How to Categorize the Type of Capital Gains Investment

In recent years, the IRS has simplified its requirements for reporting and paying taxes on capital gains. Taxpayers are not currently required to categorize the type of capital gains investment they are reporting with respect to categories such as real estate, securities, collectibles and other categories. The primary remaining requirement is that taxpayers must categorize each investment as being a short-term or long-term investment.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Complete records of capital gains transactions
• Schedule D and instructions

Categorize Each Capital Gains Investment as Short-Term or Long-Term

1. Maintain a transaction register, database or spreadsheet for each capital gains asset that you sell during the tax year, similar to your check register but with additional columns to reflect all important details of the sale and the corresponding asset purchase.
2. Divide your transaction register into pages, sections or sub-worksheets that distinguish between long-term investments and short-term investments.
3. Populate the long-term investments section with transactions involving assets that you held for more than 1 year.
4. Fill the short-term investments section with transactions involving assets held for 1 year or less.
5. Include columns to reflect the date purchased and the date sold for each transaction.
6. Add a "red flag" column to your short-term investment section that subtracts the purchase date from the sale date for each transaction and shows a value greater than 0 when the time you held the asset was longer than 365 days.
7. Categorize your transactions for Schedule D purposes by reconciling your transaction register sections and migrating any misplaced transactions to the appropriate section.

Play It Safe by Continuing to Categorize Each Capital Gains Investment by Old Categories

8. Play it safe by continuing to categorize each capital gains investment according to the old IRS categories that differentiated between shares and other securities, real estate, equipment and collectibles. There is very little work involved, and the potential benefit of this additional preparation would occur if the government legislated a return to the old practice.
9. Use your transaction register of each capital gains asset sold to keep records of each type of investment property in which you experienced a sale.
10. Create a type or category column with a standard single-digit alphabetic code for each type of investment, such as C for collectible and R for real estate.
11. Sort and categorize your transactions at any time by type using the "sort" feature usually found off the "Data" pull-down menu.

Tips & Warnings

• Although taxpayers are no longer required to categorize the type of capital gains investment in the same detail as was previously required, many taxpayers play it safe by continuing to maintain their capital gains records in accordance with the old categories.