How to Meet IRS Capital Gains Record Keeping Requirements for Capital Gains

Capital gains transactions create major adjustments to taxes and often involve voluminous amounts of paperwork. Consequently the IRS requires that taxpayers be able to produce complete record keeping files supporting capital gains transactions for up to 7 years after a return is filed. However, the IRS generally places few requirements on taxpayers for actually filing records with the tax return to which the capital gains apply.

Difficulty: Moderate

Instructions

Meet IRS Capital Gains Record Keeping Requirements for Assets Sold Through a Brokerage

1. Create and maintain files of all brokerage transactions with a summary spreadsheet or database that lines each purchase of assets up against the corresponding sale.

2. Separate these files by "short-term" and "long-term" category to ease your ability to meet the separate reporting requirements for assets held longer or shorter than one year.

3. Maintain hard copies of your broker confirmations for all sales and purchases as backup documentation to check against 1099-B copies received from your brokerage.

4. Maintain Form 1099-B copies and monthly statements from your brokerage documenting fees and commissions charged to your account.

Meet IRS Capital Gains Record Keeping Requirements for Sales of Real Estate and Other Assets

5. Maintain a separate, easily accessible file folder for each asset of significant value that you own.

6. Include all documents relating to purchase and payments of each asset, dates and purposes of any improvements made to each asset during your period of ownership and damages affecting the asset's value.

7. File all annual tax documents and worksheets pertaining to your depreciation of each asset's value for tax purposes in the folder for that asset.

8. Keep your records documenting the sale of each asset with the other documents for that asset.

9. Audit your record keeping at tax time to ensure that it supports the capital gains you are reporting and meets IRS record keeping requirements.

Tips & Warnings

• Active investment traders may find the IRS capital gains record keeping requirements quite onerous if they wait until tax time to meet their record keeping requirements. Create a system in advance and maintain it as capital gains events occur in real-time.
• Even if your purchases and sales of investment shares or units are recorded online, never depend on online record keeping to be there later when you need it. Maintain or print contemporaneous hard copies and file them each month.
• The IRS builds its raw database of potential capital gains transactions based on sales records obtained from brokerage firms' 1099-B filings. Failure to meet IRS capital gains record keeping requirements regarding underlying purchase amounts makes a taxpayer liable for capital gains tax on the entire sale amount.

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