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 2012 tax year. Think of it as the worksheet where you calculate whether you made or lost money on things like stocks, bonds, mutual funds, real estate (including rental property or vacation homes), and collectibles.

A “capital asset” is basically most property you own—whether it's for personal use, pleasure, or investment. Your car, house, furniture, and investment accounts all qualify. However, Schedule D doesn't cover everything: inventory from a business you run, accounts receivable from services you performed, and property used directly in your trade or business are reported elsewhere.

The form works in partnership with Form 8949 (Sales and Other Dispositions of Capital Assets), which was required starting in 2011. For 2012, you must first complete Form 8949 to list each individual transaction before transferring the totals to Schedule D. Schedule D then combines these totals to calculate your overall capital gain or loss for the year.

According to the official IRS instructions, you use Schedule D to figure the overall gain or loss from transactions reported on Form 8949, to report gains from various other forms (like Form 2439 or 6252), to report capital gain distributions not reported directly on Form 1040, and to report capital loss carryovers from prior years.

When You’d Use It (Late Filing or Amended Returns)

You must file Schedule D with your 2012 Form 1040 if any of these situations apply:

• You sold stocks, bonds, mutual funds, real estate (other than your primary home in most cases), or other capital assets during 2012
• You received Form 1099-B, 1099-S, or similar tax documents reporting sales
• You received capital gain distributions from mutual funds or real estate investment trusts (even if you didn't sell anything yourself)
• You're carrying forward capital losses from previous years to offset 2012 gains
• You had gains reported on Forms 2439, 4684, 6252, 6781, or 8824

Amended Returns

For amended returns: If you're filing Form 1040X to correct your 2012 return, you can amend Schedule D to report transactions you missed or correct errors. If you initially used the installment method to report a sale but want to elect out, the IRS instructions state you can do so on an amended return filed within six months of your original return's due date (excluding extensions)—just write “Filed pursuant to section 301.9100-2” at the top of the amended return.

Key Rules or Details for 2012

Holding Periods Matter

The most important distinction on Schedule D is between short-term and long-term transactions. According to the IRS instructions, the holding period for short-term capital gains and losses is one year or less, while the holding period for long-term capital gains and losses is more than one year. Short-term gains are taxed at your ordinary income tax rates, while long-term gains receive preferential tax treatment with lower maximum rates.

Loss Limitations

While you can use capital losses to offset capital gains dollar-for-dollar, the IRS limits how much you can deduct against ordinary income: only $3,000 per year ($1,500 if married filing separately). The Schedule D instructions specify that any losses exceeding this limit can be carried forward to future tax years.

Form 8949 Requirement

For 2012, you cannot simply list transactions directly on Schedule D. The form itself states: “Complete Form 8949 before completing line 1, 2, or 3” for short-term gains and “Complete Form 8949 before completing line 8, 9, or 10” for long-term gains. Every sale or exchange must first be reported on Form 8949, which has specific boxes (A, B, or C) to check depending on whether you received Form 1099-B and whether basis was reported to the IRS.

Special Situations

Several transactions require extra attention according to the IRS instructions:

• Wash sales: If you sell stock or securities at a loss and, within 30 days before or after the sale, you buy substantially identical stock or securities, the loss cannot be deducted (unless the loss was incurred in the ordinary course of business as a dealer in stock or securities)
• Home sales: You must report the sale or exchange of your main home on Form 8949 if you cannot exclude all of your gain from income, or if you received a Form 1099-S for the sale or exchange
• Qualified Small Business (QSB) stock: Section 1202 allows for an exclusion of up to 50% of the eligible gain on the sale or exchange of QSB stock held for more than 5 years

Step-by-Step (High Level)

Step 1: Gather Your Documents

Collect all Forms 1099-B (from brokers), 1099-S (from real estate transactions), 1099-DIV (showing capital gain distributions), and your own records showing purchase dates, prices, and selling costs.

Step 2: Complete Form 8949

This is where you list each transaction individually. Part I covers short-term transactions (held one year or less), Part II covers long-term (held more than one year). For each sale, you'll enter the description, dates acquired and sold, proceeds (sales price), cost basis, and any adjustments. Check the appropriate box (A, B, or C) at the top of each Form 8949 page based on whether you received Form 1099-B and whether basis was reported.

Step 3: Transfer Totals to Schedule D

After completing Form 8949, transfer the column totals to the corresponding lines on Schedule D. Lines 1–3 on Schedule D receive short-term totals from Form 8949 Part I; lines 8–10 receive long-term totals from Form 8949 Part II.

Step 4: Add Other Capital Transactions

Include capital gain distributions from mutual funds (line 13), gains from installment sales on Form 6252, and any capital loss carryovers from prior years (lines 6 and 14). The IRS instructions explain that capital gain distributions are paid by mutual funds or real estate investment trusts from their net realized long-term capital gains.

Step 5: Calculate Net Gain or Loss

Part III of Schedule D combines your short-term results (line 7) with your long-term results (line 15) to determine your net capital gain or loss (line 16). If you have a net gain, you may need to complete additional worksheets to calculate the proper tax.

Step 6: Apply the Right Tax Rate

If both lines 15 and 16 show gains, Schedule D directs you to determine whether you need to complete the “28% Rate Gain Worksheet” (line 18) or the “Unrecaptured Section 1250 Gain Worksheet” (line 19). Based on your answers to the questions in Part III, you'll complete either the “Qualified Dividends and Capital Gain Tax Worksheet” or the “Schedule D Tax Worksheet” to calculate your tax at the appropriate rates.

Common Mistakes and How to Avoid Them

Forgetting to Report All Transactions

Even if you didn't receive a Form 1099-B, you must report every sale. The IRS instructions emphasize that you must report all capital gains and losses even if you cannot use all of your losses in 2012.
Solution: Keep meticulous records throughout the year, including confirmation statements.

Wrong Holding Period Classification

Counting the holding period incorrectly can cost you by applying the wrong tax rate. The IRS instructions are clear: you must hold an asset for more than one year (not just one year) to qualify for long-term treatment.
Solution: When in doubt, count the months carefully or refer to the detailed holding period instructions in the Form 8949 instructions.

Incorrect Cost Basis

The IRS instructions explain that basis is the amount of your investment in property for tax purposes, usually its cost. You need to know your basis to figure any gain or loss on the sale. The instructions emphasize that you must keep accurate records that show the basis and adjusted basis of your property, including purchase price, commissions, improvements, depreciation, and stock splits.
Solution: Maintain a basis worksheet for each investment, tracking all adjustments.

Missing Adjustments on Form 8949

Form 8949 requires you to report adjustments in columns (f) and (g) for situations like wash sales, non-deductible losses, and basis adjustments not reported by your broker.
Solution: Carefully review the codes in column (f) and corresponding instructions. The IRS instructions provide specific codes including “W” for wash sales, “L” for non-deductible losses, and “E” for certain adjustments.

Failing to Use Losses Strategically

Taking a capital loss in the wrong year or forgetting to carry forward unused losses wastes valuable tax benefits.
Solution: Track capital loss carryovers using the Capital Loss Carryover Worksheet provided in the Schedule D instructions.

Ignoring Related-Party Transactions

The IRS instructions specifically state you cannot deduct losses from sales or exchanges between family members, a grantor and fiduciary of a trust, or other related parties, though you still must report the transaction.
Solution: Flag any transaction with a family member or related entity and verify whether the loss is allowed under the related-party rules detailed in the instructions.

What Happens After You File

Once you file your 2012 Form 1040 with Schedule D attached, the form becomes part of your permanent tax record. Here's what typically follows:

IRS Processing

The IRS will match the transactions you reported against information returns (Forms 1099-B, 1099-S) filed by brokers, real estate closing agents, and other payers. Discrepancies may trigger correspondence asking you to explain missing income or provide documentation.

Carryover Tracking

If you had net capital losses exceeding $3,000, the unused portion carries forward to 2013 and beyond. The IRS instructions provide a Capital Loss Carryover Worksheet specifically for tracking these amounts. You're responsible for calculating your carryover—the IRS doesn't automatically do this for you. You'll enter the carryover amounts on lines 6 and 14 of your 2013 Schedule D.

Audit Considerations

Capital transactions can be subject to examination. The standard statute of limitations for IRS audits is generally three years from filing, though certain circumstances can extend this period.

State Tax Implications

Most states that impose income tax also require capital gains reporting, often using your federal Schedule D as the starting point. Check your state's requirements for any differences in treatment.

FAQs

Q: Do I have to report the sale of my primary home on Schedule D?

According to the IRS instructions, you must report the sale or exchange of your main home on Form 8949 if you cannot exclude all of your gain from income, or if you received a Form 1099-S. Generally, if you meet the ownership and use tests (owned and lived in the home for at least 2 of the 5 years before the sale) and your gain is under $250,000 ($500,000 for married couples filing jointly), you can exclude the entire gain from income. If you qualify for the full exclusion and didn't receive Form 1099-S, you don't need to report the sale.

Q: What tax rate applies to my capital gains in 2012?

It depends on your holding period and income level. Short-term gains (one year or less) are taxed as ordinary income at your marginal tax rate. Long-term gains (more than one year) receive preferential rates, which the IRS instructions indicate are calculated using special worksheets provided with the Schedule D instructions. The instructions direct you to complete either the “Qualified Dividends and Capital Gain Tax Worksheet” or the “Schedule D Tax Worksheet” depending on your specific situation.

Q: Can I deduct capital losses if I don't have any gains?

Yes, but with limits. The IRS instructions state that you can deduct capital losses up to the amount of your capital gains plus $3,000 ($1,500 if married filing separately). According to the instructions, losses exceeding this limit can be used in future years—you enter them on the Capital Loss Carryover Worksheet and carry them forward to offset gains or income in subsequent years.

Q: What is a wash sale and why does it matter?

According to the IRS instructions, a wash sale occurs when you sell or otherwise dispose of stock or securities at a loss and, within 30 days before or after the sale, you buy substantially identical stock or securities (or acquire them in a fully taxable trade, or through a contract or option). You cannot deduct losses from wash sales unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities. However, the disallowed loss is added to the basis of the replacement property.

Q: I received Form 1099-DIV showing capital gain distributions. Where do these go?

The IRS instructions specify that you enter capital gain distributions on Schedule D, line 13. These represent distributions paid by a mutual fund or real estate investment trust from its net realized long-term capital gains. The instructions state you should enter the total capital gain distributions paid to you during the year, regardless of how long you held your investment, using the amount shown in box 2a of Form 1099-DIV.

Q: What records should I keep and for how long?

The IRS instructions emphasize that you must keep accurate records that show the basis and adjusted basis of your property. Your records should show the purchase price (including commissions), increases to basis (such as the cost of improvements), and decreases to basis (such as depreciation, nondividend distributions on stock, and stock splits). While the instructions don't specify an exact retention period, keeping these records is essential for accurately reporting gains and losses when you sell the property.

Q: Can I amend Schedule D if I discover an error?

Yes. The IRS instructions for installment sales note that you can file an amended return to make certain elections. File Form 1040X (Amended U.S. Individual Income Tax Return) with a corrected Schedule D and Form 8949. For installment sale elections made on amended returns, the instructions state the amended return must be filed no later than 6 months after the due date of your return (excluding extensions), with “Filed pursuant to section 301.9100-2” written at the top.

This guide is based on the official IRS Schedule D (Form 1040) and instructions for tax year 2012. For the complete forms and detailed instructions, visit IRS.gov and reference Publication 544 (Sales and Other Dispositions of Assets) and Publication 550 (Investment Income and Expenses) for additional details.

Source: 2012 Instructions for Schedule D (Form 1040) | 2012 Schedule D Form