more of the straddle positions that are section contracts would be considered gain or loss from the sale or exchange of a capital asset. The sale of no position in the straddle, other than a section contract, would result in a long-term capital gain or loss. You have not made a straddle-by-straddle identification election Election B or mixed straddle account election Election Cboth discussed later. On March 7,you entered into a long gold forward contract. On July 18,you entered into an offsetting short gold regulated futures contract. You did not make an election to offset gains and losses from positions in a mixed straddle. On August 8,you disposed of the long forward contract at a loss. If you disposed of a position in a mixed straddle and make one of the elections described in the following discussions, report your gain or loss as indicated in those discussions. If you do not make any of the elections, report your gain or loss in Part II of Options If you disposed of the section component of the straddle, enter the recognized loss line 10, column h or your gain line 12, column f in Part I of Formon line 1. Do not include it on line 11 or 13 Part II. Each position forming part of the straddle is clearly identified as being part of that straddle on the day the first section contract forming part of the straddle is acquired. Make a separate identification of the positions of each mixed straddle for which you are electing this treatment the straddle-by-straddle identification method. Establish a mixed straddle account for a class of activities for which gains and losses will be recognized and offset on a periodic basis. Straddle established on or before August 18, On April 2,you entered into a non-section position and an offsetting section contract. You also made a valid election to treat this straddle as an identified mixed straddle. Straddle established after August 18, On January 26,you entered into an offsetting section position. You elected to treat the straddle as an identified mixed straddle. This gain is calculated as though you had disposed of the position on the day prior to establishing the identified mixed straddle. If you sold qualified securities held for at least 3 years to an employee stock ownership plan ESOP or eligible worker-owned cooperative, you may be able to elect to postpone all or part of the gain on the sale if you bought qualified replacement property certain securities within the period that began 3 months before the sale and ended 12 months after the sale. If you make the election, you must recognize gain on the sale only to the extent the proceeds from the sale exceed the cost of the qualified replacement property. You must reduce the basis of the replacement property by any postponed gain. If you dispose of any replacement property, you may have to recognize all of the postponed gain. Also, the qualified replacement property must have been issued by a domestic operating corporation. A description of the securities sold, including the type and number of shares, the date of the sale, the amount realized on the sale, and the adjusted basis of the securities. For a sale that was part of a single, interrelated transaction under a prearranged agreement between taxpayers involving other sales of qualified securities, the names and identifying numbers of the other taxpayers under the agreement and the number of shares sold by the other taxpayers. The statement must have been notarized no later than 30 days after the purchase. A verified written statement of the domestic corporation whose employees are covered by the ESOP acquiring the securities, or of any authorized officer of the cooperative, consenting to the taxes under sections and A of the Internal Revenue Code on certain dispositions, and prohibited allocations of the stock purchased by the ESOP or cooperative. You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain. You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement propertylater. This postpones your gain until the year you dispose of the replacement property. You sell publicly traded securities at a gain. Publicly traded securities are securities traded on an established securities market. During the day period beginning on the date of the sale, you buy replacement property. This replacement property must be either common stock of, or a partnership interest in, a specialized small business investment company SSBIC. This is any partnership or corporation licensed by the Small Business Administration under section d of the Small Business Investment Act ofas in effect on May 13, The cost of any common stock or partnership interest in an SSBIC that you bought during the day period beginning on the date of sale and did not previously take into account on an earlier sale of publicly traded securities. This section discusses two provisions of the law that may apply to gain from the sale or trade of qualified small business stock. You may qualify for a tax-free rollover of all or part of the gain. You may be able to exclude gain from your income. When figuring the corporation's total gross assets, you must also count the assets of any predecessor of the corporation. In addition, you must treat all corporations that are members of the same parent-subsidiary controlled group as one corporation. You must have acquired the stock at its original issue, directly or through an underwriter, in exchange for money or other property not including stockor as pay for services provided to the corporation other than services performed as an underwriter of the stock. In certain cases, your stock may also meet this test if you acquired it from another person who met this test, or through a conversion or trade of qualified small business stock that you held. The corporation must have met the active business test, defined next, and must have been a C corporation during substantially all the time you held the stock. Within the period beginning 2 years before and ending 2 years after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from you or a related party. A corporation that has made, or whose subsidiary has made, an election under section of the Internal Revenue Code. One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services. Any business involving the production or extraction of products for which percentage depletion can be claimed; or. You may qualify for a tax-free rollover of capital gain from the sale of qualified small business stock held more than 6 months. This means that, if you buy certain replacement stock and make the choice described in this section, you postpone part or all of your gain. You postpone the gain by adjusting the basis of the replacement stock as described in Basis of replacement stocklater. This postpones your gain until the year you dispose of the replacement stock. The replacement stock continues to meet the active business requirement for small business stock for at least the first 6 months after you buy it. The cost of any qualified small business stock you bought during the day period beginning on the date of sale and did not previously take into account on an earlier sale of qualified small business stock. See Empowerment zone business stocklater. See Capital Gain Tax Rateslater. Ten times your basis in all qualified stock of the issuer you sold or exchanged during the year, or. You sell or trade stock in a corporation that qualifies as an empowerment zone business during substantially all of the time you held the stock, and. If you sold or exchanged a District of Columbia Enterprise Zone DC Zone asset that you acquired after and held for more than 5 years, you may be able to exclude capital gain that you would otherwise include in income. The exclusion applies to an interest in, or property of, certain businesses operating in the District of Columbia. See section B for more details. Generally, report capital gains and losses on Form Complete Form before you complete line 1b, 2, 3, 8b, 9, or 10 of Schedule D Form Gains from involuntary conversions other than from casualty or theft of capital assets not held for business or profit. On Formenter all sales and exchanges of capital assets, including stocks, bonds, etc. Include these transactions even if you did not receive a Form B or Form S, Proceeds From Real Estate Transactions, for the transaction. Report short-term gains or losses in Part I. Report long-term gains or losses in Part II. Use as many Forms as you need. Gains and losses from transactions for which you received a Form B that shows basis was reported to the IRS, for which the Ordinary box in box 2 is not checked, and for which you do not need to make any adjustments in column g of Form or enter any codes in column f of Form Complete columns abcand e. Complete all remaining columns. Stock in a cooperative housing corporation as defined in section of the Internal Revenue Code ; and. It is unlawful for any real estate reporting person to separately charge you for complying with the requirement to file Form S. Undistributed long-term capital gains from a mutual fund or other regulated investment company or real estate investment trust REIT. Your share of long-term capital gains or losses from partnerships, S corporations, and fiduciaries. All capital gain distributions from mutual funds and REITs not reported directly on line 10 of Form A or line 13 of Form ; and. If your capital losses are more than your capital gains, you can claim a capital loss deduction. Report the deduction on line 13 of Formenclosed in parentheses. Your taxable income increased by your allowable capital loss deduction for the year and your deduction for personal exemptions. Bob and Gloria sold securities in They had no other capital transactions. They would have no carryover. The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates. See Table for details. If you figure your tax using the maximum capital gain rate and the regular tax computation results in a lower tax, the regular tax computation applies. You received qualified dividends. See Qualified Dividends in chapter 1. You do not have to file Schedule D Form and you received capital gain distributions. See Exceptions to filing Form and Schedule D Formearlier. Special rules apply if you are a trader in securities in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, you must meet all the following conditions. You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation. The following facts and circumstances should be considered in determining if your activity is a securities trading business. If your trading activities do not meet the above definition of a business, you are considered an investor, and not a trader. You may be a trader in some securities and have other securities you hold for investment. The special rules discussed here do not apply to the securities held for investment. You must keep detailed records to distinguish the securities. The securities held for investment must be identified as such in your records on the day you got them for example, by holding them in a separate brokerage account. Transactions from trading activities result in capital gains and losses and must be reported on Form and Schedule D Formas appropriate. Losses from these transactions are subject to the limit on capital losses explained earlier in this chapter. To make the mark-to-market election foryou must file a statement with your timely filed return for or with a properly filed request for extension of time to file FormApplication for Automatic Extension of Time To File U. Individual Income Tax Return on or before the normal due date of the return. The statement must include the following information. If you are not required to file a income tax return, you make the election by placing the above statement in your books and records no later than March 15, Attach a copy of the statement to your return. If your method of accounting for is inconsistent with the mark-to-market election, you must change your method of accounting for securities under Revenue Procedure or its successor available at www. Revenue Procedure requires you to file FormApplication for Change in Accounting Method. Once you make the election, it will apply to and all later tax years, unless you get permission from the IRS to revoke it. The effect of making the election is described under Mark-to-market election madeearlier. Subscriptions IRS Guidewire IRS Newswire QuickAlerts e-News for Tax Professionals IRS Tax Tips More. Sales and Trades of Investment Property. Table of Contents Introduction Nominees. Topics - This chapter discusses: Useful Items - You may want to see: Dividend versus sale or trade. Worthless Securities Constructive Sales of Appreciated Financial Positions Section Contracts Marked to Market Basis of Investment Property Cost Basis Basis Other Than Cost Adjusted Basis Stocks and Bonds How To Figure Gain or Loss Fair market value. Special Rules for Mutual Funds Nontaxable Trades Like-Kind Exchanges Corporate Stocks Exchange of Shares In One Mutual Fund For Shares In Another Mutual Fund Insurance Policies and Annuities U. Treasury Notes or Bonds Transfers Between Spouses Related Party Transactions Gain on Sale or Trade of Depreciable Property Capital Gains and Losses Capital or Ordinary Gain or Loss Holding Period Nonbusiness Bad Debts Short Sales Wash Sales Options Straddles Sales of Stock to ESOPs or Certain Cooperatives Rollover of Gain From Publicly Traded Securities Gains on Qualified Small Business Stock Exclusion of Gain From DC Zone Assets Reporting Capital Gains and Losses Exception 1. Section contracts and straddles. File Form B or Form S with the IRS. Capital Losses Capital Gain Tax Rates Special Rules for Traders in Securities How To Report. This is property that produces investment income. Examples include stocks, bonds, and Treasury bills and notes. Property used in a tax or business is not investment property. If you sold property such as stocks, bonds, mutual funds, or certain commodities through a broker during the year, the broker should send you, for each sale, a Form B, Proceeds From Broker and Barter Exchange Transactions. You should receive Form B for by February 15, It will show the gross proceeds from the sale. The IRS will also get a copy of Form B from the broker. Use Form B received from your broker to complete Form If you sold a covered security inyour broker will send you a Form B that shows your basis. This will help you complete Form Generally, a covered security is a security you acquired afterwith certain exceptions explained in the Instructions for Form If someone receives gross proceeds as a nominee for you, that person will give you a Form B, which will show gross proceeds received on your behalf. If you receive a Form B that includes gross proceeds belonging to another person, see Nomineeslater under Reporting Capital Gains and Losses for more information. Certain transfers of property are discussed in other IRS publications. Sale of your main home, discussed in Pub. Publication Basis of Assets. Form and Instructions Schedule D Form Capital Gains and Losses Gains and Losses From Section Contracts and Straddles Passive Activity Loss Limitations Like-Kind Exchanges Sales and Other Dispositions of Capital Assets. Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. The sale and purchase are two separate transactions. But see Like-Kind Exchanges under Nontaxable Tradeslater. A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Both direct and indirect ownership of stock will be considered. The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend—see Dividends and Other Distributions in chapter 1, There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. Redemption or retirement of bonds. A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. See Stocks, stock rights, and bonds and Discounted Debt Instrumentslater. In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. For details, see Regulations section 1. A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Trade of investment property for an annuity. The transfer of investment property to a corporation, trust, fund, foundation, or other organization, in exchange for a fixed annuity contract that will make guaranteed annual payments to you for life, is a taxable trade. If the present value of the annuity is more than your basis in the property traded, you have a taxable gain in the year of the trade. Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. The transfer of property of a decedent to the executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or other disposition. No taxable gain or deductible loss results from the transfer. Termination of certain rights and obligations. The cancellation, lapse, expiration, or other termination of a right or obligation other than a securities futures contract with respect to property that is a capital asset or that would be a capital asset if you acquired it is treated as a sale. Any gain or loss is treated as a capital gain or loss. This rule does not apply to the retirement of a debt instrument. See Redemption or retirement of bondsearlier. How to report loss. Report worthless securities on FormPart Stock or Part II, whichever applies. Filing a claim for refund. If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. You must use Form X, Amended U. Individual Income Tax Return, to amend your return for the year the security became worthless. You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later. For more information about filing a claim, see Pub. Constructive Sales of Appreciated Financial Positions. You are treated as having made a constructive sale of an appreciated financial position if you: Enter into a short sale of the same or substantially identical property, Enter into an offsetting notional principal contract relating to the same or substantially identical property, Enter into a futures or forward contract to deliver the same or substantially identical property including a forward contract that provides for cash settlementor Acquire the same or substantially identical property if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract. Exception gains nonmarketable securities. You are not treated as having made a constructive sale solely because you entered into a contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security if it settles within 1 year of the date you enter into it. Exception for certain closed transactions. Do not treat a transaction as a constructive sale if all of the following are true. You closed the transaction on or before the 30th day after the end of your tax year. This is any interest in stock, a partnership interest, or a debt instrument including a futures or forward contract, a short sale, or an option if disposing of the interest would result in a gain. An appreciated financial position does not include the following. Any position in a debt instrument if: The position unconditionally entitles the holder to receive a specified principal amount, The interest payments or other similar amounts with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. Certain trust instruments treated as stock. For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the exception to the definition of an appreciated financial position explained in 2 above. Sale of appreciated financial position. A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position. Section Contracts Marked to Market. Regulated futures contract, Foreign currency contract, Nonequity option, Dealer equity option, or Dealer securities futures gains. A section contract does not include: Interest rate swaps, Currency swaps, Basis swaps, Interest rate caps, Interest rate floors, Commodity swaps, Equity swaps, Equity index swaps, Credit default swaps, or Similar agreements. This is a contract that: Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions a system of marking to marketand Is traded on, or subject to the rules of, a qualified board of exchange. Requires delivery of a foreign currency that has positions traded through regulated futures contracts or settlement of which depends on the value of that type of foreign currencyIs traded in the interbank market, and Is entered into at arm's length at a price determined by reference to the price in the interbank market. This is any listed option defined later that is not an equity option. Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based on the value of a group of diversified stocks or securities such as the Standard and Poor's index. Cash-settled options based on a stock index and either traded on or subject to the rules of a qualified board of exchange are nonequity options if the Securities and Exchange Commission SEC determines that the stock index is broad based. This rule does not apply to options established before the SEC determines that the stock index is broad based. This is any option traded on, or subject to the rules of, a qualified board or exchange as discussed earlier under Regulated futures contract. A listed option, however, does not include an option that is a right to acquire stock from the issuer. This is any listed option that, for an options dealer: Is an equity option, Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and Is listed on the qualified board of exchange where that dealer is registered. This is any option: To buy or sell stock, or That is valued directly or indirectly by reference to any stock or narrow-based security index. Dealer securities futures contract. For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract or option on such a contract that: Is entered into by the dealer or, in the case of an option, is purchased or granted by the dealer in the normal course of the dealer's activity of dealing in this type of contract or option ; and Is traded on a qualified board or exchange as defined under Regulated futures contractearlier. The marked-to-market rules do not apply to hedging transactions. See Hedging Transactionslater. This is true regardless of how long you actually held the property. Limited partners or entrepreneurs. Instead, these gains or losses are treated as short term. The marked-to-market rules also apply if your obligation or rights under section contracts are terminated or transferred during the tax year. In this case, use the fair market value of each section contract at the time of termination or transfer to determine the gain or loss. Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section contracts. An individual having a net section contracts loss defined latergenerally can elect to carry this loss back 3 years instead of carrying it over to the next year. See How To Reportlater, for information about reporting this election on your return. The loss carried back to any year under this election cannot be more than the net section contracts gain in that year. In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. If only a portion of the net section contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. For more information, see Capital Losseslater. In the carryover year, treat any capital loss carryover from losses on section contracts as if it were a loss from section contracts for that year. Net section contracts loss. This loss is the lesser of: The net capital loss for your tax year determined by taking into account only the gains and losses from section contracts, or The capital loss carryover to the next tax year determined without this election. Net section contracts gain. This gain is the lesser of: The options gain net income for the carryback year determined by taking into account only gains and losses from section contracts, or The capital gain net income for that year. Traders in section contracts. Gain or loss from the trading of section contracts is capital gain or loss subject to the marked-to-market rules. However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. Treatment of underlying property. The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section contracts related to that property. Use Part I of Form to report your gains and losses from all section contracts that are open at the end of the year or that were closed out during the year. This includes the amount shown in box 11 of Form B. Then enter the net amount of these gains and losses on Schedule D Formline 4 or line 11, as appropriate. Include a copy of Form with your income tax return. If the Form B you receive includes a straddle or hedging transaction, defined later, it may be necessary to show certain adjustments on Form Follow the Form instructions for completing Part I. To carry back your loss under the stock procedures described earlier, file Form X or FormApplication for Tentative Refund, for the year to which you are carrying the loss with an amended Form and an amended Schedule D Form attached. Follow the instructions for completing Form for the loss year to make this election. You entered into the transaction in the normal course of your trade or business primarily to manage the risk of: Price changes or currency fluctuations on ordinary property you hold or will hold ; or Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. Any hedging loss allocated to you for the tax year is limited to your taxable income for that year from the trade or business in which the hedging transaction occurred. Ignore any hedging transaction items in determining this taxable income. If you have a hedging loss that is disallowed because of this limit, you can carry it over to the next tax year as a deduction resulting from a hedging transaction. If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. The limit on hedging losses does not apply to any hedging loss to the extent that it is more than all your unrecognized gains from hedging transactions at the end of the tax year that are from the trade or business in which the hedging transaction occurred. Sale of property used in a hedge. Once you identify personal property as being part of a hedging transaction, you must treat gain from its sale or exchange as ordinary income, not capital gain. Basis of Investment Property. If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. You generally have unstated interest if your interest rate is less than the applicable federal rate. For more information, see Unstated Interest and Original Issue Discount OID in Pub. Basis Other Than Cost. This is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Sales of similar property, around the same date, may be helpful in figuring fair market value. Property Received for Services. If you receive, as payment for services, property that is subject to certain restrictions, your basis in the property generally is its fair market value when it becomes substantially vested. Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. See Restricted Property in Pub. If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. Your basis in the property is the price you pay plus the amount you include in income. Property Received in Taxable Trades. Property Received in Nontaxable Trades. Property Received From Your Spouse. Property Received as a Gift. Fair market value less than donor's adjusted basis. If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property. No gain or loss. If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss. Fair market value equal to or more than donor's adjusted basis. If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. Gift received before If you received property as a gift beforeyour basis in the property is the donor's adjusted basis increased by the total gift tax paid on the gift. However, your basis cannot be more than the fair market value of the gift at the time it was given to you. Gift received after If you received property as a gift afteryour basis is the donor's adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. You figure this part by multiplying the gift tax paid on the gift by a fraction. The numerator top part is the net increase in value of the gift and the denominator bottom part is the amount of the gift. The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. You figure your basis in the following way: Part sale, part gift. If you get property in a transfer that is partly a sale and partly a gift, your basis is the larger of the amount you paid for the property or the transferor's adjusted basis in the property at the time of the transfer. Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. For information on gift tax, see Pub. For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Pub. Property Received as Inheritance. Before or after If you inherited property from a decedent who died before or afteror who died in and the executor of the decedent's estate elected not to file FormAllocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value its appraised value on FormUnited States Estate and Generation-Skipping Transfer Tax Return on: The date of the decedent's death; or The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. Appreciated property you gave the decedent. Your basis in certain appreciated property that you inherited is the decedent's adjusted basis in the property immediately before death rather than its fair market value. This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. Inherited in and executor elected to file Form If you inherited property from a decedent who died in and the executor made the election to file Formsee Pub. Identifying stock or bonds sold. If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and Receive a written confirmation of this from your broker or other agent within a reasonable time. If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and Receive a written confirmation of this from your broker or other agent within a reasonable time. These methods of identification also apply to bonds sold or transferred. If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares. You figure the basis of the shares of stock you sold in as follows: Shares in a mutual fund or REIT. The basis of shares in a mutual fund or other regulated investment company or a real estate investment trust REIT is generally figured in the same way as the basis of other stock and usually includes any commissions or load charges paid for the purchase. Commissions and load charges. The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. A fee paid to redeem the shares is usually a reduction in the redemption price sales price. You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply. You dispose of the shares within 90 days of the purchase date. Choosing average basis for mutual fund shares. You can choose to use the average basis of mutual fund shares if you acquired the identical shares at various times and prices, or you acquired the shares after in connection with a dividend reinvestment plan, and left them on deposit in an account kept by a custodian or agent. The methods you can use to figure average basis are explained later. If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference between the amount you included and the amount of tax paid for you by the fund or REIT. See Undistributed capital gains of mutual funds and REITs in chapter 1. This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge. The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. Mutual Fund Acquired 1 Adjustment to Basis Per Share Adjusted 2 Basis Per Share Sold or Redeemed Date Number of Shares Cost Per Share Date Number of Shares. If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker's commission. If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value of the stock on the dividend payment date. You must include the amount of the discount in your income. If, beforeyou excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. Stock dividends are distributions made by a corporation of its own stock. Generally, stock dividends are not taxable to you. However, see Distributions of Stock and Stock Rights in chapter 1 for some exceptions. If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. New and old stock identical. If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis of the old stock by the number of shares of old and new stock. The result is your basis for each share of stock. New and old stock not identical. If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is calculated differently. Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock. Stock bought at various times. Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it. If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. The basis of your old stock does not change. Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. A stock right is a right to acquire a corporation's stock. It may be exercised, it may be sold if it has a market value, or it may expire. Stock rights are rarely taxable when you receive them. See Distributions of Stock and Stock Rights in chapter 1. If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. The basis of the old stock does not change. If you receive nontaxable stock rights and allow them to expire, they have no basis. Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. However, you can choose to divide the basis of the old stock between the old stock and the stock rights. To make the choice, attach a statement to your return for the year in which you received the rights, stating that you choose to divide the basis of the stock. Basis of new stock. If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. You figure the basis of the rights and the basis of the old stock as follows: Investment property received in liquidation. In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution. You must increase your basis in stock of an S corporation by your pro rata share of the following items. The nonseparately stated income of the S corporation. Distributions by the S corporation that were not included in your income. Any nonseparately stated loss of the S corporation. Specialized small business investment company stock or partnership interest. If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock or interest by the amount of any postponed gain on that sale. See Rollover of Gain From Publicly Traded Securitieslater. Qualified small business stock. If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this replacement stock by the amount of any postponed gain on the earlier sale. See Gains on Qualified Small Business Stocklater. If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale. See Payments in lieu of dividendslater, for information about deducting payments in lieu of dividends. If you buy a bond at a premium, the premium is treated as part of your basis in the bond. If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond. Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. You must reduce the basis of the bond by the premium you amortized for the period you held the bond. For a tax-exempt covered security acquired at a premium, box 13 shows the amount of bond premium amortization allocable to the interest paid during the tax year. If a net amount of interest appears in box 8 or 9, whichever is applicable, box 13 should be blank. See Bond Premium Amortization in chapter 3 for more information. Market discount on bonds. If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your income. See Market Discount Bonds in chapter 1 for more information. Bonds purchased at par value. A bond purchased at par value face amount has no premium or discount. When you sell or otherwise dispose of the bond, you figure the gain or loss by comparing the bond proceeds to the purchase price of the bond. Acquisition discount on short-term obligations. If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of acquisition discount you include in your income. See Discount on Short-Term Obligations in chapter 1 for more information. Original issue discount OID on debt instruments. Increase the basis of a debt instrument by the OID you include in your income. See Original Issue Discount OID in chapter 1. OID on tax-exempt obligations is generally not taxable. However, when you dispose of a tax-exempt obligation issued after September 3,that you acquired after March 1,you must accrue OID on the obligation to determine its adjusted basis. The accrued OID is added to the basis of the obligation to determine your gain or loss. For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1,and Before or Debt Instruments Issued Afterwhichever applies, in Pub. If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term obligations. See Discount on Short-Term Obligations in chapter 1. If you acquired a stripped tax-exempt bond or coupon after October 22,you must accrue OID on it to determine its adjusted basis when you dispose of it. For stripped tax-exempt bonds or coupons acquired after June 10,part of this OID may be taxable. You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons. Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. Also increase your basis by the interest that accrued but was not paid and was not previously reflected in your basis before the date you sold the bond or coupon. In addition, for bonds acquired after June 10,add to your basis any accrued market discount not previously reflected in basis. How To Figure Gain or Loss. If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale such as redemption fees, sales commissions, sales charges, or exit fees. Amount realized includes the money you receive plus the fair market value of any property or services you receive. If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. For more information, see Pub. If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. See Regulations section 1. However, if the debt instrument was previously issued by a third party one not part of the sale transactionthe fair market value of the debt instrument is used to determine the amount realized. Fair market value is the price at which property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. A debt against the property, or against you, that is paid off as a part of the transaction or that is assumed by the buyer must be included in the amount realized. This is true even if neither you nor the buyer is personally liable for the debt. For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount stock the note is more than the fair market value of the property. If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. If the result is a positive number, it is a gain. If the result is tax negative number, it is a loss. You may have to use a basis for figuring gain that is different from the basis used for figuring loss. In this case, you may have neither a gain nor a loss. See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Costearlier. Special Rules for Mutual Funds. If you adequately identify the shares you sold, you can use the adjusted basis of those particular shares to figure your gain or loss. You will adequately identify your mutual fund shares, even if you bought the shares in different lots at various prices and times, if you: Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer, and Receive confirmation in writing from your broker or other agent within a reasonable time of your specification of the particular shares sold or transferred. If your shares were acquired at different times or at different prices and you cannot identify which shares you sold, use the basis of the shares you acquired first as the basis of the shares sold. In other words, the oldest shares you own are considered sold first. You should keep a separate record of each purchase and any dispositions of the shares until all shares purchased at the same time have been disposed of completely. Table illustrates the use of the FIFO method to figure the cost basis of shares sold, compared with the use of the average basis method discussed next. They are shares in a mutual fund or other regulated investment company ; They are shares you hold in connection with a dividend reinvestment plan DRPand all the shares you hold in connection with the DRP are treated as covered securities defined later ; or You acquired them after in connection with a DRP. Transition rule from double-category method. You may no longer use the double-category method for figuring your average basis. If you were using the double-category method for stock you acquired before April 1,and you sell, exchange or otherwise dispose of that stock on or after April 1,you must figure the average basis of this stock by averaging together all identical shares of stock in the account on April 1,regardless of the holding period. Election of average basis method for covered securities. To make the election to use the average basis method for your covered securities, you must send written notice to the custodian or agent who keeps the account. The written notice can be made electronically. You must also notify your broker that you have made the election. You can make the election to use the average basis method at any time. The election will be effective for sales or other dispositions of stocks that occur after you notify the custodian or agent of your election. Your election must identify each account with that custodian or agent and each stock in that account to which the election applies. The election can also indicate that it applies to all accounts with a custodian or agent, including accounts you later establish with the custodian or agent. Election of average basis method for noncovered securities. For noncovered securities, you elect to use the average basis method on your income tax return for the first taxable year that stock election applies. You make the election by showing on your return that you used the average basis method in reporting gain or loss on the sale or other disposition. Revoking the average basis method election. You can revoke an election to use the average basis method for your covered securities by sending written notice to the custodian or agent holding the stock for which you want to revoke the election. The election must generally be revoked by the earlier of 1 year after you make the election or the date of the first sale, transfer, or disposition of the stock following the election. The revocation applies to all the stock you hold in an account that is identical to the shares of stock for which you are revoking the election. After revoking your election, your basis in the shares of stock to which the revocation applies is the basis before averaging. Average basis method illustrated. Table illustrates the average basis method of shares sold, compared with the use of the FIFO method to figure cost basis discussed earlier. Even though you include all unsold shares of identical stock in an account to compute average basis, you may have both short-term and long-term gains or losses when you sell these shares. To determine your holding period, the shares disposed of are considered to be those acquired first.
A system in which only the rear lens group moves during focusing, thus eliminating changes in the physical length of the lens during focusing and enabling faster focusing.
While both novels deal with adultery in the provinces, Emma passively reads romantic fiction, wallows in dissatisfaction with her dull husband Charles, and after committing adultery destroys herself.
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