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previous page Previous Page: Publication 564 - Mutual Fund Distributions - Keeping Track of Your Basis
next page Next Page: Publication 564 - Mutual Fund Distributions - Investment Expenses
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p564-002.htm#en_us_publink100097772

Sales, Exchanges,  
and Redemptions(p5)


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Sales, Exchanges, and Redemptions

When you sell or exchange your mutual fund shares, or if they are redeemed (a redemption), you will generally have a taxable gain or a deductible loss. This also applies to shares of a tax-exempt mutual fund. Sales, exchanges, and redemptions are all treated as sales of capital assets. The amount of the gain or loss is the difference between your adjusted basis (defined earlier) in the shares and the amount you realize from the sale, exchange, or redemption. This is explained further under Gains and Losses, later.
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Sale.(p5)


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In general, a sale is a transfer of shares for money only.
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Exchange.(p5)


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An exchange is a transfer of shares in return for other shares.
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Redemption.(p5)


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A redemption occurs when a fund reacquires its shares from you in exchange for money or other property.
Where Refund
Recordkeeping. When there is a sale, exchange, or redemption of your shares in a fund, keep the confirmation statement you receive. The statement shows the price you received for the shares and other information you need to report gain or loss on your return.
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Exchange of shares in one mutual fund for shares in another mutual fund.(p5)


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Any exchange of shares in one fund for shares in another fund is a taxable exchange. This is true even if you exchange shares in one fund for shares in another fund within the same family of funds. Report any gain or loss on the shares you gave up as a capital gain or loss in the year in which the exchange occurs. Usually, you can add any service charge or fee paid in connection with an exchange to the cost of the shares acquired. For an exception, see Commissions and load charges under Shares Acquired by Purchase, earlier.
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Information returns.(p6)


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Mutual funds and brokers must report proceeds from sales, exchanges, or redemptions to the Internal Revenue Service. They must provide or send each customer a written statement with that information by February 15 of the year following the calendar year the transaction occurred. Form 1099-B, or a substitute, may be used for this purpose. If it is mailed, you should allow adequate time to receive it before contacting the payer. If you still do not get the form by February 28, call the IRS for help.
Report your sales shown on Form(s) 1099-B (or substitute) on Schedule D (Form 1040) along with your other gains and losses. If the total of the sales price amounts reported on Form(s) 1099-B in box 2 is more than the total you report on Schedule D (Form 1040), lines 3 and 10, attach a statement to your return explaining the difference.
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Taxpayer identification number.(p6)
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You must give the broker your correct taxpayer identification number (TIN). Generally, an individual will use his or her social security number as the TIN.
If you do not provide your TIN, your broker is required to withhold tax on the gross proceeds of a transaction. For 2009, the withholding rate is 28%. In addition, you may be penalized.
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Identifying the Shares Sold(p6)


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Shares Sold

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. If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficult. However, shares are generally acquired at various times, in various quantities, and at various prices. Therefore, figuring your basis can be more difficult. You can choose to use either a cost basis or an average basis to figure your gain or loss.
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Cost Basis(p6)


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previous topic occurrence Cost Basis next topic occurrence

You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund.
To figure cost basis, you can choose one of the following methods.
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Specific share identification.(p6)


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If you adequately identify the shares you sold, you can use the adjusted basis of those particular shares to figure your gain or loss.
You will adequately identify your mutual fund shares, even if you bought the shares in different lots at various prices and times, if you:
  1. Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer, and
  2. Receive confirmation in writing from your broker or other agent within a reasonable time of your specification of the particular shares sold or transferred.
You continue to have the burden of proving your basis in the specified shares at the time of sale or transfer.
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First-in first-out (FIFO).(p6)


rule
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If your shares were acquired at different times or at different prices and you cannot identify which shares you sold, use the basis of the shares you acquired first as the basis of the shares sold. In other words, the oldest shares you own are considered sold first. You should keep a separate record of each purchase and any dispositions of the shares until all shares purchased at the same time have been disposed of completely.
Table 3 (on the next page) illustrates the use of the FIFO method to figure the cost basis of shares sold, compared with the use of the single-category method to figure average basis (discussed next).
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Average Basis(p7)


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previous topic occurrence Average Basis next topic occurrence

You can figure your gain or loss using an average basis only if you acquired the shares at various times and prices, and you left the shares on deposit in an account handled by a custodian or agent who acquires or redeems those shares.
To figure average basis, you can use one of the following methods.
Once you elect to use an average basis, you must continue to use it for all accounts in the same fund. (You must also continue to use the same method.) However, you may use the cost basis (or a different method of figuring the average basis) for shares in other funds, even those within the same family of funds.
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Example.(p7)

You own two accounts that hold shares of the income fund issued by Company A. You also own 100 shares of the growth fund issued by Company A. If you elect to use average basis for the first account of the income fund, you must use average basis for the second account. However, you may use cost basis for the growth fund.
Deposit
You may be able to find the average basis of your shares from information provided by the fund.
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Single-category method.(p7)


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Under the single-category method, you find the average basis of all shares owned at the time of each disposition, regardless of how long you owned them. Include shares acquired with reinvested dividends or capital gain distributions.
Table 3 illustrates the use of the single-category method to figure the average basis of shares sold, compared with the use of the FIFO method to figure cost basis (discussed earlier).
Even though you include all unsold shares of a fund in a single category to compute average basis, you may have both short-term and long-term gains or losses when you sell these shares. To determine your holding period, the shares disposed of are considered to be those acquired first.
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Example.(p7)

You bought 400 shares in the LJO Mutual Fund: 200 shares on May 15, 2007, and 200 shares on May 14, 2008. On November 10, 2008, you sold 300 shares. The basis of all 300 shares sold is the same, but you held 200 shares for more than 1 year, so your gain or loss on those shares is long term. You held 100 shares for 1 year or less, so your gain or loss on those shares is short term.
How to figure the basis of shares sold. To figure the basis of shares you sell, use the steps in the following worksheet.
1)Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) $
2)Enter the total number of shares you owned in the fund just before the sale            
3)Divide the amount on line 1 by the amount on line 2. This is your average basis per share$
4)Enter the number of shares you sold            
5)Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold$
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Example 1.(p7)

You bought 300 shares in the LJP Mutual Fund: 100 shares in 2005 for $1,000 ($10 per share); 100 shares in 2006 for $1,200 ($12 per share); and 100 shares in 2007 for $2,600 ($26 per share). Thus, the total cost of your shares was $4,800 ($1,000 + $1,200 + $2,600). On May 16, 2008, you sold 150 shares. The basis of the shares you sold is $2,400 ($16 per share), figured as follows.
1)Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) $4,800
2)Enter the total number of shares you owned in the fund just before the sale300
3)Divide the amount on line 1 by the amount on line 2. This is your average basis per share$  16
4)Enter the number of shares you sold150
5)Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold$2,400
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Remaining shares.(p7)
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The average basis of the shares you still hold after a sale of some of your shares is the same as the average basis of the shares sold. The next time you make a sale, your average basis will still be the same, unless you have acquired additional shares (or have made a subsequent adjustment to basis).
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Example 2.(p7)

The facts are the same as in Example 1, except that you sold an additional 50 shares on December 17, 2008. You do not need to recompute the average basis of the 150 shares you owned at that time because you acquired or sold no shares, and had no other adjustments to basis, since the last sale. Your basis is the $16 per share figured earlier.
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Example 3.(p7)

The facts are the same as in Example 1, except that you bought an additional 150 shares at $14 a share on September 17, 2008, and then sold 50 shares on December 18, 2008. The total adjusted basis of all the shares you owned just before the sale is $4,500, figured as follows.
1)Basis of remaining shares ($16 x 150)$2,400
2)Cost of shares acquired 9/17/08 ($14 x 150)$2,100
3)Total adjusted basis of all shares owned ($2,400 + $2,100)$4,500
   
The basis of the shares sold is $750 ($15 a share), figured as follows.
1)Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) $4,500
2)Enter the total number of shares you owned in the fund just before the sale300
3)Divide the amount on line 1 by the amount on line 2. This is your average basis per share$  15
4)Enter the number of shares you sold50
5)Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold$ 750
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Double-category method.(p8)


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In the double-category method, all shares in an account at the time of each disposition are divided into two categories: short term and long term. Shares held 1 year or less are short term. Shares held longer than 1 year are long term.
The basis of each share in a category is the average basis for that category. This is the total remaining basis of all shares in that category at the time of disposition divided by the total shares in the category at that time. To use this method, you specify, to the custodian or agent handling your account, from which category the shares are to be sold or transferred. The custodian or agent must confirm in writing your specification. If you do not specify or receive confirmation, you must first charge the shares sold against the long-term category and then charge any remaining shares sold against the short-term category.
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Changing categories.(p8)
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After you have held a mutual fund share for more than 1 year, you must transfer that share from the short-term category to the long-term category. The basis of a transferred share is its actual cost or other basis to you unless some of the shares in the short-term category have been disposed of. In that case, the basis of a transferred share is the average basis of the undisposed shares at the time of the most recent disposition from this category.
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Making the choice.(p8)


rule
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You choose to use the average basis of mutual fund shares by clearly showing on your income tax return, for each year the choice applies, that you used an average basis in reporting gain or loss from the sale or transfer of the shares. You must specify whether you used the single-category method or the double-category method in determining average basis. This choice is effective until you get permission from the IRS to revoke it.
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Shares received as gift.(p8)
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If your account includes shares that you received by gift, and the fair market value of the shares at the time of the gift was not more than the donor's basis, special rules apply. You cannot choose to use the average basis for the account unless you submit a statement with your initial choice. It must state that the basis used in figuring the average basis of the gift shares will be the FMV at the time of the gift. This statement applies to gift shares received before and after making the choice, as long as the choice to use the average basis is in effect.
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Table 3. Example of How To Figure Basis of Shares Sold

This is an example showing two different ways to figure basis. It compares the cost basis using the FIFO method with the average basis using the single-category method.
DateActionShare PriceNo. of SharesTotal Shares Owned
2/6/07Invest $4,000$25160160
8/7/07Invest $4,800$20240400
12/18/07Reinvest $300 dividend$3010410
10/1/08Sell 210 shares for $6,720$32210200
 
COST BASIS
(FIFO)
To figure the basis of the 210 shares sold on 10/1/08, use the share price of the first 210 shares you bought, namely the 160 shares you purchased on 2/6/07 and 50 of those purchased on 8/7/07.
 
  $4,000 (cost of 160 shares on 2/6/07)
 +$1,000 (cost of 50 shares on 8/7/07)
 Basis =$5,000
 
AVERAGE BASIS (single-category) To figure the basis of the 210 shares sold on 10/1/08, use the average basis of all 410 shares owned on 10/1/08.
  $9,100 (cost of 410 shares)
  ÷  410 (number of shares)
  $22.20 (average basis per share)
 
  $22.20 
  × 210
 Basis =$4,662
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Gains and Losses(p8)


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previous topic occurrence Sale of Property, Gain or Loss next topic occurrence

You figure gain or loss on the disposition of your shares by comparing the amount you realize with the adjusted basis of your shares. If the amount you realize is more than the adjusted basis of the shares, you have a gain. If the amount you realize is less than the adjusted basis of the shares, you have a loss.
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Amount you realize.(p8)


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The amount you realize from a disposition of your shares is the money and value of any property you receive for the shares disposed of, minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees).
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Adjusted basis.(p8)


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Adjusted basis is explained under Keeping Track of Your Basis, earlier. Also see the explanations of cost basis and average basis under Identifying the Shares Sold, earlier.
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Wash sales.(p8)


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If you sell mutual fund shares at a loss and within 30 days before or after the sale you buy, acquire in a taxable exchange, or acquire a contract or option to buy substantially identical shares, you have a wash sale. You cannot deduct losses from wash sales.
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Substantially identical.(p8)
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In determining whether the shares are substantially identical, you must consider all the facts and circumstances. Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.
For more information on wash sales, see Publication 550.
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Reporting information from Form 1099-B.(p8)


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Mutual funds and brokers report dispositions of mutual fund shares on Form 1099-B, or a substitute form containing substantially the same language. The form shows the amount of the sales price and indicates whether the amount reported is the gross amount or the net amount (gross amount minus commissions).
If your Form 1099-B or similar statement from the payer shows the gross sales price, do not subtract the expenses of sale from it when reporting your sales price in column (d) on Schedule D (Form 1040). Instead, report the gross amount in column (d) and increase your cost or other basis, column (e), by any expense of the sale. If your Form 1099-B shows that the gross sales price less commissions was reported to IRS, enter the net amount in column (d) of Schedule D (Form 1040) and do not increase your basis in column (e) by the sales commission.
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Example 1.(p8)

You sold 100 shares of Fund HIJ for $2,500. You paid a $75 commission to the broker for handling the sale. Your Form 1099-B shows that the net sales proceeds, $2,425 ($2,500 − $75), were reported to the IRS. Report $2,425 in column (d) of Schedule D (Form 1040).
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Example 2.(p8)

You sold 200 shares of Fund KLM for $10,000. You paid a $100 commission at the time of the sale. You bought the shares for $5,000. The broker reported the gross proceeds to IRS on Form 1099-B, so you enter $10,000 in column (d) of Schedule D (Form 1040) and increase your basis in column (e) to $5,100.
Note.Whether you use line 1 (for a short-term gain or loss) or line 8 (for a long-term gain or loss) of Schedule D (Form 1040) depends on how long you held the shares, discussed next.
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Holding Period(p8)


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previous topic occurrence Holding Period next topic occurrence

When you dispose of your mutual fund shares, you must determine your holding period. Your holding period determines whether the gain or loss is a short-term capital gain or loss or a long-term capital gain or loss.
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Short-term gain or loss.(p8)


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If you hold the shares for 1 year or less, your gain or loss will be a short-term gain or loss.
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Long-term gain or loss.(p8)


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If you hold the shares for more than 1 year, your gain or loss will be a long-term gain or loss.
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Determining period held.(p8)


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Determine your holding period by using the trade dates of your purchases and your sales. The trade date is the date on which you contract to buy or sell shares. Most mutual funds will show the trade dates on confirmation statements showing your purchases and sales.
EIC
Do not confuse the trade date with the settlement date, which is the date by which the mutual fund shares must be delivered and payment must be made.
To find out how long you have held your shares, begin counting on the day after the trade date on which you bought the shares. (Do not count the trade date itself.) The trade date on which you dispose of the shares is counted as part of your holding period.
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Example.(p8)

If you bought shares on January 3, 2007 (trade date), and sold them on January 3, 2008 (trade date), your holding period would not be more than 1 year. If you sold them on January 4, 2008, your holding period would be more than 1 year (12 months plus 1 day).
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Mutual fund shares received as a gift.(p8)


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If you receive a gift of mutual fund shares and your basis is determined by the donor's basis, your holding period is considered to have started on the same day that the donor's holding period started.
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Inherited mutual fund shares.(p8)


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If you inherit mutual fund shares, you are considered to have held the shares for more than 1 year, regardless of how long you actually held them. Report the sale of inherited mutual fund shares on Schedule D (Form 1040), line 8, and enter "Inherited" in column (b) instead of the date you acquired the shares.
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Reinvested distributions.(p8)


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If your dividends and capital gain distributions are reinvested in new shares, the holding period of each new share begins the day after that share was purchased. Therefore, if you sell both the new shares and the original shares, you might have both short-term and long-term gains and losses.
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Certain short-term losses.(p8)


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Special rules may apply if you have a short-term loss on the sale of shares on which you received an exempt-interest dividend or a capital gain distribution.
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Exempt-interest dividends before short-term loss.(p8)
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If you received exempt-interest dividends on mutual fund shares that you held for 6 months or less and sold at a loss, you may claim only the part of the loss that is more than the exempt-interest dividends. On Schedule D (Form 1040), column (d), increase the sales price by the amount of exempt-interest dividends, but do not increase it to more than the cost or other basis shown in column (e). Report the loss as a short-term capital loss.
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Example.(p9)

On January 7, 2008, you bought a mutual fund share for $40. On February 4, 2008, the mutual fund paid a $5 dividend from tax-exempt interest, which is not taxable to you. On February 11, 2008, you sold the share for $34. If it were not for the tax-exempt dividend, your loss would be $6 ($40 − $34). However, you must increase the sales price from $34 to $39 (to account for the $5 portion of the loss that is not deductible). You can deduct only $1 as a short-term capital loss.
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Capital gain distribution before short-term loss.(p9)
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Generally, if you received capital gain distributions (or had to report undistributed capital gains) on mutual fund shares that you held for 6 months or less and sold at a loss, report only the part of the loss that is more than the capital gain distribution (or undistributed capital gain) as a short-term capital loss. The rest of the loss is reported as a long-term capital loss.
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Example.(p9)

On April 10, 2008, you bought a mutual fund share for $20. On June 26, 2008, the mutual fund paid a capital gain distribution of $2 a share, which is taxed as a long-term capital gain. On July 14, 2008, you sold the share for $17.50. If it were not for the capital gain distribution, your loss would be a short-term loss of $2.50 ($20 − $17.50). However, the part of the loss that is not more than the capital gain distribution ($2) must be reported as a long-term capital loss. The remaining $0.50 of the loss can be reported as a short-term capital loss.
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Loss on share that paid qualified dividends.(p9)


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Any loss on the sale or exchange of a mutual fund share must be treated as a long-term capital loss to the extent you received, from that share, qualified dividends (defined earlier) that are extraordinary dividends. This is true regardless of how long you actually held the share. Generally, an extraordinary dividend is a dividend that equals or exceeds 10% (5% in the case of preferred stock) of your adjusted basis in the mutual fund share.
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How To Figure Net Gain or Loss(p9)


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Separate your short-term gains and losses from your long-term gains and losses on all the mutual fund shares and other capital assets you disposed of during the year. Then determine your net short-term gain or loss and your net long-term gain or loss.
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Net short-term capital gain or loss.(p9)


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Net short-term capital gain or loss is determined by adding the gains and losses shown on Schedule D (Form 1040), Part I, column (f), lines 1 through 6. Line 7 is the net short-term capital gain or loss.
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Net long-term capital gain or loss.(p9)


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Net long-term capital gain or loss is determined by adding the gains and losses shown on Schedule D (Form 1040), Part II, column (f), lines 8 through 14. Line 15 is the net long-term capital gain or loss.
Your net long-term capital gain or loss includes any undistributed capital gains you reported on Schedule D (Form 1040), line 11, and any capital gain distributions you reported on Schedule D (Form 1040), line 13.
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Total net gain or loss.(p9)


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The total net gain or loss is determined by combining the net short-term capital gain or loss on line 7 with the net long-term capital gain or loss on line 15. Enter the result on Schedule D (Form 1040), Part III, line 16. If line 16 shows a gain, enter the amount on Form 1040, line 13. If line 16 shows a loss, see Limit on Capital Loss Deduction, later.
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Figuring Your Tax(p9)


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If you are reporting capital gain distributions on Form 1040A, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040A instructions to figure your tax. See How To Report, earlier, to see whether you can report your capital gain distributions on Form 1040A.
If you are reporting capital gain distributions on Form 1040, but are not required to file Schedule D (Form 1040), use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax. See How To Report, earlier, to see whether you must file Schedule D (Form 1040).
If you are required to file Schedule D (Form 1040), use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax if both of the following are true.
  1. You have a net capital gain or qualified dividends (or both). You have a net capital gain if both lines 15 and 16 of Schedule D (Form 1040) are gains. Qualified dividends are explained earlier under Tax Treatment of Distributions.
  2. You do not have to use the Schedule D Tax Worksheet.
If you have any collectibles gain, exclusion from eligible gain on qualified small business stock, or unrecaptured section 1250 gain, you will have to use the Schedule D Tax Worksheet in the Schedule D instructions to figure your tax.
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Capital Gain Tax Rates(p9)


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previous topic occurrence Capital Gain Tax Rate next topic occurrence

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.
The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than any net short-term capital loss.
The maximum capital gain rate can be 0%, 15%, 25%, or 28%. See Table 4.
Deposit
If you figure your tax using the maximum capital gain rate and the regular tax computation results in a lower tax, the regular tax computation applies.
taxmap/pubs/p564-002.htm#f15112n03

Table 4. What Is Your Maximum Capital Gain Rate?

IF your net capital gain is from ...THEN your maximum capital gain rate is ...
collectibles gain28%
eligible gain on qualified small business stock minus the section 1202 exclusion28%
unrecaptured section 1250 gain25%
other gain*, and the regular tax rate that would apply is 25% or higher 15%
Other gain*, and the regular tax rate that would apply is lower than 25% 0%
* "Other gain" means any gain that is not collectibles gain, eligible gain on qualified small business stock, or unrecaptured section 1250 gain.
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Example.(p9)

You have a capital gain distribution that is a section 1202 gain, so the maximum capital gain rate on the distribution would be 28%. Because you are single and your taxable income is $25,000, none of your taxable income will be taxed above the 15% rate. The 28% rate does not apply.
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Limit on Capital Loss Deduction(p9)


rule
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Limit on Capital Loss Deduction

If Schedule D (Form 1040), Part III, line 16, shows a loss, your allowable capital loss deduction is the smaller of:
  1. $3,000 ($1,500 if you are married and filing a separate return), or
  2. Your total net loss shown on Schedule D (Form 1040), line 16.
Enter your allowable loss on Form 1040, line 13.
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Example.(p9)

Bob and Gloria sold all of their shares in a mutual fund. The sale resulted in a capital loss of $7,000. They had no other capital transactions. Their taxable income was $26,000. On their joint 2008 return, they can deduct $3,000. The unused part of the loss, $4,000 ($7,000 – $3,000), can be carried over to 2009.
If Bob and Gloria's capital loss had been $2,000, their capital loss deduction would have been $2,000. They would have no carryover.
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Capital loss carryover.(p9)


rule
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If you have a total net loss on Schedule D (Form 1040), line 16, that is more than the yearly limit on capital loss deductions, you can carry over the unused part to next year and treat it as if you had incurred it in that next year. To determine your capital loss carryover, subtract from your total net loss the lesser of:
  1. Your allowable capital loss deduction for the year, or
  2. Your taxable income increased by your allowable capital loss deduction for the year and by your deduction for personal exemptions.
If your deductions exceed your gross income, you start the computation in (2) above with a negative number.
Use the Capital Loss Carryover Worksheet in Publication 550 to figure your capital loss carryover.
When carried over, the loss will keep its original character as long term or short term. Therefore, a long-term capital loss carried over from a previous year will offset long-term gains of the current year before it offsets short-term gains of the current year. For more information on figuring capital loss carryovers, see Publication 550.
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Separate returns.(p9)
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Capital loss carryovers from separate returns are combined if you now file a joint return. However, if you once filed jointly and are now filing separately, a capital loss carryover from the joint return can be deducted only on the separate return of the spouse who actually had the loss.
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