Schedule D (Form 1040): Capital Gains and Losses – A Comprehensive Guide for the 2020 Tax Year
What the Form Is For
Schedule D (Form 1040) is the IRS form individual taxpayers use to report capital gains and losses from the sale or exchange of investment property and certain other assets. Think of it as the final summary sheet where all your investment profits and losses come together to determine what you owe in taxes—or how much you can deduct from your income.
Capital assets include most property you own for personal use or investment purposes: stocks, bonds, mutual funds, real estate (including rental properties and second homes), collectibles like coins or artwork, and even cryptocurrency. When you sell these assets for more than you paid, you have a capital gain. When you sell for less, you have a capital loss.
Schedule D works hand-in-hand with Form 8949 (Sales and Other Dispositions of Capital Assets), which replaced the old Schedule D-1 continuation sheet in 2011. Form 8949 is where you list each individual transaction with all its details; Schedule D then summarizes those transactions and calculates your overall tax liability. The form divides transactions into two categories based on holding period: short-term (assets held one year or less) and long-term (assets held more than one year). This distinction matters because long-term capital gains typically receive preferential tax rates, often much lower than your ordinary income tax rate.
You'll also use Schedule D to report capital gain distributions from mutual funds or real estate investment trusts, gains from installment sales reported on Form 6252, and gains or losses from partnerships, S corporations, estates, or trusts passed through to you via Schedule K-1. Additionally, if you're carrying forward capital losses from previous years that exceeded the annual deduction limit, Schedule D is where you apply those losses to offset current-year gains.
When You’d Use It (Late/Amended)
You file Schedule D as part of your regular annual tax return, typically due April 15 (or the following business day if April 15 falls on a weekend or holiday), with extensions available until October 15. However, there are several situations where you might need to file Schedule D late or submit an amended return.
Late filing situations generally arise when you receive corrected or late-arriving tax documents. Brokers sometimes issue corrected Forms 1099-B months after the original—perhaps discovering they reported incorrect basis information or failed to include certain transactions. If you filed your return before receiving these corrections and they materially affect your capital gains or losses, you should file an amended return using Form 1040-X within three years of your original filing deadline.
Amended returns become necessary for several specific scenarios. If you discover after filing that you omitted transactions, miscalculated your basis (the original cost of your investment), incorrectly reported holding periods (mixing up short-term and long-term), or failed to properly apply loss carryovers from prior years, you must file Form 1040-X with a corrected Schedule D attached. The IRS also requires amendments if they send you a notice identifying discrepancies between your reported figures and information they received from brokers or mutual funds.
The 2020 instructions provide special timing rules for certain elections. If you want to elect out of installment sale reporting or make elections regarding qualified small business (QSB) stock, you can do so on an amended return filed within six months after your original return's due date (excluding extensions). When filing such an amended return, you must write "Filed pursuant to section 301.9100-2" at the top to indicate you're making a valid retroactive election.
Key Rules or Details for 2020
Understanding Schedule D requires grasping several fundamental rules that govern capital gains and loss reporting. First, the capital asset definition determines what belongs on this form. Most property you own qualifies—your home, investment real estate, stocks, bonds, collectibles—but important exceptions exist. Inventory held for sale in your business, accounts receivable, depreciable business property, and certain creative works don't count as capital assets and get reported elsewhere.
The holding period rule creates a crucial distinction. Assets held one year or less generate short-term capital gains or losses, taxed at your ordinary income tax rate (potentially 10% to 37% in 2020). Assets held more than one year produce long-term capital gains or losses, typically taxed at preferential rates (0%, 15%, or 20%, depending on your income bracket). This single distinction can mean the difference between paying $370 or $200 in tax on a $1,000 gain, making timing a significant planning factor.
The capital loss limitation rule prevents unlimited deductions of investment losses against ordinary income. You can deduct capital losses fully against capital gains—$5,000 in losses completely offsets $5,000 in gains. But if your losses exceed your gains, you can only deduct up to $3,000 ($1,500 if married filing separately) against other income like wages or self-employment income. Any excess loss carries forward indefinitely to future years, maintaining its character as short-term or long-term.
Basis accuracy forms the foundation of correct reporting. Your basis is typically what you paid for an asset, including purchase commissions and fees. But basis adjustments happen frequently: improvements to real estate increase basis; depreciation deductions reduce it; stock splits and dividend reinvestments require careful tracking. The IRS receives basis information from brokers for securities purchased after certain dates (generally 2011 for stocks), but you remain responsible for accuracy. Keep meticulous records, because lost paperwork can cost you thousands in unnecessary taxes.
Related-party transaction rules prevent abuse through manufactured losses. You cannot deduct losses from selling property to family members, entities you control (owning more than 50% of a corporation), or certain trusts. These "nondeductible losses" must still be reported on Form 8949 and Schedule D, but adjustments eliminate the tax benefit.
Personal-use property rules create an asymmetry: gains from selling your car, furniture, or vacation home (unless it qualifies as a residence with exclusions) are taxable capital gains, but losses are nondeductible. You must report transactions for which you received Form 1099-S (typically real estate sales), even if the loss provides no tax benefit.
Step-by-Step (High Level)
Completing Schedule D follows a structured process that builds from detailed transactions to final tax calculations. Start by gathering documentation: Forms 1099-B from brokers, Forms 1099-DIV showing capital gain distributions, Schedule K-1s from partnerships or S corporations, records of asset purchases and sales with dates and amounts, and any carryover worksheets from your prior-year return.
Step One involves completing Form 8949, which precedes Schedule D. Form 8949 comes in two parts—Part I for short-term transactions and Part II for long-term transactions. Each part has three possible checkbox categories based on whether your broker reported the transaction to the IRS and what adjustments you need to make. For each sale, you'll enter description, acquisition date, sale date, proceeds (sales price), cost or other basis, adjustment codes if applicable (like "W" for wash sales or "L" for nondeductible losses), and calculated gain or loss. This detailed work often spans multiple pages when you've made numerous trades.
Step Two transfers Form 8949 totals to Schedule D. Part I of Schedule D (lines 1–7) handles short-term transactions. Line 1a allows a shortcut: if you have simple broker-reported transactions with no adjustments needed, you can enter the total directly from your 1099-B without itemizing on Form 8949. Lines 1b, 2, and 3 bring in subtotals from Form 8949's three checkbox categories. Lines 4 and 5 add gains from other forms (like installment sales or partnership income), and line 6 applies any short-term capital loss carryover from prior years. Line 7 calculates your net short-term gain or loss.
Step Three repeats the process for long-term transactions in Part II (lines 8–15). Line 8a offers the same shortcut as line 1a for uncomplicated broker-reported sales. Lines 8b, 9, and 10 pull in Form 8949 subtotals. Line 11 brings in long-term gains from other sources. Line 13 is particularly important—here you enter total capital gain distributions from mutual funds or REITs (reported in box 2a of Form 1099-DIV), regardless of how long you held the fund shares. Line 14 applies long-term capital loss carryover. Line 15 shows your net long-term gain or loss.
Step Four completes Part III (lines 16–22), the summary section determining your tax treatment. Line 16 combines your net short-term and net long-term results. If line 16 shows a gain, you report it on Form 1040 line 7 and potentially complete special worksheets (the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet) to calculate preferential tax rates. If line 16 shows a loss, line 21 determines your deductible amount—the smaller of your loss or $3,000 ($1,500 if married filing separately)—which you report on Form 1040 line 7. Any excess loss carries forward to 2021 using the Capital Loss Carryover Worksheet in next year's instructions.
Step Five involves potential additional worksheets. The 28% Rate Gain Worksheet applies if you sold collectibles (art, antiques, stamps, precious metals) or had Section 1202 qualified small business stock with partially excluded gains. The Unrecaptured Section 1250 Gain Worksheet calculates special tax treatment for depreciation recapture on real estate. These worksheets feed into the Schedule D Tax Worksheet for final tax calculation.
Common Mistakes and How to Avoid Them
Taxpayers frequently stumble over several recurring errors when preparing Schedule D. Forgetting Form 8949 ranks among the most common—people try to enter transactions directly on Schedule D without the required detail sheet. Unless your transactions qualify for the line 1a or 8a shortcuts (broker-reported sales with no adjustments and no special circumstances), you must complete Form 8949 first. Always read the eligibility criteria carefully.
Incorrect basis reporting causes countless problems. Some taxpayers use the wrong cost basis, forgetting to include purchase commissions or failing to account for stock splits and dividend reinvestments. Others simply lose records and guess at basis, which the IRS will challenge if their records differ. Avoid this by maintaining a dedicated investment file with purchase confirmations, year-end statements, and dividend reinvestment records. Most brokers now maintain online transaction histories going back years—download and save these periodically.
Mixing up short-term and long-term categories happens surprisingly often. Remember: count the holding period starting the day after purchase through the sale date. If you bought on January 15, 2019, and sold on January 15, 2020, that's exactly one year—short-term. You need January 16, 2020, or later for long-term treatment. Don't rush this determination, as it significantly affects your tax bill.
Failing to report nondeductible losses creates IRS matching problems. If you sold property to a family member at a loss or received a Form 1099-S for selling a vacation home at a loss, you must still report the transaction on Form 8949 and Schedule D. Enter the appropriate adjustment code ("L" for nondeductible loss) and make an offsetting entry in column (g) so the loss doesn't reduce your tax. This shows the IRS you properly handled the transaction.
Ignoring wash sale rules proves costly. If you sell stock at a loss and buy substantially identical stock within 30 days before or after the sale, the loss is disallowed and added to the basis of the replacement shares. Brokers report wash sales on Form 1099-B for transactions within the same account, but you're responsible for tracking wash sales across different brokers or between taxable and IRA accounts. Many traders accidentally trigger wash sales by repurchasing too quickly after tax-loss harvesting.
Omitting mutual fund capital gain distributions on line 13 generates IRS notices. Even if you reinvested these distributions rather than receiving cash, they're taxable and must be reported. Your Form 1099-DIV box 2a contains this amount—don't overlook it.
Rounding inconsistently creates minor errors that compound. If you choose to round figures to whole dollars, you must round all amounts throughout Schedule D. Mixing exact cents with rounded dollars produces mismatched totals.
Forgetting capital loss carryovers wastes valuable deductions. If you had excess capital losses in 2019, you must apply them in 2020 using the Capital Loss Carryover Worksheet. Many taxpayers forget to carry forward these losses, essentially throwing away tax benefits they've already earned.
What Happens After You File
Once you file Schedule D with your Form 1040, several processes unfold. The IRS computer-matches your reported gains and losses against Forms 1099-B, 1099-DIV, and other information returns filed by brokers and mutual funds. This matching occurs automatically, typically within months of filing. If the IRS finds discrepancies—you omitted transactions, reported different amounts than your broker, or claimed different basis—you'll receive a CP2000 notice proposing changes and additional tax.
Your capital loss carryover automatically continues to future years if your losses exceeded the annual deduction limit. You don't need to file anything special—simply complete the Capital Loss Carryover Worksheet when preparing your 2021 return to determine how much loss remains available. This carryover persists indefinitely until fully used, maintaining its character as short-term or long-term.
The IRS typically has three years from your filing date to audit Schedule D and propose adjustments, though this extends to six years if they believe you substantially understated income (by more than 25%). Keep all supporting documentation—brokerage statements, purchase confirmations, Form 8949, worksheets—for at least three years, preferably seven for significant transactions.
If you owe additional tax because Schedule D showed net capital gains, your payment was due with your return. If you didn't pay enough, the IRS will send a notice with interest and potentially penalties. Conversely, if Schedule D showed a net loss within the deductible limit, it reduced your tax liability or increased your refund, which typically arrives within 21 days of electronic filing.
State tax implications follow federal treatment in most states. Capital gains flow through to your state return, where they're typically taxed at your state's ordinary income rate (though a few states provide preferential treatment). Some states require separate capital gain schedules mirroring the federal form.
Your investment records remain crucial going forward. Basis in assets you continue holding must be tracked accurately for when you eventually sell. Carryover losses must be documented for future use. If you made elections (like QSB stock rollovers or installment sale elections), those elections affect future year reporting.
FAQs
Do I need to file Schedule D if I only received a Form 1099-DIV with capital gain distributions?
Yes, you must complete Schedule D and enter the capital gain distribution amount on line 13, even if you had no sales or exchanges during the year. However, you won't need Form 8949 in this situation—the capital gain distributions go directly on Schedule D line 13, and the total flows to Form 1040 line 7. Many taxpayers mistakenly think they can skip Schedule D and report dividends directly on Form 1040, but capital gain distributions require the Schedule D reporting path.
How do I report cryptocurrency sales on Schedule D?
The IRS treats virtual currency like Bitcoin or Ethereum as property, not currency. Sales, exchanges (including trading one cryptocurrency for another), and using cryptocurrency to purchase goods or services all trigger taxable events requiring Schedule D reporting. Report each transaction on Form 8949 with acquisition date, sale date, proceeds, basis, and gain or loss. If you made numerous small transactions, consider using specialized cryptocurrency tax software that generates Form 8949 statements, as manual tracking becomes impractical with high trading volume.
Can I avoid reporting sales if I reinvested all the proceeds?
No. Reinvesting sale proceeds doesn't change the tax treatment—you still realized a gain or loss when you sold, regardless of what you did with the money. This confuses many taxpayers who reinvested mutual fund proceeds, sold one stock to buy another, or executed 1031 like-kind exchanges improperly. The only exception involves specific deferral elections (like qualified opportunity funds) or qualifying like-kind exchanges of business real estate, both requiring special reporting and strict rule compliance.
What if my broker's Form 1099-B shows the wrong basis or is missing transactions?
Contact your broker immediately to request a corrected Form 1099-B. If they refuse or cannot correct it by the filing deadline, you must file with adjustments. Report the incorrect information exactly as shown on the 1099-B (so IRS matching won't flag your return), then make an adjustment in column (g) of Form 8949 with code "B" (for basis adjustment) and explain the correction in an attached statement. This reconciles your return with the broker's reporting while claiming the correct tax result.
How long can I carry forward capital losses?
Indefinitely. Unlike some deductions that expire, capital loss carryovers persist until you either use them to offset capital gains or deduct them against ordinary income (up to $3,000 annually). If you had a $30,000 capital loss in 2020 with no offsetting gains, you'd deduct $3,000 in 2020 and carry forward $27,000 to 2021, where you'd deduct another $3,000, carry forward $24,000 to 2022, and so on until exhausted. The loss maintains its character—short-term losses offset short-term gains first, long-term losses offset long-term gains first, with specific ordering rules applying for the $3,000 annual deduction.
Do I need Schedule D if my only capital gain was from selling my primary residence but I qualify for the home sale exclusion?
Generally no, if you can exclude your entire gain under the Section 121 exclusion (up to $250,000 for single filers, $500,000 for married filing jointly) and didn't receive Form 1099-S, you don't need to report the sale. However, if you received Form 1099-S or cannot exclude the entire gain (perhaps because you didn't meet the two-year ownership and use requirements, used part of the home for business, or your gain exceeded the exclusion limits), you must file Schedule D. Report the full sale on Form 8949, then enter adjustment code "H" with the exclusion amount as a negative number in column (g).
What happens if I made an estimated tax payment based on expected capital gains but then had losses instead?
You'll receive a refund when you file your return. Many taxpayers make quarterly estimated tax payments anticipating capital gains, only to have market downturns create losses instead. When you file Schedule D showing a loss rather than a gain, your total tax liability decreases. If your withholding and estimated payments exceed your actual tax, the IRS refunds the difference, typically within 21 days of electronic filing or six to eight weeks for paper returns.
Sources: All information derived from IRS.gov official publications: 2020 Instructions for Schedule D, 2020 Schedule D Form 1040, and About Schedule D (Form 1040).
