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Frequently Asked Questions - Sales of Securities

Q: What is the lowest tax rate on long-term gains for people who are already in the 10 percent–15 percent tax bracket?

A: 5 percent for most assets. In 2008, the 5 percent rate drops to zero.

Q: If I change from one fund family to another, is there any way I can do it without paying a capital gains tax?

A: You are actually selling one fund and purchasing a new fund. As such, the sale of the fund shares you replaced would need to be reported on Form 1040, Schedule D.

Q: Last year I had some capital losses that exceeded the $3,000 maximum allowed. How do I get to use the remaining losses?

A: You need to use last year's return and complete the Capital Loss Carryover worksheet in this year's Schedule D instruction book to allocate this carryover between long and short term. Then enter the short-term carryover, if any, on Part I, Line 6 and the long-term on Part II, Line 14.

Q: How do I figure a gain or loss on a sale of stock?

A: The gain or loss on a sale stock is calculated by subtracting your cost basis from the proceeds of the sale. The dates of purchase and sale are important to determine whether the loss is a short-term one or a long-term one.

For your tax basis (cost basis) for the stock, you should have that in your records; or if not, your broker might be able to provide that to you. Alternatively, the company may be able to provide you the value of the stock on the purchase date.

Please note: Always keep purchase records until an asset is sold!

Q: I am a longtime holder of AT&T stock. There have been a number of splits and spinoffs, and now a reverse split. How do I allocate my original AT&T basis to each share of the stocks I now hold, or sold last year?

A: This website has tax basis information for AT&T stockholders.

Q: I had a major loss on my stock portfolio last year. How can I put this on my tax form?

A: Did you actually sell something, or did you experience only "paper losses"; that is, did you not actually sell any investments, but saw the value go down?

If nothing was sold, there is nothing to report on your tax forms. You have no realized loss.

If you actually sold investments and had a capital loss, you can deduct this using Schedule D of Form 1040. A maximum of $3,000 in net losses from Schedule D may be taken in one year. Any remainder is carried over to the following year.

Q: How do I figure capital gains, or losses, on property or stock I inherited?

A: The cost basis for inherited property is the Fair Market Value of the property at the date of death of the deceased. In some cases, the person handling the estate may elect to use an alternate date of valuation. This can be up to 6 months past the date of death.

Q: I had some stock in a company which was purchased by another. Our old shares were replaced with shares in the new company. What is the cost basis and holding period for the new shares?

A: Your basis for the new stock in such a corporate acquisition is the same as your basis in the original stock. Regardless of the number of shares before and after the acquisition, the TOTAL cost basis remains the same. Only the cost basis per share changes. The holding period for the new shares includes the holding period of the original shares that were replaced.

Q: Must I pay taxes on U.S. saving bonds or stock that I inherited from a parent when I redeem or sell them?

A: You are not required to pay tax on the stock or savings bonds you receive from an inheritance. However, you are liable for any income tax on any gain if you sell any of the stock you inherited.

In addition, you may be liable for any income tax on any interest income earned by the savings bonds. The rules below are very complicated, and you may want to discuss them with a tax professional.

Upon the owner's or one co-owner's death, any surviving person named on savings bonds as co-owner or beneficiary is the new owner, and as such, is required to include on his or her return interest earned on the bonds for the year the bonds are redeemed or disposed of or when the bonds reach final maturity, whichever occurs first. Also, if the owner or "principal co-owner" is deceased, even when a surviving co-owner or beneficiary is named on the bonds, whoever files the deceased person's federal income tax return for the year has the option of reporting on that return all interest earned on the bonds to the date of death. If an owner or co-owner dies and is not survived by another co-owner or beneficiary, the bonds involved are the property of the estate of either:

1. The owner, if named on the bonds alone, or
2. The person named on the bonds who died last, if two people who are now deceased are named on the bonds

In these circumstances, reporting the interest on those bonds for federal income tax purposes is the responsibility of either:

1. The estate, if a court-appointed representative of the estate redeems them, or
2. The persons entitled to share in the estate

If these persons entitled become new owners or co-owners of the bonds, they report the interest for the year in which they redeem bonds, they otherwise dispose of the bonds as described earlier, or the bonds reach final maturity, whichever event occurs first.

Q: I had invested in a company and now, all my shares are worthless. Can I carry the loss forward to coming years, or must I claim the loss this year?

A: You must take the loss in the year that the shares become worthless. If you discover that your shares became worthless in a prior year, you are allowed to go back up to seven years to amend your tax return to obtain a refund. Normally, you can only go back three years. Please note that simply declaring bankruptcy does not make the stock worthless.

You report the worthless security on Line 1 or Line 8 of Schedule D (Form 1040). Enter "worthless" in columns (c) and (d) and the amount of the loss in parentheses in columns (f).

If your net capital loss for the year exceeds $3,000, you get to carry the excess forward. The Form 1040, Schedule D instructions explain how to account for worthless stock.

Q: Do I need to report a capital gain or loss for selling a bond or selling shares in a mutual bond fund?

A: Sales of shares of any mutual fund are always reported on Schedule D. You may have a gain, or loss, or neither.

If you sold a bond for more than the amount for which you bought it, you have a capital gain on the sales price, less the purchase price, plus commissions.

However, be careful if it was a bond (for instance, a zero-coupon bond), for which you were required to report the annual increase in value (OID) as interest income. In that case, add the reported OID over the life of the bond to your cost to get your basis before you determine whether this a gain or a loss.

You (and the IRS) should get a Form 1099-B reporting the sale, and the sale will have to be reported on Schedule D, even if the gain or loss is zero. You will also have either a gain or loss (or, unlikely, neither) on the sale of the bond fund. Its sale, also reported to you and the IRS on Form 1099-B, must be reported on Schedule D. Your broker or the fund should help you determine the basis of the shares sold.

Q: I received Form 1099B on a certificate of accrual on a Treasury bond. During the years of having this bond, I reported the interest each year reported to me on a Form 1099-OID. The bond matured, and I cashed it in. Do I have to report this amount, since I reported the interest it made throughout the years?

A: Yes, you have to report the disposition of the bond on Form 1040, Schedule D, Part II. The sales price is the amount you received for the bond. Your cost basis in the bond is what you paid for it plus all the interest income you declared as OID.

Q: I have a large capital loss in excess of the $3,000 annual capital loss deduction. I also don't have enough income to get a benefit from the $3,000 loss. What should I do?

A: There is an IRS Carryover worksheet included with the Schedule D instructions that you can use to figure out how much capital loss to carryover to the next tax year. If your AGI less your standard or itemized deductions is a negative number, you will see that any unused capital loss will get carried over. You should file each year to establish that the capital loss is not used.

Q: I had some insurance-company stock I received a few years ago when they went through "demutualization." I sold it last year and received a Form 1099-B for the sales amount. What is my basis in this stock?

A: According to the IRS, the cost basis for stock received in the demutualization proceeds is zero. The sale is long term if you owned the insurance policy more than one year. The purchase date would be the date you first took out an insurance policy with the company.

However: The U.S. Court of Federal Claims recently ruled that the shares in question do have a basis. This is a national court. The IRS has not announced whether or not the agency intends to appeal. Therefore, you will need to discuss this with a tax professional if you intend to use something other than zero as the cost basis.

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