Filing Schedule D (Form 1040): What You Need to Know
Translate your investment activities into the correct tax figures. This overview details how to properly report capital gains and losses to ensure an accurate Form 1040.
Schedule D to Form 1040 is an Internal Revenue Service (IRS) schedule used by individuals to report gains and losses resulting from the sale or exchange of capital assets. A capital asset is property you own for personal use or investment. This form summarizes these transactions, calculating the net capital gain or loss, which then gets reported on your main tax return, Form 1040. It works in conjunction with Form 8949, where the details of each individual asset sale are listed.
Determining if You Need to File Schedule D
The requirement to file Schedule D is triggered by specific financial events. You must file this form if you sell stocks, bonds, mutual funds, or other securities during the tax year. The sale of real estate, other than your primary residence that qualifies for the full gain exclusion, also necessitates filing Schedule D. Taxpayers who receive a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a Form 1099-S, Proceeds From Real Estate Transactions, will need to file.
Other situations also require the use of Schedule D. If you have a capital loss carryover from a previous tax year, you must file Schedule D to deduct that loss. Receiving undistributed capital gains from a regulated investment company (like a mutual fund) or a real estate investment trust (REIT), reported on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, requires filing. The form is also used for reporting nonbusiness bad debts or the worthlessness of a security.
Information Required to Complete Schedule D
Before you begin filling out Schedule D, you must gather specific information for each asset you sold. This includes a clear description of the property, such as the number of shares and the company name for stock. You will need the exact date you acquired the asset and the date you sold it, which are used to determine if the gain or loss is short-term or long-term.
The financial details of each transaction are also necessary. You must have the sales proceeds, which is the gross amount you received from the sale, and the cost basis of the asset. The cost basis is what you paid for it, including any commissions or fees. The difference between the sales proceeds and the cost basis results in your capital gain or loss.
This information is found on source documents like Form 1099-B from your broker, which details sales of securities and often includes the cost basis information. For real estate sales, you will receive Form 1099-S. For assets where you do not receive a form, you must rely on your personal records. These details are first entered onto Form 8949, Sales and Other Dispositions of Capital Assets, and the totals are then transferred to Schedule D.
Completing Schedule D and Form 8949
The process of reporting your capital transactions begins with Form 8949. This form requires you to categorize each sale as either short-term (held for one year or less) or long-term (held for more than one year), and whether the cost basis was reported to the IRS on your Form 1099-B. Form 8949 has checkboxes at the top of its two parts to make this distinction.
After listing all individual transactions on Form 8949, you will calculate the totals for proceeds, basis, and gain or loss for each category. These summary totals are then transferred to Schedule D. The totals from Part I of your Form 8949s are entered on the short-term section of Schedule D, while totals from Part II are entered on the long-term section.
Once you have transferred all the summary data from Form 8949, you complete Part III of Schedule D. This section summarizes your short-term and long-term amounts to calculate your net overall capital gain or loss for the year. This final figure is the amount that will ultimately affect your tax liability.
How Schedule D Affects Your Form 1040
The final result calculated on Schedule D directly impacts your Form 1040. The net capital gain or loss from Schedule D is transferred to line 7 of your Form 1040. This amount is then included in the calculation of your adjusted gross income (AGI). A net capital gain will increase your AGI and your taxable income.
The tax treatment of your net gain depends on whether it is short-term or long-term. Short-term capital gains are taxed at your ordinary income tax rates. Long-term capital gains are generally taxed at lower, preferential rates, which can be 0%, 15%, or 20%, depending on your overall taxable income.
If you have a net capital loss, you can use it to offset other income. The IRS allows you to deduct up to $3,000 of capital losses ($1,500 if married filing separately) against other forms of income in a single tax year. If your net capital loss exceeds this annual limit, the unused portion becomes a capital loss carryover that you can use in future tax years.