Capital Gains Reporting — Increased Complexity

The good news for individual taxpayers who sustain long term capital gains is that the tax bite is favorable, compared with the tax on ordinary income.  Beginning with 2011 tax returns, however, the reporting complexity rises to a new level.

First of all, there’s an entirely new form to deal with now:  Form 8949, Sales and Other Dispositions of Capital Assets. Many transactions which used to go directly on our old friend, “Schedule D” must now be reported on Form 8949, though landing eventually on Schedule D.

And all of this further integrates with the new Form 1099-B rules which apply this year, and which impose upon your broker the requirement that your tax basis in any “covered security” which you sold be reported to IRS.

Use Form 8949 to “sort” both long and short term transactions among those for which your broker did or did not report the tax basis of the assets sold, and those related to which the broker-reported basis is correct or incorrect, as well as whether the type of gain or loss (short term or long term) is correct or incorrect as characterized by the broker.  Also use Form 8949 if you received a Form 1099-B as a nominee for the actual owner of the property, to report the sale of your main home at a gain, to report the sale of “qualified small business stock” with some excludable gain, to report a nondeductible loss from a “wash sale,” among other things.


It’s probably a good idea to familiarize yourself with the 14 pages of instructions for Schedule D (and Form 8949) before starting the process, which is obviously going to create some new headaches for taxpayers this filing season.