How to Report Sale of C Corporation Stock

The sale of C corporation stock is a common financial transaction with specific tax implications for individuals. This event typically results in either a capital gain or a capital loss, which must be accurately reported to the Internal Revenue Service (IRS). Understanding the nuances of this reporting process is key for compliance and to manage any resulting tax liability.

Understanding the Taxable Event

The sale of C corporation stock is a taxable event, generating a gain or loss that must be accounted for on an individual’s tax return. When an investor sells stock, the transaction triggers the need to calculate the difference between the sales proceeds and the adjusted cost basis of the shares. This calculation determines the capital gain or loss.

Basis is generally the original cost paid for the stock, including any commissions or fees incurred during the purchase. This initial cost establishes the starting point for determining gain or loss. The adjusted basis refines this figure by accounting for various events that occur after the initial purchase, such as stock splits, reinvested dividends, or return of capital distributions. For instance, reinvested dividends increase the adjusted basis, while return of capital distributions decrease it.

Sales proceeds are determined by taking the gross sales price received for the stock and subtracting any selling expenses. The difference between these net sales proceeds and the adjusted basis is the capital gain if the proceeds exceed the basis, or a capital loss if the basis exceeds the proceeds. C corporation stock is typically classified as a capital asset.

Distinguishing between short-term capital gains/losses and long-term capital gains/losses is important due to differing tax treatments. A short-term capital gain or loss results from selling stock held for one year or less, with the holding period generally counted from the day after acquisition up to and including the day of disposition. Conversely, a long-term capital gain or loss applies to stock held for more than one year. Short-term capital gains are typically taxed at an individual’s ordinary income tax rates, which can be higher, while long-term capital gains often benefit from lower, preferential tax rates.

Gathering Information and Calculating Gain or Loss

Accurate reporting of a C corporation stock sale requires specific information. Key data points include the purchase and sale dates, the original cost or purchase price, and any adjustments made to the basis. These adjustments can arise from events like stock splits or reinvested dividends that increase basis, or return of capital distributions that decrease basis. The total sale price received and any selling expenses are also necessary.

Primary sources for this information include brokerage statements, often provided on Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions.” This form details the description of the property, acquisition and sale dates, sales price, and cost or other basis. Purchase confirmations and, for privately held stock, historical company records may also serve as documentation sources. Taxpayers are responsible for ensuring the accuracy of their cost basis information, which is typically provided by brokerage firms on Form 1099-B.

Calculating the adjusted basis involves starting with the original purchase price and then incorporating any increases or decreases. For instance, if dividends were reinvested to purchase additional shares, the cost of those new shares adds to the basis. Conversely, if the corporation made a return of capital distribution, this would reduce the basis. The net sales proceeds are calculated by subtracting any selling expenses from the gross sales price. Finally, the capital gain or loss is determined by subtracting the adjusted basis from the net sales proceeds.

For example, if stock was purchased for $10,000, and $500 in commissions were paid, the initial basis is $10,500. If later, $200 in dividends were reinvested, the adjusted basis would increase to $10,700. If the stock was then sold for $15,000, with $100 in selling expenses, the net sales proceeds would be $14,900. The capital gain would be $14,900 (net sales proceeds) minus $10,700 (adjusted basis), resulting in a $4,200 gain.

Reporting on Tax Forms

Reporting the sale of C corporation stock on the appropriate tax forms uses Form 8949, “Sales and Other Dispositions of Capital Assets,” and Schedule D, “Capital Gains and Losses.” Form 8949 details each individual capital asset transaction, while Schedule D summarizes these transactions to calculate the overall capital gain or loss.

Form 8949 requires taxpayers to enter specific information for each stock sale. Transactions are categorized as either short-term or long-term, and reported in Part I or Part II of the form, respectively. For each transaction, taxpayers must list the description of the property, the date it was acquired, the date it was sold, the sales price, and the cost or other basis. Form 1099-B information, received from brokers, is directly transferred to Form 8949. Any adjustments to gain or loss, such as those related to wash sales, are also entered.

After completing Form 8949 for all applicable transactions, the totals from each part are then transferred to Schedule D. Schedule D involves netting short-term gains and losses, and separately netting long-term gains and losses. These short-term and long-term results are then combined to arrive at an overall net capital gain or loss for the tax year. If capital losses exceed capital gains, individuals can deduct up to $3,000 of the net capital loss against ordinary income per year ($1,500 if married filing separately). Any loss exceeding this annual limit can be carried forward to offset income in future tax years.

The final gain or loss calculated on Schedule D is then reported on Form 1040, the U.S. Individual Income Tax Return. Taxpayers typically submit their tax returns electronically or by mail, ensuring that Form 8949 and Schedule D are attached as supporting documents.

Special Reporting Considerations

Section 1244 stock allows individuals to treat a loss from the sale or worthlessness of qualifying small business stock as an ordinary loss, rather than a capital loss. This is advantageous because ordinary losses can offset any type of income, unlike capital losses which are generally limited to offsetting capital gains plus $3,000 of ordinary income annually. The maximum ordinary loss deduction under Section 1244 is $50,000 per year, or $100,000 for those filing a joint return. Losses exceeding these limits are treated as capital losses. To report a Section 1244 loss, it is generally included on Form 4797, “Sales of Business Property,” before being transferred to Schedule 1 of Form 1040.

The wash sale rule disallows a loss deduction if an investor sells stock at a loss and then purchases substantially identical stock within 30 days before or after the sale date. This 61-day window (30 days before, the sale day, and 30 days after) prevents taxpayers from generating artificial tax losses while maintaining their investment position. If a wash sale occurs, the disallowed loss is not lost entirely; instead, it is added to the cost basis of the newly acquired, substantially identical stock.

Capital loss carryovers address situations where an individual’s capital losses exceed the annual deduction limit of $3,000. Any excess loss can be carried forward indefinitely to offset capital gains or a limited amount of ordinary income in future tax years. The character of the loss (short-term or long-term) is retained when carried forward. This carryover amount is reported on Schedule D in subsequent years until fully utilized.

The netting rules for capital gains and losses are important when an individual has a mix of short-term and long-term gains and losses. Short-term losses are first used to offset short-term gains, and long-term losses are first used to offset long-term gains. If a net short-term loss remains, it can then offset net long-term gains, and vice-versa.