Capital gains basics: what your 1099-B is telling you

The tax on a sale depends on how long you held the asset and on what it cost you. Your broker reports the sale price for certain; it may or may not know the cost.

Short-term or long-term

Hold an asset for more than one year before you dispose of it and the gain or loss is long-term. Hold it for one year or less and it is short-term. The count runs from the day after the day you acquired the asset up to and including the day you disposed of it, which is why a sale a few days early can cost real money.

The split matters because the two are taxed on different scales. A short-term gain is taxed as ordinary income, at whatever rate your other income has already reached. A net capital gain has its own rates, and some or all of it can fall in the zero band, which applies where taxable income is at or below these ceilings.

Above those ceilings the long-term rates step up to fifteen and then twenty percent, still below the ordinary rates most sellers pay on wages.

Basis is the whole game

Basis is generally what the asset cost you, adjusted for things that happened afterwards. Gain or loss is the difference between adjusted basis and the amount you realized on the sale. Everything else in this article is arithmetic on top of that one subtraction.

Two situations put basis somewhere other than your purchase price. Assets received as a gift or as an inheritance have their own basis rules, and they are not the rules you would guess. And basis does not always follow shares that moved between brokers, which is a records problem rather than a tax question. If either describes you, settle basis before you file rather than after.

Reading the 1099-B

A broker or barter exchange files this form for each person for whom it sold stocks, commodities, futures contracts, debt instruments, options and similar property for cash. What it always tells you is the proceeds. What it sometimes tells you is your basis, because for some securities the broker is required to report basis to the IRS and for others it is not.

Where the basis box is blank, or shows a number you know to be wrong, supplying the right one is your job and not the broker's. The source is the purchase confirmation from the day you bought, or the statement covering that month. It is not a guess, and it is not zero because you could not find the paperwork.

Netting, in the order the return does it

The return nets in a fixed order: long-term gains against long-term losses, short-term gains against short-term losses, and then the two results against each other. Net capital gain, the term the IRS uses, means the amount by which your net long-term capital gain for the year exceeds your net short-term capital loss. That is the figure the lower rates apply to. If the netting ends below zero instead, the next section is the one you want.

The loss limit and the carryover

When losses exceed gains, the excess you can use against other income — wages, interest, a pension — is capped at $3,000 for the year, or $1,500 on a married filing separately return. That cap is the reason a heavy loss year does not wipe out a salary.

What it does not do is disappear. A net capital loss above the limit carries forward to later years, where it offsets gains first and then income again up to the same annual cap, for as long as it takes to use it up. Keep the Schedule D that created the carryover; it is the only record of what is left.

Wash sales

You cannot deduct a loss on stock or securities if, within thirty days before or after the sale, you buy substantially identical stock or securities, acquire them in a fully taxable trade, acquire a contract or option to buy them, or acquire them for your individual retirement arrangement or Roth IRA. Selling by you and buying by your spouse, or by a corporation you control, is also a wash sale, stated separately from that list.

Normally the disallowed loss is not lost, only deferred: it is added to the basis of the new shares, so you recover it when those are sold. The exception is the fourth item above. Where the replacement shares were bought inside a traditional or Roth individual retirement arrangement, that basis adjustment does not apply, and the disallowed loss is simply gone. Sell in a taxable account, rebuy in an IRA, and the tax benefit of the loss never comes back.

Where it all goes

Form 8949 is where you reconcile what the broker reported against what you report, and its subtotals carry to Schedule D, where the aggregate gain or loss is figured. Two other things can follow from a big year: a large gain can create an obligation to make an estimated payment rather than wait for April, which quarterly estimates covers, and losses on the sale of personal-use property are not deductible at all, which is why selling your own furniture at a loss does nothing for you and why selling on Etsy and eBay treats personal items separately.