What Is Schedule D and How Does It Affect Your Tax?

When you sell certain assets for a profit or a loss, the Internal Revenue Service (IRS) requires you to report these transactions on Schedule D, Capital Gains and Losses. This schedule is an attachment to your main tax return, Form 1040, that summarizes your capital asset sales for the year to calculate your total net capital gain or loss.

The final figure from Schedule D is transferred to your Form 1040, affecting your adjusted gross income. The form separates transactions based on how long you owned the asset, which determines the tax rate applied to any profit.

Determining When to File Schedule D

Filing Schedule D is necessary when you have a “reportable transaction” involving a “capital asset.” The IRS defines a capital asset as almost everything you own and use for personal or investment purposes. Common examples include stocks, bonds, mutual funds, and cryptocurrencies held in a taxable account. Other capital assets can be personal property like a home, a car, artwork, or collectibles.

A reportable transaction is a sale or exchange of one of these assets. If you sold stocks, real estate other than your primary residence, or other investments during the tax year, you will likely need to file Schedule D. This requirement applies to both gains and losses. Even if you reinvested the proceeds from a sale, the transaction itself must be reported.

Transactions within tax-deferred retirement accounts, such as a traditional IRA or a 401(k), do not require filing Schedule D. The reporting for these accounts occurs when you take distributions.

Information Required for Schedule D and Form 8949

Before you can begin filling out the tax forms, you must gather specific information for each asset sale. For every transaction, you need a description of the property sold, the date you acquired it, and the date you sold it. You will also need the total sales proceeds and the asset’s cost basis. Brokerage firms provide much of this information for security transactions on Form 1099-B.

Cost basis is a central concept in this process. For a stock or bond, the cost basis is the purchase price plus any associated costs, like commissions. For real estate, the basis starts with the purchase price and is then adjusted; it increases with the cost of improvements and decreases by any depreciation claimed. Understanding your adjusted basis is necessary for accurately calculating the gain or loss.

The time you owned the asset, known as the “holding period,” determines how it is categorized. An asset held for one year or less is considered short-term, while an asset held for more than one year is long-term. These individual transaction details are first listed on Form 8949, Sales and Other Dispositions of Capital Assets, which organizes your sales into these categories.

The Calculation and Reporting Process on Schedule D

The calculation process begins by transferring the summary totals from Form 8949 to Schedule D. Part I of Schedule D is for short-term transactions, while Part II is for long-term transactions.

In Part I, you will net your short-term capital gains and losses to arrive at a net short-term capital gain or loss. This involves taking the total proceeds from your short-term sales and subtracting the total cost basis of those assets. The same procedure is followed in Part II for all your long-term transactions to determine your net long-term capital gain or loss.

Part III serves as a summary where you combine the net results from Part I and Part II. This calculation produces your final net capital gain or loss for the tax year. This final amount is then reported on the designated line of your Form 1040 and becomes a component of your total income calculation.

Tax Treatment of Capital Gains and Losses

The tax implications of your capital asset sales depend on whether you have a net gain or loss and whether it is short-term or long-term. Net short-term capital gains are taxed at your ordinary income tax rates. These are the same rates that apply to your wages and can range from 10% to 37% depending on your tax bracket.

Net long-term capital gains receive more favorable tax treatment. For the 2024 tax year, these gains are taxed at rates of 0%, 15%, or 20%, depending on your taxable income and filing status. For example, a single filer with taxable income up to $47,025 in 2024 would pay 0% on long-term gains. Those with income between $47,026 and $518,900 would pay 15%. Certain assets, like collectibles, are subject to a higher maximum rate of 28%.

If your capital losses exceed your capital gains, you have a net capital loss. You can deduct this loss from other income, limited to $3,000 per year ($1,500 if married filing separately).

Any net capital loss that exceeds the annual deduction limit is not lost. You can carry over the unused portion to future tax years. This capital loss carryover can be used to offset capital gains in those future years, and any remaining amount can again be used to reduce your ordinary income by up to the $3,000 annual limit.