What is the Schedule D?

If investors sold stocks, bonds, options, or other securities they will have to prepare the Schedule D, for Capital Gains and Losses, and file it with Form 1040.  If investors file the Schedule D then they will not be able to use either the 1040A or the 1040EZ form.  Because of the complexity involved in preparing the Schedule D, the IRS frequently audits taxpayers who include the Schedule D in their returns. 

Calculating Capital Gains and Losses on the Schedule D

A frequently asked question by investors during tax time is how to calculate capital gains and losses on the Schedule D.  Unfortunately, the answer is not a simple one.

The basic principle in calculating capital gains or losses is to subtract the cost to purchase a security from the proceeds of selling it. Gains from investments held for more than one year are taxed at the more favorable capital gains rate of no higher than 15 percent. Investments held less than a year are treated as ordinary income and taxed at the personal income tax rate as high as 35 percent. If investors have net loss positions for the year, the IRS will allow them to write off a loss of up to $3,000 against their income.  All other losses can be carried forward to future years.

Sounds simple, but….

What Makes Completing the Schedule D so Painful?

Tax-Lot Matching:  Most brokerage firms do not provide investors with an accurate summary of capital gains and losses.  It is the responsibility of investors to track cost basis and calculate their own gains and losses. Brokers will provide investors with form 1099-B listing all the stock sales they made throughout the year. However, they do not identify which tax lots were sold, what capital gains or losses were, or whether gains and losses were short or long-term. Unless the investor provides instructions to his or her broker identifying specific tax lots to sell and receive written confirmation, he or she must account for stock sales using the first in first out (FIFO) method. This means for each sell order placed, the investor must match it to the appropriate tax lot(s) originally purchased. Further, sells can go across multiple lots, perhaps resulting in both short and long-term capital gains and losses. Complications magnify if an investor re-invests dividends or systematically invests smaller amounts.

Wash Sale Rule: The IRS implemented the  wash sale rule to prevent investors from generating artificial losses to reduce their taxes. If an investor sells a security for a loss, and re-purchases that security (or a substantially identical security) 30 days before or after the sell date, the loss is deferred for tax purposes. Investors need to offset the deferred loss with a wash sale cost adjustment on the newly acquired tax lot.  Again, brokers do not notify investors when or if they have wash sales. It is up to each individual investor to scan their trading history, identify wash sales, and make the appropriate cost basis adjustments.

Corporate Actions:  A corporate action is any material change to a security, including name changes, stock splits, spin-offs, and mergers, to name just a few. In many cases, a corporate action will result in a new position or a change to the cost basis of the security. Not surprisingly, it is up to the investor to make all necessary cost basis adjustments for each security. Each corporate action type has its own rules that investors must learn if they are to accurately complete their Schedule D.

How GainsKeeper Can Help

GainsKeeper protects investors from having to manually apply complicated tax laws and cost basis adjustments to their holdings and gain/loss reports, while providing accurate records in the event of an IRS audit and reports for filing Schedule D.  GainsKeeper calculates capital gains, adjusting portfolios for wash sales and corporate actions, which are used to generate a Schedule D.  With GainsKeeper users can complete a Schedule D.  To view or print the Schedule D in GainsKeeper, go to Tax Center / Schedule D.  Here users have unlimited access to view and print their Schedule D throughout the year.

Investors record original buy and sell transactions into GainsKeeper, and GainsKeeper will automatically match sell transactions against appropriate tax lots, and adjust positions and cost basis for corporate actions and wash sales.  Investors with trading activity in accounts from participating brokerages can import their information into GainsKeeper by connecting directly to their brokerage online.  Investors can also import data using GainsKeeper’s Excel template or other financial software products such as Quicken and MS Money. Once investors have recorded their trading activity GainsKeeper takes over by automatically calculating capital gains and the Schedule D can be completed with the click of the mouse.

To ensure that all trades have been entered accurately into your GainsKeeper account, compare your broker(s) 1099 total sales (or called total proceeds) with the Schedule D total sales figures. They should match or be off by a very small amount (due to penny rounding differences when wash sales adjustments come into play). The only exception to this rule is if an investor also traded options or short-sell securities. Brokers will not include the options proceeds on the 1099, but shorts are included. The GainsKeeper (and Schedule D) proceed figure should be higher than that of the 1099 by the amount of the options proceeds, and lower by proceeds from shorts that remain open at the end of the year. These differences are normal and to be expected. With these two exceptions, if the sales figures on the 1099 and on the Schedule D differ more than a few pennies, then you may have missed entering some trades into your GainsKeeper account.

Currently GainsKeeper does not allow for full reporting of mutual fund distributions. Do not add the mutual fund gain distributions in the "Adjust" section for completing the Schedule D. If mutual fund gain distributions are added, they will be incorrectly added to line 8 instead of line 13 of the Schedule D. Please review the mutual fund distributions section of the IRS booklet for Forms 1040 or 1040A for further information on your particular situation and reporting requirements.