How to Report Capital Gains on Your Tax Return With Schedule D

When you sell an asset for more than you paid for it, the profit you make is considered a capital gain and must be reported to the IRS. Understanding how to use Schedule D to report these gains will help you file your taxes accurately and avoid potential penalties.

If you have questions about how capital gains taxes can impact your financial plan, consider reaching out to a financial advisor .

What are Capital Gains and Capital Losses?

To determine a capital gain or loss, you will first need to know the cost basis . This is the original purchase price of the asset, including any associated costs such as commissions and fees. So when an asset is sold, the capital gain or loss is determined by subtracting the asset’s basis from the selling price. If the selling price is lower than the basis, it results in a capital loss. And if it's higher, you will have a capital gain.

For example, if you buy a stock for $1,000 (your basis) and later sell it for $800, you would have a capital loss of $200. But, if you bought it for $1,000 (your basis) and sold it for $1,500, you would have a capital gain of $500.

What Is Schedule D?

Schedule D is a tax form used by the IRS to report capital gains and losses from the sale of personal assets. It includes information about the profits or losses incurred from selling stocks, bonds, personal real estate and other investment properties. Completing Schedule D helps calculate your total capital gain or loss, which is then transferred to your main tax return, Form 1040.

Anyone who has realized capital gains or losses during the tax year needs to file Schedule D. This applies whether you have sold stocks, bonds, mutual funds or other investments. Even if you had only a few transactions, you have to report them accurately. Understanding how to report capital gains on your tax return can help you avoid errors and potential penalties.

How to Report Capital Gains

Reporting capital gains on your tax return involves the following steps:

1. Detail each transaction. This process involves recording every sale of assets like stocks, bonds or mutual funds. List the date of purchase, the date of sale, the full purchase price, which is the amount paid to acquire an asset, and the sale price, which can include associated fees or commissions.
2. Total your transactions. This is where you calculate the overall gains and losses from your investments. Using Form 8949, categorize your transactions into short-term (assets held for one year or less) and long-term (assets held for more than one year) assets. Enter the totals from Form 8949 into Schedule D, where you combine all the gains and losses.
3. File your taxes. To complete the process, include Schedule D and Form 8949 with your Form 1040 tax return. Accurate and thorough filing helps in managing your tax liability and ensures compliance with IRS requirements.

Short-Term and Long-Term Capital Gains

Capital gains are either short-term or long-term, depending on how long you’ve held the asset before selling it. Short-term capital gains come from the sale of assets held for one year or less. These gains are taxed at your ordinary income tax rates, which can be as high as 37%, depending on your income bracket.

Long-term capital gains , on the other hand, come from assets held for more than one year. These gains benefit from lower tax rates, typically 0%, 15% or 20%, based on your taxable income. For example, if your taxable income is up to $47,025 for single filers or $94,050 for married couples filing jointly for tax year 2024, you might qualify for the 0% tax rate on long-term capital gains. The favorable tax treatment of long-term gains is designed to encourage long-term investment.

When you report your gains on IRS Form 8949, you'll report short-term gains in Part I and long-term gains in Part II. Correct classification and reporting of short-term and long-term gains are vital to accurately determine your tax liability and take advantage of the lower tax rates on long-term investments.

Offsetting Capital Gains With Losses

Offsetting is the process of reducing a tax liability by applying losses against gains to lower the overall taxable amount.

One strategy to offset capital gains is to intentionally offset your capital gains with capital losses. This practice is known as tax-loss harvesting, which is the deliberate sale of losing investments for the purpose of offsetting capital gains. However, you should note that you can still offset capital gains even without engaging in this strategy. The IRS allows you to offset gains with any losses you have incurred within the same tax year.

If your losses exceed your gains, you can deduct up to $3,000 of the remaining losses against your other income through tax-loss harvesting. You can also carry any losses beyond this limit to offset gains in future years, providing ongoing tax benefits.

Bottom Line

To report capital gains on your tax return, use Schedule D to detail your gains and losses from the sale of assets. You will also need to categorize your losses based on the holding period of the assets (short- or long-term) and then transfer the totals to your main tax return, where applicable deductions can be applied. And finally, to offset any capital gains, subtract your capital losses from your capital gains on Schedule D, thereby reducing your taxable income and potentially lowering your tax liability.

Tax Planning Tips for Investors

• If you're building an investment portfolio, a financial advisor can help you plan for taxes. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• If you're looking for tax-efficient investments, here are seven you can add to your portfolio .

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