Schedule D often frightens taxpayers. It is one of the schedules that most frequently contains errors, but it need not. The form itself is relatively simple, and unless the filer is a frequent investment trader, with minimal preparation, it can be easily completed. Basic tax software takes filers through the schedule with minimal discomfort.
Schedule D is the form on which a taxpayer reports personal capital gains and losses. Like several other schedules, the document supports and justifies an income-related entry on Form 1040, the base U.S. income tax form. Schedule D must be submitted with Form 1040 when income taxes are filed.
Capital Asset Definition
Capital assets refer to investments such as real estate or company stock that are generally held over a long time, and are intended to make money. Capital gains refer to monetary gains received upon the sale of the asset — the difference between what the asset cost versus the higher value when it was sold. A capital loss occurs when the sale price is less than the purchase price. Capital assets that are held over one year and then sold at a gain are considered long-term gains. They are taxed at rates lower than those for assets held one year or less, although the differences and rates change depending on the tax laws in effect at the time.
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Schedule D is divided into three parts. Short-term gains (held one year or less) are reported in Part I, while long-term gains are reported in Part II. Each section requires a property description, such as home or stock name, purchase and sell dates, cost and sale prices. From these a gain or loss is calculated. The third part or summary page combines the two sections and determines the tax rates each asset will incur. The results are entered in Form 1040. While Schedule D is straightforward and uncomplicated, other forms and information are often necessary to support certain entries, like gains associated with partnerships.
Certain capital gains need not be reported on Schedule D. Taxpayers who receive a 1099 DIV form from a mutual fund usually can just report the capital gain directly on Form 1040. But if the 1099 DIV form includes amounts in Box 2B, 2C or 2D, Schedule D must be completed. Mutual funds also normally provide specific instructions how to report distributions on tax forms.
If income includes gains or losses from partnerships or frequent and extensive investment activity with traders, taxpayers often use professional tax preparers or specialized software to prepare the forms. In addition, accurate record-keeping makes completion of Schedule D simpler. If throughout the year notes are kept about purchase and sales transactions, they can be easily transposed to Schedule D.