How to Fill Out Schedule D: Capital Gains and Losses

Schedule D is the IRS form used to report capital gains and losses. When you sell a capital asset, such as stocks, bonds, or your home, the resulting profit or loss must be reported to the IRS on your individual income tax return. The form categorizes gains and losses as either short-term or long-term. Assets held for one year or less generate short-term gains or losses, while those held for more than a year result in long-term gains. This distinction is important because long-term capital gains are taxed at lower rates than short-term gains, which are taxed as ordinary income.

Information and Forms Needed to Complete Schedule D

Before filling out Schedule D, you must gather specific information for every capital asset transaction. For each sale, you need to know the property’s description, the date you acquired it, the date you sold it, the sale price, and your cost basis. The cost basis is what you paid for the asset, including any commissions or fees. For example, if you bought 100 shares of a stock for $5,000 and paid a $10 commission, your cost basis would be $5,010.

This information is provided on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, which you receive from your brokerage firm. This form details your sales transactions for the year. If you did not receive a Form 1099-B or its information is incorrect, you must rely on your own records to report the transaction details.

Schedule D is a summary form. The individual details of each transaction are first reported on Form 8949, Sales and Other Dispositions of Capital Assets. Think of Form 8949 as the detailed worksheet where you list every sale, and Schedule D is where you report the totals calculated on Form 8949.

When completing Form 8949, you must separate your transactions based on their holding period. Part I is for short-term transactions, and Part II is for long-term transactions. At the top of each part, you must select a checkbox based on how the transaction was reported on Form 1099-B. For short-term transactions, you would check Box A if your broker reported your cost basis to the IRS, Box B if the basis was not reported, and Box C if you did not receive a Form 1099-B. A similar set of boxes (D, E, and F) exists for long-term transactions in Part II.

Completing Schedule D Part I and Part II

Once all your transactions are listed on Form 8949, you can fill out Schedule D. This process involves transferring summary totals, not re-entering each sale.

Part I of Schedule D is for reporting short-term capital gains and losses. You will take the total proceeds, cost basis, and gain or loss amounts from your short-term Forms 8949 and enter them on the designated lines. For example, the totals from a Form 8949 where you checked Box A, B, or C are entered on lines 1b, 2, and 3, respectively. After entering these totals, you will calculate your net short-term capital gain or loss.

The process for Part II, which covers long-term capital gains and losses, mirrors that of Part I. You will transfer the summary totals from your long-term Forms 8949 to the appropriate lines. For instance, totals from Forms 8949 with Box D, E, or F checked are entered on lines 8b, 9, and 10. After entering these figures and any other long-term items, such as capital gain distributions from Form 1099-DIV, you will determine your net long-term capital gain or loss.

Completing Schedule D Part III and Transferring to Form 1040

Part III of Schedule D is the summary section, where you combine the outcomes from Part I and Part II to determine your overall capital gain or loss for the year. You will carry the net short-term result and the net long-term result to this section, and combining them gives you the total net gain or loss.

If you have a net capital loss, there is a limit to how much you can deduct from your other income in a single year. Your deductible loss is limited to $3,000 per year ($1,500 if you are married and filing separately). Any loss exceeding this annual limit can be carried over to subsequent tax years. You would use the Capital Loss Carryover Worksheet in the IRS instructions for Schedule D to calculate the amount to carry forward.

If you have a capital loss carryover from a previous year, you must report it on the current year’s Schedule D. A short-term carryover is entered in Part I, and a long-term carryover is entered in Part II. Finally, the results from Schedule D are transferred to your main tax return, Form 1040.

Reporting Special Capital Asset Sales

Certain types of capital asset sales have unique reporting rules. These situations often involve specific tax benefits or limitations that must be handled correctly on your tax forms.

Sale of Your Main Home

When you sell your primary residence, you may be able to exclude a significant portion of the gain from your income under Section 121 of the tax code. An individual can exclude up to $250,000 of gain, and married couples filing jointly can exclude up to $500,000. To qualify, you must have owned and lived in the home as your main residence for at least two of the five years preceding the sale. You must report the sale on Form 8949 and Schedule D if your gain exceeds the exclusion limit or if you receive a Form 1099-S. On Form 8949, you report the full gain and then show the excludable amount as an adjustment by entering code “H” in column (f) and the exclusion amount as a negative number in column (g).

Wash Sales

A wash sale occurs when you sell a security at a loss and, within 30 days before or after the sale, you purchase a “substantially identical” security. The wash sale rule prevents you from deducting the loss on that sale in the current year. Instead, the disallowed loss is added to the cost basis of the new replacement security. This adjustment postpones the tax benefit of the loss until you sell the new security. To report a wash sale, you list the transaction on Form 8949, enter code “W” in column (f), and report the amount of the disallowed loss as a positive number in column (g).

Collectibles and Qualified Small Business Stock (QSBS)

Gains from the sale of certain assets are taxed at different rates than standard long-term capital gains. Long-term gains on collectibles, such as art, antiques, or precious metals, are taxed at a maximum rate of 28%. A portion of the gain from selling Qualified Small Business Stock (QSBS) may be excludable, but the remaining taxable portion could also be subject to the 28% rate. These gains are identified on Schedule D and may require you to complete the 28% Rate Gain Worksheet. For QSBS, you would use code “Q” on Form 8949 to note the transaction.