How to File Federal Income Tax Schedule D to Report Capital Gains and Losses with Example

The various schedules accompanying Federal Income Tax Form 1040 are used to figure taxable income such as itemizing deductions and reporting income from operation of a business. Schedule D is the form used to report Capital Gains and Losses. A capital gain is the difference between an asset’s market and book value. Essentially, it is an increase in value when an asset is sold for more than it cost. Negative increases are considered Capital Losses and may reduce a tax payer’s tax liability. Usually such assets are held for one year or more.

Suppose an investor buys a share of stock for $100. At the end of one year, the stock has risen to a value of $110. The investor has had a capital gain of $10. However, for tax purposes, the investor does not pay taxes on the gain until the asset is sold and the actual gain is realized in the form of a cash flow. This is what’s known as a tax-timing option, in which taxes on capital gains are deferred until the asset is sold. The investor has the option to defer taxes until money has actually been transferred to the owner. There are other examples of capital gains and losses, but this example is the most-often cited and simplest to understand.

Who Must File Schedule D

Schedule D is used to figure taxable income from capital gains and losses. The sale of exchange of a capital asset must be included on Schedule D if it has not been reported on another tax form. Depending on the type of asset sold, it may be required to report the capital gains or losses on another form. Gains and losses from involuntary conversions of capital assets not held for business or profit purposes are filed under Schedule D. These conversions do not include those arising from casualty or theft. Capital gain distributions not directly reported on the 1040 must be declared on Schedule D, as is bad debt from non-business transactions.

Almost all property owned for personal, pleasure, or investment purposes are considered capital assets. Houses, cars, furniture, stocks, and bonds all fall under this category because they all potential may make an owner realize a capital gain or loss. However, not all assets are considered capital assets for taxation purposes. For example, property that depreciates over time in a business is not considered a capital asset even after the asset has fully depreciated. Also, real estate used in a trade or business is not considered a capital asset for personal income tax. The list is quite long so consultation with the Schedule D Instructions published by the Internal Revenue Service is wise for tax payers with capital asset holdings.

Conclusion

When an asset is sold for more than it is cost to acquire it (i.e. its market value is more than its book value when sold), a capital gain is considered to have taken place. This gain is taxable under Federal Tax law and must be declared as income for Federal Income Tax purposes. The tax-timing option allows investors in property to defer paying taxes on capital gains until an actual cash flow from the sale of the asset is realized. Schedule D is the Federal Tax form used to declare gains and losses from the sale of capital assets.

Always consult with a tax professional for questions about your tax liability.

This post is part of the series: Federal Income Taxes, the IRS, and the 1040 Tax Form and Schedules

U.S. Federal Income Taxes are a complicated matter to figure. There are numerous forms, sub-forms, and schedules the filing of which are necessary for some and not for others. Learn about income taxes, the 1040, and the 1040’s numerous schedules.
  1. Learn Whether You Must File a 1040 Income Tax Form for the 2010 Tax Year
  2. Qualifying to File a 1040EZ Income Tax Form vs. the 1040
  3. Should You Itemize Your Deductions with Schedules A and B for 2010?
  4. Learn Whether You Need to File a Schedule C with Your Income Taxes
  5. Should You File a Schedule C or C-EZ with Your Federal Tax Form 1040?
  6. Filing for Capital Gains and Losses on Schedule D of Income Tax Form 1040
  7. Filing Tax Schedule E for Supplemental Income or Losses
  8. Find Out Whether you Qualify for the Earned Income Tax Credit (EITC) and Need to File a Schedule EIC
  9. Filing Schedule F with Federal Tax Form 1040 to Report Income or Losses from Farming
  10. Federal Income Tax Schedule R for the Elderly and Disabled
  11. Am I Required to File Schedule SE for Self Employment Income?