How to Report Capital Gains and Losses on the 2022 Federal Income Tax Return (2024)

IRS Schedule D (Capital Gains and Losses) is used to summarize the net transaction of capital asset sales that occurred during the calendar year.

The following sales are not reported on Schedule D: (1) Business equipment sales; (2) Rental property sales; (3) Assets sold inside of retirement plans and IRAs such as the Thrift Savings Plan; (4) Inventory sales; and (4) Taxable gifts to from individual to another (reported on IRS Form 709 (United States Gift Tax Return).

Net Schedule D income or loss is reported on Form 1040 line 7 for 2022 as shown here:

What is a Capital Asset?

Internal Revenue Code (IRC) Section 1221 defines a capital asset as generally everything owned by an individual for personal, pleasure, business or investment purposes including :

(1) Stocks, bonds, mutual funds, exchange traded fund (investments);

(2) Personal and secondary residences and furnishings;

(3) Vehicles and personal jewelry;

(4) Coins, stamps, jewelry, gems, gold, silver, paintings, sculptures (collectibles);

(5) Gains and losses on investment assets are taxable or deductible; (6) Gains on personal and pleasure assets are taxable but losses are not deductible.

The following items are not considered capital assets and as will be explained below, the gains on the sale of such items are subject to ordinary tax rates rather than “preferential” tax rates:

(1) Inventory for resale;

(2) Personally created copyrights, musical or artistic compositions;

(3) Depreciable business property; and

(4) Business accounts and notes receivable.

Capital Gains and Losses

A sale or exchange of a capital asset produces a capital gain or a loss. The tax rate on a capital gain depends on the holding period, type of capital asset and the amount of an individual’s ordinary income. Ordinary income includes wages/salary income, interest income, IRA and pension income, rental income, and Social Security income and is taxed at ordinary tax rates (10, 12, 22, 24, 32, 35 or 37 percent) depending on the individual’s federal marginal tax bracket.

Capital losses are netted against capital gains. Up to $3,000 ($1,500 if filing as married filing separately) of excess capital losses are deductible against ordinary income each year. Unused net capital losses are carried forward indefinitely and may offset capital gains plus up to $3,000 of excess capital losses ($1,500 if married filing separately) of ordinary income during each subsequent year.

Holding Period

Capital gains and losses must be separated according to how long the capital asset was held.

•Short-term. The holding period is one year or less.

•Long-term. The holding period is more than one year.

To figure the holding period, the capital asset owner begins counting on the day after the day the property is acquired and includes the date of disposition.

Exceptions:

(1) Property that is acquired by inheritance (other than a decedent for whom the special 2010 election was made) is treated as long-term property, regardless of how long actually held; and

(2) A nonbusiness bad debt must be treated as a short-term capital loss.

• Securities traded on an established market.

For securities traded on an established securities market, the holding period begins the day after the trade date the securities are purchased, and ends on the trade date the securities are sold. Note: The trade date is different than the settlement date, which is the date the security must be delivered, and payment must be made.

The following example illustrates:

Example 1. Judy bought 20 shares of the XYZ stock on an established market. The 20 shares have a trade of September 15, 2021. In order to qualify for the long-term holding period, the XYZ stock shares would have to be sold with a trade date on or after September 16, 2022.

Capital Gain Tax Rates

Since 2003, lower tax rates have been applied to long-term capital gains (capital gains resulting from the sale of capital assets owned for more than one year) and qualified dividends. Theses “preferential” rates are lower than the “ordinary” tax rates applied to earned income (wages/salary), interest income, short-term capital gains, IRA and pension income, rental income, and Social Security income.

The Tax Cuts and Jobs Act of 2017 retained the 0 percent, 15 percent and 20 percent rates on long-term capital gains and qualified dividends for individuals. For the years 2018 through 2025, these rates have their own brackets that are not tied to the ordinary income brackets.

The following table presents the 2022 tax brackets (using an individual’s 2022 taxable income equal to the individual’s adjusted gross income less the appropriate standard deduction) for taxing long-term capital gains and qualified dividends:

Summary of Capital Gains Tax Rates

1. Capital gains and losses are divided into two categories: short- and long-term.

2. To determine how long the taxpayer held the investment property, begin counting on the date after the day they acquired the property. The day they disposed of the property is part of the holding period.

3. For securities traded on an established securities market, the holding period begins the day after the trade date the taxpayer bought the securities and ends on the trade date the taxpayer sold them.

4. A capital gains surtax of 3.8% applies to the lesser of unearned net investment income (NII) or Modified AGI over a base amount. The tax applies to individuals, estates and trusts. The base amount for individuals is $250,000 for MFJ or surviving spouse, $125,000 for MFS, and $200,000 for all other filing statuses.

5. Short term items (held one year or less) are taxed as follows:
a. Gains flow through to Form 1040 and are taxed at ordinary income tax rates..
b. Losses are deductible up to $3,000 per year, and then carried forward to future years without expiration.

6. Long term items (held more than one year) are taxed as follows:
a. Losses are deductible up to $3,000 per year, and then carried to future years without expiration.
b. Gains on most assets (but see below) are taxed at the lesser of ordinary or special long term capital gains rates (0-28%)

7. Both short and long-term losses are combined within a year in order to limit the total deductible capital loss to $3,000 per year, after offsetting against gains.

8. A capital loss sustained by a decedent during his or her last tax year (or carried over to that year from an earlier year) can be deducted only on the final return filed for the decedent. The capital loss limits still apply in this situation. The decedent’s estate cannot deduct any of the loss or carry it over to following years.

9. Property received as a gift usually uses the donor’s adjusted basis, and the holding period is considered to have started on the same day the donor’s holding period started.

a. If the FMV of the property at the time of the gift is less than the donor’s adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Your basis for figuring gain is the same as the donor’s adjusted basis plus or minus any required adjustment to basis while you held the property. Your basis for figuring loss is its fair market value (FMV)when you received the gift plus or minus any required adjustment to basis while you held the property.

b. If you use the donor’s adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property.

10. Inherited property: capital gain or loss on any later disposition of inherited property is treated as a long-term capital gain or loss. This is true regardless of how long the taxpayer actually held the property.

Schedule D/Form 8949 Reporting Tips

1. Totals for which short-term and long-term transactions are reported on Form 1099-B (or a substitute statement) for which cost basis was reported to the IRS and which the individual has adjustments can be reported directly on Schedule D; namely, line 1a (short-term) and line 8a (long-term). Note that individuals can choose to report these transactions on Form 8949.

2. Instead of reporting each transaction on a separate row of Schedule D Part I (short-term) and Part II (long-term), a statement (s) may be attached containing all the same information as required by the form and in a similar format. The combined totals from all the statements in Parts I and II are entered with the appropriate box checked.

3. All other sales and dispositions of capital assets are reported on Form 8949 and the totals carried to Schedule D.

4. If an individual sells a block of stock (or similar property) purchased at various times, he or she may enter “VARIOUS” in column (b) of Form 8949 for “date acquired”.

5. If the property sold was inherited, the individual who inherited the property should enter “INHERITED” in column (b) for the date acquired.

6. If adjustments to gain or loss are required, then the property owner should report on Form 8949 the reason for the adjustments and the amount of the adjustments.

Reporting Basis When Stock Is Sold

There are two methods for identifying shares of stock sold when individuals sell less than their entire holding in a particular stock. These two methods are:

∙ First-in, first-out (FIFO). Under the FIFO method, if the stock or securities have been acquired on different dates or at different prices and the stock or securities owner does not or cannot identify the specific shares sold, then the stock or securities are considered to be sold in the order they were purchased, beginning with the earliest.

∙ Specific identification method. If the stock or securities owner chooses to use the specific identification method and specify to the investment broker or registered representative the shares sold, then the cost basis and holding period of those shares are used in computing the character (short-term or long-term) and the amount of the gain.

Note 1. The average cost basis method is available for mutual fund shares but is not available for corporate stock (except for stock shares acquired through a dividend reinvestment plan or DRIP after December 31, 2010).

Note 2. Stockbrokers or registered representatives must show in Box 1a of IRS Form 1099-B the cost or other of the following so-called “covered” securities when they are sold:

(1) Corporate stock acquired after December 31, 2010:

(2) Mutual fund shares, DRIP stock, and Exchange Traded Fund (ETF) shares acquired after December 31,2011; and

(3) Certain debt instruments, stock options, and future contracts acquired after December 31, 2013.

Note 3. For stock, stockbrokers and registered representatives must use the FIFO method when reporting cost basis, but can choose a different method (FIFO, average cost basis or specific identification) for a mutual fund, DRIP, and ETF shares. However, individual security owners can instruct their stockbrokers or registered representatives to use any permissible method.

Worthless Securities

Stocks, stock rights and bonds that become completely worthless during the year and are treated as if they were sold on the last day of the year at a $0 sales price. Depending on when the stock, stock right, or bond was purchased will determine whether the capital loss is short-term or long-term.

Wash Sales

A wash sale occurs if an individual sells stock or securities at a loss and within 30 days before or after the sale directly or indirectly: (1) Buys the substantially identical stock or securities in a fully taxable trade; (2) Enters into a contract or option to acquire substantially identical stock or securities; or (3) Acquires substantially identical stock or securities for a traditional IRA or a Roth IRA.

The loss from a wash sale is not deductible. Instead, the cost basis of the substantially identical property is increased by the amount of the disallowed loss. The holding period of the new stock or security includes the holding period of the sold stock or security. Note that buying stock in an individual’s IRA can cause a loss sustained by that individual on stock held outside the individual’s IRA to be subject to the wash sale rules. The individual’s cost basis in the traditional IRA is not, however, increased by the amount of the disallowed loss.

The following two examples illustrate the wash sale rules and ramifications:

Example 1. Jesse bought 50 shares of the XYZ stock for $750 on October 2, 2022. Jesse sells all 50 shares of the XYZ stock for $600 on October 25, 2022 and on November 10, 2022, Jesse acquires 50 shares of the XYZ stock for $500. Because Jesse bought identical stock within 30 days of the sale in which he incurred a ($600 less $750) $150 capital loss, he cannot deduct the $150 loss because of the wash sale rules. The $150 disallowed loss is added to the cost basis of the 50 shares of the XYZ stock that Jesse acquired on November 10, 2022. The cost basis of the 50 shares purchased on November 10,2022 is therefore $500 plus $150, or $650.

Example 2. Alice bought 100 shares of ABC stock for $1,000. The stock is invested within Alice’s traditional IRA. She bought the ABC stock on August 15, 2022. Alice also bought 100 shares of ABC stock on August 15,2022 for $1,000. These stocks are invested in Alice’s regular (non-retirement) brokerage account (held outside her traditional IRA). On September 1,2022, Alice sold 100 shares of the ABC stock held in her brokerage account for $600. Because Alice bought 100 shares of the ABC stock on August 15, 2022 for her traditional IRA (within 30 days of selling at a capital loss the 100 shares of the ABC stock held in her brokerage account), the $600 less $1,000 or $400 capital loss is a wash sale and the capital loss is disallowed. Alice’s cost basis in the 100 shares of ABC stock she purchased for her traditional IRA is not increased, however.