Form 8949 is a tax form individuals use to report the sale or exchange of capital assets, such as stocks, bonds, mutual funds, and real estate. The form calculates and reports any gains or losses from the sale or exchange of these assets, which must be reported on an individual's tax return.
This article will cover the basics of Form 8949, including when it is required, how to fill it out, and some common mistakes to avoid.
When is Form 8949 Required?
Form 8949 is required to report any sale or exchange of capital assets that results in a gain or loss. This includes sales of stocks, bonds, mutual funds, real estate, and other property that is not used for personal use or held for investment.
If an individual has only simple capital gains or losses, they may be able to report them on Form 1040, Schedule D, without using Form 8949. However, if an individual has complex capital gains or losses, such as multiple transactions or transactions with different cost bases, they must use Form 8949 to report them.
How to Fill Out Form 8949
Form 8949 is divided into two sections: Part I and Part II. Part I is used to report short-term capital gains and losses, while Part II is used to report long-term capital gains and losses.
For each asset that was sold or exchanged during the tax year, the individual must provide the following information on Form 8949:
Description of Property: A description of the asset that was sold or exchanged, including the name of the security, the number of shares, and any other identifying information.
Date Acquired: The date the asset was acquired. If the asset was purchased on different dates or acquired through different methods, the individual must list each date separately.
Date Sold or Disposed of: The date the asset was sold or disposed of.
Proceeds: The amount of money received from the sale or exchange of the asset.
Cost or Other Basis: The cost or other basis of the asset, which includes the purchase price, any commissions or fees paid, and any adjustments made to the cost basis.
Gain or Loss: The difference between the proceeds and the cost or other basis, which determines the amount of gain or loss from the sale or exchange of the asset.
Code: A code that indicates the type of transaction, such as A for a short-term gain, B for a short-term loss, C for a long-term gain, or D for a long-term loss.
If an individual has multiple transactions for the same asset, they must list each transaction separately on Form 8949. The individual must also provide a total for each Parts I and II column.
Common Mistakes to Avoid When Filling Out Form 8949
Filling out Form 8949 can be complex and time-consuming, with several common mistakes to avoid. Some of these mistakes include the following:
Failing to Report All Transactions: It is important to report all transactions involving the sale or exchange of capital assets, even if the individual still needs to receive a Form 1099-B from their broker.
Failing to Provide Accurate Cost Basis Information: The cost basis of an asset is a key factor in determining the gain or loss from its sale or exchange. It is important to provide accurate and complete cost basis information, including any adjustments or modifications made to the cost basis.
Failing to Use the Correct Codes: Each transaction must be assigned a code that indicates the type of transaction, such as short-term gain or loss, long-term gain or loss, or other types of transactions. It is important to use the correct codes to ensure accurate reporting.
Not Providing Adequate Description of Property: It is important to provide a detailed description of the asset that was sold or exchanged, including the name of the security, the number of shares, and any other identifying information. Please adequately describe the property to avoid errors or discrepancies in the reported information.
Failing to Report Correct Dates: The dates when the asset was acquired, sold, or disposed of must be reported accurately. Incorrect dates can lead to incorrect calculations of the gain or loss on the asset.
Failing to Report Wash Sales: A wash sale occurs when an individual sells or exchanges security at a loss and then buys the same or substantially identical security within 30 days before or after the sale. In such cases, the loss is disallowed for tax purposes. It is important to report wash sales accurately on Form 8949 to avoid penalties and interest.
Failing to Report Partnership Transactions: If an individual is a partner in a partnership that sold or exchanged capital assets during the tax year, the individual must report their share of the partnership's gain or loss on Form 8949. Failure to do so may result in penalties and interest.
Conclusion
Form 8949 is an important tax form that individuals must use to report the sale or exchange of capital assets that result in a gain or loss. The form requires detailed information about each transaction, including the property description, the dates of acquisition and sale or disposition, the proceeds from the sale, the cost or other basis of the property, and the gain or loss from the transaction. Failure to fill out the form correctly or accurately may result in penalties, interest, and additional scrutiny from the IRS. It is important to take the time to fill out the form correctly and avoid common mistakes to ensure accurate reporting and compliance with tax laws.
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