Using Form 8949 Code L for Nondeductible Losses

Form 8949, Sales and Dispositions of Capital Assets, is used to report the sale of investments and other capital assets. It connects the information a broker reports on Form 1099-B to the final figures entered on Schedule D of a tax return. While brokers provide details like sales proceeds and cost basis, this information sometimes requires modification for tax reporting. The Internal Revenue Service (IRS) uses a system of codes to explain these adjustments.

The Purpose of Code L

Code L is used on Form 8949 to signify a nondeductible loss that is not related to a wash sale, for which Code W is used. Other situations can also prevent a taxpayer from claiming a capital loss. For instance, losses from the sale of property between related parties are generally not deductible. This includes transactions between family members or an individual and a corporation in which they own more than 50% of the stock.

Another use for Code L is to report a loss on the sale of personal-use property, such as a car or a boat. While gains from selling such assets are taxable, losses are personal and cannot offset other capital gains. If you receive a Form 1099-K for selling personal property at a loss, Form 8949 with Code L is the correct way to report the transaction and reconcile the proceeds.

Information Required for Adjustment

Before completing Form 8949, have your Form 1099-B from your broker. From this document, you will need the property description, acquisition and sale dates, sales proceeds, and cost basis. You must also determine the exact amount of the nondeductible loss. For a loss on personal-use property, this is the difference between your original purchase price and the lower sale price.

Completing Form 8949 with Code L

The transaction is reported on either Part I for short-term assets (held one year or less) or Part II for long-term assets (held more than one year). For a transaction requiring Code L, transcribe the details from your Form 1099-B into columns (a) through (e). This includes the property description, acquisition and sale dates, proceeds, and cost basis.

The adjustment process occurs in the next three columns. In column (f), you will enter the letter “L” to indicate a nondeductible loss. Then, in column (g), you enter the amount of the nondeductible loss as a positive number. This figure represents the adjustment needed to correct the gain or loss.

Finally, column (h) shows the result of the adjustment. The value is calculated by taking the sales proceeds from column (d) and subtracting both the cost basis from column (e) and the adjustment amount from column (g). For a nondeductible loss, this calculation should result in a zero, effectively neutralizing the loss for tax purposes on your Schedule D.