Investment 
Income and 
Expenses

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 (Form 1040) instructions. For more information about DC Zone assets, see section 1400B of the Internal Revenue Code.

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.