Publication 550
taxmap/pubs/p550-020.htm#en_us_publink100010301This chapter explains the tax treatment of sales and trades of
investment property.
taxmap/pubs/p550-020.htm#en_us_publink100010302This is property that produces investment income. Examples include
stocks, bonds, and Treasury bills and notes. Property used in a trade or
business is not investment property.
taxmap/pubs/p550-020.htm#en_us_publink100010303If you sold property such as stocks, bonds, mutual funds, or
certain commodities through a broker during the year, you should receive, for
each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions,
or an equivalent statement from the broker. You should receive the statement by
March 1 of the next year. It will show the gross proceeds from the sale. The IRS
will also get a copy of Form 1099-B from the broker.
Use Form 1099-B (or an equivalent statement received from your
broker) to complete Schedule D of Form 1040. 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. For more information, see
Form 1099-B transactions under
Reporting Capital Gains and Losses, later.
If someone receives gross proceeds as a nominee for you, that
person will give you a Form 1099-B, which will show gross proceeds received on
your behalf.
If you receive Form 1099-B that includes gross proceeds belonging
to another person, see
Nominees later under
Reporting Capital Gains and Losses for more information.
Certain transfers of property are discussed in other IRS publications.
These include:
- Sale of your main home, discussed in Publication 523, Selling
Your Home,
- Installment sales, covered in Publication 537, Installment
Sales,
- Various types of transactions involving business property,
discussed in Publication 544, Sales and Other Dispositions of Assets,
- Transfers of property at death, covered in Publication 559,
Survivors, Executors, and Administrators, and
- Disposition of an interest in a passive activity, discussed
in Publication 925, Passive Activity and At-Risk Rules.
Useful items
You may want to see:
Publication 551 Basis of Assets
Form (and Instructions) Schedule D (Form 1040):
Capital Gains and Losses
6781:
Gains and Losses From Section 1256 Contracts and Straddles
8582:
Passive Activity Loss Limitations
8824:
Like-Kind Exchanges See
chapter 5 for information about getting these publications and forms.
Words you may need to know (see Glossary)
This section explains what is a sale or trade. It also explains
certain transactions and events that are treated as sales or trades.
A sale is generally a transfer of property for money or a mortgage,
note, or other promise to pay money.
A trade is a transfer of property for other property or services,
and may be taxed in the same way as a sale.
taxmap/pubs/p550-020.htm#en_us_publink100010307Ordinarily, a transaction is not a trade when you voluntarily
sell property for cash and immediately buy similar property to replace it. The
sale and purchase are two separate transactions. But see
Like-Kind Exchanges under
Nontaxable Trades, later.
A redemption of stock is treated as a sale or trade and is subject
to the capital gain or loss provisions unless the redemption is a dividend or
other distribution on stock.
taxmap/pubs/p550-020.htm#en_us_publink100010309Whether a redemption is treated as a sale, trade, dividend, or
other distribution depends on the circumstances in each case. Both direct and
indirect ownership of stock will be considered. The redemption is treated as a
sale or trade of stock if:
- The redemption is not essentially equivalent to a dividend
— see
Dividends and Other Distributions in chapter 1,
- There is a substantially disproportionate redemption of stock,
- There is a complete redemption of all the stock of the corporation
owned by the shareholder, or
- The redemption is a distribution in partial liquidation of
a corporation.
In addition, a significant modification of a bond is treated
as a trade of the original bond for a new bond. For details, see Regulations
section 1.1001-3.
taxmap/pubs/p550-020.htm#en_us_publink100010311A surrender of stock by a dominant shareholder who retains ownership
of more than half of the corporation's voting shares is treated as a
contribution to capital rather than as an immediate loss deductible from taxable
income. The surrendering shareholder must reallocate his or her basis in the
surrendered shares to the shares he or she retains.
taxmap/pubs/p550-020.htm#en_us_publink100010312The transfer of investment property to a corporation, trust,
fund, foundation, or other organization, in exchange for a fixed annuity
contract that will make guaranteed annual payments to you for life, is a taxable
trade. If the present value of the annuity is more than your basis in the
property traded, you have a taxable gain in the year of the trade. Figure the
present value of the annuity according to factors used by commercial insurance
companies issuing annuities.
taxmap/pubs/p550-020.htm#en_us_publink100010313The transfer of property of a decedent to the executor or administrator
of the estate, or to the heirs or beneficiaries, is not a sale or other
disposition. No taxable gain or deductible loss results from the transfer.
taxmap/pubs/p550-020.htm#en_us_publink100010314The cancellation, lapse, expiration, or other termination of
a right or obligation (other than a securities futures contract) with respect to
property that is a capital asset (or that would be a capital asset if you
acquired it) is treated as a sale. Any gain or loss is treated as a capital gain
or loss.
taxmap/pubs/p550-020.htm#en_us_publink100010315Stocks, stock rights, and bonds (other than those held for sale
by a securities dealer) that became completely worthless during the tax year are
treated as though they were sold on the last day of the tax year. This affects
whether your capital loss is long term or short term. See
Holding Period, later.
Worthless securities also include securities that you abandon
after March 12, 2008. To abandon a security, you must permanently surrender and
relinquish all rights in the security and receive no consideration in exchange
for it. All the facts and circumstances determine whether the transaction is
properly characterized as an abandonment or other type of transaction, such as
an actual sale or exchange, contribution to capital, dividend, or gift.
If you are a cash basis taxpayer and make payments on a negotiable
promissory note that you issued for stock that became worthless, you can deduct
these payments as losses in the years you actually make the payments. Do not
deduct them in the year the stock became worthless.
taxmap/pubs/p550-020.htm#en_us_publink100010316Report worthless securities on Schedule D (Form 1040), line 1
or line 8, whichever applies. In columns (c) and (d), enter "Worthless." Enter
the amount of your loss in parentheses in column (f).
taxmap/pubs/p550-020.htm#en_us_publink100010317If you do not claim a loss for a worthless security on your original
return for the year it becomes worthless, you can file a claim for a credit or
refund due to the loss. You must use Form 1040X, Amended U.S. Individual Income
Tax Return, to amend your return for the year the security became worthless. You
must file it within 7 years from the date your original return for that year had
to be filed, or 2 years from the date you paid the tax, whichever is later.
(Claims not due to worthless securities or bad debts generally must be filed
within 3 years from the date a return is filed, or 2 years from the date the tax
is paid, whichever is later.) For more information about filing a claim, see
Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund.
taxmap/pubs/p550-020.htm#en_us_publink100010318You are treated as having made a constructive sale when you enter
into certain transactions involving an appreciated financial position (defined
later) in stock, a partnership interest, or certain debt instruments. You must
recognize gain as if the position were disposed of at its fair market value on
the date of the constructive sale. This gives you a new holding period for the
position that begins on the date of the constructive sale. Then, when you close
the transaction, you reduce your gain (or increase your loss) by the gain
recognized on the constructive sale.
taxmap/pubs/p550-020.htm#en_us_publink100010319You are treated as having made a constructive sale of an appreciated
financial position if you:
- Enter into a short sale of the same or substantially identical
property,
- Enter into an offsetting notional principal contract relating
to the same or substantially identical property,
- Enter into a futures or forward contract to deliver the same
or substantially identical property (including a forward contract that provides
for cash settlement), or
- Acquire the same or substantially identical property (if the
appreciated financial position is a short sale, an offsetting notional principal
contract, or a futures or forward contract).
You are also treated as having made a constructive sale of an
appreciated financial position if a person related to you enters into a
transaction described above with a view toward avoiding the constructive sale
treatment. For this purpose, a related person is any related party described
under
Related Party Transactions, later in this chapter.
You are not treated as having made a constructive sale solely
because you entered into a contract for sale of any stock, debt instrument, or
partnership interest that is not a marketable security if it settles within 1
year of the date you enter into it.
taxmap/pubs/p550-020.htm#en_us_publink100010321Do not treat a transaction as a constructive sale if all of the
following are true.
- You closed the transaction on or before the 30th day after
the end of your tax year.
- You held the appreciated financial position throughout the
60-day period beginning on the date you closed the transaction.
- Your risk of loss was not reduced at any time during that
60-day period by holding certain other positions.
If a closed transaction is reestablished in a substantially similar
position during the 60-day period beginning on the date the first transaction
was closed, this exception still applies if the reestablished position is closed
before the 30th day after the end of your tax year in which the first
transaction was closed and, after that closing, (2) and (3) above are true.
This exception also applies to successive short sales of an entire
appreciated financial position. For more information, see Revenue Ruling 2003-1
in Internal Revenue Bulletin 2003-3. This bulletin is available at
www.irs.gov/pub/irs-irbs/irb03-03.pdf.
This is any interest in stock, a partnership interest, or a debt
instrument (including a futures or forward contract, a short sale, or an option)
if disposing of the interest would result in a gain.
taxmap/pubs/p550-020.htm#en_us_publink100010323An appreciated financial position does not include the following.
- Any position from which all of the appreciation is accounted
for under marked to market rules, including section 1256 contracts (described
later under
Section 1256 Contracts Marked to Market).
- Any position in a debt instrument if:
- The position unconditionally entitles the holder to receive
a specified principal amount,
- The interest payments (or other similar amounts) with respect
to the position are payable at a fixed rate or a variable rate described in
Regulations section 1.860G-1(a)(3), and
- The position is not convertible, either directly or indirectly,
into stock of the issuer (or any related person).
- Any hedge with respect to a position described in (2).
For the constructive sale rules, an interest in an actively traded
trust is treated as stock unless substantially all of the value of the property
held by the trust is debt that qualifies for the exception to the definition of
an appreciated financial position (explained in (2) above).
taxmap/pubs/p550-020.htm#en_us_publink100010325A transaction treated as a constructive sale of an appreciated
financial position is not treated as a constructive sale of any other
appreciated financial position, as long as you continue to hold the original
position. However, if you hold another appreciated financial position and
dispose of the original position before closing the transaction that resulted in
the constructive sale, you are treated as if, at the same time, you
constructively sold the other appreciated financial position.
taxmap/pubs/p550-020.htm#en_us_publink100010326If you hold a section 1256 contract at the end of the tax year,
you generally must treat it as sold at its fair market value on the last
business day of the tax year.
taxmap/pubs/p550-020.htm#en_us_publink100010327A section 1256 contract is any:
- Regulated futures contract,
- Foreign currency contract,
- Nonequity option,
- Dealer equity option, or
- Dealer securities futures contract.
For tax years beginning after July 21, 2010, a section 1256 contract
does not include:
- Interest rate swaps,
- Currency swaps,
- Basis swaps,
- Interest rate caps,
- Interest rate floors,
- Commodity swaps,
- Equity swaps,
- Equity index swaps,
- Credit default swaps, or
- Similar agreements.
For more details, including definitions of these terms, see
section 1256.
This is a contract that:
- Provides that amounts that must be deposited to, or can be
withdrawn from, your margin account depend on daily market conditions (a system
of marking to market), and
- Is traded on, or subject to the rules of, a qualified board
of exchange. A qualified board of exchange is a domestic board of trade
designated as a contract market by the Commodity Futures Trading Commission, any
board of trade or exchange approved by the Secretary of the Treasury, or a
national securities exchange registered with the Securities and Exchange
Commission.
This is a contract that:
- Requires delivery of a foreign currency that has positions
traded through regulated futures contracts (or settlement of which depends on
the value of that type of foreign currency),
- Is traded in the interbank market, and
- Is entered into at arm's length at a price determined by reference
to the price in the interbank market.
Bank forward contracts with maturity dates longer than the maturities
ordinarily available for regulated futures contracts are considered to meet the
definition of a foreign currency contract if the above three conditions are
satisfied.
Special rules apply to certain foreign currency transactions.
These transactions may result in ordinary gain or loss treatment. For details,
see Internal Revenue Code section 988 and Regulations sections 1.988-1(a)(7) and
1.988-3.
taxmap/pubs/p550-020.htm#en_us_publink100010330This is any listed option (defined later) that is not an equity
option. Nonequity options include debt options, commodity futures options,
currency options, and broad-based stock index options. A broad-based stock index
is based on the value of a group of diversified stocks or securities (such as
the Standard and Poor's 500 index).
Warrants based on a stock index that are economically, substantially
identical in all material respects to options based on a stock index are treated
as options based on a stock index.
taxmap/pubs/p550-020.htm#en_us_publink100010331Cash-settled options based on a stock index and either traded
on or subject to the rules of a qualified board of exchange are nonequity
options if the Securities and Exchange Commission (SEC) determines that the
stock index is broad based.
This rule does not apply to options established before the SEC
determines that the stock index is broad based.
taxmap/pubs/p550-020.htm#en_us_publink100010332This is any option traded on, or subject to the rules of, a qualified
board or exchange (as discussed earlier under
Regulated futures contract). A listed option, however, does not include an option that
is a right to acquire stock from the issuer.
taxmap/pubs/p550-020.htm#en_us_publink100010333This is any listed option that, for an options dealer:
- Is an equity option,
- Is bought or granted by that dealer in the normal course of
the dealer's business activity of dealing in options, and
- Is listed on the qualified board of exchange where that dealer
is registered.
An "options dealer" is any person registered with an appropriate
national securities exchange as a market maker or specialist in listed options.
taxmap/pubs/p550-020.htm#en_us_publink100010334This is any option:
- To buy or sell stock, or
- That is valued directly or indirectly by reference to any
stock or narrow-based security index.
Equity options include options on a group of stocks only if
the group is a narrow-based stock index.
For any dealer in securities futures contracts or options on
those contracts, this is a securities futures contract (or option on such a
contract) that:
- Is entered into by the dealer (or, in the case of an option,
is purchased or granted by the dealer) in the normal course of the dealer's
activity of dealing in this type of contract (or option), and
- Is traded on a qualified board or exchange (as defined under
Regulated futures contract, earlier).
A securities futures contract that is not a dealer securities
futures contract is treated as described later under
Securities Futures Contracts.
A section 1256 contract that you hold at the end of the tax year
will generally be treated as sold at its fair market value on the last business
day of the tax year, and you must recognize any gain or loss that results. That
gain or loss is taken into account in figuring your gain or loss when you later
dispose of the contract, as shown in the example under
60/40 rule, below.
taxmap/pubs/p550-020.htm#en_us_publink100010337taxmap/pubs/p550-020.htm#en_us_publink100010338Under the marked to market system, 60% of your capital gain or
loss will be treated as a long-term capital gain or loss, and 40% will be
treated as a short-term capital gain or loss. This is true regardless of how
long you actually held the property.
taxmap/pubs/p550-020.htm#en_us_publink100010339On June 22, 2009, you bought a regulated futures contract for
$50,000. On December 31, 2009 (the last business day of your tax year), the fair
market value of the contract was $57,000. You recognized a $7,000 gain on your
2009 tax return, treated as 60% long-term and 40% short-term capital gain.
On February 1, 2010, you sold the contract for $56,000. Because
you recognized a $7,000 gain on your 2009 return, you recognize a $1,000 loss
($57,000 − $56,000) on your 2010 tax return, treated as 60% long-term and
40% short-term capital loss.
taxmap/pubs/p550-020.htm#en_us_publink100010340The 60/40 rule does not apply to dealer equity options or dealer
securities futures contracts that result in capital gain or loss allocable to
limited partners or limited entrepreneurs (defined later under
Hedging Transactions). Instead, these gains or losses are treated as short term.
The marked to market rules also apply if your obligation or rights
under section 1256 contracts are terminated or transferred during the tax year.
In this case, use the fair market value of each section 1256 contract at the
time of termination or transfer to determine the gain or loss. Terminations or
transfers may result from any offsetting, delivery, exercise, assignment, or
lapse of your obligation or rights under section 1256 contracts.
taxmap/pubs/p550-020.htm#en_us_publink100010342An individual having a net section 1256 contracts loss (defined
later) for 2010 can elect to carry this loss back 3 years, instead of carrying
it over to the next year. See
How To Report, later, for information about reporting this election on your
return.
The loss carried back to any year under this election cannot
be more than the net section 1256 contracts gain in that year. In addition, the
amount of loss carried back to an earlier tax year cannot increase or produce a
net operating loss for that year.
The loss is carried to the earliest carryback year first, and
any unabsorbed loss amount can then be carried to each of the next 2 tax years.
In each carryback year, treat 60% of the carryback amount as a long-term capital
loss and 40% as a short-term capital loss from section 1256 contracts.
If only a portion of the net section 1256 contracts loss is absorbed
by carrying the loss back, the unabsorbed portion can be carried forward, under
the capital loss carryover rules, to the year following the loss. (See
Capital Losses under
Reporting Capital Gains and Losses,
later.) Figure your capital loss carryover as if, for the loss year, you had an
additional short-term capital gain of 40% of the amount of net section 1256
contracts loss absorbed in the carryback years and an additional long-term
capital gain of 60% of the absorbed loss. In the carryover year, treat any
capital loss carryover from losses on section 1256 contracts as if it were a
loss from section 1256 contracts for that year.
This loss is the lesser of:
- The net capital loss for your tax year determined by taking
into account only the gains and losses from section 1256 contracts, or
- The capital loss carryover to the next tax year determined
without this election.
This gain is the lesser of:
- The capital gain net income for the carryback year determined
by taking into account only gains and losses from section 1256 contracts, or
- The capital gain net income for that year.
Figure your net section 1256 contracts gain for any carryback
year without regard to the net section 1256 contracts loss for the loss year or
any later tax year.
Gain or loss from the trading of section 1256 contracts is capital
gain or loss subject to the marked to market rules. However, this does not apply
to contracts held for purposes of hedging property if any loss from the property
would be an ordinary loss.
taxmap/pubs/p550-020.htm#en_us_publink100010346The determination of whether an individual's gain or loss from
any property is ordinary or capital gain or loss is made without regard to the
fact that the individual is actively engaged in dealing in or trading section
1256 contracts related to that property.
taxmap/pubs/p550-020.htm#en_us_publink100010347If you disposed of regulated futures or foreign currency contracts
in 2010 (or had unrealized profit or loss on these contracts that were open at
the end of 2009 or 2010), you should receive Form 1099-B, or an equivalent
statement, from your broker.
taxmap/pubs/p550-020.htm#en_us_publink100010348Use Part I of Form 6781 to report your gains and losses from
all section 1256 contracts that are open at the end of the year or that were
closed out during the year. This includes the amount shown in box 11 of Form
1099-B. Then enter the net amount of these gains and losses on Schedule D (Form
1040). Include a copy of Form 6781 with your income tax return.
If the Form 1099-B you receive includes a straddle or hedging
transaction, defined later, it may be necessary to show certain adjustments on
Form 6781. Follow the Form 6781 instructions for completing Part I.
taxmap/pubs/p550-020.htm#en_us_publink100010349To carry back your loss under the election procedures described
earlier, file Form 1040X or Form 1045, Application for Tentative Refund, for the
year to which you are carrying the loss with an amended Form 6781 and an amended
Schedule D attached. Follow the instructions for completing Form 6781 for the
loss year to make this election.
taxmap/pubs/p550-020.htm#en_us_publink100010350The marked to market rules, described earlier, do not apply to
hedging transactions. A transaction is a hedging transaction if both of the
following conditions are met.
- You entered into the transaction in the normal course of your
trade or business primarily to manage the risk of:
- Price changes or currency fluctuations on ordinary property
you hold (or will hold), or
- Interest rate or price changes, or currency fluctuations,
on your current or future borrowings or ordinary obligations.
- You clearly identified the transaction as being a hedging
transaction before the close of the day on which you entered
into it.
This hedging transaction exception does not apply to transactions
entered into by or for any syndicate. A syndicate is a partnership, S
corporation, or other entity (other than a regular corporation) that allocates
more than 35% of its losses to limited partners or limited entrepreneurs. A
limited entrepreneur is a person who has an interest in an enterprise (but not
as a limited partner) and who does not actively participate in its management.
However, an interest is not considered held by a limited partner or entrepreneur
if the interest holder actively participates (or did so for at least 5 full
years) in the management of the entity, or is the spouse, child (including a
legally adopted child), grandchild, or parent of an individual who actively
participates in the management of the entity.
If you are a limited partner or entrepreneur in a syndicate,
the amount of a hedging loss you can claim is limited. A "hedging loss" is the
amount by which the allowable deductions in a tax year that resulted from a
hedging transaction (determined without regard to the limit) are more than the
income received or accrued during the tax year from this transaction.
Any hedging loss allocated to you for the tax year is limited
to your taxable income for that year from the trade or business in which the
hedging transaction occurred. Ignore any hedging transaction items in
determining this taxable income. If you have a hedging loss that is disallowed
because of this limit, you can carry it over to the next tax year as a deduction
resulting from a hedging transaction.
If the hedging transaction relates to property other than stock
or securities, the limit on hedging losses applies if the limited partner or
entrepreneur is an individual.
The limit on hedging losses does not apply to any hedging loss
to the extent that it is more than all your unrecognized gains from hedging
transactions at the end of the tax year that are from the trade or business in
which the hedging transaction occurred. The term "unrecognized gain" has the
same meaning as defined under
Straddles, later.
Once you identify personal property as being part of a hedging
transaction, you must treat gain from its sale or exchange as ordinary income,
not capital gain.
taxmap/pubs/p550-020.htm#en_us_publink100010353Gains and losses derived in the ordinary course of a commodity
or option dealer's trading in section 1256 contracts and property related to
these contracts are included in net earnings from self-employment. See the
Instructions for Schedule SE (Form 1040). In addition, the rules relating to
contributions to self-employment retirement plans apply. For information on
retirement plan contributions, see Publication 560, Retirement Plans for Small
Business, and Publication 590, Individual Retirement Arrangements (IRAs).
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