# Presentation: 079137

## Lesson 12 
Sale of Stock 
and Other 
Investment Property

**Sale of Stock **
**and Other **
**Investment Property**

**Notes:**
This lesson contains information for the Advanced and Military/International courses and has been updated for Tax Year 2007

Lessons in the Advanced Course are more complex. Throughout this lesson, there are a number of situations when taxpayers should be referred to a paid tax preparer. (Don’t like the term paid tax preparer, need to use the same term on page 5 for consistency) (a suggestion, seek professional assistance)	
Reminder:  Volunteers should not prepare returns with complex issues that are beyond the scope of VITA/TCE or their certification.  

  References:
Form 1040, Schedule D, Capital Gains & Losses & Instructions
Qualified Dividends and Capital Gains Tax Worksheet 
Capital Loss Carryover Worksheet
Form 1099-DIV, Dividend and Distributions 
Form 1099-B, Proceeds From Broker and Barter Exchange Transactions (These are most often stock sales.)

  Additional References:
Publication 550, Investment Income
Publication 551, Basis of Assets
Publication 544, Sales & Disposition of Assets

Progress to the next slide.

## Objectives

- Compute adjusted basis of stock or other investment property
- Determine if an assets holding period is long-term or short-term
- Calculate the taxable gain/deductible loss using the Schedule D
- Calculate the correct tax liability

**Notes:**
Review the objectives with the class.

 Progress to the next slide.

## Intake/Interview Process

- Form 13614 – Intake and Interview Sheet –
-                      Income Section

**Notes:**
Conversation is key.  The Form 13614, Intake and interview Sheet, cannot capture all types of income so you have to ask some open ended questions to engage the taxpayer in preparing an accurate return. 
Use the Intake/Interview Sheet as a starting point in combination with all the source documents provided by the taxpayer.
The goal is a complete and accurate return with all income correctly reported.
You might ask if the taxpayer ever owned any stock or ever bought anything to hold for resale.  This could jog their memory.   You might even explain that it could decrease their tax liability if they sold it for less than their investment.
You can also save the taxpayer time and trouble with correspondence from the IRS.  Even if a sale was a break even situation, the IRS gets notice of all sales and they look for evidence of it on the tax return.  They don’t know the purchase price or adjusted basis, they just know it was sold.
If something is uncovered through conversation that was not originally disclosed on the Intake Sheet, make note of it on the form for the Quality Reviewer.  Assure all questions and issues have been addressed and entered on the return.

Progress to the next slide.

## Investment Property

**   ****Property that produces investment income**
**Stocks**
**Bonds**
**Mutual Funds**
**Treasury Bills and Notes**
**Other**

**Notes:**
Define investment property and give examples.
Investment property does not necessarily produce income.  It could just as well result in a loss.  This is how investment property differs from personal property.  You report the gain on both but you can not take a loss on the sale of personal property.
Property held for investment includes property that produces interest, dividends, annuities or royalties.
Property that produces gain or loss (not derived in the ordinary course of a trade or business) when sold or traded.
A tract of land held for resale would be investment property, gold or silver, rare coins, etc.

Remind the students that many investment property transactions will be out of the SCOPE of VITA.

Go over Example 1 in text.

Progress to the next slide.

## Basis of Investment Property

- The **basis** of an asset is usually its **cost**
- The **adjusted basis** is +/- certain costs or expenses
- Adjustments include but are not limited to:
**Brokerage commissions paid **(buying and selling)
**Stock splits and tax-free stock dividends**
**Reinvested dividends**
**Reinvested capital gain distributions**

**Notes:**
Explain that before a capital gain or loss can be put on a tax return, the asset’s adjusted basis must be determined. It is the taxpayer’s responsibility to provide information regarding the asset’s basis. If the taxpayer cannot provide the information needed to determine basis, the IRS can deem the basis to be zero.  This would result in a higher taxable gain.
Describe basis and adjusted basis. (cost plus capital improvements, casualty losses, insurance reimbursements, etc.) 
Give examples of adjustments to basis. 
Commissions/fees paid to a broker for stock transactions increase basis.
Buying one share of stock for $10 then having a split two-for-one results in reduced basis of $5.
Review Examples 2 & 3 in the text.
Explain how to figure the basis of property that was received: As a gift or by inheritance.  Example 4.
Remind students that bonds, other tax-exempt obligations, and employee stock option plans more likely than not will require the assistance of a tax professional.
Explain the importance of good recordkeeping.  Especially with stock because of splits and reinvestments of dividends, etc.

Complete Exercises 1, 2, and 3.  When they are finished with the exercises, review them together.

 Progress to the next slide.

## Sale of Investment Property

**Capital gains or losses are reported when a sale, exchange, or other disposition of investment property occurs.**
**Redemption of Stock or Bonds**
**Sale or Exchange of Mutual Fund Shares**
**Worthless Securities**
**Other Sales and Trades**

**Notes:**
The IRS is notified of the sale of most investment property with a copy of the same notice the taxpayer receives.  If the taxpayer fails to report a sale (even if it is a break even sale) there may be inquiry from the IRS.   If you pay $5,000 for stock and sell it for $5,000, the IRS just knows you had $5,000 in income.  The taxpayer should offset it with their cost by reporting it. 
A change in market value of a mutual fund or IRA is not a reportable transaction, it is the disposition of the shares that creates an event that needs to be reported.
Explain that there are a number of terms that describe the sale of an asset.
Provide examples for each of the following:  redemption of stocks and sale of mutual fund shares.
Work through Example 5 and Exercise 4 with the class.
Explain what worthless securities are and that losses are only deductible when they are totally worthless.
Review Example 6.
Discuss examples of other sales and trades that are beyond the scope of VITA/TCE:  e.g. market-to-market, wash sales, day trading, like kind exchanges trading investment  property for an annuity, etc.

Review parts of the Form. Exhibit 8 – Blank Form 1099-B – Proceeds from Broker and Barter Exchange Transactions. Used to report sale of stock. 
Box 1a – sale date – Used to compute holding period.
Box 2  - Where broker indicates gross or net proceeds reported.  

Progress to the next slide.

## Identifying Items Sold

-   Stock and Mutual funds have separate methods:
- Shares of Stock
- Specific Identification
- Identification Not Possible
- Mutual Funds
- Cost Basis
- Average Basis

**Notes:**
It is necessary for the taxpayer to verify the cost (hence recordkeeping) of investment property sold as well as to the specific stock or mutual fund shares.  
Explain that if a taxpayer does not sell his entire interest in shares of stock or mutual funds owned, it will be necessary to identify the particular shares sold so that the correct adjusted basis can be determined.
Shares of Stock:  
Describe how shares of stock would be specifically identified by the taxpayer. Recordkeeping is key.
Review Example 8.
Have the students work Exercise 5 and review it together when they are finished.
Discuss that the FIFO method (first in first out) which will be used if the taxpayer cannot determine specifically what shares were sold.
Review Example 9 with the class.
Have the students work Exercise 6 and review it together when they are finished.
Mutual funds:
Explain that there are two methods for determining basis for mutual fund shares: cost basis and average basis. Describe the two methods and explain that once a method is chosen, taxpayers have to use the same method for all the shares sold from the same mutual fund.
Review 

Progress to the next slide. 

## Holding Period

**Long term** – held more than 12 months
**Short term** – held for 1 year or less
**Inherited property** - always long-term
**Nontaxable stock dividends or stock splits** - same holding period as the original stock

**Notes:**
Explain that capital gains and losses are classified as either long or short term when reported on Schedule D, depending on how long the taxpayer owned the investment property.
Describe the definitions of long –term or short-term.
Explain that the acquisition date is not counted, but the sale date is counted when determining holding period. 
Review Examples 12 and 13.
Share that inherited property is always considered property with a long-term holding period, regardless of how long it is actually held.
Review Example 14.
Describe reinvested stock dividends and stock splits.
Explain nontaxable stock dividends and stock splits result in the same holding period as the original stock.
Have students work Exercises 7 and 8. 

Progress to the next slide.

## Determining Gain or Loss

- Amount realized – adjusted basis = gain/loss reported on Schedule D
- What You Will Need
- Form 1099-B, Proceeds From Broker and Barter Exchange Transactions or consolidated brokerage statement
- Date property was acquired
- Taxpayer’s records of basis

**Notes:**
Describe how amount realized and/or gain or loss is computed. 
Sale price may be $10,000 but the amount realized is after commissions and fees.
Have students look at a 1099-B and/or a consolidated brokerage statement and review the elements of the form. (See example of form in Exhibit 8.  
It is the taxpayer’s responsibility to provide an acquisition date and proof of basis.
 Review Examples 15 and 16.

 Progress to the next slide.

## Commissions and Fees

- Commissions paid when investment property is purchased is **added to basis**
- Commissions paid at the time of sale **may** increase basis
- If 1099-B shows gross proceeds, add the commissions to the basis
- If 1099-B shows net proceeds, no adjustment to basis is necessary

**Notes:**
Explain that commissions and fees are adjustments that increase basis in investment property.
When property is purchased, always add the commissions and fees to basis.
When investment property is sold, only increase adjusted basis for commissions if the 1099-B shows gross proceeds.
Adjusting basis for commissions on the sale of investment property is often confusing to students. They often want to reduce the proceeds.  Explain that this should not be done because the IRS matches the 1099 information received to the information reported on the tax return.
Review Examples 17 and 18.
Describe wash sales and tell the students they are outside of the scope of the VITA/TCE program and a tax professional should be consulted.  
Have the students work Exercises 9, 10, and 11.
Review exercises with the class.

Progress to the next slide.

## Reporting Transactions on the Tax Return

- Schedule D reflects gains and losses
- Schedule D has three sections
-   Part I - Short-term transactions
-   Part II - Long-term transactions
-   Part III – Summary
-  Schedule D-1 is a continuation page

**Notes:**
Remind students that capital gains and losses are reported on Schedule D of the tax return.
Have students review a Schedule D. (See Exhibit 6 for a blank form)
Show students that Schedule D is divided into three sections: 
Part I for short-term transactions, 
Part II for long-term transactions, and 
Part III for summarizing and determining the net taxable gain or net deductible loss.
Review the line items of Schedule D and show students where they will obtain the information needed to complete Schedule. D.
Taxpayers should include all transactions, even if no 1099-B was received. (To reduce future burden)
If additional transactions need to be reported, Schedule D-1 is a continuation page for that purpose.

 Progress to the next slide.

## Reporting Transactions on the Tax Return - cont’d

- 	Combine net Short-Term capital gain/loss with net Long-Term capital gain/loss (Part III of Schedule D)
- If losses exceed gains, the taxpayer has a **total net capital loss.**
- If gains exceed losses, the taxpayer has a **total net capital gain**.

**Notes:**
Explain that net short-term capital gains/losses are combined with net long-term capital gains/losses in Part III.
Review Schedule D, Part III, with students.

Progress to the next slide.

## Capital Gain Distributions

- <date/time>

- <footer>

- Reported on Form 1099-DIV, box 2a
-   If taxpayer received only capital gain  	distributions, Schedule D **not** required
-   If taxpayer sold investment property or had 	unused capital loss carryovers, report 	capital gain distributions on line 13 of 	Schedule D

**Notes:**
Explain the difference between capital gain distributions and mutual funds.
Tell students that capital gain distributions are reported on Form 1099-DIV, box 2a.
Review  Form 1099-DIV. 
Explain that a Schedule D is not required if the taxpayer received only capital gain distributions and had no other sales of investment property. The amount should be reported on Line 13, 1040 and the box should be checked.
Ask the students if they know which form the taxpayer has to use if filing a paper return and claiming just a capital gain distribution and which they must use for stock or investment property sales.  (1040, 1040-A, or 1040-EZ)
Describe how to report capital gain distributions on Schedule D, if it is required.
If you have another reason to use Sch. D and also have capital gains distribution it goes on the ‘D’ and not on front of 1040.

Progress to the next slide.

## Total Net Capital Loss

- If taxpayer has a net capital loss, claim the **lesser** of:
-  The total net loss or
-  $3,000 ($1,500 – if married filing separately)
- Capital Loss Carryovers
- Carryover until used up
- Retains character

**Notes:**
Taxpayer may claim capital losses but not personal losses.
Explain the limitations.
Describe how capital losses in excess of the limitations may be carried over indefinitely to future years.
Taxpayers should bring prior year tax returns when carrying over a loss
Review Examples 19 and 20.
Explain that carryover losses retain their character as either short-term or long-term.
Have students review the Capital Loss Carryover Worksheet –Exhibit 9. 
Common Queries: 
What happens to a capital loss carryover if a taxpayer dies.  Capital losses cannot be carried over after a taxpayer’s death. Losses are deducted on the final income tax return filed for the decedent, but the capital loss limits still apply. 
What happens if one year there is no filing requirement?  The loss is reduced by $3,000 for that year.  In other words, you forfeit part of your loss by not filing.  

Progress to the next slide.

## Total Net Capital Gain

- If taxpayer has a net capital gain, apply **capital gains tax rates**
- Capital Gains Tax Rates:  5% to 28%
- To figure capital gains tax use:
- Schedule D Tax Worksheet or
- Qualified Dividends & Capital Gains   Tax Worksheet

**Notes:**
If the taxpayer has a net capital gain, capital gains tax rates apply to the gain.  Capital Gains tax rates are often more favorable than the regular rate.   
Explain that capital gains tax rates are generally lower than tax rates applied to other income.
Share that the maximum capital gains tax rates range from 5% to 28%.
Explain that capital gains tax rates are applied by completing Schedule D Tax Worksheet or the Qualified Dividends & Capital Gains Tax Worksheet.  For VITA/TCE, the latter is most common.
Have students review a sample Qualified Dividends & Capital Gains Tax Worksheet.
Paper return preparers should be cautioned to remember this step in computing tax.  

Progress to the next slide.

## Quality Review (QR)

- Form 8158 – Quality Review Checklist
-                                Income Section

**Notes:**
Use the Form 8158, Quality Review Sheet, or your site’s approved equivalent form to review all returns prepared.  
Apply the QR tools in combination with the Intake/Interview Sheet and all the source documents to the returns you prepare to assure quality and accuracy for every taxpayer.  Remember we are also trying to reduce future burden
Consider each box on the QR sheet which applies to your taxpayer’s situation to confirm that all the necessary questions and issues have been addressed.   If items are incorrect or incomplete, revisit the issue and make corrections to the return, as needed.
To ensure accurate reporting of income, verify that the taxpayer’s wages are accurate and that all income from Form(s) W-2 and other income sources, such as Forms 1099, have been included. (There is often income without documentation.)
Confirm that all income received by the taxpayer has been discussed and shown on the return, if required. 

Progress to the next slide.

## Lesson Summary

- Basis of investment property is cost
- Adjusted basis is cost +/- adjustments such as commissions
- Holding period is classified as either
- Short-term (one year or less) or
- Long-term (more than one year)

**Notes:**
Review the main points of the lesson with the class. 
Work through Example 21 with the students.
Have students work independently on Exercise 12.
Review Exercise 12 with the students.
Review and discuss the Frequently Asked Questions (FAQ’s) at the end of the chapter.

Progress to the next slide.

## Lesson Summary – cont’d

- Capital gain or loss is computed as: **amount realized minus adjusted basis**
- Capital gains/losses are reported on Schedule D, Form 1040
- Net capital losses are deductible up to a yearly limitation, the lesser of:
-  the loss amount or
-  $3,000 ($1,500 if married filing separately)

**Notes:**
  Review the summary points.

Progress to the next slide.

## Lesson Summary – cont’d

- Net capital gains are taxed at a lower tax rates computed on
- Schedule D Tax Worksheet, or
- Qualified Dividends & Capital Gains   Tax Worksheet
- Schedule D is not required if the taxpayer has only capital gain distributions from 1099-DIV to report

**Notes:**
  Review the summary points.

Review the summary points.

Progress to the next lesson.