Top Frequently Asked Questions for Capital Gains, Losses, and Sale of Home

Is the loss on the sale of my home deductible?

Answer:

Maybe. A loss on the sale or exchange of personal use property, including a capital loss on the sale of your home used by you as your personal residence at the time of sale, or loss attributable to the sale of part of your home that is used for personal purposes, isn't deductible. The only deductible losses associated with property (or a portion of property) are losses on property used in a trade or business, losses resulting from a transaction entered into for profit (for example, a loss on the sale of stock), and certain casualty losses. Until 2025, the only deductible casualty losses are those resulting from federally declared disasters.

I own stock that became worthless last year. Is this a bad debt? How do I report my loss?

Answer:

If you own securities, including stocks, and they become totally worthless, you have a capital loss but not a deduction for bad debt. Worthless securities also include securities that you abandon. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it.

  • Treat worthless securities as though they were capital assets sold or exchanged on the last day of the tax year.
  • You must determine the holding period to determine if the capital loss is short term (one year or less) or long term (more than one year). 
  • Report losses due to worthless securities on Schedule D of Form 1040 and fill out Part I or Part II of Form 8949.

I received a 1099-DIV showing a capital gain. Why do I have to report capital gains from my mutual funds if I never sold any shares of that mutual fund?

Answer:

A mutual fund is a regulated investment company that pools funds of investors allowing them to take advantage of a diversity of investments and professional asset management.

You own shares in the mutual fund but the fund owns capital assets, such as shares of stock, corporate bonds, government obligations, etc. One of the ways the fund makes money for you is to sell these assets at a gain.

If the mutual fund held the capital asset for more than one year, the nature of the income from a sale of the capital asset is capital gain, and the mutual fund passes it on to you as a capital gain distribution. These capital gain distributions are usually paid to you or credited to your mutual fund account, and are considered income to you. Form 1099-DIV, Dividends and Distributions distinguishes capital gain distributions from other types of income, such as ordinary dividends.

Consider capital gain distributions as long-term capital gains no matter how long you've owned shares in the mutual fund.

Report the amount shown in box 2a of Form 1099-DIV on line 13 of Schedule D (Form 1040), Capital Gains and Losses. If you have no requirement to use Schedule D (Form 1040), report this amount on line 7 of Form 1040, U.S. Individual Tax Return or Form 1040-SR, U.S. Tax Return for Seniors and check the box. Review the Instructions for Form 1040 (and Form 1040-SR) for more information.
 

I purchased stock from my employer under a § 423 employee stock purchase plan and received a Form 1099-B for selling it. How do I report this?

Answer:

Under a § 423 employee stock purchase plan, you have taxable income or a deductible loss when you sell the stock. Your income or loss is the difference between the amount you paid for the stock (the purchase price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss, but you may also have ordinary income to report.

You must account for and report this sale on your tax return. You have indicated that you received a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. You must report all 1099-B transactions on Schedule D (Form 1040), Capital Gains and Losses and you may need to use Form 8949, Sales and Other Dispositions of Capital Assets. This is true even if there's no net capital gain subject to tax.

You must first determine if you meet the holding period. You meet the holding period requirement if you don't sell the stock until the end of the later of:

  • The 1-year period after the stock was transferred to you, or
  • The 2-year period after the option was granted.

If you meet the holding period requirement:

  • You can generally treat the sale of stock as giving rise to capital gain or loss. You may have ordinary income if the option price was below the stock's fair market value (FMV) at the time the option was granted.

If you don't meet the holding period requirement:

  • The ordinary income that you should report in the year of the sale is the amount by which the FMV of the stock at the time of purchase (or vesting, if later) exceeds the purchase price. Treat any additional gain or loss as capital gain or loss.

If you meet the holding period requirement and the option price was below (but not less than 85% of) the FMV of the stock at the time the option was granted:

  • You report as ordinary income (wages) on line 1a of Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors the lesser of (1) the amount by which the stock's FMV on the date of grant exceeds the option price or (2) the amount by which the stock's FMV on the date of sale or other disposition exceeds the purchase price. Your employer should report the ordinary income to you as wages in box 1 of Form W-2, Wage and Tax Statement. If your employer (or former employer) doesn't provide you with a Form W-2, or if the Form W-2 doesn't include the income in box 1, report the income on line 8k of Schedule 1 (Form 1040) PDF for the year of sale or other disposition.
  • If your gain is more than the amount you report as ordinary income, the remainder is a capital gain reported on Schedule D (Form 1040) and, if required, on Form 8949.

If you don't satisfy the holding period requirement and sell the stock for less than the purchase price, your loss is a capital loss but you still may have ordinary income.

You should receive a Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c) from your employer when the employer has recorded the first transfer of legal title of stock you acquired pursuant to your exercise of the option. This form will assist you in tracking your holding period and figuring your cost basis for the stock purchased through your qualifying plan.

How do I figure the cost basis when the shares I'm selling were purchased at various times and at different prices?

Answer:

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. When selling securities, you should be able to identify the specific shares you are selling.

If you can identify which shares of stock you sold, your basis generally is:

  • What you paid for the shares sold plus any costs of purchase.

If you can't adequately identify the shares you sold and you bought the shares at various times for different prices, the basis of the stock sold is:

  • The basis of the shares you acquired first, then the basis of the stock later acquired, and so forth (first-in first-out). Except for certain mutual fund shares and certain dividend reinvestment plans, you can't use the average basis per share to figure gain or loss on the sale of stock.

Each security you buy is considered a covered security. The broker is required to provide you basis information on the Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. For each sale of a covered security for which you receive a Form 1099-B, the broker will provide you the following information: the date of acquisition (box 1b), whether the gain or loss is short-term or long-term (box 2), cost or other basis (box 1e), and the loss disallowed due to a wash sale (box 1g) or the amount of accrued market discount (box 1f).

The law requires you to keep and maintain records that identify the basis of all capital assets.

How do I report the sale of my second residence?

What is the basis of property received as a gift?

Answer:

To figure out the basis of property received as a gift, you must know three amounts:

If the FMV of the property at the time the donor made the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

  • Your adjusted basis for figuring a gain is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
  • Your adjusted basis for figuring a loss is the FMV of the property at the time the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
  • Note: If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property. 

If the FMV of the property at the time the donor made the gift is equal to or greater than the donor's adjusted basis, your adjusted basis is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.

  • If the donor paid a gift tax on the gift and made the gift after 1976, increase your basis by the gift tax paid on the net increase in value. To figure out the net increase in value or for other information on gifts received before 1977, see Publication 551, Basis of Assets.

 

If I exclude the gain on the sale of my former principal residence this year, can I take the exclusion again if I sell my new principal residence in the future?

Answer:

You can exclude gain from the future sale of your principal residence (within the limits of the exclusion) as long as you satisfy the ownership and use tests and haven't excluded gain from the sale of a former principal residence within the two-year period ending on the date of the sale. Also, if the future sale of your home is due to a change in employment, health, or unforeseen circumstances, you may qualify for a reduced exclusion even if you fail to meet the ownership and use tests or you used the exclusion within the two-year period ending on the date of the sale. There's no limit to the number of times you can claim the exclusion.

How are reinvested dividends reported on my tax return?

Answer:

When dividends are reinvested on your behalf and used to purchase additional shares or fractions of shares for you:

  • If the reinvested dividends buy shares at a price equal to their fair market value (FMV), you must report the dividends as income along with any other ordinary dividends.
  • If you're a member of a dividend reinvestment plan that lets you buy more stock at a price less than its FMV, you must also report as dividend income the FMV of the additional stock on the dividend payment date.

Report your reinvested dividends with your other dividends, if any, on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. You must complete Schedule B (Form 1040) and attach it to your Form 1040 or Form 1040-SR, if your ordinary dividends (in box 1a of Form 1099-DIV, Dividends and Distributions) and your reinvested dividends are more than $1,500.

Note: Keep records of the amount of the reinvested dividends, the number of additional shares purchased and the purchase dates. You'll need this information to establish your basis when you sell the shares.

I sold stock I received over several years through a dividend reinvestment plan. How do I compute the basis for this stock?

Answer:

An investor must include in income the amount received as a dividend. A dividend reinvestment plan uses the amount received as a dividend to purchase additional shares or fractional shares of the same stock, usually at the fair market value of the stock on the day reinvested. Therefore, the basis of stock that you received through a dividend reinvestment plan is the cost of the shares plus any adjustments, such as sales commissions:

  • If you haven't kept detailed records of your dividend reinvestments, you must reconstruct those records with the help of public records from sources such as the media, your broker or the company that issued the dividends.
  • Determine the basis by using the first-in first-out (FIFO) rule if you can't specifically identify which shares you sold.
    • FIFO rule means:
      • You use the basis of the shares you acquired first as the basis of the shares sold. In other words, you sold the oldest shares you owned first.
      • You need to have kept adequate documentation of all your purchases, including those that were made through the dividend reinvestment plan, in order to establish the basis of these shares.
      • Even if you sold the oldest shares you owned first, under certain circumstances, you may elect to use average basis rather than the actual basis of the shares you acquired first to determine the basis of those shares you acquired pursuant to a dividend reinvestment plan.

Frequently Asked Question Subcategories for Capital Gains, Losses, and Sale of Home

Property (basis, sale of home, etc.)
Stocks (options, splits, traders)
Mutual funds (costs, distributions, etc.)
Losses (homes, stocks, other property)

 

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