Stocks (Options, Splits, Traders)
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
How do I prepare Schedule D for various stocks when records as to the original purchase price have been lost?
If you purchased the stocks, you need to be able to determine the purchase price to establish your basis when you sell them. If you cannot establish the basis of stocks sold, the basis of that stock is the basis of the stock you acquired first. Except for certain mutual fund shares, you cannot use an average price per share to figure the gain or loss on the sale of stock.
Refer to Stocks and Bonds under Basis of Investment Property in Chapter 4 of Publication 550 (PDF), Investment Income and Expenses. For information on the basis of inherited stock, refer to Inherited Property in the same section of Chapter 4, Publication 550 (PDF), Investment Income and Expenses.
References: How do I figure the cost basis when the stocks I'm selling were purchased at various times and at different prices?
If you can identify which shares of stock you sold, your basis is what you paid for the shares sold (plus sales commissions). If you sell a block of the same kind of stock, you can report all the shares sold at the same time as one sale, writing VARIOUS in the "date acquired" column of Form 1040, Schedule D (PDF). However, what you enter into the "cost or other basis" column is the total of all the acquisition costs of the shares sold.
If you cannot adequately identify the shares you sold and you bought the shares at various times for different prices, the basis of the stock sold is the basis of the shares you acquired first (first-in first-out). Except for certain mutual fund shares, you cannot use the average price per share to figure gain or loss on the sale of stock.
For more information, refer to Publication 550 (PDF), Investment Income and Expenses.
References: Can the cost averaging method be used for calculating the cost basis of stocks, or is it limited only to mutual fund shares?
The average basis method may be used only for mutual fund shares that were purchased at various times for various prices if the shares are left in the custody of a custodian or agent in an account maintained for the acquisition or redemption of the shares.
References: If a stock was sold short prior to the end of the year but was purchased in the next year to cover the short sale, when should it be included on Schedule D?
Generally, gain or loss is realized on a short sale when you deliver the stock that "covers" the short sale, not at the time you sell short. Gain (but not loss) short sale will be recognized earlier under constructive sale rules if the taxpayer subsequently acquire the same or substantially identical property to the property sold short.
Refer to Constructive Sales of Appreciated Financial Positions in either the Instructions for Form 1040, Schedule D or Chapter 4 of Publication 550 (PDF), Investment Income and Expenses for more details and exceptions.
References: Since the date acquired is after the date sold, how should I report a short sale on Schedule D?
This can be confusing with a short sale since it is really a two-step process. The date sold is the date that the transaction closes, which is the date you deliver to the lender the stock or (other assets) that cover the short sale. The date acquired is the date you purchased the stock (or other assets) delivered to the lender.
Normally, the short sale of a capital asset is considered to result in short-term gain or loss since the stocks (or other assets) that are delivered to "cover" the short sale are purchased the same time as the delivery. However, if stock held by the taxpayer for greater than one year is used top cover the short sale, then the gain or loss is long-term.
References: I held stock substantially identical to the stock I sold short, but I covered the short sale with shares that I purchased later. How does that affect the way I report the short sale?
If you also held substantially identical stock at the time of the short sale, but you acquired new stock to close the transaction, only gain or loss would still be recognized when you close the short sale. However, the loss would be long-term if you held the substantially identical property more than one year at the time of the short sale, regardless of what stock was delivered to close the transaction.
For more information on constructive sales, refer to Constructive Sale treatment for Certain Appreciated Positions in Chapter 4 of Publication 550 (PDF), Investment Income and Expenses.
References: Should I advise the IRS why amounts reported on Form 1099-B do not agree with my Schedule D for proceeds from short sales of stock not closed by the end of year that I did not include?
If you are able to defer the reporting of gain or loss until the year the short sale closes, the following will allow you to reconcile your Forms 1099-B to your Schedule D and still not recognize the gain or loss from the short sale: - Your total of lines 3 and 10, column (d), on your Schedule D should equal your total gross proceeds reported to you on all Forms 1099-B.
- In columns (b) and (c) write "SHORT SALE," and
- in column (f) write "See attached statement."
- In your statement, explain the details of your short sale and that it has not closed as of the end of the year. Include your name as it appears on the return and your social security number.
For more on these rules and exceptions that may apply, refer to Chapter 4 of Publication 550 (PDF), Investment Income and Expenses.
References: How do I determine my gain or loss on the proceeds reported on Form 1099-B from a short sale entered into last year if I have not yet bought the stock to deliver back to my broker?
In general, you cannot determine your gain or loss until you purchase the stock that you are going to deliver to close the short sale. You still need to report the gross proceeds on Schedule D so that the total of lines 3 and 10, column (d), reconciles with all of your Forms 1099-B.
Also, in columns b and c write "short sale." In column f, write "see attached statement." In the statement, explain the details of the short sale and that it is not closed. Include your name as it appears on your return and your social security number.
For more information on rules and exceptions that may apply, refer to Chapter 4 of Publication 550 (PDF), Investment Income and Expenses.
References: I am a day trader. How do I go about paying tax on the gain as a business and not on Schedule D?
Special rules apply if you are a trader in securities in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, you must meet all the following conditions.
- You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
- Your activity must be substantial.
- You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your activity is a securities trading business.
- Typical holding periods for securities bought and sold.
- The frequency and dollar amount of your trades during the year.
- The extent to which you to produce income for a livelihood.
- The amount of time you devote to the activity.
If your trading activity is a business, your trading expenses would be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, unless you file an election to change your method of accounting.
If your trading activity is a business and you elect to change to the mark-to-market method of accounting, you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property.
The mark-to-market method of accounting cannot be revoked without the consent of the Secretary. Though there is no publication specific to day traders, information for traders in securities and commodities is in Internal Revenue Code Section 475(f) and Revenue Procedure 99-17, Revenue Procedure. 99-49, and Publication 550 (PDF), Investment Income and Expenses.
For details about not-for-profit activities, refer to Chapter 1 in Publication 535 (PDF), Business Expenses. That chapter explains how to determine whether your activity is carried on to make a profit and how to figure the amount of loss you can deduct.
Regardless of whether your day trading activities are reported on Schedule D or on Form 4797, you may need to pay tax on your gains by following the requirements for making estimated tax payments on Form 1040ES (PDF), Estimated Tax for Individuals.
References: - Publication 535 (PDF), Business Expenses
- Publication 550 (PDF), Investment Income and Expenses
- Form 3115 (PDF), Application for Change in Accounting Method
- Form 4797 (PDF), Sales of Business Property
- Form 1040ES (PDF), Estimated Tax for Individuals
- Internal Revenue Code Section 475(f)
- Revenue Procedure 99-17
10.3 Captial Gains, Losses/Sale of Home: Mutual Funds (Costs, Distributions, etc.) How do you list gains from mutual funds on Schedule D and Form 1040 when some mutual funds list short-term capital gains separately and others lump short-term capital gains and taxable dividends together as dividends?
Only the capital gain distributions are reported on Form 1040, Schedule D (PDF), Capital Gains and Losses. They are reported in Part II as long-term capital gains. Short-term capital gains are taxed as ordinary income and are therefore treated as ordinary dividends on Form 1099-DIV. They are reported on line 9 of Form 1040 (PDF) or Form 1040A (PDF).
Because many mutual fund companies send out annual fund statements as well as Forms 1099-DIV, or "consolidated statements," some confusion has arisen regarding short-term capital gains. The purpose of Form 1099-DIV is to provide you with information to report income correctly on your tax return.
The annual report often breaks down the income from fund activity as dividends, tax-exempt dividends, short-term capital gains, long-term capital gains, returns of capital, and undistributed capital gains. Form 1099-DIV, on the other hand, will show only ordinary dividends (which includes the fund's short-term capital gains), capital gain distributions, and returns of capital (nontaxable distributions).
Mutual fund companies may combine the annual fund information with the Form 1099-DIV information into a consolidated statement. If this is what you receive, look for the part of the statement identified as the Form 1099-DIV or that contains language such as "in lieu of Form 1099-DIV."
References:
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