Investment 
Income and 
Expenses

The IRS has created a page on IRS.gov for information about Publication 550, at www.irs.gov/pub550. Information about any future developments affecting Publication 550 (such as legislation enacted after we release it) will be posted on that page.

Form 8949 is new. Many transactions that, in previous years, would have been reported on Schedule D (Form 1040) or D-1 must be reported on Form 8949 if they occur in 2011. Complete all necessary pages of Form 8949 before completing line 1, 2, 3, 8, 9, or 10 of Schedule D (Form 1040). Instructions for how to complete Form 8949 are included in the 2011 Instructions for Schedule D, Capital Gains and Losses.

In certain situations, you must put a code in column (b) of Form 8949 and make an adjustment to your gain or loss in column (g). See the 2011 Instructions for Schedule D.

For 2011 transactions, Schedule D-1 is no longer in use. Form 8949 replaces it.

You may be able to exclude from income up to 100% of your gain from the sale or trade of qualified small business stock acquired, in 2011, if you hold the stock for more than 5 years. This up to 100% exclusion also continues to apply for qualified small business stock acquired, in 2011, and held for more than 5 years. See Section 1202 Exclusion under Gains on Qualified Small Business Stock in chapter 4.

Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, for 2011 and later, has been expanded. As a general rule, it will include your cost or other basis, the date of acquisition, the amount of loss disallowed due to a wash sale, and whether the gain or loss is short-term or long-term, unless the property sold is a noncovered security. See the sample 2011 Form 1099-B in the Comprehensive Example in chapter 4.

A portion of the interest on specified private activity bonds issued after December 31, 2010, may be a tax preference item subject to the alternative minimum tax. See Qualified bonds issued after December 31, 2010, under Interest Income in chapter 1.

A bond issued on or after January 1, 2011 (not counting renewals or extensions) and guaranteed by a Federal home loan bank will not be eligible to pay exempt interest even if the bank meets safety and soundness criteria. The bond will be treated as federally guaranteed. See Federally guaranteed bonds, under Interest Income in chapter 1.

Bonds issued after December 31, 2010, cannot be classified as build America bonds. See Build America bonds, under Interest Income in chapter 1.

If you enter into a short sale on or after January 1, 2011, your short sale will be reported on a Form 1099-B for the year in which you deliver the security to satisfy the short sale obligation. See Short-Term or Long-Term Capital Gain or Loss under Short Sales in chapter 4.

If you had foreign financial assets in 2011, you may have to file new Form 8938, Statement of Foreign Financial Assets, with your tax return. Check www.irs.gov/form8938 for details.

A mutual fund or other regulated investment company that is a qualified fund of funds, in any of its taxable years beginning after December 22, 2010, may distribute exempt-interest dividends to its shareholders. See Exempt-interest dividends under Dividends and Other Distributions in chapter 1.

Publication 564, Mutual Fund Distributions, has been incorporated into this publication.

Underpayments of tax due to an undisclosed foreign financial asset are now subject to a 40% penalty. Underpayments due to a transaction lacking economic substance are now subject to a 20% penalty but may be subject to a 40% penalty in some cases. See Accuracy-related penalties in chapter 2.

You will no longer be taxed for certain trades involving life insurance contracts. See Insurance Policies and Annuities under Nontaxable Trades in chapter 4.

A section 1256 contract no longer includes certain swaps. See Exceptions under Section 1256 Contract in chapter 4 for more information.

Penalties for failure to disclose a reportable transaction on a tax return changed in 2010. See Penalty for failure to disclose a reportable transaction in chapter 2.

If you acquire a U.S. real property interest from a foreign person or firm, you may have to withhold income tax on the amount you pay for the property (including cash, the fair market value of other property, and any assumed liability). Domestic or foreign corporations, partnerships, trusts, and estates may also have to withhold on certain distributions and other transactions involving U.S. real property interests. If you fail to withhold, you may be held liable for the tax, penalties that apply, and interest. For more information, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

If you are a U.S. citizen with investment income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.

If you received an option to buy or sell stock or other property as payment for your services, see Publication 525, Taxable and Nontaxable Income, for the special tax rules that apply.

Investments in District of Columbia Enterprise Zone (DC Zone) assets acquired after 1997 and before 2012 and held more than 5 years will qualify for a special tax benefit. If you sell or trade a DC Zone asset at a gain, you may be able to exclude the qualified capital gain from your gross income. This exclusion applies to an interest in, or property of, certain businesses operating in the District of Columbia. For more information about the exclusion, see the Schedule D instructions. For more information about DC Zone assets, see section 1400B of the Internal Revenue Code.

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