How to Report Realized Capital Gains or Losses on Your Income Tax Return

Many taxpayers do not know that they must report Realized Capital Gains and Losses from their money market funds and other brokerage account transactions. They receive Tax Return Document Enclosed envelopes from their brokers, report the interest and dividends, but don't know to report the Realized Capital transactions. Here's how to keep the IRS away from your door:

Difficulty: Moderate

Instructions

1. 
    

   You will receive a multi-page mailing from your broker noting that "Important Tax Return Document Enclosed."

2. 
    

   Open the envelope immediately to see what is inside. Put it in a special place where you are keeping your tax return documents, so it doesn't get lost.

3. 
    

   On the first page, you will see a Summary of Gross Proceeds Transaction. This is the amount of income the IRS's computers are expecting to find on your tax return.

4. 
    

   To avoid a problem with IRS, search through the pages, until you find one that shows your Realized Capital Gains or Losses. You know when you have found it, when the far right-hand column shows your gains or losses for each transaction. The transactions should also be organized into short term and long term transactions. "Realized" gains or losses means that you must report the transaction on your tax return.

5. 
    

   In order to account to the IRS properly for these transaction, you need to know what the cost basis was when you acquired this asset. Most of the time, the cost basis will be shown on the form, so all you have to do is copy the information onto Schedule D.

6. 
    

   If the cost basis is not provided, you need to become a detective to find out what the cost basis was. Did you transfer this account from another brokerage firm? If so, you need to call you former broker to try to find the information. Perhaps you kept copies of the transaction notifications when the asset was purchased? Perhaps you need to go back to the broker before the previous broker, if you transferred accounts more than once. You need to find an answer to the question: what was your cost basis for the asset? You may need to hire a tax attorney, if you're still stuck.

7. 
    

   Once you've followed these steps, you should not get a surprise letter from the IRS wondering why you didn't claim all that income!

Tips & Warnings

• If you haven't been keeping your confirmations, do so from now on. That will make preparing your 2009 return that much easier.
• The IRS is really a stickler about not reporting income. All income is reported to the IRS, whether it is W-2 income, self-employed income, irrespective of whether you receive a 1099-MISC income, or broker transaction income (1099-B). It can be very expensive to track down $20,000 or $30,000 of unreported gross transaction income only to find out that your REALIZED income was only $100.
• See Netwelth's article on 1099-MISC Income. Link is below.

Resources

• IRS Web Site
• MISC-1099 Information

[Maranatha80]

on 8/20/2009 Thanks so much for this! I got so confused trying to prepare our taxes involving capital gains myself...I had to get help. Could they make this stuff more confusing? Good thing for a helpful tax attorney! 5*'s!

[sanderdoe]

on 3/18/2009 Thanks for the great advice! I have bookmarked your article for future reference.

[barba0727]

on 3/18/2009 great article with plenty of advice.5*

[DeeCee]

on 3/17/2009 Very good tips in an understandable language. 5*

[consignmentchic]

on 3/17/2009 Thanks for this excellent information! 5**