Reporting Capital Gains and Losses to the IRS: Schedule D and Form 8949
The federal capital gains tax has been around in some form since 1916 and it's occasionally been a hotbed of debate in some national elections. As the name suggests, the tax applies when you sell an asset for more than you paid for it and invested in it. Numerous and sometimes intricate rules apply, depending on the nature of the asset and how long you owned it.
There have been very few big changes to the tax, but some minor tweaks have occurred over the years. These changes deal primarily with tax rates and reporting gains, and they affect how much tax you'll pay to the federal government.
Capital Gains Basics
Gains or losses are the difference between the cost basis of an asset—what you paid for it plus certain allowable costs of maintaining and selling it—and the ultimate sales price. For example, your gain would be $50,000 if you purchased stock for $200,000, it cost you $25,000 to maintain and sell it, and you ultimately sold it for $275,000.
Capital gains tax rates are based on the length of time the investment is held. Investments that are sold a year or less after purchase will typically have a higher tax rate than investments held for longer than one year, but it can depend on some unique factors.
Long-Term Capital Gains
The Tax Cuts and Jobs Act (TCJA) made some broad-ranging changes for taxpayers beginning in 2018, including some provisions for the long-term capital gains tax. Long-term gains were taxed at either 0%, 15%, and 20% before the passage of the TCJA and that's still the case, but these rates used to be tied to your ordinary income tax bracket.
In other words, if your ordinary overall income put you in a 33% tax bracket, you'd fall into the 15% long-term capital gains bracket.
The 20% rate was reserved for those who fell into the top ordinary income tax bracket of 39.6%.
Investors continue to be taxed at ordinary income tax rates on short-term capital gains—those resulting from the sale of assets held for one year or less—and long-term capital gains are still taxed at 0%, 15%, and 20%, but the TCJA assigned long-term gains their very own income spans for these brackets.
Post-TCJA Tax Rates
As of 2020, the 0% capital gains tax rate applies to incomes of up to $40,000 if you're single, $53,600 if you qualify as head of household, or $80,000 if you're married and file a joint return.
Beyond this, you'll jump into the 15% capital gains tax rate. This bracket covers incomes of up to $441,450 if you're single, $469,050 if you're head of household, or $496,600 if you're married and filing jointly. This bracket covers a large swath of investors.
You'll pay the 20% rate only if your overall income exceeds these levels.
Reporting Requirements for Brokers
Congress passed the Emergency Economic Stabilization Act (EESA) in 2008 in an effort to address the subprime mortgage crisis of 2007, which ultimately trickled down to affect investment services companies and, by extension, investors. The EESA requires that brokers report the cost basis of investment products to investors and to the IRS for reporting purposes on Form 1099-B.
In theory, having brokers report cost basis along with sales proceeds was intended to reduce the burden on individual taxpayers to maintain extensive records on their own investments. Congress thought that it would simplify the tax-reporting process.
A New Form 1099-B
Before the EESA, Form 1099-B only reported information about the sale of investments, such as the date of sale and sale proceeds. Taxpayers then had to provide the purchase date and the purchase price when reporting the transactions on their tax returns.
Many brokers were already providing gain/loss reports as supplemental information with their annual reports and their 1099-Bs, but cost basis information was to be included directly on the 1099-B beginning in 2011. Brokers have been required to provide cost basis for stocks acquired since that year.
Some brokers are not required to supply cost basis information.
Brokers must also provide cost basis for mutual funds and stocks in a dividend reinvestment plan since 2012. The reporting requirement began in 2013 for all other investment products acquired beginning in that year.
The IRS substantially revised Form 1099-B to facilitate this cost basis reporting, and Schedule D functions as a summary of all capital gains transactions. Both these forms are needed to file Form 8949.
Reporting Requirements for Taxpayers: Form 8949
The IRS also rolled out a new tax form for reporting capital gains and losses from stocks, bonds, mutual funds, and similar investments during the 2011 tax year. Investment transactions are now reported on Form 8949, Sales and Other Dispositions of Capital Assets. The IRS also revised Schedule D to accommodate the new Form 8949.
Form 8949 is the reporting form used by individuals, businesses, and estates and trusts to report capital gains. The IRS provides the form and instructions for completing it.
Form 8949 provides for the reporting of both short-term and long-term capital gains. All taxpayers should receive the necessary tax reporting details for Form 8949 on a 1099-B statement.
Schedule D is most often used as a summation of the capital gains you report on Form 8949. In most cases, investors will use Schedule D to show their total capital gains for the year. Other situations that may also require a Schedule D include:
- Reporting certain transactions you don't have to report on Form 8949.
- Reporting a gain from Form 2439 or 6252 or Part I of Form 4797.
- Reporting a gain or loss from Form 4684, 6781, or 8824.
- Reporting a gain or loss from a partnership, S corporation, estate, or trust.
- Reporting capital gain distributions not reported directly on Schedule 1 (Form 1040), line 13 (or effectively connected capital gain distributions not reported directly on Form 1040NR, line 14).
- Reporting a capital loss carryover from one tax year to the next.
New Forms 1040
These new tax forms are designed to be shorter and simpler, but they come with multiple schedules—adding to all the old forms and schedules like Schedule D and Form 8949 that still exist.
Rest assured that you'll still be entering the same information, but in different places—as though preparing your taxes wasn't already complicated enough.
Keep Your Own Records
Cost-basis reporting by brokers will never fully and completely eliminate the need for taxpayers to maintain their own records because basis reporting applies only to newly acquired shares that have occurred since these changes were made.
If you purchased stocks before 2011, mutual fund shares before 2012, or bonds before 2013, basis reporting on these assets won't be reported on the Form 1099-B for the 2019 tax year. That information will likely be found in other reports or data, however, such as brokerage statements, year-end reports, or trade confirmations.
Tax laws change periodically. You should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
The Tax Foundation. "2020 Tax Brackets." Accessed Jan. 24, 2020.
University of California, Berkeley. "Slaying the Dragon of Debt." Accessed Jan. 24, 2020.
IRS. "2020 Instructions for Form 1099-B," Page 8. Accessed Jan. 24, 2020.
IRS. "2019 Instructions for Schedule D," Page 1. Accessed Jan. 24, 2020.