Changes in Reporting Capital Gains and Losses to the IRS—Form 8949
The IRS has tweaked capital gains tax forms and tax rates
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 very few big changes to the tax over the decades, but a few minor tweaks have occurred in the millennium.
These changes deal with reporting gains and losses, and they affect how much tax you'll pay to the federal government on gains.
A New Tax Form
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 the new Form 8949.
The Emergency Economic Stabilization Act
Congress passed the Emergency Economic Stabilization Act in 2008. The EESA requires that brokers report 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.
Before the EESA, the 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 Schedule D and their tax returns.
Many brokers were already providing gain/loss reports as supplemental information with their annual reports and 1099-Bs, 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, and for mutual funds and stocks in a dividend reinvestment plan beginning in 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 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.
The Tax Cuts and Jobs Act
No, we're not done with the changes yet. Beginning in 2018, long-term capital gains have their very own tax brackets that will determine how much tax you'll pay on all these forms.
Long-term gains were taxed at either 0 percent, 15 percent, and 20 percent before the passage of the Tax Cuts and Jobs Act (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 income put you in a 33 percent tax bracket on your overall income, you'd fall into the 15 percent long-term capital gains bracket. The 20 percent rate was reserved for those who fell into the top ordinary income tax bracket of 39.6 percent.
The TCJA gives long-term gains and qualified dividends their very own tax brackets effective January 1, 2018, but these still correlate with your overall income. Currently, the 0 percent capital gains rate applies to income up to $38,600 if you're single, $51,700 if you qualify as head of household, or $77,200 if you're married and file a joint return.
Beyond this, you'll jump into the 15 percent capital gains rate. This bracket covers incomes of up to $425,801 if you're single, $452,801 if you're head of household, or $479,001 if you're married and filing jointly. In other words, this bracket now covers a large swath of investors. You'll pay the 20 percent rate on your gains only if your overall income exceeds these levels.
The IRS is additionally issuing a whole new tax form for the 2018 tax year, a Form 1040 that will replace the old 1040, as well as Forms 1040A and 1040Ez. The new tax form is supposed to be shorter and simpler, but it comes with multiple schedules...along with 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 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.