Capital gains and losses play a critical role in determining your overall tax liability, especially if you are involved in the sale of stocks, mutual funds, cryptocurrency, real estate, or other investment assets. The IRS requires taxpayers to report these transactions on Schedule D (Form 1040). This blog provides a detailed guide on how to accurately report your capital gains and losses, avoid common pitfalls, and ensure compliance with IRS rules using Schedule D and Form 8949.
What Is Schedule D?
Schedule D is a supplemental form used to report the total capital gains and losses that flow into your main income tax return (Form 1040). This includes both short-term and long-term transactions, categorized based on the holding period of each asset sold.
Capital gains and losses are typically the result of selling assets such as:
- Stocks and bonds
- Mutual funds and ETFs
- Cryptocurrencies
- Investment properties
- Options and futures contracts
What Is Form 8949?
Before completing Schedule D, you may need to list individual transactions on Form 8949. This form provides a detailed breakdown of each sale, including acquisition and sale dates, cost basis, proceeds, and adjustments (if any).
There are separate parts of Form 8949 for:
- Short-term transactions with basis reported to the IRS
- Short-term transactions with basis not reported
- Long-term transactions with basis reported
- Long-term transactions with basis not reported
After entering all necessary details on Form 8949, the subtotals are carried over to Schedule D.
Short-Term vs. Long-Term Capital Gains
Capital gains and losses are classified based on how long you held the asset before selling it:
- Short-Term: Held for one year or less. Taxed at ordinary income tax rates.
- Long-Term: Held for more than one year. Taxed at favorable rates—typically 0%, 15%, or 20% depending on your income bracket.
Step-by-Step Guide to Reporting on Schedule D
Step 1: Collect Your 1099-B Forms
Your brokerage will issue a Form 1099-B summarizing your sales of securities. This form includes details such as sale dates, proceeds, cost basis, and whether the transaction was reported to the IRS.
Step 2: Complete Form 8949
If your 1099-B includes basis information reported to the IRS and no adjustments are required, you may be able to summarize those directly on Schedule D. Otherwise, use Form 8949 for each transaction, specifying:
- Description of property (e.g., 100 shares of ABC)
- Date acquired and date sold
- Sales price (proceeds)
- Cost basis
- Gain or loss
- Adjustment codes and amounts (if applicable)
Step 3: Transfer Totals to Schedule D
After completing Form 8949, carry the subtotals to the corresponding parts of Schedule D:
- Part I: Short-term capital gains and losses
- Part II: Long-term capital gains and losses
Step 4: Calculate Net Capital Gain or Loss
Net your short-term and long-term totals. If you have:
- Net gain: It’s added to your taxable income
- Net loss: Up to $3,000 ($1,500 if MFS) can be deducted against ordinary income
- Excess losses: Carried forward to future years indefinitely
Step 5: Transfer Net Gain or Loss to Form 1040
The final figure from Schedule D (line 16) flows to:
- Form 1040, Line 7 (for tax year 2025)
Understanding Adjustment Codes on Form 8949
If there’s a discrepancy between your records and the 1099-B, or if the basis wasn’t reported, you must explain it using a code. Common codes include:
- B: Basis not reported to the IRS
- D: Sale includes disallowed loss from wash sale
- W: Adjustment for a wash sale loss
- M: Adjustment for incorrect basis
- O: Other adjustment
Wash Sale Rule
If you sell a stock at a loss and repurchase the same or substantially identical stock within 30 days, the loss is disallowed under the wash sale rule. Instead, the disallowed loss is added to the basis of the new stock, delaying your deduction.
Report disallowed losses using adjustment code “W” on Form 8949, along with the dollar amount of the adjustment.
Common Mistakes to Avoid
- Failing to report all transactions, even if there’s no gain
- Confusing short-term and long-term holding periods
- Not reporting crypto asset sales
- Omitting Form 8949 when required
- Ignoring wash sale rules
- Entering incorrect cost basis or forgetting reinvested dividends
Special Considerations for Cryptocurrency
Sales of digital assets like Bitcoin or Ethereum must be reported similarly to stocks. You must include:
- Date acquired and sold
- Proceeds and basis
- Any gains or losses
The IRS treats cryptocurrency as property, not currency, so each sale or exchange is a taxable event—even converting one coin to another or using crypto to buy goods.
Tools and Software to Simplify the Process
To simplify your reporting process, consider using tax software or working with a CPA. Many platforms now support direct import of 1099-B and crypto transaction CSVs from brokerages and exchanges. Look for features such as:
- Automatic Form 8949 generation
- Wash sale identification
- Carryover tracking
- Audit trails for each transaction
Example of a Capital Gain Transaction
Example: You bought 100 shares of XYZ stock for $5,000 on February 1, 2023, and sold them for $8,000 on March 1, 2025.
- Gain: $8,000 – $5,000 = $3,000
- Holding period: More than 1 year → Long-term gain
- Report on Form 8949 → Part II → Carry to Schedule D → Part II
- Include in Form 1040, Line 7
Capital Loss Carryovers
If your total capital losses exceed capital gains in a given year, you can:
- Deduct up to $3,000 from your ordinary income ($1,500 if MFS)
- Carry forward the remaining loss to future tax years indefinitely
Track these losses using a Capital Loss Carryover Worksheet found in IRS Publication 550.
When to Seek Professional Help
While many taxpayers can handle straightforward investments on their own, professional help is advised if:
- You have large numbers of trades or complex options
- You’re involved in cryptocurrency or foreign securities
- You experience a wash sale
- You received inherited or gifted assets
- You need to amend prior returns due to incorrect basis
Conclusion
Reporting capital gains and losses correctly on Schedule D is essential for maintaining compliance and optimizing your tax situation. By following the IRS guidelines, utilizing Form 8949 appropriately, and being mindful of nuances such as holding periods, wash sales, and carryovers, you can accurately report your investment activity and potentially reduce your overall tax bill. For those with complex scenarios or significant investments, consulting a tax advisor or CPA ensures that you don’t miss important deductions or trigger costly errors.
