What the Form Is For

Schedule D (Form 1040) is the IRS form you use to report profits and losses from selling investments and other capital assets during the 2020 tax year. Think of it as your financial scoreboard for tracking what happened when you sold stocks, bonds, mutual funds, real estate (not your main home in most cases), or other investment property.

A capital asset is essentially any property you own for personal use or investment—your stocks, bonds, vacation home, collectibles, or cryptocurrency. When you sell these assets for more than you paid, you have a capital gain (profit). When you sell them for less, you have a capital loss. Schedule D is where you report these transactions and calculate the net result, which ultimately affects how much tax you owe or the refund you receive.

The form works hand-in-hand with Form 8949, where you first list individual transactions before totaling them on Schedule D. Source

When You'd Use It (Including Late or Amended Returns)

You must file Schedule D with your 2020 Form 1040 if you:

• Sold stocks, bonds, mutual funds, or other securities
• Sold real estate (other than your primary residence, in most cases)
• Received capital gain distributions from a mutual fund or real estate investment trust that aren't reported directly on Form 1040, line 7
• Had gains or losses from partnerships, S corporations, estates, or trusts
• Had nonbusiness bad debts
• Reported gains from Forms 2439, 4684, 6252, 6781, or 8824

For late or amended returns: If you discover errors in your capital gains reporting after filing your original 2020 return, you would file Form 1040-X (Amended U.S. Individual Income Tax Return) along with a corrected Schedule D. As of 2020, amended returns could be filed electronically for current and two prior tax years, though paper filing remained an option. Generally, you have three years from the original filing deadline to amend a return and claim a refund. Source

Key Rules and Thresholds for 2020

Understanding these fundamental rules helps you complete Schedule D correctly:

• Holding Period Matters: The length of time you owned an asset before selling determines your tax rate. Assets held for one year or less generate short-term capital gains or losses (reported in Part I), taxed at ordinary income rates up to 37%. Assets held for more than one year produce long-term capital gains or losses (reported in Part II), taxed at preferential rates of 0%, 15%, or 20%, depending on your taxable income.
• Capital Loss Limits: You can deduct capital losses against capital gains plus an additional $3,000 of ordinary income ($1,500 if married filing separately). Any excess losses carry forward to future years. This means if you lost $10,000 on stocks but gained $4,000 on others, you'd have a $6,000 net loss—you could deduct $3,000 in 2020 and carry the remaining $3,000 forward to 2021.
• Wash Sale Rules: You cannot claim a loss if you sell securities at a loss and purchase substantially identical securities within 30 days before or after the sale. The disallowed loss gets added to the basis of the new securities.
• Form 8949 Requirement: Before completing Schedule D, you must list individual transactions on Form 8949, which serves as the detailed transaction worksheet. Brokers typically provide Form 1099-B showing your sales, and this information flows through Form 8949 to Schedule D. Source

How to Complete It: Step-by-Step (High Level)

Overview

While tax software typically automates this process, understanding the flow helps you verify accuracy:

Step 1: Gather Documentation

Collect all Forms 1099-B from brokers, records of asset purchases (showing your cost basis), and documentation of any gifts or inheritances.

Step 2: Complete Form 8949

List each sale transaction separately, including the description of property, dates acquired and sold, sales proceeds, cost basis, and any adjustments. Separate short-term transactions (Part I) from long-term transactions (Part II).

Step 3: Transfer Totals to Schedule D

The totals from Form 8949 flow into Schedule D, Lines 1b and 8b (if you completed Form 8949) or Lines 1a and 8a (for certain transactions not requiring Form 8949).

Step 4: Add Other Capital Gains

Include capital gain distributions from mutual funds (Line 13), gains from other forms like installment sales on Form 6252 (Lines 4, 11), and any capital loss carryover from 2019 (Lines 6, 14).

Step 5: Calculate Net Gain or Loss

Work through the form's arithmetic: combine short-term totals in Part I (Line 7) and long-term totals in Part II (Line 15), then combine both on Line 16.

Step 6: Determine Tax Treatment

If you have a net capital gain, you may complete the Qualified Dividends and Capital Gain Tax Worksheet to benefit from preferential long-term rates. If you have a net loss, the $3,000 annual deduction limit applies, with excess amounts carrying forward.

Step 7: Transfer Results to Form 1040

The final figure from Schedule D goes on your Form 1040, affecting your overall tax liability or refund. Source

Common Mistakes and How to Avoid Them

Mistake 1: Forgetting Cost Basis Adjustments

Many taxpayers report only the original purchase price without accounting for reinvested dividends, stock splits, or commissions. Your basis should include all costs of acquiring the property plus improvements. Keep meticulous records from purchase to sale.

Mistake 2: Misclassifying Holding Periods

Counting your holding period incorrectly can cost you money. The clock starts the day after you acquire property and includes the day you sell it. Assets held exactly one year qualify as short-term (higher taxes), while those held one year plus one day qualify as long-term (lower taxes).

Mistake 3: Reporting Wash Sales Incorrectly

If you sold stock at a loss and repurchased it within the 30-day window, the loss is disallowed. Your Form 1099-B should indicate wash sales, but you're responsible for identifying them if your broker doesn't. Enter "W" in column (f) of Form 8949 and adjust column (g) accordingly.

Mistake 4: Omitting Capital Loss Carryovers

Failing to track and use losses from prior years means overpaying taxes. The IRS doesn't automatically carry these forward for you—you must calculate and report them using Line 6 (short-term) and Line 14 (long-term) of Schedule D.

Mistake 5: Not Reconciling with Form 1099-B

The IRS receives copies of your 1099-B forms and matches them against your return. Failing to report all transactions, even if they resulted in losses, triggers automated notices. Report every transaction shown on your 1099-B forms.

Mistake 6: Treating Related-Party Losses as Deductible

Sales to family members, controlled entities, or trusts may result in nondeductible losses. While you must report these transactions, enter "L" in column (f) of Form 8949 and adjust column (g) to prevent claiming the loss. Source

What Happens After You File

Once you submit Schedule D with your 2020 Form 1040:

IRS Matching Process

The IRS compares the totals on your Schedule D against the 1099-B forms brokers filed. Discrepancies may generate automated notices (CP2000) proposing additional tax, typically arriving 12-18 months after filing.

Tax Consequences

Net capital gains increase your tax liability, but long-term gains enjoy preferential rates (0%, 15%, or 20% depending on income). Net capital losses reduce your taxable income by up to $3,000, lowering your tax bill. Any excess losses appear on your 2021 Schedule D as capital loss carryovers.

Record Retention

Keep all supporting documentation (brokerage statements, purchase confirmations, sale confirmations) for at least three years after filing. For property with carried-over basis (like inherited assets or wash sale adjustments), maintain records indefinitely until the property is finally sold.

Future Year Impact

Unused capital losses carry forward indefinitely, maintaining their character as short-term or long-term. You must track these amounts yourself using the Capital Loss Carryover Worksheet in the Schedule D instructions for use on future returns.

Refund or Payment

Schedule D results flow through to your Form 1040, affecting whether you owe additional tax or receive a larger refund. Large capital gains may require quarterly estimated tax payments in future years to avoid underpayment penalties. Source

FAQs

Q1: Do I need to report the sale of my primary residence?

Most homeowners don't need to report home sales if they meet the $250,000 exclusion ($500,000 for married couples filing jointly). You must have owned and lived in the home as your main residence for at least two of the five years before selling. Report the sale only if you can't exclude all the gain or received Form 1099-S. Source

Q2: What happens if I don't report capital gains shown on my 1099-B?

The IRS receives copies of all 1099-B forms and will notice missing transactions. You'll likely receive a CP2000 notice proposing additional tax, interest, and possibly penalties. Always report all transactions, even those resulting in losses, to avoid discrepancies.

Q3: Can I use capital losses from 2020 in future years?

Absolutely. Capital losses exceeding your gains plus the $3,000 annual deduction limit carry forward indefinitely. They maintain their character as short-term or long-term losses. Calculate the carryover using the Capital Loss Carryover Worksheet and report it on your 2021 Schedule D. Source

Q4: How do I handle cryptocurrency transactions?

The IRS treats virtual currencies like Bitcoin as property, not currency. Sales, exchanges, or uses of cryptocurrency generate capital gains or losses reported on Form 8949 and Schedule D. Each transaction requires basis tracking—what you paid versus what you received when disposing of the cryptocurrency.

Q5: What if my broker didn't report my cost basis correctly?

You can adjust the cost basis on Form 8949 using column (g). Enter the broker's reported basis in column (e), then use column (g) to show the adjustment needed to reflect the correct basis. Maintain documentation supporting your adjustment in case of IRS questions.

Q6: Are investment management fees deductible on Schedule D?

For 2020, investment advisory and management fees were not deductible due to the suspension of miscellaneous itemized deductions under tax reform. These fees can no longer reduce your capital gains directly, though they may affect net investment income tax calculations.

Q7: How long should I keep records related to Schedule D?

Keep records for at least three years after filing, but longer is wiser. For inherited property, gifts, or complex transactions involving basis adjustments, maintain documentation indefinitely. If you have capital loss carryovers, keep supporting records until you've fully used those losses. Source

This summary is based on the official 2020 Instructions for Schedule D (Form 1040) published by the Internal Revenue Service. For specific tax situations, consult a qualified tax professional or refer to the complete instructions at IRS.gov.