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?
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.
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
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.