Reporting capital gains and losses can be a little tricky, depending on what type of property you have sold, how long you kept it, and whether or not you received all of the proceeds in the year of sale or not.
First of all, a “short term” gain/loss occurs with property you’ve kept for less than a year and is reported as ordinary income. If you’ve kept the property for a year and a day, then it is considered “long term”. Before I go any further, any property that is inherited, is considered “long term” regardless of how long you’ve had it. Ok, let’s start with, perhaps, the easiest transaction – sale of stock. It is fairly simple to determine the cost basis of the stock by asking, “What did you pay for it and when?” Take the actual cost of the stock, say, 100 shares of XYZ at $10 per share that you paid on October 1, 2011. That would be $1000, then add to it the broker’s commission of $60 and your cost basis is now $1060. If you kept the stock until October 1, 2012, you’ve kept it for one year and a day, and it is now “long-term”. If you sold it on that day for $15 per share, your gain is $440, less the broker’s commission. You should get a Form 1099-B from your broker on this and you would report it on Form 1040, Schedule D. If you sold the stock on September 30, 2012, it is considered “short-term”, but you still report it on Schedule D.
Now, if you sold business equipment, say, a bulldozer that has been used in the business for 10 years, things get a little more complicated. This type of equipment is depreciated on Form 4562 from the time it is actually put into service in the business and according to certain IRS rules that determine its life expectancy. In this case, a bulldozer is depreciated over 7 years. When it is sold, one must re-capture the depreciation allowed (whether or not it is actually taken – more on that later). This transaction is recorded on Form 4797 and the resultant gain or loss is carried over to Schedule D, regardless of whether this business is incorporated or is a sole proprietor. If incorporated, the Schedule D would be shown on the corporate return (1120 or 1120S). If unincorporated, the Schedule D would be shown on Form 1040. One of the difficult parts of this process is determining the cost basis of the property. That may not always be black and white. Generally speaking, though, your cost basis is what you paid for it, plus any costs you incurred to put the item into service. In the case of the bulldozer, if you bought it used, you might have had to overhaul the motor and transmission to make it useful. Those costs are part of your basis.
Remember I said in the beginning that how you report the gain/loss would also depend upon whether you received the proceeds in the year of sale or not? Well, if you did not receive all of the proceeds in the year of sale, you have an “installment sale”. Installment sales are reported on Form 6252. Here you record the details of the transaction, the gross sale amount, the cost of sale, how much you received in the year of sale. Then, depending upon whether this is business property sold or not, you would carry the results over to Form 4797, then to Schedule D or straight to Schedule D, if this is personal property, like a sale of stock.