Instructions for IRS Form 8949: How to Report Capital Gains and Losses

Reporting capital gains and losses is a key part of filing taxes for anyone who sells investments like stocks, bonds, or real estate. The IRS requires taxpayers to use Form 8949 to detail these transactions before summarizing them on Schedule D. This ensures accurate tax reporting and helps determine how much you owe or can deduct.

To properly complete Form 8949, it’s important to understand what information needs to be reported and how it affects your overall tax calculation.

Transactions That Require Form 8949

Certain asset sales must be reported on Form 8949 before they are summarized on Schedule D. This form is necessary when the IRS does not already have complete details of a transaction, which often happens when cost basis or adjustments are involved.

One common scenario is the sale of stocks, bonds, or mutual funds through a brokerage account. Brokers issue Form 1099-B to report sales, but they may not always provide the IRS with the cost basis, especially for assets acquired before 2011 when reporting rules changed. If the cost basis is missing or incorrect, the taxpayer must use Form 8949 to make adjustments.

Real estate transactions also frequently require this form. If a property sale is not fully reported on another tax document, such as Form 1099-S, the details must be listed on Form 8949. This includes rental properties, land, or inherited real estate. If depreciation deductions were claimed, adjustments must be made to reflect the correct taxable gain.

Cryptocurrency transactions often necessitate Form 8949. Digital asset exchanges do not always provide complete tax documentation, so individuals must track their own purchase prices and sales proceeds. Each taxable event, such as selling Bitcoin for cash or exchanging Ethereum for another token, must be reported separately.

Column Details

Form 8949 includes multiple columns, each requiring specific details about the asset sold. These columns determine the correct gain or loss for tax purposes.

Description of Property

This column requires a brief but clear description of the asset sold. For stocks and bonds, this typically includes the name of the security and the number of shares. For example, “100 shares of Apple Inc. (AAPL).” Mutual funds should be listed with their full fund name.

For real estate, the description should include the type of property and its location, such as “Single-family rental property – 123 Main St, Springfield, IL.” If multiple properties were sold, each must be reported separately unless they were part of the same transaction.

Cryptocurrency transactions should specify the type of digital asset and the quantity sold, such as “0.5 Bitcoin (BTC).” Since crypto trades often involve multiple transactions, taxpayers may need to aggregate sales by acquisition date or use specific identification methods like FIFO (First-In, First-Out) or LIFO (Last-In, First-Out) to determine gains or losses.

Acquisition Date

The acquisition date is the day the asset was originally purchased or received. This determines whether the gain or loss is classified as short-term (held for one year or less) or long-term (held for more than one year), which affects the tax rate.

For stocks and bonds, the purchase date is usually listed on brokerage statements. If the asset was inherited, the acquisition date is considered the original owner’s purchase date, but the cost basis is typically adjusted to the fair market value on the date of the original owner’s death.

For real estate, the acquisition date is the closing date when the property was officially transferred. If the property was received as a gift, the acquisition date remains the original owner’s purchase date, but the cost basis may be adjusted based on the donor’s purchase price and any gift tax paid.

Cryptocurrency transactions can be more complex, especially if assets were acquired through mining, staking, or airdrops. In these cases, the acquisition date is when the taxpayer first took control of the asset, and the cost basis is determined by its fair market value at that time.

Basis

The basis represents the original cost of acquiring the asset, including any associated fees or commissions. This figure determines the taxable gain or loss when the asset is sold.

For stocks and bonds, the basis is generally the purchase price plus any brokerage fees. If shares were acquired through a dividend reinvestment plan (DRIP) or an employee stock purchase plan (ESPP), the basis may include adjustments for discounts or reinvested dividends.

For real estate, the basis includes the purchase price, closing costs, and any capital improvements. Depreciation deductions claimed for rental properties must be subtracted from the basis, which can significantly impact the taxable gain.

Cryptocurrency basis can be more challenging to track, especially for frequent traders. If digital assets were acquired at different times and prices, taxpayers must use an accepted accounting method, such as FIFO or specific identification, to determine the correct basis for each sale.

Adjustments

This column is used to report modifications to the gain or loss calculation. Adjustments may be required for wash sales, depreciation recapture, or incorrect cost basis reporting.

For stocks, a wash sale occurs when a security is sold at a loss and repurchased within 30 days before or after the sale. The IRS disallows the loss in these cases, requiring an adjustment to the basis of the repurchased shares.

For real estate, depreciation recapture applies when a rental property is sold. The IRS requires taxpayers to add back any depreciation deductions previously claimed, which increases the taxable portion of the gain. This recaptured amount is taxed at a maximum rate of 25%, rather than the lower long-term capital gains rate.

For cryptocurrency, adjustments may be needed if a taxpayer received a digital asset through a hard fork or airdrop. The IRS considers these taxable events, meaning the fair market value at the time of receipt must be included in income, potentially affecting the gain or loss when the asset is later sold.

Gain or Loss

The final column calculates the difference between the sale price and the adjusted basis, determining whether the transaction resulted in a gain or loss. This figure is then carried over to Schedule D, where total capital gains and losses are summarized.

For stocks and bonds, gains and losses are straightforward: subtract the adjusted basis from the sale price. If the result is positive, it’s a capital gain; if negative, it’s a capital loss.

For real estate, the calculation must account for depreciation recapture and any selling expenses, such as real estate agent commissions or closing costs.

For cryptocurrency, gains and losses must be calculated for each individual transaction. If multiple transactions result in an overall capital loss, up to $3,000 can be deducted against ordinary income, with any excess carried forward to future tax years.

Adjustment Codes

When reporting capital asset sales on Form 8949, taxpayers sometimes need to modify the gain or loss calculation using IRS-designated adjustment codes. These codes explain why an adjustment is necessary and ensure compliance with tax regulations.

One common reason for adjustments is the application of the Section 1202 exclusion, which allows certain small business stockholders to exclude up to 100% of their capital gain. If a taxpayer qualifies, they must use code “Q” in the adjustment column and reduce the reported gain accordingly.

Another scenario involves the sale of an asset at a loss when the taxpayer previously claimed a bad debt deduction on the same asset. If a security was written off as a worthless investment in a prior year but later recovered some value through a sale, the taxpayer must adjust the gain or loss using code “B.”

Restricted stock units (RSUs) and incentive stock options (ISOs) also introduce complexity in capital gain reporting. If an employee exercises ISOs and does not sell the stock immediately, the difference between the exercise price and the fair market value at the time of exercise may be subject to alternative minimum tax (AMT). When the stock is later sold, an adjustment using code “V” may be required to reconcile the AMT basis with the regular tax basis.

Consolidating Figures on Schedule D

Once all transactions have been recorded on Form 8949, the next step is transferring the summarized totals to Schedule D. This form categorizes capital gains and losses into short-term and long-term holdings, ensuring they are taxed at the appropriate rates. Short-term gains are subject to ordinary income tax rates, which range from 10% to 37% in 2024, while long-term gains benefit from preferential rates of 0%, 15%, or 20%, depending on taxable income thresholds.

Schedule D also incorporates adjustments for capital loss limitations. Taxpayers can deduct up to $3,000 in net capital losses ($1,500 if married filing separately) against ordinary income, with any excess carried forward to future years. This carryforward provision allows investors to offset gains in later tax years, reducing overall tax liability.