04/20/23 NJ Training TY 2008 1

Capital Gains & Losses (Including Sale of Home)

Pub 17 Chapters 13-16Pub 4012 Tab 2

Module NJ 1.10

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Stock Sales – Schedule D

Key elements of stock sale When was it bought? When was it sold? What was the sales price? What was the cost basis?

Note: Use Tax Wise Capital Gain Worksheet for entering data for each transaction

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Stock Sales – Capital Gains

TaxWise

Determines whether long/short term

Calculates taxable gain/loss

Calculates tax liability on worksheet

Calculates capital loss carryover

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Cost Basis Cost basis is usually cost plus commissions (buy

and sell)

FIFO unless specified before sale

Original basis is adjusted by Stock split or non-taxable stock dividend

Cost basis of taxable stock dividends and Dividends Reinvestments (DRIP) is the price of the stock on the distribution date

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Cost Basis (cont)

The cost basis is not reported on the 1099-B

Typical sources of the cost basis Year end broker activity statement may provide

information as a result of the sale Taxpayer records Average of stock price during approximate period of

purchase, if no other records are available

Out of scope – determining basis for employee stock options

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Sales Price

Reported on 1099 B - Proceeds From Broker and Barter

Exchange Transactions 1099 Consolidated Statement

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Sales Commissions

Commission paid will affect the basis If 1099B reports sale as gross, commission will

be added to basis. If 1099B reports sale as net, no adjustment to

basis is needed.

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Gross / Net Proceeds

2007

Gross proceeds – Add fees to cost to get basis

Net proceeds – Use original cost basis

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1099 Consolidated Statement

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Cost Basis – Question #1

The taxpayer paid $1,000 for 100 shares of XYZ stock. What is his basis per share in XYZ?

Answer - $10 per share

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Cost Basis – Question #2

The taxpayer who paid $1,000 for 100 shares of XYZ stock received a 2 for 1 stock split. What is his adjusted basis per share in XYZ?

Answer - $5 per share

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Commissions – Question #3

The taxpayer sells all 200 shares of XYZ stock receiving $7 per share minus a total commission of $15. If the 1099B reports gross proceeds, what will be the sales price and the basis?

Answer: $1,400 selling price minus $1,015 cost basis (gain=$385)

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Commissions – Question #4

The taxpayer sells all 200 shares of XYZ stock receiving $7 per share less a total commission of $15. If the 1099B reports net proceeds, what will be the sales price and the basis?

Answer: $1,385 selling price $1,000 basis (gain is still $385)

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Long vs Short Term

Stock held one year or less is short-term – begin counting the day after the trade date

If sale of all shares bought on various dates at different prices (multiple blocks) and all were long term Enter “Various” in Tax Wise Purchase Date column

This type of transaction will automatically be reported as Long Term

Enter actual transaction date(s) if short term

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Long vs Short Term (cont)

Shares acquired in tax-free stock dividend or stock split have same holding period as original shares

Holding period for taxable stock dividends and Dividend Reinvestments (DRIP) are the date of declaration. They do not revert to the holding period of the

original stock

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Problem #1 – Stock Split

6/01/08: 100 shares of XYZ bought at $100 per share Cost basis is $100 x 100 shares = $10,000

6/01/09: 2 for 1 (2:1) Stock Split All 200 shares have the $10,000 basis and all have

the same purchase date If sold on 6/01/09, is the transaction a short or

long term transaction.

ANSWER: Short term i.e. 6/02/08 to 06/01/09 is less than a year

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Problem #2 – Reinvested Taxable Dividend 9/20/07: 200 shares of XYZ bought at $40 per

share. Basis is $8,000 6/20/09: 20 shares worth $30/share are received

as DRIP (20 at $30=$600)

The cost basis of the original 200 share remains at $8,000 with an acquisition date of 9/20/07

The cost basis of the 20 shares received as a DRIP is $600 and has the acquisition date of 6/20/09

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Capital Gains Tax Rates(0% new in 2008, extended thru 2010)

NOTES: WHEN USING VA/RI/OUS OR IN/HE/RIT AS PURCHASE DATE, TAXWISE ASSUMES THAT THE TRANSACTION IS LONG TERM (MORE THAN ONE YEAR)

15%0% in 2009QUALIFIED DIVIDENDS

15%0% in 2009

LONG TERM (Greater than

12 months)

ORDINARY RATEORDINARY RATESHORT TERM (12 months or less)

Other Brackets10% or 15% Brackets

TAXPAYER IN:CAPITAL GAINS RATES FOR 2009

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Tax Liability Net Loss

Net loss can offset all gains, plus Up to $3,000 can be used to reduce other

taxable income in the current year ($1,500 if MFS)

The amount in excess of $3,000 (or $1,500 if MFS) is carried forward to the next year

Note: Loss not allowed on NJ return

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Capital Loss Carry Forward Check prior year Schedule D or related worksheet to

determine carryover loss

Carryover losses keep their short-term or long-term classification

Carryover losses are combined with the gains and losses that actually occur in the subsequent year

There is no limit to how many times a loss can be carried forward but the maximum loss (i.e. $3,000) must be used each year even if no there is no tax liability to offset. If not used, the $3,000 deduction is lost

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Capital Loss Carry ForwardSchedule D – Worksheet 2

Required For Next Years Returns

2008

Short Term Carry Forward

Long Term Carry Forward

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Capital Gain Distributions

These distributions result when mutual funds that sold stock pass resulting gains to TP each year

Treated as long-term capital gain

If these are the only capital gains, no Schedule D required

Reported on 1099-DIV or broker’s Consolidated Statement

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1099-DIVDividends and Distributions

2008

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1099 Consolidated Statement

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Demutualization

Demutualization occurs when insurance company is changed from a “mutual company” to a “stock company” and issues stock to policy holders in the new company

Basis of stock issued is always $0.00

When sold, stock is always long term

SCHEDULE K-1 CAPITAL GAINS AND LOSSES

Schedule K-1 Net short-term capital gain (loss) Net long-term capital gain (loss)

Use Schedule D Enter short-term on line 5 Enter long-term on line 12

Sample K-1s (may vary)

SAMPLE SCHEDULE K-1

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Wash Sales – Out Of Scope

Wash sales – Occurs when stock is sold at a loss, and then within 30 days, (either before or after) substantially equivalent stock is purchased

Loss is not deductible

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Capital Gain/Loss Problem #3 Jim sold a mutual fund he purchased 8/15/1983.

The records show he reinvested capital gains totaling $8,640, interest totaling $6,940 and dividends of $3,298.

All reinvestments qualify for LTCG. His purchase

price was $20,000. He sold this fund for $39,201 on 11/15/2009

What is his capital gain?

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2008

Capital Gain/Loss Problem #3Answer

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Sale Of Home

Define Main Home

Determine if taxpayer who sold a main home this year qualifies to exclude all or part of any gain from income

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Main Home

Determined by facts – not by choice Where TP resides most of the time If TP is living in a rental, the rental might be

considered the main home Other places may qualify (house, boat,

mobile home, apt, condo, etc) Land sale does not qualify

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Sale Of Business/Rental Property - OUT OF SCOPE

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Calculate Gain Selling price includes all monies received plus any

mortgages or other debts taken over by the buyer

Amount Realized is the sale price minus selling expenses

Adjusted Basis is the original cost plus any increase or decrease to original basis

Gain or loss is the amount realized compared to the adjusted basis

Loss on sale of home can not be deducted

A lot of useful information can be gleaned from the HUD-1 form given to all buyers and sellers

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1099-S May Not Be Provided If Can Exclude Total Gain

2008

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Calculate Exclusion Single homeowner can exclude up to $250,000 of

gain from sale of main home Married couple can exclude up to $500,000 of gain,

if: Filed a joint return Either or both meet the ownership test Both individuals meet the use test Neither individual excluded gain in the 2 years before

the current sale New: Sale of home within 2 years of spousal death

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Ownership And Use Tests

Ownership Test: Owned by the taxpayer for a combined period of at least 2 years out of the last 5 years, ending on the date of sale

AND

Use Test: Lived in home as the taxpayer’s main home for at least 2 years of that 5 year period