Investors in the United States are required to annually report proceeds from the sale of stock, along with a computation of the associated gain and loss to the Internal Revenue Service (IRS) using Schedule D, Capital Gains and Losses, to be filed as part of IRS Form 1040, U.S. Individual Income Tax Return.
Schedule D is used to compute not only the aggregate amount of capital gain or loss earned by an investor from the sale of all capital assets, including stock, but to bifurcate capital dispositions between assets with a short term holding period and assets with a long term holding period. While the net capital gain is reported as part of adjusted gross income on Form 1040 and ultimately becomes a portion of an individual income taxpayer's taxable income, Schedule D is also used to identify net long term capital gains that are eligible for preferential reduced tax rates.
Schedule D requires taxpayers to first determine whether stocks and other capital assets are short or long term. Long term capital assets are assets with a holding period of more than one year and short term capital assets are assets with a holding period of less than a year. After determining the holding period for each stock or other capital asset, taxpayers must individually enter each capital asset disposed of during the tax year on the Schedule D. The IRS requires that the taxpayer provide a brief description of the capital asset sold (such as "100 shares of ABC Corp."), the date the asset was acquired, the date the asset was sold, the sales price and the cost or other basis. The taxpayer must also compute the gain or loss on the sale.
Long Term Capital Gain Rate
After determining the gain or loss for each individual capital asset, taxpayers must then aggregate the net gain or net loss from the sale of all short term capital assets and the net gain or net loss from the sale of all long term capital assets. If the taxpayer has a net gain from all long term capital assets and a net loss from all short term capital assets, the net gain from all long term capital assets is reduced by the amount of the short term capital loss. If any amount remains, the net long term capital gain is eligible for taxation at preferential reduced tax rates, currently at 15 percent for taxpayers in ordinary marginal income tax rate brackets of 25 percent or greater and 0 percent for taxpayers in ordinary marginal income tax rate brackets of 15 percent or less.
Estimated Tax Payments
Taxpayers with significant investment income from the sale of stock and other capital assets may be required to report the anticipated income and make periodic estimated tax payments throughout the tax years based on anticipated federal income tax liabilities. This reporting and payments should be made using IRS Form 1040-ES, Estimated Tax for Individuals. Failure to sufficiently report estimated income taxes may result in the levy of failure to pay penalties when the annual Schedule D to Form 1040 is filed. In general, estimated tax payments must be at least 100 percent of the taxpayer's prior year income tax or 90 percent of the taxpayer's current year income tax to avoid penalties, although for some higher income taxpayers, those amounts are increased to 110 percent and 100 percent, respectively.