The Ins and Outs of Schedule D: Capital Gains and Losses

Taxes can be both daunting and confusing. Add in capital gains and losses, and your mind is sure to be spinning. Thankfully, the IRS breaks everything down, making the process more manageable.

One way of doing this is with tax schedules. IRS tax schedules are just a name for additional forms for income or deductions and are typically attached to Form 1040 with more detailed information, with Schedule D being one of them.

When making investments, you're likely to have capital gains or losses. The IRS wants to know about these and requires them to be reported on Schedule D, regardless of whether you're self-employed or a W-2 worker. It's not as complicated as it sounds, and we'll break it down so you're ready to report your capital gains and losses in no time.

What is Schedule D?

Let's start with the basics. Schedule D is the IRS form you'll use to report capital gains and losses from selling investments like stocks, bonds and real estate. It's like the financial scorecard for your investments, helping the IRS determine how much tax you owe on your investment gains.

Who needs to file Schedule D?

Anyone who has capital gains or losses from an investment needs to file Schedule D, including individuals, trusts and estates.

Understanding capital gains and losses  

Now, let's talk about the heart of Schedule D – capital gains and losses. If you sold an investment for more than you paid for it, congratulations, you have a capital gain! If the sale resulted in less money than you initially paid, that's a capital loss. Schedule D helps you calculate the total of these gains and losses.

When it comes to investments, there are two types: short-term and long-term. Short-term refers to investments that are held for less than a year from the purchase date, and long-term refers to investments held for more than 12 months from the purchase date.

For example, if you bought twelve Tesla stocks on February 25 and sold them on November 26, this would be an example of a short-term investment since you bought and sold them in less than a year from purchase.

If you bought those same Tesla shares on February 25 but sold them the following year in June, the shares are now a long-term investment since you had them for more than a year from purchase.

Do I file Form 8949 along with Schedule D?

IRS Form 8949 is used to report the sales and disposition of capital assets. Disposition refers to the act of selling or transferring. You’ll need Form 8949 for any transactions involving capital assets during the tax year. The purpose of Form 8949 is to include specific information about each sale or disposition of capital assets, including the date of the transaction, the description of the asset, the proceeds from the sale, the cost or other basis and the resulting gain or loss.

When it comes to filing taxes, Form 8949 is typically filed alongside Schedule D, which is the main form for reporting capital gains and losses. The information provided on Form 8949 is then summarized on Schedule D, and the total gains or losses are transferred to the appropriate section of the individual's tax return or Form 1040.

Schedule D cannot be completed without Form 8949, meaning if you're filing Schedule D, you must complete Form 8949.

What are the tax rules for capital gains and losses?

On a tax return, you need to report capital gains and losses because the gains are seen as income, and losses can be deducted.

Capital losses are broken down into three categories:

• Realized losses are when the asset is sold for less than the purchase price.
• Unrealized losses are assets that go down in price but are held and not sold. These aren’t reported on your tax return.
• Recognizable losses are the extent of a loss that can be reported in a specific year.

Let’s say you bought eight Apple stocks for $30 a share in June. In August of the following year, you sell your shares for $20 a share. You can report the loss of $10 per share and would calculate it as 8 (share) x 10 (dollars lost per share) = $80. Let’s say your fifteen Amazon stocks gained $5 per share for a total of $75 as a gain. Your $80 loss from Apple will offset the $75 you gained from Amazon, leaving you with a loss of just $5.

As per the IRS, you can offset your losses against your gains up to $3,000 or $1,500 if you're married and filing separately.

When it comes to capital gains and losses, you don’t have to navigate them alone. FlyFin is here for all your tax filing needs. With savvy tools like a crypto tax calculator, you’re sure to stay on top of your taxes. Expert CPAs offer unlimited support and can help file your 1099 tax return. A.I. can also help you find every possible deduction, saving you more than ever.