Reporting Capital Gains and Losses with IRS Form 8949
The IRS tweaked some capital gains tax forms beginning in 2011
The federal capital gains tax has been around in some form since 1916 and has occasionally been a hotbed of debate in some national elections. There have been few radical changes to the tax over the decades, although one moderate tweak has occurred in the millennium. The change basically deals basically with reporting gains and losses.
The IRS 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 and Form 1099-B to accommodate Form 8949.
The Emergency Economic Stabilization Act
Congress passed the Emergency Economic Stabilization Act in 2008 requiring that brokers begin reporting the cost basis of investment products to investors and to the IRS 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 investments. It was thought that it would simplify the tax-reporting process.
Brokerage firms are obligated to send out Forms 1099-B to investors and the IRS, reporting sales of investment products such as stocks or mutual funds. Before the EESA, the 1099-B only reported information about the sale of the investment, such as the date of sale and the sale proceeds.
Taxpayers then had to provide the purchase date and the purchase price when reporting the transactions on Schedule D and their tax returns.
Many brokers were already providing gain/loss reports as supplemental information with their annual reports, but cost basis information was included directly on the 1099-B beginning in 2011 if the broker was required to supply that information.
Brokers have been required to provide cost basis for stocks acquired beginning in 2011, for mutual funds and stocks in a dividend reinvestment plan acquired beginning in 2012, and all other investment products acquired beginning in 2013.
The IRS substantially revised Form 1099-B to facilitate this cost basis reporting, and Schedule D now functions as a summary of all capital gains transactions. Individual investment sales are detailed on Form 8949.
Investment sales transactions fall into one of three categories:
- Sales of covered securities for which cost basis is provided
- Sales of non-covered securities for which no cost basis is provided
- Sales of investments assets for which no 1099-B is received
Form 8949 reflects this categorization. A separate Form 8949 is required for each type of transaction, with the appropriate check box indicated at the top of the form. Form 8949 is further divided into two pages with short-term transactions listed on the first page and long-term transactions listed on the second page.
One Form 8949 would report capital gains and losses where cost basis is provided—check box A—with short-term transactions listed on page 1 and long-term transactions listed on page 2.
A separate Form 8949 would be required to report capital gains and losses where cost basis in not provided—check box B—with short-term transactions shown on page 1 and long-term transactions shown on page 2. A third Form 8949 would report capital gains and losses where Form 1099-B was not received—check box C.
You see where this is going. It's possible that a single taxpayer could have one, two or three Forms 8949, one for each check box. Totals from these separate Forms 8949 are then summarized on Schedule D. The structure of Schedule D mirrors the structure of Form 8949.
Form 8949 now has two columns that were not present on the previous version of Schedule D. It includes a Column B to report a "code" and a Column G to report "adjustments to gain or loss." The column B codes are used to indicate that a transaction has some sort of special treatment, such as because it was a wash sale, a section 1202 gain, a small business stock gain, the sale of a main home, or if the basis reported by the broker is incorrect.
Taxpayers can then correct the cost basis of a particular transaction by reporting the basis as it was reported by the broker in column F and making any adjustments or corrections in column G.
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 Form 1099-B. That information will likely be found in other reports or data, however, such as brokerage statements, year-end reports or trade confirmations.