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State free file 4. State free file   Sales and Trades of Investment Property Table of Contents IntroductionNominees. State free file Topics - This chapter discusses: Useful Items - You may want to see: What Is a Sale or Trade?Dividend versus sale or trade. State free file Worthless Securities Constructive Sales of Appreciated Financial Positions Section 1256 Contracts Marked to Market Basis of Investment PropertyCost Basis Basis Other Than Cost Adjusted Basis Stocks and Bonds How To Figure Gain or LossFair market value. State free file Debt paid off. State free file Payment of cash. State free file Special Rules for Mutual Funds Nontaxable TradesLike-Kind Exchanges Corporate Stocks Exchange of Shares In One Mutual Fund For Shares In Another Mutual Fund Insurance Policies and Annuities U. State free file S. State free file Treasury Notes or Bonds Transfers Between Spouses Related Party TransactionsGain on Sale or Trade of Depreciable Property Capital Gains and LossesCapital or Ordinary Gain or Loss Holding Period Nonbusiness Bad Debts Short Sales Wash Sales Options Straddles Sales of Stock to ESOPs or Certain Cooperatives Rollover of Gain From Publicly Traded Securities Gains on Qualified Small Business Stock Exclusion of Gain From DC Zone Assets Reporting Capital Gains and LossesException 1. State free file Exception 2. State free file Section 1256 contracts and straddles. State free file Market discount bonds. State free file File Form 1099-B or Form 1099-S with the IRS. State free file Capital Losses Capital Gain Tax Rates Special Rules for Traders in SecuritiesHow To Report Introduction This chapter explains the tax treatment of sales and trades of investment property. State free file Investment property. State free file   This is property that produces investment income. State free file Examples include stocks, bonds, and Treasury bills and notes. State free file Property used in a trade or business is not investment property. State free file Form 1099-B. State free file   If you sold property such as stocks, bonds, mutual funds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. State free file You should receive the statement by February 15 of the next year. State free file It will show the gross proceeds from the sale. State free file The IRS will also get a copy of Form 1099-B from the broker. State free file   Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. State free file If you sold a covered security in 2013, your broker will send you a Form 1099-B (or substitute statement) that shows your basis. State free file This will help you complete Form 8949. State free file Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. State free file    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in this chapter. State free file Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). State free file Nominees. State free file   If someone receives gross proceeds as a nominee for you, that person will give you a Form 1099-B, which will show gross proceeds received on your behalf. State free file   If you receive a Form 1099-B that includes gross proceeds belonging to another person, see Nominees , later under Reporting Capital Gains and Losses for more information. State free file Other property transactions. State free file   Certain transfers of property are discussed in other IRS publications. State free file These include: Sale of your main home, discussed in Publication 523, Selling Your Home; Installment sales, covered in Publication 537; Various types of transactions involving business property, discussed in Publication 544, Sales and Other Dispositions of Assets; Transfers of property at death, covered in Publication 559; and Disposition of an interest in a passive activity, discussed in Publication 925. State free file Topics - This chapter discusses: What Is a Sale or Trade? , Basis of Investment Property , Adjusted Basis , How To Figure Gain or Loss , Nontaxable trades , Transfers Between Spouses , Related Party Transactions , Capital Gains and Losses , Reporting Capital Gains and Losses , and Special Rules for Traders in Securities . State free file Useful Items - You may want to see: Publication 551 Basis of Assets Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 6781 Gains and Losses From Section 1256 Contracts and Straddles 8582 Passive Activity Loss Limitations 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5, How To Get Tax Help , for information about getting these publications and forms. State free file What Is a Sale or Trade? This section explains what is a sale or trade. State free file It also explains certain transactions and events that are treated as sales or trades. State free file A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. State free file A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. State free file Sale and purchase. State free file   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. State free file The sale and purchase are two separate transactions. State free file But see Like-Kind Exchanges under Nontaxable Trades, later. State free file Redemption of stock. State free file   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. State free file Dividend versus sale or trade. State free file   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. State free file Both direct and indirect ownership of stock will be considered. State free file The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend — see Dividends and Other Distributions in chapter 1, There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. State free file Redemption or retirement of bonds. State free file   A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. State free file See Stocks, stock rights, and bonds and Discounted Debt Instruments under Capital or Ordinary Gain or Loss, later. State free file   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. State free file For details, see Regulations section 1. State free file 1001-3. State free file Surrender of stock. State free file   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. State free file The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. State free file Trade of investment property for an annuity. State free file   The transfer of investment property to a corporation, trust, fund, foundation, or other organization, in exchange for a fixed annuity contract that will make guaranteed annual payments to you for life, is a taxable trade. State free file If the present value of the annuity is more than your basis in the property traded, you have a taxable gain in the year of the trade. State free file Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. State free file Transfer by inheritance. State free file   The transfer of property of a decedent to the executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or other disposition. State free file No taxable gain or deductible loss results from the transfer. State free file Termination of certain rights and obligations. State free file   The cancellation, lapse, expiration, or other termination of a right or obligation (other than a securities futures contract) with respect to property that is a capital asset (or that would be a capital asset if you acquired it) is treated as a sale. State free file Any gain or loss is treated as a capital gain or loss. State free file   This rule does not apply to the retirement of a debt instrument. State free file See Redemption or retirement of bonds , earlier. State free file Worthless Securities Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. State free file This affects whether your capital loss is long term or short term. State free file See Holding Period , later. State free file Worthless securities also include securities that you abandon after March 12, 2008. State free file To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. State free file All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. State free file If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. State free file Do not deduct them in the year the stock became worthless. State free file How to report loss. State free file   Report worthless securities in Form 8949, Part I or Part II, whichever applies. State free file    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. State free file See Form 8949 and the Instructions for Form 8949. State free file Filing a claim for refund. State free file   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. State free file You must use Form 1040X, Amended U. State free file S. State free file Individual Income Tax Return, to amend your return for the year the security became worthless. State free file You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. State free file (Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later. State free file ) For more information about filing a claim, see Publication 556. State free file Constructive Sales of Appreciated Financial Positions You are treated as having made a constructive sale when you enter into certain transactions involving an appreciated financial position (defined later) in stock, a partnership interest, or certain debt instruments. State free file You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. State free file This gives you a new holding period for the position that begins on the date of the constructive sale. State free file Then, when you close the transaction, you reduce your gain (or increase your loss) by the gain recognized on the constructive sale. State free file Constructive sale. State free file   You are treated as having made a constructive sale of an appreciated financial position if you: Enter into a short sale of the same or substantially identical property, Enter into an offsetting notional principal contract relating to the same or substantially identical property, Enter into a futures or forward contract to deliver the same or substantially identical property (including a forward contract that provides for cash settlement), or Acquire the same or substantially identical property (if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract). State free file   You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. State free file For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter. State free file Exception for nonmarketable securities. State free file   You are not treated as having made a constructive sale solely because you entered into a contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security if it settles within 1 year of the date you enter into it. State free file Exception for certain closed transactions. State free file   Do not treat a transaction as a constructive sale if all of the following are true. State free file You closed the transaction on or before the 30th day after the end of your tax year. State free file You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction. State free file Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions. State free file   If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true. State free file   This exception also applies to successive short sales of an entire appreciated financial position. State free file For more information, see Revenue Ruling 2003-1 in Internal Revenue Bulletin 2003-3. State free file This bulletin is available at www. State free file irs. State free file gov/pub/irs-irbs/irb03-03. State free file pdf. State free file Appreciated financial position. State free file   This is any interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain. State free file Exceptions. State free file   An appreciated financial position does not include the following. State free file Any position from which all of the appreciation is accounted for under marked-to-market rules, including section 1256 contracts (described later under Section 1256 Contracts Marked to Market ). State free file Any position in a debt instrument if: The position unconditionally entitles the holder to receive a specified principal amount, The interest payments (or other similar amounts) with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. State free file 860G-1(a)(3), and The position is not convertible, either directly or indirectly, into stock of the issuer (or any related person). State free file Any hedge with respect to a position described in (2). State free file Certain trust instruments treated as stock. State free file   For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the exception to the definition of an appreciated financial position (explained in (2) above). State free file Sale of appreciated financial position. State free file   A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. State free file However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position. State free file Section 1256 Contracts Marked to Market If you hold a section 1256 contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year. State free file Section 1256 Contract A section 1256 contract is any: Regulated futures contract, Foreign currency contract, Nonequity option, Dealer equity option, or Dealer securities futures contract. State free file Exceptions. State free file   A section 1256 contract does not include: Interest rate swaps, Currency swaps, Basis swaps, Interest rate caps, Interest rate floors, Commodity swaps, Equity swaps, Equity index swaps, Credit default swaps, or Similar agreements. State free file For more details, including definitions of these terms, see section 1256. State free file Regulated futures contract. State free file   This is a contract that: Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions (a system of marking to market), and Is traded on, or subject to the rules of, a qualified board of exchange. State free file A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission. State free file Foreign currency contract. State free file   This is a contract that: Requires delivery of a foreign currency that has positions traded through regulated futures contracts (or settlement of which depends on the value of that type of foreign currency), Is traded in the interbank market, and Is entered into at arm's length at a price determined by reference to the price in the interbank market. State free file   Bank forward contracts with maturity dates longer than the maturities ordinarily available for regulated futures contracts are considered to meet the definition of a foreign currency contract if the above three conditions are satisfied. State free file   Special rules apply to certain foreign currency transactions. State free file These transactions may result in ordinary gain or loss treatment. State free file For details, see Internal Revenue Code section 988 and Regulations sections 1. State free file 988-1(a)(7) and 1. State free file 988-3. State free file Nonequity option. State free file   This is any listed option (defined later) that is not an equity option. State free file Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. State free file A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). State free file Warrants based on a stock index that are economically, substantially identical in all material respects to options based on a stock index are treated as options based on a stock index. State free file Cash-settled options. State free file   Cash-settled options based on a stock index and either traded on or subject to the rules of a qualified board of exchange are nonequity options if the Securities and Exchange Commission (SEC) determines that the stock index is broad based. State free file   This rule does not apply to options established before the SEC determines that the stock index is broad based. State free file Listed option. State free file   This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). State free file A listed option, however, does not include an option that is a right to acquire stock from the issuer. State free file Dealer equity option. State free file   This is any listed option that, for an options dealer: Is an equity option, Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and Is listed on the qualified board of exchange where that dealer is registered. State free file   An “options dealer” is any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. State free file Equity option. State free file   This is any option: To buy or sell stock, or That is valued directly or indirectly by reference to any stock or narrow-based security index. State free file  Equity options include options on a group of stocks only if the group is a narrow-based stock index. State free file Dealer securities futures contract. State free file   For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract (or option on such a contract) that: Is entered into by the dealer (or, in the case of an option, is purchased or granted by the dealer) in the normal course of the dealer's activity of dealing in this type of contract (or option), and Is traded on a qualified board or exchange (as defined under Regulated futures contract , earlier). State free file A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts . State free file Marked-to-Market Rules A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. State free file That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the example under 60/40 rule, below. State free file Hedging exception. State free file   The marked-to-market rules do not apply to hedging transactions. State free file See Hedging Transactions , later. State free file 60/40 rule. State free file   Under the marked-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. State free file This is true regardless of how long you actually held the property. State free file Example. State free file On June 22, 2012, you bought a regulated futures contract for $50,000. State free file On December 31, 2012 (the last business day of your tax year), the fair market value of the contract was $57,000. State free file You recognized a $7,000 gain on your 2012 tax return, treated as 60% long-term and 40% short-term capital gain. State free file On February 1, 2013, you sold the contract for $56,000. State free file Because you recognized a $7,000 gain on your 2012 return, you recognize a $1,000 loss ($57,000 − $56,000) on your 2013 tax return, treated as 60% long-term and 40% short-term capital loss. State free file Limited partners or entrepreneurs. State free file   The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions ). State free file Instead, these gains or losses are treated as short term. State free file Terminations and transfers. State free file   The marked-to-market rules also apply if your obligation or rights under section 1256 contracts are terminated or transferred during the tax year. State free file In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. State free file Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. State free file Loss carryback election. State free file   An individual having a net section 1256 contracts loss (defined later), generally can elect to carry this loss back 3 years instead of carrying it over to the next year. State free file See How To Report , later, for information about reporting this election on your return. State free file   The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. State free file In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. State free file   The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. State free file In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts. State free file   If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. State free file (See Capital Losses under Reporting Capital Gains and Losses, later. State free file ) Figure your capital loss carryover as if, for the loss year, you had an additional short-term capital gain of 40% of the amount of net section 1256 contracts loss absorbed in the carryback years and an additional long-term capital gain of 60% of the absorbed loss. State free file In the carryover year, treat any capital loss carryover from losses on section 1256 contracts as if it were a loss from section 1256 contracts for that year. State free file Net section 1256 contracts loss. State free file   This loss is the lesser of: The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or The capital loss carryover to the next tax year determined without this election. State free file Net section 1256 contracts gain. State free file   This gain is the lesser of: The capital gain net income for the carryback year determined by taking into account only gains and losses from section 1256 contracts, or The capital gain net income for that year. State free file  Figure your net section 1256 contracts gain for any carryback year without regard to the net section 1256 contracts loss for the loss year or any later tax year. State free file Traders in section 1256 contracts. State free file   Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. State free file However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. State free file Treatment of underlying property. State free file   The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section 1256 contracts related to that property. State free file How To Report If you disposed of regulated futures or foreign currency contracts in 2013 (or had unrealized profit or loss on these contracts that were open at the end of 2012 or 2013), you should receive Form 1099-B, or substitute statement, from your broker. State free file Form 6781. State free file   Use Part I of Form 6781 to report your gains and losses from all section 1256 contracts that are open at the end of the year or that were closed out during the year. State free file This includes the amount shown in box 10 of Form 1099-B. State free file Then enter the net amount of these gains and losses on Schedule D (Form 1040), line 4 or line 11, as appropriate. State free file Include a copy of Form 6781 with your income tax return. State free file   If the Form 1099-B you receive includes a straddle or hedging transaction, defined later, it may be necessary to show certain adjustments on Form 6781. State free file Follow the Form 6781 instructions for completing Part I. State free file Loss carryback election. State free file   To carry back your loss under the election procedures described earlier, file Form 1040X or Form 1045, Application for Tentative Refund, for the year to which you are carrying the loss with an amended Form 6781 and an amended Schedule D (Form 1040) attached. State free file Follow the instructions for completing Form 6781 for the loss year to make this election. State free file Hedging Transactions The marked-to-market rules, described earlier, do not apply to hedging transactions. State free file A transaction is a hedging transaction if both of the following conditions are met. State free file You entered into the transaction in the normal course of your trade or business primarily to manage the risk of: Price changes or currency fluctuations on ordinary property you hold (or will hold), or Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. State free file You clearly identified the transaction as being a hedging transaction before the close of the day on which you entered into it. State free file This hedging transaction exception does not apply to transactions entered into by or for any syndicate. State free file A syndicate is a partnership, S corporation, or other entity (other than a regular corporation) that allocates more than 35% of its losses to limited partners or limited entrepreneurs. State free file A limited entrepreneur is a person who has an interest in an enterprise (but not as a limited partner) and who does not actively participate in its management. State free file However, an interest is not considered held by a limited partner or entrepreneur if the interest holder actively participates (or did so for at least 5 full years) in the management of the entity, or is the spouse, child (including a legally adopted child), grandchild, or parent of an individual who actively participates in the management of the entity. State free file Hedging loss limit. State free file   If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. State free file A “hedging loss” is the amount by which the allowable deductions in a tax year that resulted from a hedging transaction (determined without regard to the limit) are more than the income received or accrued during the tax year from this transaction. State free file   Any hedging loss allocated to you for the tax year is limited to your taxable income for that year from the trade or business in which the hedging transaction occurred. State free file Ignore any hedging transaction items in determining this taxable income. State free file If you have a hedging loss that is disallowed because of this limit, you can carry it over to the next tax year as a deduction resulting from a hedging transaction. State free file   If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. State free file   The limit on hedging losses does not apply to any hedging loss to the extent that it is more than all your unrecognized gains from hedging transactions at the end of the tax year that are from the trade or business in which the hedging transaction occurred. State free file The term “unrecognized gain” has the same meaning as defined under Loss Deferral Rules in Straddles, later. State free file Sale of property used in a hedge. State free file   Once you identify personal property as being part of a hedging transaction, you must treat gain from its sale or exchange as ordinary income, not capital gain. State free file Self-Employment Income Gains and losses derived in the ordinary course of a commodity or option dealer's trading in section 1256 contracts and property related to these contracts are included in net earnings from self-employment. State free file See the Instructions for Schedule SE (Form 1040). State free file In addition, the rules relating to contributions to self-employment retirement plans apply. State free file For information on retirement plan contributions, see Publication 560 and Publication 590. State free file Basis of Investment Property Basis is a way of measuring your investment in property for tax purposes. State free file You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. State free file Investment property you buy normally has an original basis equal to its cost. State free file If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. State free file Cost Basis The basis of property you buy is usually its cost. State free file The cost is the amount you pay in cash, debt obligations, or other property or services. State free file Unstated interest. State free file   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. State free file You generally have unstated interest if your interest rate is less than the applicable federal rate. State free file For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. State free file Basis Other Than Cost There are times when you must use a basis other than cost. State free file In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. State free file Fair market value. State free file   This is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. State free file Sales of similar property, around the same date, may be helpful in figuring fair market value. State free file Property Received for Services If you receive investment property for services, you must include the property's fair market value in income. State free file The amount you include in income then becomes your basis in the property. State free file If the services were performed for a price that was agreed to beforehand, this price will be accepted as the fair market value of the property if there is no evidence to the contrary. State free file Restricted property. State free file   If you receive, as payment for services, property that is subject to certain restrictions, your basis in the property generally is its fair market value when it becomes substantially vested. State free file Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. State free file See Restricted Property in Publication 525 for more information. State free file Bargain purchases. State free file   If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. State free file Your basis in the property is the price you pay plus the amount you include in income. State free file Property Received in Taxable Trades If you received investment property in trade for other property, the basis of the new property is its fair market value at the time of the trade unless you received the property in a nontaxable trade. State free file Example. State free file You trade A Company stock for B Company stock having a fair market value of $1,200. State free file If the adjusted basis of the A Company stock is less than $1,200, you have a taxable gain on the trade. State free file If the adjusted basis of the A Company stock is more than $1,200, you have a deductible loss on the trade. State free file The basis of your B Company stock is $1,200. State free file If you later sell the B Company stock for $1,300, you will have a gain of $100. State free file Property Received in Nontaxable Trades If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the property you received in the trade. State free file See Nontaxable Trades , later. State free file The basis of property you received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property you gave up. State free file Increase this amount by any cash you paid, additional costs you had, and any gain recognized. State free file Reduce this amount by any cash or unlike property you received, any loss recognized, and any liability of yours that was assumed or treated as assumed. State free file Property Received From Your Spouse If property is transferred to you from your spouse (or former spouse, if the transfer is incident to your divorce), your basis is the same as your spouse's or former spouse's adjusted basis just before the transfer. State free file See Transfers Between Spouses , later. State free file Recordkeeping. State free file The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. State free file Property Received as a Gift To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you. State free file Fair market value less than donor's adjusted basis. State free file   If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. State free file Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property. State free file No gain or loss. State free file   If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss. State free file Example. State free file You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. State free file The fair market value at the time of the gift is $9,000. State free file You later sell the property for $9,500. State free file You have neither gain nor loss. State free file Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. State free file Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain. State free file Fair market value equal to or more than donor's adjusted basis. State free file   If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. State free file Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. State free file Gift received before 1977. State free file   If you received property as a gift before 1977, your basis in the property is the donor's adjusted basis increased by the total gift tax paid on the gift. State free file However, your basis cannot be more than the fair market value of the gift at the time it was given to you. State free file Example 1. State free file You were given XYZ Company stock in 1976. State free file At the time of the gift, the stock had a fair market value of $21,000. State free file The donor's adjusted basis was $20,000. State free file The donor paid a gift tax of $500 on the gift. State free file Your basis for gain or loss is $20,500, the donor's adjusted basis plus the amount of gift tax paid. State free file Example 2. State free file The facts are the same as in Example 1 except that the gift tax paid was $1,500. State free file Your basis is $21,000, the donor's adjusted basis plus the gift tax paid, but limited to the fair market value of the stock at the time of the gift. State free file Gift received after 1976. State free file   If you received property as a gift after 1976, your basis is the donor's adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. State free file You figure this part by multiplying the gift tax paid on the gift by a fraction. State free file The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. State free file   The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. State free file The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. State free file Example. State free file In 2013, you received a gift of property from your mother. State free file At the time of the gift, the property had a fair market value of $101,000 and an adjusted basis to her of $40,000. State free file The amount of the gift for gift tax purposes was $87,000 ($101,000 minus the $14,000 annual exclusion), and your mother paid a gift tax of $21,000. State free file You figure your basis in the following way: Fair market value $101,000 Minus: Adjusted basis 40,000 Net increase in value of gift $61,000 Gift tax paid $21,000 Multiplied by . State free file 701 ($61,000 ÷ $87,000) . State free file 701 Gift tax due to net increase in value $14,721 Plus: Adjusted basis of property to  your mother 40,000 Your basis in the property $54,721 Part sale, part gift. State free file   If you get property in a transfer that is partly a sale and partly a gift, your basis is the larger of the amount you paid for the property or the transferor's adjusted basis in the property at the time of the transfer. State free file Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. State free file For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. State free file Gift tax information. State free file   For information on gift tax, see Publication 950, Introduction to Estate and Gift Taxes. State free file For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551. State free file Property Received as Inheritance Before or after 2010. State free file   If you inherited property from a decedent who died before or after 2010, or who died in 2010 and the executor of the decedent's estate elected not to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value (its appraised value on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) on: The date of the decedent's death, or The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. State free file If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. State free file For stocks and bonds, if no Form 706 was filed and there are no state inheritance or transmission taxes, see the Form 706 instructions for figuring the fair market value of the stocks and bonds on the date of the decedent's death. State free file Appreciated property you gave the decedent. State free file   Your basis in certain appreciated property that you inherited is the decedent's adjusted basis in the property immediately before death rather than its fair market value. State free file This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. State free file Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. State free file More information. State free file   See Publication 551 for more information on the basis of inherited property, including community property, property held by a surviving tenant in a joint tenancy or tenancy by the entirety, a qualified joint interest, and a farm or closely held business. State free file Inherited in 2010 and executor elected to file Form 8939. State free file   If you inherited property from a decedent who died in 2010 and the executor made the election to file Form 8939, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to figure your basis. State free file Adjusted Basis Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or amortization, you usually must make certain adjustments (increases and decreases) to the basis of the property. State free file The result of these adjustments to the basis is the adjusted basis. State free file Adjustments to the basis of stocks and bonds are explained in the following discussion. State free file For information about other adjustments to basis, see Publication 551. State free file Stocks and Bonds The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. State free file If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted basis as discussed earlier under Basis Other Than Cost . State free file The basis of stock must be adjusted for certain events that occur after purchase. State free file For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. State free file You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). State free file These distributions, up to the amount of your basis, are a nontaxable return of capital. State free file The IRS partners with companies that offer Form 8949 and Schedule D (Form 1040) software that can import trades from many brokerage firms and accounting software to help you keep track of your adjusted basis in securities. State free file To find out more, go to www. State free file irs. State free file gov/Filing/Filing-Options. State free file Identifying stock or bonds sold. State free file   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. State free file Adequate identification. State free file   You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. State free file Broker holds stock. State free file   If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and Receive a written confirmation of this from your broker or other agent within a reasonable time. State free file  Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other agent. State free file Single stock certificate. State free file   If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and Receive a written confirmation of this from your broker or other agent within a reasonable time. State free file   If you sell part of the stock represented by a single certificate directly to the buyer instead of through a broker, you will make an adequate identification if you keep a written record of the particular stock that you intend to sell. State free file Bonds. State free file   These methods of identification also apply to bonds sold or transferred. State free file Identification not possible. State free file   If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. State free file Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares. State free file Example. State free file You bought 100 shares of stock of XYZ Corporation in 1998 for $10 a share. State free file In January 1999 you bought another 200 shares for $11 a share. State free file In July 1999 you gave your son 50 shares. State free file In December 2001 you bought 100 shares for $9 a share. State free file In April 2013 you sold 130 shares. State free file You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. State free file The shares of stock you gave your son had a basis of $500 (50 × $10). State free file You figure the basis of the 130 shares of stock you sold in 2013 as follows: 50 shares (50 × $10) balance of stock bought in 1998 $ 500 80 shares (80 × $11) stock bought in January 1999 880 Total basis of stock sold in 2013 $1,380 Shares in a mutual fund or REIT. State free file    The basis of shares in a mutual fund (or other regulated investment company) or a real estate investment trust (REIT) is generally figured in the same way as the basis of other stock and usually includes any commissions or load charges paid for the purchase. State free file Example. State free file You bought 100 shares of Fund A for $10 a share. State free file You paid a $50 commission to the broker for the purchase. State free file Your cost basis for each share is $10. State free file 50 ($1,050 ÷ 100). State free file Commissions and load charges. State free file   The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. State free file You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. State free file A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). State free file   You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply. State free file You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. State free file You dispose of the shares within 90 days of the purchase date. State free file You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the original shares. State free file   The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. State free file The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of the new shares). State free file Choosing average basis for mutual fund shares. State free file   You can choose to use the average basis of mutual fund shares if you acquired the identical shares at various times and prices, or you acquired the shares after 2010 in connection with a dividend reinvestment plan, and left them on deposit in an account kept by a custodian or agent. State free file The methods you can use to figure average basis are explained later. State free file Undistributed capital gains. State free file   If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference between the amount you included and the amount of tax paid for you by the fund or REIT. State free file See Undistributed capital gains of mutual funds and REITs under Capital Gain Distributions in chapter 1. State free file Reinvestment right. State free file   This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge. State free file      The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. State free file This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. State free file Table 4-1. State free file This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. State free file Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. State free file This worksheet will help you figure the adjusted basis when you sell or redeem shares. State free file Table 4-1. State free file Mutual Fund Record Mutual Fund Acquired1 Adjustment to Basis Per Share Adjusted2 Basis Per Share Sold or redeemed Date Number of Shares Cost Per Share Date Number of Shares                                                                                                                                                                                                                                                                         1 Include share received from reinvestment of distributions. State free file 2 Cost plus or minus adjustments. State free file Automatic investment service. State free file   If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker's commission. State free file Dividend reinvestment plans. State free file   If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value of the stock on the dividend payment date. State free file You must include the amount of the discount in your income. State free file Public utilities. State free file   If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. State free file Stock dividends. State free file   Stock dividends are distributions made by a corporation of its own stock. State free file Generally, stock dividends are not taxable to you. State free file However, see Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1 for some exceptions. State free file If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. State free file New and old stock identical. State free file   If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis of the old stock by the number of shares of old and new stock. State free file The result is your basis for each share of stock. State free file Example 1. State free file You owned one share of common stock that you bought for $45. State free file The corporation distributed two new shares of common stock for each share held. State free file You then had three shares of common stock. State free file Your basis in each share is $15 ($45 ÷ 3). State free file Example 2. State free file You owned two shares of common stock. State free file You bought one for $30 and the other for $45. State free file The corporation distributed two new shares of common stock for each share held. State free file You had six shares after the distribution—three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15 each ($45 ÷ 3). State free file New and old stock not identical. State free file   If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is calculated differently. State free file Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock. State free file Example. State free file You bought a share of common stock for $100. State free file Later, the corporation distributed a share of preferred stock for each share of common stock held. State free file At the date of distribution, your common stock had a fair market value of $150 and the preferred stock had a fair market value of $50. State free file You figure the basis of the old and new stock by dividing your $100 basis between them. State free file The basis of your common stock is $75 (($150 ÷ $200) × $100), and the basis of the new preferred stock is $25 (($50 ÷ $200) × $100). State free file Stock bought at various times. State free file   Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it. State free file Taxable stock dividends. State free file   If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. State free file The basis of your old stock does not change. State free file Stock splits. State free file   Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. State free file Stock rights. State free file   A stock right is a right to acquire a corporation's stock. State free file It may be exercised, it may be sold if it has a market value, or it may expire. State free file Stock rights are rarely taxable when you receive them. State free file See Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1. State free file Taxable stock rights. State free file   If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. State free file The basis of the old stock does not change. State free file Nontaxable stock rights. State free file   If you receive nontaxable stock rights and allow them to expire, they have no basis. State free file   If you exercise or sell the nontaxable stock rights and if, at the time of distribution, the stock rights had a fair market value of 15% or more of the fair market value of the old stock, you must divide the adjusted basis of the old stock between the old stock and the stock rights. State free file Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. State free file   If the fair market value of the stock rights was less than 15%, their basis is zero. State free file However, you can choose to divide the basis of the old stock between the old stock and the stock rights. State free file To make the choice, attach a statement to your return for the year in which you received the rights, stating that you choose to divide the basis of the stock. State free file Basis of new stock. State free file   If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. State free file Example. State free file You own 100 shares of ABC Company stock, which cost you $22 per share. State free file The ABC Company gave you 10 nontaxable stock rights that would allow you to buy 10 more shares at $26 per share. State free file At the time the stock rights were distributed, the stock had a market value of $30, not including the stock rights. State free file Each stock right had a market value of $3. State free file The market value of the stock rights was less than 15% of the market value of the stock, but you chose to divide the basis of your stock between the stock and the rights. State free file You figure the basis of the rights and the basis of the old stock as follows: 100 shares × $22 = $2,200, basis of old stock   100 shares × $30 = $3,000, market value of old stock   10 rights × $3 = $30, market value of rights   ($3,000 ÷ $3,030) × $2,200 = $2,178. State free file 22, new basis of old stock   ($30 ÷ $3,030) × $2,200 = $21. State free file 78, basis of rights   If you sell the rights, the basis for figuring gain or loss is $2. State free file 18 ($21. State free file 78 ÷ 10) per right. State free file If you exercise the rights, the basis of the stock you acquire is the price you pay ($26) plus the basis of the right exercised ($2. State free file 18), or $28. State free file 18 per share. State free file The remaining basis of the old stock is $21. State free file 78 per share. State free file Investment property received in liquidation. State free file   In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution. State free file S corporation stock. State free file   You must increase your basis in stock of an S corporation by your pro rata share of the following items. State free file All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. State free file The nonseparately stated income of the S corporation. State free file The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted. State free file   You must decrease your basis in stock of an S corporation by your pro rata share of the following items. State free file Distributions by the S corporation that were not included in your income. State free file All loss and deduction items of the S corporation that are separately stated and passed through to you. State free file Any nonseparately stated loss of the S corporation. State free file Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. State free file The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted basis of the wells. State free file However, your basis in the stock cannot be reduced below zero. State free file Specialized small business investment company stock or partnership interest. State free file   If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock or interest by the amount of any postponed gain on that sale. State free file See Rollover of Gain From Publicly Traded Securities , later. State free file Qualified small business stock. State free file   If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this replacement stock by the amount of any postponed gain on the earlier sale. State free file See Gains on Qualified Small Business Stock , later. State free file Short sales. State free file   If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale. State free file   See Payments in lieu of dividends , later, for information about deducting payments in lieu of dividends. State free file Premiums on bonds. State free file   If you buy a bond at a premium, the premium is treated as part of your basis in the bond. State free file If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond. State free file   Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. State free file You must reduce the basis of the bond by the premium you amortized for the period you held the bond. State free file   See Bond Premium Amortization in chapter 3 for more information. State free file Market discount on bonds. State free file   If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your income. State free file See Market Discount Bonds in chapter 1 for more information. State free file Bonds purchased at par value. State free file   A bond purchased at par value (face amount) has no premium or discount. State free file When you sell or otherwise dispose of the bond, you figure the gain or loss by comparing the bond proceeds to the purchase price of the bond. State free file Example. State free file You purchased a bond several years ago for its par value of $10,000. State free file You sold the bond this year for $10,100. State free file You have a gain of $100. State free file However, if you had sold the bond for $9,900, you would have a loss of $100. State free file Acquisition discount on short-term obligations. State free file   If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of acquisition discount you include in your income. State free file See Discount on Short-Term Obligations in chapter 1 for more information. State free file Original issue discount (OID) on debt instruments. State free file   Increase the basis of a debt instrument by the OID you include in your income. State free file See Original Issue Discount (OID) in chapter 1. State free file Discounted tax-exempt obligations. State free file   OID on tax-exempt obligations is generally not taxable. State free file However, when you dispose of a tax-exempt obligation issued after September 3, 1982, that you acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. State free file The accrued OID is added to the basis of the obligation to determine your gain or loss. State free file   For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1, 1982, and Before 1985 or Debt Instruments Issued After 1984, whichever applies, in Publication 1212 under Figuring OID on Long-Term Debt Instruments. State free file   If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term obligations. State free file See Discount on Short-Term Obligations in chapter 1. State free file Stripped tax-exempt obligation. State free file   If you acquired a stripped tax-exempt bond or coupon after October 22, 1986, you must accrue OID on it to determine its adjusted basis when you dispose of it. State free file For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. State free file You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons . State free file   Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. State free file Also increase your basis by the interest that accrued (but was not paid and was not previously reflected in your basis) before the date you sold the bond or coupon. State free file In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. State free file How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. State free file Gain. State free file   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. State free file Loss. State free file   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. State free file Amount realized. State free file   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). State free file Amount realized includes the money you receive plus the fair market value of any property or services you receive. State free file   If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. State free file For more information, see Publication 537. State free file   If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. State free file See Regulations section 1. State free file 1001-1(g). State free file However, if the debt instrument was previously issued by a third party (one not part of the sale transaction), the fair market value of the debt instrument is used to determine the amount realized. State free file Fair market value. State free file   Fair market value is the price at which property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. State free file Example. State free file You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. State free file Your gain is $3,000 ($10,000 – $7,000). State free file If you also receive a note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000 + $6,000 – $7,000). State free file Debt paid off. State free file   A debt against the property, or against you, that is paid off as a part of the transaction or that is assumed by the buyer must be included in the amount realized. State free file This is true even if neither you nor the buyer is personally liable for the debt. State free file For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. State free file Example. State free file You sell stock that you had pledged as security for a bank loan of $8,000. State free file Your basis in the stock is $6,000. State free file The buyer pays off your bank loan and pays you $20,000 in cash. State free file The amount realized is $28,000 ($20,000 + $8,000). State free file Your gain is $22,000 ($28,000 – $6,000). State free file Payment of cash. State free file   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. State free file Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. State free file If the result is a positive number, it is a gain. State free file If the result is a negative number, it is a loss. State free file No gain or loss. State free file   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. State free file In this case, you may have neither a gain nor a loss. State free file See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. State free file Special Rules for Mutual Funds To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. State free file If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficu
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The State Free File

State free file 31. State free file   Tax on Unearned Income of Certain Children Table of Contents What's New Introduction Useful Items - You may want to see: Which Parent's Return To UseParents Who Do Not File a Joint Return Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, lines A–C) Step 1. State free file Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. State free file Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. State free file Figuring the Child's Tax (Form 8615, Part III) What's New Net Investment Income Tax. State free file . State free file  For tax years beginning after December 31, 2012, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax (NIIT). State free file NIIT is a 3. State free file 8% tax on the lesser of the net investment income or the excess of the child's modified adjusted gross income (MAGI) over the threshold amount. State free file Use Form 8960, Net Investment Income Tax, to figure this tax. State free file For more information on NIIT, go to www. State free file irs. State free file gov and enter “Net Investment Income Tax” in the search box. State free file Introduction This chapter discusses the following two rules that may affect the tax on unearned income of certain children. State free file If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. State free file (See Parent's Election To Report Child's Interest and Dividends , later. State free file ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. State free file (See Tax for Certain Children Who Have Unearned Income , later. State free file ) For these rules, the term “child” includes a legally adopted child and a stepchild. State free file These rules apply whether or not the child is a dependent. State free file Useful Items - You may want to see: Publication 929 Tax Rules for Children and Dependents Form (and Instructions) 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. State free file The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . State free file Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. State free file Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . State free file Parents are married. State free file   If the child's parents file separate returns, use the return of the parent with the greater taxable income. State free file Parents not living together. State free file   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. State free file If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. State free file   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in chapter 2. State free file Parents are divorced. State free file   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. State free file Custodial parent remarried. State free file   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. State free file Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. State free file Do not use the return of the noncustodial parent. State free file   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. State free file If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. State free file Parents never married. State free file   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. State free file If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. State free file Widowed parent remarried. State free file   If a widow or widower remarries, the new spouse is treated as the child's other parent. State free file The rules explained earlier under Custodial parent remarried apply. State free file Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. State free file If you do, your child will not have to file a return. State free file You can make this election only if all the following conditions are met. State free file Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. State free file Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). State free file The child's gross income was less than $10,000. State free file The child is required to file a return unless you make this election. State free file The child does not file a joint return for the year. State free file No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. State free file No federal income tax was taken out of your child's income under the backup withholding rules. State free file You are the parent whose return must be used when applying the special tax rules for children. State free file (See Which Parent's Return To Use , earlier. State free file ) These conditions are also shown in Figure 31-A. State free file Certain January 1 birthdays. State free file   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. State free file You cannot make this election for such a child unless the child was a full-time student. State free file   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. State free file You cannot make this election for such a child. State free file Full-time student. State free file   A full-time student is a child who during some part of each of any 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time on-farm training course given by a school or a state, county, or local government agency. State free file A school includes a technical, trade, or mechanical school. State free file It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. State free file How to make the election. State free file   Make the election by attaching Form 8814 to your Form 1040. State free file (If you make this election, you cannot file Form 1040A or Form 1040EZ. State free file ) Attach a separate Form 8814 for each child for whom you make the election. State free file You can make the election for one or more children and not for others. State free file Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. State free file Rate may be higher. State free file   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. State free file This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. State free file However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. State free file Deductions you cannot take. State free file   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. State free file The additional standard deduction if the child is blind. State free file The deduction for a penalty on an early withdrawal of your child's savings. State free file Itemized deductions (such as your child's investment expenses or charitable contributions). State free file Reduced deductions or credits. State free file   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return including the following. State free file Deduction for contributions to a traditional individual retirement arrangement (IRA). State free file Deduction for student loan interest. State free file Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. State free file Credit for child and dependent care expenses. State free file Child tax credit. State free file Education tax credits. State free file Earned income credit. State free file Penalty for underpayment of estimated tax. State free file   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. State free file If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. State free file See chapter 4 for more information. State free file Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. State free file Only the amount over $2,000 is added to your income. State free file The amount over $2,000 is shown on Form 8814, line 6. State free file Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. State free file Include the amount from Form 8814, line 12, on Form 1040, line 21. State free file Enter “Form 8814” on the dotted line next to line 21. State free file If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040, line 21. State free file Capital gain distributions and qualified dividends. State free file   If your child's dividend income included any capital gain distributions, see Capital gain distributions under Figuring Child's Income in Publication 929, Part 2. State free file If your child's dividend income included any qualified dividends, see Qualified dividends under Figuring Child's Income in Publication 929, Part 2. State free file Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. State free file This tax is added to the tax figured on your income. State free file This additional tax is the smaller of: 10% × (your child's gross income − $1,000), or $100. State free file Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44. State free file Check box a on Form 1040, line 44. State free file Figure 31-A. State free file Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. State free file Figure 31–A. State free file Can You Include Your Child's Income On Your Tax Return? Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. State free file If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. State free file Attach the completed form to the child's Form 1040 or Form 1040A. State free file When Form 8615 must be filed. State free file   Form 8615 must be filed for a child if all of the following statements are true. State free file The child's investment income was more than $2,000. State free file The child is required to file a return for 2013. State free file The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. State free file At least one of the child's parents was alive at the end of 2013. State free file The child does not file a joint return for 2013. State free file These conditions are also shown in  Figure 31-B. State free file Earned income. State free file   Earned income includes salaries, wages, tips, and other payments received for personal services performed. State free file It does not include unearned income as defined later in this chapter. State free file Support. State free file   Your child's support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. State free file To figure your child's support, count support provided by you, your child, and others. State free file However, a scholarship received by your child is not considered support if your child is a full-time student. State free file See chapter 3 for details about support. State free file Certain January 1 birthdays. State free file   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. State free file Figure 31-B. State free file Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. State free file Figure 31-B. State free file Do You Have To Use Form 8615 To Figure Your Child's Tax?    IF a child was born on. State free file . State free file . State free file THEN, at the end of 2013, the child is considered to be. State free file . State free file . State free file January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. State free file The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. State free file  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. State free file  ***Do not use Form 8615 for this child. State free file Providing Parental Information (Form 8615, lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. State free file (If the parents filed a joint return, enter the name and social security number listed first on the joint return. State free file ) On line C, check the box for the parent's filing status. State free file See Which Parent's Return To Use at the beginning of this chapter for information on which parent's return information must be used on Form 8615. State free file Parent with different tax year. State free file   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. State free file Parent's return information not known timely. State free file   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. State free file   You can use any reasonable estimate. State free file This includes using information from last year's return. State free file If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. State free file    When you get the correct information, file an amended return on Form 1040X, Amended U. State free file S. State free file Individual Income Tax Return. State free file   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. State free file S. State free file Individual Income Tax Return. State free file Extensions are discussed in chapter 1. State free file Step 1. State free file Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. State free file To do that, use Form 8615, Part I. State free file Line 1 (unearned income). State free file   If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. State free file Adjusted gross income is shown on Form 1040, line 38, or Form 1040A, line 22. State free file Form 1040EZ cannot be used if Form 8615 must be filed. State free file   If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. State free file   However, if the child has: excluded any foreign earned income, deducted either a loss from self-employment, or deducted a net operating loss from another year, then use the Alternate Worksheet for Form 8615, Line 1, in Publication 929 to figure the amount to enter on Form 8615, line 1. State free file Unearned income defined. State free file   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. State free file It includes taxable interest, dividends (including capital gain distributions), capital gains, unemployment compensation, the taxable part of social security and pension payments, and certain distributions from trusts. State free file Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). State free file Nontaxable income. State free file   For this purpose, unearned income includes only amounts the child must include in total income. State free file Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. State free file Income from property received as a gift. State free file   A child's unearned income includes all income produced by property belonging to the child. State free file This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. State free file   A child's unearned income includes income produced by property given as a gift to the child. State free file This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. State free file Example. State free file Amanda Black, age 13, received the following income. State free file Dividends — $800 Wages — $2,100 Taxable interest — $1,200 Tax-exempt interest — $100 Net capital gains — $100 The dividends were qualified dividends on stock given to her by her grandparents. State free file Amanda's unearned income is $2,100. State free file This is the total of the dividends ($800), taxable interest ($1,200), and net capital gains ($100). State free file Her wages are earned (not unearned) income because they are received for work actually done. State free file Her tax-exempt interest is not included because it is nontaxable. State free file Trust income. State free file   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. State free file   However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income, not unearned income. State free file Line 2 (deductions). State free file   If the child does not itemize deductions on Schedule A (Form 1040), enter $2,000 on line 2. State free file   If the child does itemize deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29, that are directly connected with the production of unearned income entered on line 1, or $2,000. State free file Directly connected. State free file   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. State free file These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. State free file   These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). State free file Only the amount greater than 2% of the child's adjusted gross income can be deducted. State free file See chapter 28 for more information. State free file Example 1. State free file Roger, age 12, has unearned income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2% limit) that are directly connected with his unearned income. State free file His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. State free file Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly connected itemized deductions of $300. State free file Example 2. State free file Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. State free file She has no other income. State free file She has itemized deductions of $1,050 (net of the 2% limit) that are directly connected with the production of her unearned income. State free file Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). State free file The amount on line 2 is $2,050. State free file This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. State free file Line 3. State free file   Subtract line 2 from line 1 and enter the result on this line. State free file If zero or less, do not complete the rest of the form. State free file However, you must still attach Form 8615 to the child's tax return. State free file Figure the tax on the child's taxable income in the normal manner. State free file Line 4 (child's taxable income). State free file   Enter on line 4 the child's taxable income from Form 1040, line 43, or Form 1040A, line 27. State free file   However, if the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, see the Form 8615 instructions or Pub. State free file 929. State free file Line 5 (net unearned income). State free file   A child's net unearned income cannot be more than his or her taxable income. State free file Enter on Form 8615, line 5, the smaller of line 3 or line 4. State free file This is the child's net unearned income. State free file   If zero or less, do not complete the rest of the form. State free file However, you must still attach Form 8615 to the child's tax return. State free file Figure the tax on the child's taxable income in the normal manner. State free file Step 2. State free file Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) The next step in completing Form 8615 is to figure a tentative tax on the child's net unearned income at the parent's tax rate. State free file The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. State free file When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. State free file For example, do not refigure the medical expense deduction. State free file Figure the tentative tax on Form 8615, lines 6 through 13. State free file Note. State free file If the child or parent has any capital gains or losses, get Publication 929 for help in completing Form 8615, Part II. State free file Line 6 (parent's taxable income). State free file   Enter on line 6 the parent's taxable income from Form 1040, line 43, Form 1040A, line 27, or Form 1040EZ, line 6. State free file   If the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) was used to figure the parent's tax, enter the amount from line 3 of that worksheet instead of the parent's taxable income. State free file Line 7 (net unearned income of other children). State free file   If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. State free file Do not include the amount from line 5 of the Form 8615 being completed. State free file Example. State free file Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. State free file The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon — $800 Jerry — $600 Mike — $1,000 Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. State free file Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). State free file Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). State free file Other children's information not available. State free file   If the net unearned income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. State free file See Parent's return information not known timely , earlier. State free file Line 11 (tentative tax). State free file   Subtract line 10 from line 9 and enter the result on this line. State free file This is the tentative tax. State free file   If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13. State free file Also skip the discussion for lines 12a and 12b that follows. State free file Lines 12a and 12b (dividing the tentative tax). State free file   If an amount is entered on line 7, divide the tentative tax shown on line 11 among the children according to each child's share of the total net unearned income. State free file This is done on lines 12a, 12b, and 13. State free file Add the amount on line 7 to the amount on line 5 and enter the total on line 12a. State free file Divide the amount on line 5 by the amount on line 12a and enter the result, as a decimal, on line 12b. State free file Example. State free file In the earlier example under Line 7 (net unearned income of other children), Sharon's Form 8615 shows $1,600 on line 7. State free file The amount entered on line 12a is $2,400, the total of the amounts on lines 5 and 7 ($800 + $1,600). State free file The decimal on line 12b is  . State free file 333, figured as follows and rounded to three places. State free file   $800 = . State free file 333     $2,400   Step 3. State free file Figuring the Child's Tax (Form 8615, Part III) The final step in figuring a child's tax using Form 8615 is to determine the larger of: The total of: The child's share of the tentative tax based on the parent's tax rate, plus The tax on the child's taxable income in excess of net unearned income, figured at the child's tax rate, or The tax on the child's taxable income, figured at the child's tax rate. State free file This is the child's tax. State free file It is figured on Form 8615, lines 14 through 18. State free file Alternative minimum tax. State free file   A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. State free file See Alternative Minimum Tax (AMT) in chapter 30. State free file    For more information on who is liable for AMT and how to figure it, see Form 6251, Alternative Minimum Tax—Individuals. State free file For information on special limits that apply to a child who files Form 6251, see Certain Children Under Age 24 in the Instructions for Form 6251. State free file Prev  Up  Next   Home   More Online Publications