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            Publication 550
            Cat. No. 15093R                                                    Contents
                                                                               Future Developments           . . . . . . . . . . . . 1
Department 
of the      Investment                                                         Reminders . . . . . . . . . . . . . . . . . . . 1
Treasury
Internal                                                                       Introduction . . . . . . . . . . . . . . . . . . 2
Revenue     Income and
Service                                                                        Chapter  1.  Investment Income            . . . . . . 2
                                                                               General Information             . . . . . . . . . . . 2
            Expenses                                                           Interest Income . . . . . . . . . . . . . . 4
                                                                               Discount on Debt Instruments                . . . .   12
                                                                               When To Report Interest Income . . .                  16
            (Including Capital                                                 How To Report Interest Income               . . . .   16
                                                                               Dividends and Other 
            Gains and Losses)                                                              Distributions . . . . . . . . . . . . .   18
                                                                               How To Report Dividend Income . . .                   22
                                                                               Stripped Preferred Stock              . . . . . . .   23
                                                                               REMICs, FASITs, and Other 
            For use in preparing                                                           CDOs    . . . . . . . . . . . . . . . .   24
                                                                               S Corporations            . . . . . . . . . . . . .   25
                                                                               Investment Clubs . . . . . . . . . . . .              25
            2022 Returns
                                                                               Chapter  2.  Tax Shelters and Other 
                                                                               Reportable Transactions                 . . . . . .   26
                                                                               Abusive Tax Shelters              . . . . . . . . .   27
                                                                               Chapter  3.  Investment Expenses            . . . .   30
                                                                               Limits on Deductions            . . . . . . . . . .   30
                                                                               Interest Expenses             . . . . . . . . . . .   30
                                                                               Bond Premium Amortization                 . . . . .   32
                                                                               Nondeductible Interest 
                                                                                           Expenses    . . . . . . . . . . . . . .   33
                                                                               How To Report Investment 
                                                                                           Interest Expenses     . . . . . . . . .   34
                                                                               When To Report Investment 
                                                                                           Expenses    . . . . . . . . . . . . . .   35
                                                                               Chapter  4.  Sales and Trades of 
                                                                               Investment Property . . . . . . . . .                 35
                                                                               What Is a Sale or Trade?              . . . . . . .   35
                                                                               Basis of Investment Property              . . . . .   38
                                                                               How To Figure Gain or Loss                . . . . .   43
                                                                               Nontaxable Trades . . . . . . . . . . .               45
                                                                               Transfers Between Spouses                 . . . . .   47
                                                                               Related Party Transactions . . . . . .                47
                                                                               Capital Gains and Losses . . . . . . .                48
                                                                               Reporting Capital Gains and 
                                                                                           Losses . . . . . . . . . . . . . . . .    64
                                                                               Special Rules for Traders in 
                                                                                           Securities or Commodities       . . . .   67
                                                                               Chapter  5.  How To Get Tax Help . . . .              68
                                                                               Index       . . . . . . . . . . . . . . . . . . . . . 73

                                                                               Future Developments
                                                                               For  the  latest  information  about  developments 
                                                                               related to Pub. 550, such as legislation enacted 
                                                                               after it was published, go to IRS.gov/Pub550.

                                                                               Reminders
              Get forms and other information faster and easier at:            Foreign source income.            If you are a U.S. citi-
              • IRS.gov (English)         • IRS.gov/Korean (한국어)               zen  with  investment  income  from  sources  out-
              • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский)          side  the  United  States  (foreign  income),  you 
              •
                IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt)    must  report  that  income  on  your  tax  return 

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unless it is exempt by U.S. law. This is true Comments and suggestions. We welcome Useful Items
whether you reside inside or outside the United your comments about this publication and sug- You may want to see:
States and whether or not you receive a Form gestions for future editions.
1099 from the foreign payer. You can send us comments through Publication
Employee stock options. If you received an IRS.gov/FormComments. Or, you can write to
option to buy or sell stock or other property as the Internal Revenue Service, Tax Forms and 525 525 Taxable and Nontaxable Income
payment for your services, see Pub. 525, Taxa- Publications, 1111 Constitution Ave. NW, 537 537 Installment Sales
ble and Nontaxable Income, for the special tax IR-6526, Washington, DC 20224.
rules that apply. Although we can’t respond individually to 590-B 590-B Distributions from Individual
Disaster relief. Relief is available for those af- each comment received, we do appreciate your Retirement Arrangements (IRAs)
fected by some disasters. See IRS.gov/ feedback and will consider your comments and 925 925 Passive Activity and At-Risk Rules
DisasterTaxRelief. suggestions as we revise our tax forms, instruc-
tions, and publications. Don’t send tax ques- 1212 1212 Guide to Original Issue Discount
Photographs of missing children. The Inter- tions, tax returns, or payments to the above ad- (OID) Instruments
nal Revenue Service is a proud partner with the dress.
National Center for Missing & Exploited Form (and Instructions)
Children® (NCMEC). Photographs of missing Getting answers to your tax questions.
children selected by the Center may appear in If you have a tax question not answered by this Schedule B (Form 1040) Schedule B (Form 1040) Interest and
this publication on pages that would otherwise publication or the How To Get Tax Help section Ordinary Dividends
be blank. You can help bring these children at the end of this publication, go to the IRS In- Schedule D (Form 1040) Schedule D (Form 1040) Capital Gains
home by looking at the photographs and calling teractive Tax Assistant page at IRS.gov/
800-THE-LOST (800-843-5678) if you recog- Help/ITA where you can find topics by using the and Losses
nize a child. search feature or viewing the categories listed. 1040 1040 U.S. Individual Income Tax Return
Getting tax forms, instructions, and pub- 1040-SR 1040-SR U.S. Income Tax Return for
Introduction lications. Go to IRS.gov/Forms to download Seniors
current and prior-year forms, instructions, and
This publication provides information on the tax publications. 1099 1099 General Instructions for Certain
treatment of investment income and expenses. Information Returns
It includes information on the tax treatment of Ordering tax forms, instructions, and
investment income and expenses for individual publications. Go to IRS.gov/OrderForms to 2439 2439 Notice to Shareholder of
shareholders of mutual funds or other regulated order current forms, instructions, and publica- Undistributed Long-Term Capital
investment companies, such as money market tions; call 800-829-3676 to order prior-year Gains
funds. It explains what investment income is forms and instructions. The IRS will process 3115 3115 Application for Change in
taxable and what investment expenses are de- your order for forms and publications as soon Accounting Method
ductible. It explains when and how to show as possible. Don’t resubmit requests you’ve al-
these items on your tax return. It also explains ready sent us. You can get forms and publica- 6251 6251 Alternative Minimum Tax —
how to determine and report gains and losses tions faster online. Individuals
on the disposition of investment property and 8582 8582 Passive Activity Loss Limitations
provides information on property trades and tax
shelters. 8615 8615 Tax for Certain Children Who Have
The glossary at the end of this publica- Unearned Income
TIP tion defines many of the terms used. 8814 8814 Parents' Election To Report Child's
Interest and Dividends
1.
Investment income. This generally includes 8815 8815 Exclusion of Interest From Series
interest, dividends, capital gains, and other EE and I U.S. Savings Bonds Issued
types of distributions including mutual fund dis- After 1989
tributions. Investment
8818 8818 Optional Form To Record
Redemption of Series EE and I U.S.
Investment expenses. These include interest Income Savings Bonds Issued After 1989
paid or incurred to acquire investment property
and expenses to manage or collect income 8824 8824 Like-Kind Exchanges
from investment property. Topics 8949 8949 Sales and Other Dispositions of
This chapter discusses:
Qualified retirement plans and IRAs. The Capital Assets
rules in this publication do not apply to invest- • Interest Income, 8960 8960 Net Investment Income
ments held in individual retirement arrange- • Discount on Debt Instruments, Tax—Individuals, Estates, and Trusts
ments (IRAs), section 401(k) plans, and other • When To Report Interest Income,
qualified retirement plans. The tax rules that ap- • How To Report Interest Income, See chapter 5, How To Get Tax Help, for infor-
ply to retirement plan distributions are explained • Dividends and Other Distributions, mation about getting these publications and
in the following publications. • How To Report Dividend Income, forms.
• Pub. 560, Retirement Plans for Small Busi- • Stripped Preferred Stock,
ness. • Real estate mortgage investment conduits
• Pub. 571, Tax-Sheltered Annuity Plans. (REMICs), financial asset securitization General Information
• Pub. 575, Pension and Annuity Income. investment trusts (FASITs), and other
• Pub. 590-A, Contributions to Individual Re- collateralized debt obligations (CDOs), A few items of general interest are covered
tirement Arrangements (IRAs). • S Corporations, and here.
• Pub. 590-B, Distributions from Individual • Investment Clubs.
Retirement Arrangements (IRAs). Recordkeeping. You should keep a
• Pub. 721, Tax Guide to U.S. Civil Service list of the sources and investment in-
Retirement Benefits. RECORDS come amounts you receive during the
year. Also, keep the forms you receive showing
your investment income (Forms 1099-INT, In-
terest Income, and 1099-DIV, Dividends and
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Distributions, for example) as an important part tion, the payer must backup withhold on your in- Certification. For new accounts paying in-
of your records. terest payments, at a rate of 24%. terest or dividends, you must certify under pen-
alties of perjury that your TIN is correct and that
TIN for joint account. If the funds in a joint you are not subject to backup withholding. Your
Net investment income tax (NIIT). You may account belong to one person, list that person's payer will give you a Form W-9, Request for
be subject to the NIIT. The NIIT is a 3.8% tax on name first on the account and give that person's Taxpayer Identification Number and Certifica-
the lesser of your net investment income or the TIN to the payer. (For information on who owns tion, or similar form, to make this certification. If
amount of your modified adjusted gross income the funds in a joint account, see Joint accounts, you fail to make this certification, backup with-
(MAGI) that is over a threshold amount based later.) If the joint account contains combined holding may begin immediately on your new ac-
on your filing status. funds, give the TIN of the person whose name count or investment.
is listed first on the account. This is because
Filing Status Threshold Amount only one name and TIN can be shown on Form Underreported interest and dividends.
Married filing jointly $250,000 1099. You will be considered to have underreported
Married filing separately $125,000 These rules apply both to joint ownership by your interest and dividends if the IRS has deter-
a married couple and to joint ownership by mined for a tax year that:
Single $200,000 other individuals. For example, if you open a • You failed to include any part of a reporta-
Head of household (with $200,000 joint savings account with your child using ble interest or dividend payment required
qualifying person) funds belonging to the child, list the child's to be shown on your return, or
Qualifying surviving spouse $250,000 name first on the account and give the child's • You were required to file a return and to in-
with dependent child TIN. clude a reportable interest or dividend pay-
ment on that return, but you failed to file
For more information, see Form 8960, Net Custodian account for your child. If your the return.
Investment Income Tax—Individuals, Estates, child is the actual owner of an account that is
and Trusts, and the Instructions for Form 8960. recorded in your name as custodian for the How to stop backup withholding due to
child, give the child's TIN to the payer. For ex- underreporting. If you have been notified that
Tax on unearned income of certain chil- ample, you must give your child's SSN to the you underreported interest or dividends, you
dren. Generally, a child must file Form 8615 if payer of dividends on stock owned by your can request a determination from the IRS to
the child: child, even though the dividends are paid to you prevent backup withholding from starting or to
as custodian. stop backup withholding once it has begun. You
1. has more than $2,300 of unearned in- must show that at least one of the following sit-
come; Penalty for failure to supply TIN. You uations applies.
may be subject to a penalty if, when required, • No underreporting occurred.
2. is required to file a tax return; you fail to: • You have a bona fide dispute with the IRS
3. meets certain age/earned-income/ • Include your TIN on any return, statement, about whether underreporting occurred.
self-support threshold; or other document; • Backup withholding will cause or is caus-
• Give your TIN to another person who must ing an undue hardship, and it is unlikely
4. has at least one parent alive at the end of include it on any return, statement, or other that you will underreport interest and divi-
the year; and document; or dends in the future.
5. doesn’t file a joint return for the year. • Include the TIN of another person on any • You have corrected the underreporting by
return, statement, or other document.
See Form 8615 and its instructions for details. filing a return if you did not previously file
The penalty is $50 for each failure up to a maxi- one and by paying all taxes, penalties, and
However, the parent can choose to include mum penalty of $100,000 for any calendar year. interest due for any underreported interest
the child's interest and dividends on the pa- This penalty may be abated if you can show or dividend payments.
rent's return if certain requirements are met. that your failure to provide the TIN was due to If the IRS determines that backup withhold-
Use Form 8814, Parents’ Election To Report reasonable cause and not to willful neglect. ing should stop, it will provide you with a certifi-
Child’s Interest and Dividends, for this purpose. If you fail to supply a TIN in the manner re- cation and will notify the payers who were sent
For more information about the tax on un- quired, you also may be subject to backup with- notices earlier.
earned income of children and the parents' holding.
election, see Pub. 929, Tax Rules for Children How to stop backup withholding due to
and Dependents. Backup withholding. Your investment income an incorrect TIN. If the IRS notifies a payer
generally is not subject to regular withholding. that your TIN is incorrect, the payer must con-
Beneficiary of an estate or trust. Interest, However, it may be subject to backup withhold- tact you and ask you to provide your correct
dividends, and other investment income you re- ing to ensure that income tax is collected on the TIN. Follow the instructions provided by the
ceive as a beneficiary of an estate or trust gen- income. The bank, broker, or other payer of in- payer to prevent or stop backup withholding.
erally is taxable income. You should receive a terest, original issue discount (OID), dividends,
Schedule K-1 (Form 1041), Beneficiary's Share cash patronage dividends, or royalties must Reporting backup withholding. If backup
of Income, Deductions, Credits, etc., from the fi- withhold income tax on these reportable pay- withholding is deducted from your interest or
duciary. Your copy of Schedule K-1 (Form ments at a rate of 24% under backup withhold- dividend income or other reportable payment,
1041) and its instructions will tell you where to ing. the bank or other business must give you an in-
report the income on your Form 1040 or Backup withholding applies if: formation return for the year (for example, a
1040-SR. Form 1099-INT) indicating the amount withheld.
1. You do not give the payer your TIN in the The information return will show any backup
Taxpayer Identification Number (TIN). You required manner; withholding as “Federal income tax withheld.”
must give your name and TIN (either a social 2. The IRS notifies the payer that you gave Nonresident aliens. Generally, payments
security number (SSN), an employer identifica- an incorrect TIN; made to nonresident aliens are not subject to
tion number (EIN), or an individual tax identifi-
cation number (ITIN)) to any person required by 3. The IRS notifies the payer that you are backup withholding. You can use Form
federal tax law to make a return, statement, or subject to backup withholding on interest W-8BEN, Certificate of Foreign Status of Bene-
other document that relates to you. This in- or dividends because you underreported ficial Owner for United States Tax Withholding
cludes payers of interest and dividends. If you interest or dividends on your income tax and Reporting (Individuals), to certify exempt
do not give your TIN to the payer, you may have return; or status. However, this does not exempt you from
the 30% (or lower treaty) withholding rate that
to pay a penalty. In addition, if you do not pro- 4. You are required, but fail, to certify that may apply to your investment income. For infor-
vide a certified TIN on Form W-9, Request for you are not subject to backup withholding mation on the 30% rate, see Pub. 519, U.S. Tax
Taxpayer Identification Number and Certifica- for the reason described in (3). Guide for Aliens.

Chapter 1 Investment Income Page 3

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Table 1-1. Where To Report Common Types of Investment Income
(For detailed information about reporting investment income, see the Interest Income
rest of this publication, especially How To Report Interest Income
and How To Report Dividend Income in chapter 1.)
Terms you may need to know
Type of Income If you file Form 1040 or 1040-SR, report on ... (see Glossary):
Tax-exempt interest Line 2a (See the instructions there.) Accrual method
Below-market loan
Taxable interest Line 2b (See the instructions there.) Cash method
Demand loan
Savings bond interest you will exclude because of higher Schedule B; also use Form 8815 Forgone interest
education expenses Gift loan
Qualified dividends Line 3a (See the instructions there.) Interest
Mutual fund
Ordinary dividends Line 3b (See the instructions there.) Nominee
Original issue discount
Capital gain distributions Line 7, or, if required, Schedule D, line 13. (See the Private activity bond
instructions of Form 1040 or 1040-SR.) Term loan
Section 1250, 1202, or collectibles gain (Form 1099-DIV, Form 8949 and Schedule D
box 2b, 2c, or 2d)
This section discusses the tax treatment of dif-
Nondividend distributions (Form 1099-DIV, box 3) Generally not reported* ferent types of interest income.
Undistributed capital gains (Form 2439, boxes 1a–1d) Schedule D In general, any interest that you receive or
that is credited to your account and can be with-
Gain or loss from sales of stocks or bonds Line 7; also use Form 8949, Schedule D, and the drawn is taxable income. Exceptions to this rule
Qualified Dividends and Capital Gain Tax are discussed later.
Worksheet or the Schedule D Tax Worksheet
Gain or loss from exchanges of like-kind investment Line 7; also use Schedule D, Form 8824, and the Form 1099-INT. Interest income generally is
property Qualified Dividends and Capital Gain Tax reported to you on Form 1099-INT, or a similar
Worksheet or the Schedule D Tax Worksheet statement, by banks, savings and loans, and
other payers of interest. This form shows you
*Report any amounts in excess of your basis in your mutual fund shares on Form 8949. Use Part II if you held the shares the interest you received during the year. Keep
more than 1 year. Use Part I if you held your mutual fund shares 1 year or less. For details on Form 8949, see Reporting this form for your records. You do not have to
Capital Gains and Losses in chapter 4, and the Instructions for Form 8949. attach it to your tax return.
Report on your tax return the total interest
Penalties. There are civil and criminal pen- you, and half belongs to your spouse. If you file income you receive for the tax year. See the In-
alties for giving false information to avoid separate returns, you each report half the in- structions for Recipient of Form 1099-INT to
backup withholding. The civil penalty is $500. come. see whether you need to adjust any of the
The criminal penalty, upon conviction, is a fine amounts reported to you.
of up to $1,000, or imprisonment of up to 1 year, Income from property given to a child.
or both. Property you give as a parent to your child un- Interest not reported on Form 1099-INT.
der the Model Gifts of Securities to Minors Act, Even if you do not receive a Form 1099-INT,
Where to report investment income. Ta- the Uniform Gifts to Minors Act, or any similar you must still report all of your interest income.
ble 1-1 gives an overview of the forms and law becomes the child's property. For example, you may receive distributive
schedules to use to report some common types Income from the property is taxable to the shares of interest from partnerships or S corpo-
of investment income. But see the rest of this child, except that any part used to satisfy a legal rations. This interest is reported to you on
publication for detailed information about re- obligation to support the child is taxable to the Schedule K-1 (Form 1065), Partner's Share of
porting investment income. parent or guardian having that legal obligation. Income, Deductions, Credits, etc., and Sched-
ule K-1 (Form 1120S), Shareholder's Share of
Joint accounts. If two or more persons hold Savings account with parent as trustee. Income, Deductions, Credits, etc.
property (such as a savings account, bond, or Interest income from a savings account opened
stock) as joint tenants, tenants by the entirety, for a minor child, but placed in the name and Nominees. Generally, if someone receives
or tenants in common, each person's share of subject to the order of the parents as trustees, interest as a nominee for you, that person must
any interest or dividends from the property is is taxable to the child if, under the law of the give you a Form 1099-INT showing the interest
determined by local law. state in which the child resides, both of the fol- received on your behalf.
lowing are true. If you receive a Form 1099-INT that includes
Community property states. If you are mar- • The savings account legally belongs to the amounts belonging to another person, see the
ried and receive a distribution that is community child. discussion on Nominee distributions, later.
income, half of the distribution generally is con- • The parents are not legally permitted to Incorrect amount. If you receive a Form
sidered to be received by each spouse. If you use any of the funds to support the child. 1099-INT that shows an incorrect amount (or
file separate returns, you must each report other incorrect information), you should ask the
one-half of any taxable distribution. See Pub. Accuracy-related penalty. An accuracy-rela- issuer for a corrected form. The new Form
555, Community Property, for more information ted penalty of 20% can be charged for under- 1099-INT you receive should be denoted “Cor-
on community income. payments of tax due to negligence or disregard rected.”
If the distribution is not considered commun- of rules or regulations or substantial understate-
ity property and you and your spouse file sepa- ment of tax. For information on the penalty and Form 1099-OID. Reportable interest income
rate returns, each of you must report your sepa- any interest that applies, see Penalties in chap- also may be shown on Form 1099-OID, Original
rate taxable distributions. ter 2. Issue Discount. For more information about
amounts shown on this form, see Original Issue
Example. You and your spouse have a Discount (OID), later in this chapter.
joint money market account. Under state law,
half the income from the account belongs to

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Exempt-interest dividends. Form 1099-DIV, account during the year without subtracting the and obligations issued by any agency or instru-
box 12, shows exempt-interest dividends from a penalty. See Penalty on early withdrawal of sav- mentality of the United States is taxable for fed-
mutual fund or other regulated investment com- ings, later, for more information on how to re- eral income tax purposes.
pany paid to you during the calendar year. See port the interest and deduct the penalty.
the Instructions for Form 1040 or 1040-SR for Interest on tax refunds. Interest you receive
where to report. Money borrowed to invest in certificate on tax refunds is taxable income.
Form 1099-DIV, box 13, shows exempt-in- of deposit. The interest you pay on money
terest dividends subject to the alternative mini- borrowed from a bank or savings institution to Interest on condemnation award. If the con-
mum tax. This amount is included in box 12. meet the minimum deposit required for a certifi- demning authority pays you interest to compen-
See the Instructions for Form 6251. cate of deposit from the institution and the inter- sate you for a delay in payment of an award, the
est you earn on the certificate are two separate interest is taxable.
Interest on VA dividends. Interest on insur- items. You must report the total interest you
ance dividends left on deposit with the Depart- earn on the certificate in your income. If you Installment sale payments. If a contract for
ment of Veterans Affairs (VA) is not taxable. itemize deductions, you can deduct the interest the sale or exchange of property provides for
This includes interest paid on dividends on con- you pay as investment interest, up to the deferred payments, it also usually provides for
verted United States Government Life Insur- amount of your net investment income. See In- interest payable with the deferred payments.
ance policies and on National Service Life In- terest Expenses in chapter 3. Generally, that interest is taxable when you re-
surance policies. ceive it. If little or no interest is provided for in a
Example. You deposited $5,000 with a deferred payment contract, part of each pay-
Individual retirement arrangements (IRAs). bank and borrowed $5,000 from the bank to ment may be treated as interest. See Unstated
Interest on a Roth IRA generally is not taxable. make up the $10,000 minimum deposit required Interest and Original Issue Discount (OID) in
Interest on a traditional IRA is tax deferred. You to buy a 6-month certificate of deposit. The cer- Pub. 537.
generally do not include it in your income until tificate earned $575 at maturity in 2022, but you
you make withdrawals from the IRA. See Pub. received only $265, which represented the Interest on annuity contract. Accumulated
590-B for more information. $575 you earned minus $310 interest charged interest on an annuity contract you sell before
on your $5,000 loan. The bank gives you a its maturity date is taxable.
Form 1099-INT for 2022 showing the $575 in-
Taxable Interest—General terest you earned. The bank also gives you a Usurious interest. Usurious interest is interest
statement showing that you paid $310 interest charged at an illegal rate. This is taxable as in-
Taxable interest includes interest you receive for 2022. You must include the $575 in your in- terest unless state law automatically changes it
from bank accounts, loans you make to others, come. If you itemize your deductions on Sched- to a payment on the principal.
and other sources. The following are some ule A (Form 1040), Itemized Deductions, you
sources of taxable interest. can deduct $310, subject to the net investment Interest income on frozen deposits. Ex-
income limit. clude from your gross income interest on frozen
Dividends that are actually interest. Certain deposits. A deposit is frozen if, at the end of the
distributions commonly called dividends are ac- Gift for opening account. If you receive non- year, you cannot withdraw any part of the de-
tually interest. You must report as interest cash gifts or services for making deposits or for posit because:
so-called “dividends” on deposits or on share opening an account in a savings institution, the • The financial institution is bankrupt or in-
accounts in: value may be reported to you as interest in- solvent, or
• Cooperative banks, come on Form 1099-INT and you may have to • The state in which the institution is located
• Credit unions, report it on your tax return. has placed limits on withdrawals because
• Domestic building and loan associations, For deposits of less than $5,000, gifts or other financial institutions in the state are
• Domestic savings and loan associations, services valued at more than $10 must be re- bankrupt or insolvent.
• Federal savings and loan associations, ported as interest. For deposits of $5,000 or The amount of interest you must exclude is
and more, gifts or services valued at more than $20 the interest that was credited on the frozen de-
• Mutual savings banks. must be reported as interest. The value is deter- posits minus the sum of:
The “dividends” will be shown as interest in- mined by the cost to the financial institution. The net amount you withdrew from these
•
come on Form 1099-INT. deposits during the year, and
Example. You open a savings account at
Money market funds. Money market funds your local bank and deposit $800. The account • The amount you could have withdrawn as
are offered by nonbank financial institutions earns $20 interest. You also receive a $15 cal- of the end of the year (not reduced by any
such as mutual funds and stock brokerage culator. If no other interest is credited to your penalty for premature withdrawals of a time
houses, and pay dividends. Generally, amounts account during the year, the Form 1099-INT deposit).
you receive from money market funds should you receive will show $35 interest for the year. If you receive a Form 1099-INT for interest in-
be reported as dividends, not as interest. You must report $35 interest income on your tax come on deposits that were frozen at the end of
return. 2022, see Frozen deposits, later, for information
Certificates of deposit and other deferred about reporting this interest income exclusion
interest accounts. If you buy a certificate of Interest on insurance dividends. Interest on on your tax return.
deposit or open a deferred interest account, in- insurance dividends left on deposit with an in- The interest you exclude is treated as credi-
terest may be paid at fixed intervals of 1 year or surance company that can be withdrawn annu- ted to your account in the following year. You
less during the term of the account. You gener- ally is taxable to you in the year it is credited to must include it in income in the year you can
ally must include this interest in your income your account. However, if you can withdraw it withdraw it.
when you actually receive it or are entitled to re- only on the anniversary date of the policy (or
ceive it without paying a substantial penalty. other specified date), the interest is taxable in Example. $100 of interest was credited on
The same is true for accounts that mature in 1 the year that date occurs. your frozen deposit during the year. You with-
year or less and pay interest in a single pay- drew $80 but could not withdraw any more as of
ment at maturity. If interest is deferred for more Prepaid insurance premiums. Any increase the end of the year. You must include $80 in
than 1 year, see Original Issue Discount (OID), in the value of prepaid insurance premiums, ad- your income and exclude $20 from your income
later. vance premiums, or premium deposit funds is for the year. You must include the $20 in your
interest if it is applied to the payment of premi- income for the year you can withdraw it.
Interest subject to penalty for early with- ums due on insurance policies or made availa-
drawal. If you withdraw funds from a deferred ble for you to withdraw. Bonds traded flat. If you buy a bond at a dis-
interest account before maturity, you may have count when interest has been defaulted or
to pay a penalty. You must report the total U.S. obligations. Interest on U.S. obligations, when the interest has accrued but has not been
amount of interest paid or credited to your such as U.S. Treasury bills, notes, and bonds,
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paid, the transaction is described as trading a A demand loan is a loan payable in full at subject to the rules for below-market loans for
bond flat. The defaulted or unpaid interest is not any time upon demand by the lender. A de- the calendar year if the lender or the lender's
income and is not taxable as interest if paid mand loan is a below-market loan if no interest spouse is age 65 or older at the end of the year.
later. When you receive a payment of that inter- is charged or if interest is charged at a rate be- For the definitions of qualified continuing care
est, it is a return of capital that reduces the re- low the applicable federal rate. facility and continuing care contract, see Inter-
maining cost basis of your bond. Interest that A demand loan or gift loan that is a be- nal Revenue Code 7872(g)(4) and (h).
accrues after the date of purchase, however, is low-market loan generally is treated as an
taxable interest income for the year received or arm's-length transaction in which the lender is Exception for loans without significant
accrued. See Bonds Sold Between Interest treated as having made: tax effect. Loans are excluded from the be-
Dates, later in this chapter. • A loan to the borrower in exchange for a low-market loan rules if their interest arrange-
note that requires the payment of interest ments do not have a significant effect on the
at the applicable federal rate, and federal tax liability of the borrower or the lender.
Below-Market Loans • An additional payment to the borrower in These loans include:
an amount equal to the forgone interest. 1. Loans made available by the lender to the
If you make a below-market gift or demand general public on the same terms and
loan, you must report as interest income any The borrower generally is treated as transfer-
forgone interest (defined later) from that loan. ring the additional payment back to the lender conditions that are consistent with the
The below-market loan rules and exceptions as interest. The lender must report that amount lender's customary business practice;
are described in this section. For more informa- as interest income. 2. Loans subsidized by a federal, state, or
tion, see section 7872 of the Internal Revenue The lender's additional payment to the bor- municipal government that are made avail-
Code and its regulations. rower is treated as a gift, dividend, contribution able under a program of general applica-
to capital, pay for services, or other payment, tion to the public;
If you receive a below-market loan, you may depending on the substance of the transaction.
be able to deduct the forgone interest as well as The borrower may have to report this payment 3. Certain employee-relocation loans;
any interest you actually paid, but not if it is per- as taxable income, depending on its classifica- 4. Certain loans to or from a foreign person;
sonal interest. tion. 5. Gift loans to a charitable organization,
These transfers are considered to occur an- contributions to which are deductible, if
Loans subject to the rules. The rules for be- nually, generally on December 31. the total outstanding amount of loans be-
low-market loans apply to: tween the organization and lender is
• Gift loans, Term loans. A term loan is any loan that is $250,000 or less at all times during the tax
• Compensation-related loans, not a demand loan. A term loan is a below-mar- year; and
• Corporation-shareholder loans, ket loan if the amount of the loan is more than
• Tax avoidance loans, and the present value of all payments due under the 6. Other loans on which the interest arrange-
• Certain loans made to qualified continuing loan. ment can be shown to have no significant
care facilities under a continuing care con- A lender who makes a below-market term effect on the federal tax liability of the
tract. loan other than a gift loan is treated as transfer- lender or the borrower.
ring an additional lump-sum cash payment to For a loan described in (6) above, all the
A compensation-related loan is any be- the borrower (as a dividend, contribution to cap- facts and circumstances are used to determine
low-market loan between an employer and an ital, etc.) on the date the loan is made. The if the interest arrangement has a significant ef-
employee or between an independent contrac- amount of this payment is the amount of the fect on the federal tax liability of the lender or
tor and a person for whom the contractor pro- loan minus the present value, at the applicable borrower. Some factors to be considered are:
vides services. federal rate, of all payments due under the loan. • Whether items of income and deduction
An equal amount is treated as original issue dis- generated by the loan offset each other;
A tax avoidance loan is any below-market count (OID). The lender must report the annual • The amount of these items;
loan where the avoidance of federal tax is one part of the OID as interest income. The bor- • The cost to you of complying with the be-
of the main purposes of the interest arrange- rower may be able to deduct the OID as interest low-market loan rules, if they were to ap-
ment. expense. See Original Issue Discount (OID), ply; and
later.
Forgone interest. For any period, forgone in- • Any reasons other than taxes for structur-
ing the transaction as a below-market loan.
terest is: Exceptions to the below-market loan rules.
• The amount of interest that would be paya- Exceptions to the below-market loan rules are If you structure a transaction to meet this ex-
ble for that period if interest accrued on the discussed here. ception and one of the principal purposes of
loan at the applicable federal rate and was that structure is the avoidance of federal tax,
payable annually on December 31, minus Exception for loans of $10,000 or less. the loan will be considered a tax-avoidance
• Any interest actually payable on the loan The rules for below-market loans do not apply loan, and this exception will not apply.
for the period. to any day on which the total outstanding
amount of loans between the borrower and Limit on forgone interest for gift loans of
Applicable federal rate. Applicable fed- lender is $10,000 or less. This exception ap- $100,000 or less. For gift loans between indi-
eral rates are published by the IRS each month plies only to: viduals, if the outstanding loans between the
in the Internal Revenue Bulletin. The Internal lender and borrower total $100,000 or less, the
Revenue Bulletin is available through IRS.gov/ 1. Gift loans between individuals if the gift forgone interest to be included in income by the
IRB. You also can find applicable federal rates loan is not directly used to buy or carry in- lender and deducted by the borrower is limited
in the Index of Applicable Federal Rates (AFR) come-producing assets, and to the amount of the borrower's net investment
Rulings at https://irs.gov/applicable-federal- 2. Compensation-related loans or corpora- income for the year. If the borrower's net invest-
rates. tion-shareholder loans if the avoidance of ment income is $1,000 or less, it is treated as
See chapter 5, How To Get Tax Help, for federal tax is not a principal purpose of the zero. This limit does not apply to a loan if the
other ways to get this information. interest arrangement. avoidance of federal tax is one of the main pur-
poses of the interest arrangement.
Rules for below-market loans. The rules that This exception does not apply to term loans.
apply to a below-market loan depend on The general below-market loan rules will con-
whether the loan is a gift loan, demand loan, or tinue to apply even if the outstanding balance is U.S. Savings Bonds
term loan. reduced to $10,000 or less.
This section provides tax information on U.S.
Gift and demand loans. A gift loan is any Exception for loans to continuing care savings bonds. It explains how to report the in-
below-market loan where the forgone interest is facilities. Loans to qualified continuing care fa- terest income on these bonds and how to treat
in the nature of a gift. cilities under continuing care contracts are not transfers of these bonds.
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U.S. savings bonds currently offered to indi- value as they earn interest. The face value plus b. Report all interest on the bonds ac-
viduals include Series EE bonds and Series I all accrued interest is payable to you at redemp- quired before the year of change
bonds. tion. when the interest is realized upon dis-
position, redemption, or final maturity,
For information about U.S. savings Reporting options for cash method tax- whichever is earliest, with the excep-
bonds, go to www.treasurydirect.gov/ payers. If you use the cash method of report- tion of the interest reported in prior tax
savings-bonds/. Also, go to ing income, you can report the interest on Ser- years.
www.treasurydirect.gov/contact-us/ and click ies EE, Series E, and Series I bonds in either of
on a topic to find answers to your questions by the following ways. You must attach this statement to your tax
email. return for the year of change, which you must
1. Method 1. Postpone reporting the interest
If you prefer, write to: until the earlier of the year you cash or dis- file by the due date (including extensions).
pose of the bonds or the year in which You can have an automatic extension of 6
they mature. (However, see Savings months from the due date of your return for the
bonds traded, later.) year of change (excluding extensions) to file the
Treasury Retail Securities Services Note. Series EE bonds issued in 1992 statement with an amended return. On the
P.O. Box 9150 matured in 2022. If you have used method statement, type or print “Filed pursuant to sec-
Minneapolis, MN 55480-9150 1, you generally must report the interest tion 301.9100-2.” To get this extension, you
on these bonds on your 2022 return. The must have filed your original return for the year
last Series E bonds were issued in 1980 of the change by the due date (including exten-
Accrual method taxpayers. If you use an ac- and matured in 2010. If you used method sions). See also Revenue Procedure 2015-13,
crual method of accounting, you must report in- 1, you generally should have reported the Section 6.03(4).
terest on U.S. savings bonds each year as it ac- interest on these bonds on your 2010 re- Instead of filing this statement, you can re-
crues. You cannot postpone reporting interest turn. quest permission to change from method 2 to
until you receive it or until the bonds mature. method 1 by filing Form 3115. In that case, fol-
2. Method 2. Choose to report the increase low the form instructions for an automatic
Cash method taxpayers. If you use the cash in redemption value as interest each year. change. No user fee is required.
method of accounting, as most individual tax-
payers do, you generally report the interest on You must use the same method for all Series Co-owners. If a U.S. savings bond is issued in
U.S. savings bonds when you receive it. But EE, Series E, and Series I bonds you own. If the names of co-owners, such as you and your
see Reporting options for cash method taxpay- you do not choose method 2 by reporting the in- child or you and your spouse, interest on the
ers, later. crease in redemption value as interest each bond generally is taxable to the co-owner who
year, you must use method 1. bought the bond.
Series H and HH bonds. These bonds were If you plan to cash your bonds in the One co-owner's funds used. If you used
issued at face value in exchange for other sav- TIP same year you will pay for higher edu- your funds to buy the bond, you must pay the
ings bonds. cation expenses, you may want to use tax on the interest. This is true even if you let
Series HH bonds were issued between method 1 because you may be able to exclude the other co-owner redeem the bond and keep
1980 and 2004. They mature 20 years after is- the interest from your income. To learn how, all the proceeds. Under these circumstances,
sue. Series HH bonds that have not matured see Education Savings Bond Program, later. the co-owner who redeemed the bond will re-
pay interest twice a year, usually by direct de- ceive a Form 1099-INT at the time of redemp-
posit to your bank account. If you are a cash Change from method 1. If you want to tion and must provide you with another Form
method taxpayer, you must report this interest change your method of reporting the interest 1099-INT showing the amount of interest from
as income in the year you receive it. from method 1 to method 2, you can do so with- the bond taxable to you. The co-owner who re-
Series H bonds were issued before 1980. All out permission from the IRS. In the year of deemed the bond is a “nominee.” See Nominee
Series H bonds have matured and are no lon- change, you must report all interest accrued to distributions, later, for more information about
ger earning interest. date and not previously reported for all your how a person who is a nominee reports interest
In addition to the twice-a-year interest pay- bonds. income belonging to another person.
ments, most H/HH bonds also have a deferred Once you choose to report the interest each
interest component. year, you must continue to do so for all Series Both co-owners' funds used. If you and
EE, Series E, and Series I bonds you own and the other co-owner each contribute part of the
Series EE and Series I bonds. Interest on for any you get later, unless you request per- bond's purchase price, the interest generally is
these bonds is payable when you redeem the mission to change, as explained next. taxable to each of you in proportion to the
bonds. The difference between the purchase amount each of you paid.
price and the redemption value is taxable inter- Change from method 2. To change from
est. method 2 to method 1, you must request per- Community property. If you and your
mission from the IRS. Permission for the spouse live in a community property state and
Series E and EE bonds. Series E bonds change is automatically granted if you send the hold bonds as community property, one-half of
were issued before 1980. All Series E bonds IRS a statement that meets all the following re- the interest is considered received by each of
have matured and are no longer earning inter- quirements. you. If you file separate returns, each of you
est. Series EE bonds were first offered in Janu- 1. You have typed or printed the following generally must report one-half of the bond inter-
ary 1980 and have a maturity period of 30 number at the top: “131.” est. For more information about community
years; they were offered in paper (definitive) property, see Pub. 555.
form until 2012. Paper Series EE and Series E 2. It includes your name and social security
bonds were issued at a discount and increase number under “131.” Table 1-2. These rules are also shown in
Table 1-2.
in value as they earn interest. Electronic 3. It includes the year of change (both the
(book-entry) Series EE bonds were first offered beginning and ending dates). Child as only owner. Interest on U.S. savings
in 2003; they are issued at face value and in- bonds bought for and registered only in the
crease in value as they earn interest. For all 4. It identifies the savings bonds for which
Series E and Series EE bonds, the purchase you are requesting this change. name of your child is income to your child, even
if you paid for the bonds and are named as ben-
price plus all accrued interest is payable to you 5. It includes your agreement to: eficiary. If the bonds are Series EE, Series E, or
at redemption. Series I bonds, the interest on the bonds is in-
a. Report all interest on any bonds ac-
Series I bonds. Series I bonds were first quired during or after the year of come to your child in the earlier of the year the
offered in 1998. These are inflation-indexed change when the interest is realized bonds are cashed or disposed of or the year the
bonds issued at face value with a maturity pe- upon disposition, redemption, or final bonds mature, unless your child chooses to re-
riod of 30 years. Series I bonds increase in maturity, whichever is earliest; and port the interest income each year.

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Table 1-2. Who Pays the Tax on U.S. Savings Bond Interest were owned by a person who used an accrual
method, or who used the cash method and had
IF ... THEN the interest must be reported by ... chosen to report the interest each year, the in-
you buy a bond in your name and the name of another you. terest earned in the year of death up to the date
person as co-owners, using only your own funds of death must be reported on that person's final
you buy a bond in the name of another person, who is the the person for whom you bought the bond. return. The person who acquires the bonds in-
sole owner of the bond cludes in income only interest earned after the
date of death.
you and another person buy a bond as co-owners, each both you and the other co-owner, in proportion to the
contributing part of the purchase price amount each paid for the bond. Decedent who postponed reporting in-
you and your spouse, who live in a community property you and your spouse. If you file separate returns, both you terest. If the transferred bonds were owned by
state, buy a bond that is community property and your spouse generally report half of the interest. a decedent who had used the cash method and
had not chosen to report the interest each year,
Choice to report interest each year. The This income-reporting rule also applies and who had bought the bonds entirely with his
choice to report the accrued interest each year when the bonds are reissued in the name of or her own funds, all interest earned before
can be made either by your child or by you for your former co-owner and a new co-owner. But death must be reported in one of the following
your child. This choice is made by filing an in- the new co-owner will report only his or her ways.
come tax return that shows all the interest share of the interest earned after the transfer. 1. The surviving spouse or personal repre-
earned to date, and by stating on the return that If bonds that you and a co-owner bought sentative (executor, administrator, etc.)
your child chooses to report the interest each jointly are reissued to each of you separately in who files the final income tax return of the
year. Either you or your child should keep a the same proportion as your contribution to the decedent can choose to include on that
copy of this return. purchase price, neither you nor your co-owner return all interest earned on the bonds be-
Unless your child is otherwise required to has to report at that time the interest earned be- fore the decedent's death. The person
file a tax return for any year after making this fore the bonds were reissued. who acquires the bonds then includes in
choice, your child does not have to file a return income only interest earned after the date
only to report the annual accrual of U.S. savings Example 1. You and your spouse each of death.
bond interest under this choice. However, see spent an equal amount to buy a $1,000 Series
Tax on unearned income of certain children, EE savings bond. The bond was issued to you 2. If the choice in (1) is not made, the interest
earlier, under General Information. Neither you and your spouse as co-owners. You both post- earned up to the date of death is income in
nor your child can change the way you report pone reporting interest on the bond. You later respect of the decedent and should not be
the interest unless you request permission from have the bond reissued as two $500 bonds, included in the decedent's final return. All
the IRS, as discussed earlier under Change one in your name and one in your spouse's interest earned both before and after the
from method 2 . name. At that time neither you nor your spouse decedent's death (except any part repor-
has to report the interest earned to the date of ted by the estate on its income tax return)
Ownership transferred. If you bought Series reissue. is income to the person who acquires the
E, Series EE, or Series I bonds entirely with bonds. If that person uses the cash
your own funds and had them reissued in your Example 2. You bought a $1,000 Series method and does not choose to report the
co-owner's name or beneficiary's name alone, EE savings bond entirely with your own funds. interest each year, he or she can postpone
you must include in your gross income for the The bond was issued to you and your spouse reporting it until the year the bonds are
year of reissue all interest that you earned on as co-owners. You both postponed reporting in- cashed or disposed of or the year they
these bonds and have not previously reported. terest on the bond. You later have the bond re- mature, whichever is earlier. In the year
But, if the bonds were reissued in your name issued as two $500 bonds, one in your name that person reports the interest, he or she
alone, you do not have to report the interest ac- and one in your spouse's name. You must re- can claim a deduction for any federal es-
crued at that time. port half the interest earned to the date of reis- tate tax paid on the part of the interest in-
This same rule applies when bonds (other sue. cluded in the decedent's estate.
than bonds held as community property) are For more information on income in respect of a
transferred between spouses or incident to di- Transfer to a trust. If you own Series E, Ser-
vorce. ies EE, or Series I bonds and transfer them to a decedent, see Pub. 559, Survivors, Executors,
trust, giving up all rights of ownership, you must and Administrators.
Example. You bought Series EE bonds en- include in your income for that year the interest
tirely with your own funds. You did not choose earned to the date of transfer if you have not al- Example 1. Your uncle, a cash method tax-
to report the accrued interest each year. Later, ready reported it. However, if you are consid- payer, died and left you a $1,000 Series EE
you transfer the bonds to your former spouse ered the owner of the trust and if the increase in bond. He had bought the bond for $500 and
under a divorce agreement. You must include value both before and after the transfer contin- had not chosen to report the interest each year.
the deferred accrued interest, from the date of ues to be taxable to you, you can continue to At the date of death, interest of $200 had ac-
the original issue of the bonds to the date of defer reporting the interest earned each year. crued on the bond, and its value of $700 was in-
transfer, in your income in the year of transfer. You must include the total interest in your in- cluded in your uncle's estate. Your uncle's ex-
Your former spouse includes in income the in- come in the year you cash or dispose of the ecutor chose not to include the $200 accrued
terest on the bonds from the date of transfer to bonds or the year the bonds finally mature, interest in your uncle's final income tax return.
the date of redemption. whichever is earlier. The $200 is income in respect of the decedent.
The same rules apply to previously unrepor- You are a cash method taxpayer and do not
Purchased jointly. If you and a co-owner ted interest on Series EE or Series E bonds if choose to report the interest each year as it is
each contributed funds to buy Series E, Series the transfer to a trust consisted of Series HH or earned. If you cash the bond when it reaches a
EE, or Series I bonds jointly and later have the Series H bonds you acquired in a trade for the value of $1,000, you report $500 interest in-
bonds reissued in the co-owner's name alone, Series EE or Series E bonds. See Savings come—the difference between the value of
you must include in your gross income for the bonds traded, later. $1,000 and the original cost of $500.
year of reissue your share of all the interest
earned on the bonds that you have not previ- Decedents. The manner of reporting interest Example 2. If, in Example 1, the executor
ously reported. The former co-owner does not income on Series E, Series EE, or Series I had chosen to include the $200 accrued inter-
have to include in gross income at the time of bonds, after the death of the owner (decedent), est in your uncle's final return, you would report
reissue his or her share of the interest earned depends on the accounting and income-report- only $300 as interest when you cashed the
that was not reported before the transfer. This ing methods previously used by the decedent. bond. $300 is the interest earned after your un-
interest, however, as well as all interest earned cle's death.
after the reissue, is income to the former Decedent who reported interest each
co-owner. year. If the bonds transferred because of death
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Example 3. If, in Example 1, you make or You reported the $223 as taxable income on transferee will receive a 1099-INT showing
have made the choice to report the increase in your tax return. interest accrued reduced by the amount
redemption value as interest each year, you in- You hold the Series HH bonds until maturity, reported to the transferor at the time of the
clude in gross income for the year you acquire when you receive $2,500. You must report $300 original transfer.
the bond all of the unreported increase in value as interest income in the year of maturity. This • You were named as a co-owner, and the
of all Series E, Series EE, and Series I bonds is the difference between their redemption other co-owner contributed funds to buy
you hold, including the $200 on the bond you in- value, $2,500, and your cost, $2,200 (the the bond. The interest shown on your Form
herited from your uncle. amount you paid for the Series EE bonds). 1099-INT will not be reduced by the
amount you received as nominee for the
Example 4. When your aunt died, she Note. The $300 amount that is reportable other co-owner. (See Co-owners, earlier,
owned Series HH bonds that she had acquired upon redemption or maturity may be found on for more information about the reporting re-
in a trade for Series EE bonds. You were the the face of the Series HH bond as “Deferred In- quirements.)
beneficiary of these bonds. Your aunt used the terest.” If more than one Series HH bond is re- • You received the bond in a taxable distri-
cash method and did not choose to report the ceived in the exchange, the total amount of in- bution from a retirement or profit-sharing
interest on the Series EE bonds each year as it terest postponed/deferred in the transaction is plan. The interest shown on your Form
accrued. Your aunt's executor chose not to in- divided proportionately among the Series HH 1099-INT will not be reduced by the inter-
clude any interest earned before your aunt's bonds. est portion of the amount taxable as a dis-
death on her final return. tribution from the plan and not taxable as
The income in respect of the decedent is the Choice to report interest in year of trade. interest. (This amount generally is shown
sum of the unreported interest on the Series EE You could have chosen to treat all of the previ- on Form 1099-R, Distributions From Pen-
bonds and the interest, if any, payable on the ously unreported accrued interest on Series EE sions, Annuities, Retirement or Profit-Shar-
Series HH bonds but not received as of the or Series E bonds traded for Series HH bonds ing Plans, IRAs, Insurance Contracts, etc.,
date of your aunt's death. You must report any as income in the year of the trade. If you made for the year of distribution.)
interest received during the year as income on this choice, it is treated as a change from
your return. The part of the interest payable but method 1. See Change from method 1, earlier. For more information on including the cor-
rect amount of interest on your return, see U.S.
not received before your aunt's death is income savings bond interest previously reported or
in respect of the decedent and may qualify for Note. If you chose to report all of the previ-
the estate tax deduction. For information on ously unreported interest in the year of the Nominee distributions, later.
when to report the interest on the Series EE trade, then there would be the no "Deferred In- Interest on U.S. savings bonds is ex-
bonds traded, see Savings bonds traded, later. terest" recorded on the face of the new bond. TIP empt from state and local taxes. The
Form 1099-INT you receive will indi-
Savings bonds distributed from a retire- Note. The subsequent annual interest earn- cate the amount that is for U.S. savings bonds
ment or profit-sharing plan. If you acquire a ings on the Series HH bonds received in the ex- interest in box 3. Do not include this income on
U.S. savings bond in a taxable distribution from change would be paid and reported annually by your state or local income tax return.
a retirement or profit-sharing plan, your income Treasury regardless of whether the previously
for the year of distribution includes the bond's accrued interest was further deferred or repor-
redemption value (its cost plus the interest ac- ted in the year of the exchange. Education Savings Bond Program
crued before the distribution). When you re-
deem the bond (whether in the year of distribu- Form 1099-INT for U.S. savings bond inter- You may be able to exclude from income all or
tion or later), your interest income includes only est. When you cash a bond, the bank or other part of the interest you receive on the redemp-
the interest accrued after the bond was distrib- payer that redeems it must give you a Form tion of qualified U.S. savings bonds during the
uted. To figure the interest reported as a taxa- 1099-INT if the interest part of the payment you year if you pay qualified higher education ex-
ble distribution and your interest income when receive is $10 or more. Box 3 of your Form penses during the same year. This exclusion is
you redeem the bond, see Worksheet for sav- 1099-INT should show the interest as the differ- known as the Education Savings Bond Pro-
ings bonds distributed from a retirement or ence between the amount you received and the gram.
profit-sharing plan, later. amount paid for the bond. However, your Form
1099-INT may show more interest than you You do not qualify for this exclusion if your
Savings bonds traded. Prior to September have to include on your income tax return. For filing status is married filing separately.
2004, you could trade (exchange) Series E or example, this may happen if any of the following
EE bonds for Series H or HH bonds. At the time are true. Form 8815. Use Form 8815 to figure your ex-
of the trade, you had the choice to postpone • You chose to report the increase in the re- clusion. Attach the form to your Form 1040 or
(defer) reporting the interest which had been demption value of the bond each year. The 1040-SR.
earned on your Series E or EE bonds until the interest shown on your Form 1099-INT will
Series H or HH bonds received in the trade not be reduced by amounts previously in- Qualified U.S. savings bonds. A qualified
were redeemed or matured. Any cash you re- cluded in income. U.S. savings bond is a Series EE bond issued
ceived in the transaction was income up to the • You received the bond from a decedent. after 1989 or a Series I bond. The bond must be
amount of the interest that had accrued on the The interest shown on your Form 1099-INT issued either in your name (sole owner) or in
Series E or EE bonds. The amount of income will not be reduced by any interest repor- your and your spouse's names (co-owners).
that you chose to postpone reporting was recor- ted by the decedent before death, or on You must be at least 24 years old before the
ded on the face of the Series H or HH bonds as the decedent's final return, or by the estate bond's issue date. For example, a bond bought
"Deferred Interest"; this amount is also equal to on the estate's income tax return. by a parent and issued in the name of his or her
the difference between the redemption value of • Ownership of the bond was transferred. child under age 24 does not qualify for the ex-
the Series H or HH bonds and your cost. Your The interest shown on your Form 1099-INT clusion by the parent or child.
cost is the sum of the amount you paid for the will not be reduced by interest that accrued
exchanged Series E or EE bonds plus any before the transfer. The issue date of a bond may be ear-
amount you had to pay at the time of the trans- Note. This is true for paper bonds. ! lier than the date the bond is pur-
action. Treasury reporting process for electronic CAUTION chased because the issue date as-
bonds is more refined. If Treasury is aware signed to a bond is the first day of the month in
Example. You traded Series EE bonds that that the transfer of an electronic savings which it is purchased.
cost you $2,200 (on which you postponed re- bond is a reportable event, then the trans-
porting the interest) for $2,500 in Series HH feror will receive a 1099-INT for the year of Beneficiary. You can designate any indi-
bonds and $223 in cash. At the time of the the transfer for the interest accrued up to vidual (including a child) as a beneficiary of the
trade, the Series EE bonds had accrued inter- the time of the transfer; when the trans- bond.
est of $523 and a redemption value of $2,723. feree later disposes of the bond (redemp-
tion, maturity, or further transfer), the
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Verification by IRS. If you claim the exclu- 2022 for $8,308.00 ($5,000.00 investment + Use the Line 9 Worksheet in the Form 8815
sion, the IRS will check it by using bond re- $3,308.00 interest). J and L paid $4,000.00 of instructions to figure your modified AGI. If you
demption information from the Department of their child's college tuition in 2022. J and L are claim any of the exclusion or deduction items
Treasury. not claiming any credit for that amount and their listed above, you must add them to your AGI to
child does not receive any tax-free educational figure your modified AGI.
Qualified expenses. Qualified higher educa- assistance.
tional expenses are tuition and fees required for To determine the excludable amount, J and Royalties included in modified AGI. Be-
you, your spouse, or your dependent to attend L multiply the interest part of the proceeds cause the deduction for interest expenses due
an eligible educational institution. ($3,308.00) by a fraction. The numerator (top to royalties and other investments is limited to
Qualified expenses include any contribution part) of the fraction is the qualified higher edu- your net investment income (see Investment In-
you make to a qualified tuition program or to a cational expenses paid during the year terest in chapter 3), you cannot figure the de-
Coverdell education savings account. For infor- ($4,000.00). The denominator (bottom part) of duction for interest expenses until you have fig-
mation about these programs, see Pub. 970, the fraction is the total proceeds received dur- ured this exclusion of savings bond interest.
Tax Benefits for Education. ing the year ($8,308.00). Therefore, if you had interest expenses due to
Qualified expenses do not include expenses Thus, J and L can exclude $3,308.00 x royalties deductible on Schedule E (Form
for room and board or for courses involving ($4,000.00/$8,308.00) = $1,592.68. 1040), Supplemental Income and Loss, you
must make a special computation of your de-
sports, games, or hobbies that are not part of a Figuring the interest part of the pro- ductible interest to figure the net royalty income
degree or certificate granting program. ceeds (Form 8815, line 6). To figure the inter- included in your modified AGI. You must figure
Eligible educational institutions. These est to report on Form 8815, line 6, use the deductible interest without regard to this exclu-
institutions include most public, private, and Line 6 Worksheet in the Form 8815 instructions. sion of bond interest.
You can use a “dummy” Form 4952, Invest-
nonprofit universities, colleges, and vocational If you previously reported any interest ment Interest Expense Deduction, to make the
schools that are accredited and eligible to par- from savings bonds cashed during special computation. On this form, include in
ticipate in student aid programs run by the De- 2022, use the Alternate Line 6 Work- your net investment income your total interest
partment of Education. sheet below instead. income for the year from Series EE and I U.S.
Reduction for certain benefits. You must savings bonds. Use the deductible interest
reduce your qualified higher educational expen- Alternate Line 6 Worksheet amount from this form only to figure the net roy-
ses by all of the following tax-free benefits. alty income included in your modified AGI. Do
1. Enter the amount from Form 8815,
1. Tax-free part of scholarships and fellow- line 5 . . . . . . . . . . . . . . . . . . . . . . . . . not attach this form to your tax return.
ships. 2. Enter the face value of all post-1989 paper After you figure this interest exclusion, use a
2. Expenses used to figure the tax-free por- Series EE bonds cashed in 2022 . . . . . . separate Form 4952 to figure your actual de-
3. Multiply line 2 by 50% (0.50) . . . . . . . . . duction for investment interest expenses and
tion of distributions from a Coverdell ESA. 4. Enter the face value of all electronic attach that form to your return.
3. Expenses used to figure the tax-free por- Series EE bonds (including post-1989 Recordkeeping. If you claim the inter-
tion of distributions from a qualified tuition Series EE bonds converted from paper to est exclusion, you must keep a written
program. electronic format) and all Series I bonds RECORDS
cashed in 2022 . . . . . . . . . . . . . . . . . . . record of the qualified U.S. savings
4. Any tax-free payments (other than gifts or 5. Add lines 3 and 4 . . . . . . . . . . . . . . . . . bonds you redeem. Your record must include
inheritances) received as educational as- 6. Subtract line 5 from line 1 . . . . . . . . . . . the serial number, issue date, face value, and
sistance, such as: 7. Enter the amount of interest reported as total redemption proceeds (principal and inter-
a. Veterans' educational assistance ben- income in previous years . . . . . . . . . . . . est) of each bond. You can use Form 8818 to
8. Subtract line 7 from line 6. Enter the result record this information. You also should keep
efits, here and on Form 8815, line 6 . . . . . . . . bills, receipts, canceled checks, or other docu-
b. Qualified tuition reductions, or mentation that shows you paid qualified higher
Modified adjusted gross income limit. educational expenses during the year.
c. Employer-provided educational assis- The interest exclusion is limited if your modified
tance. adjusted gross income (modified AGI) is:
5. Any expense used in figuring the Ameri- • $128,650 to $158,650 for married taxpay- U.S. Treasury Bills,
can Opportunity and lifetime learning cred- ers filing jointly, and Notes, and Bonds
its. • $85,800 to $100,800 for all other taxpay-
ers. Treasury bills, notes, and bonds are direct
For information about these benefits, see Pub. debts (obligations) of the U.S. government.
970. You do not qualify for the interest exclusion if
your modified AGI is equal to or more than the
Amount excludable. If the total proceeds (in- upper limit for your filing status. Taxation of interest. Interest income from
Treasury bills, notes, and bonds is subject to
terest and principal) from the qualified U.S. sav- Modified AGI. Modified AGI, for purposes federal income tax but is exempt from all state
ings bonds you redeem during the year are not of this exclusion, is adjusted gross income and local income taxes. You should receive
more than your adjusted qualified higher educa- (Form 1040 or 1040-SR, line 11) figured before Form 1099-INT showing the interest (in box 3)
tional expenses for the year, you may be able to the interest exclusion, and modified by adding paid to you for the year.
exclude all of the interest. If the proceeds are back any:
more than the expenses, you may be able to Treasury bills. These bills generally have a
exclude only part of the interest. 1. Foreign earned income exclusion, 4-week, 8-week, 13-week, 26-week, or 52-week
To determine the excludable amount, multi- 2. Foreign housing exclusion and deduction, maturity period. They generally are issued at a
ply the interest part of the proceeds by a frac- discount in the amount of $100 and multiples of
tion. The numerator (top part) of the fraction is 3. Exclusion of income for bona fide resi- $100. The difference between the discounted
the qualified higher educational expenses you dents of American Samoa, price you pay for the bills and the face value
paid during the year. The denominator (bottom 4. Exclusion for income from Puerto Rico, you receive at maturity is interest income. Gen-
part) of the fraction is the total proceeds you re- erally, you report this interest income when the
ceived during the year. 5. Exclusion for adoption benefits received bill is paid at maturity. If you paid a premium for
under an employer's adoption assistance a bill (more than face value), you generally re-
Example. J and L, a married couple, paid program, and port the premium as a section 171 deduction
$5,000.00 for a $10,000 denominated Series 6. Deduction for student loan interest. when the bill is paid at maturity. See Discount
EE U.S. Savings Bond in January 2006. J and L on Short-Term Obligations, later.
redeemed (cashed in) the bond in January

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If you reinvest your Treasury bill at its matur- accrued to the date of sale. You must report There are other requirements for tax-exempt
ity in a new Treasury bill, note, or bond, you will that part of the sales price as interest income for bonds. Contact the issuing state or local gov-
receive payment for the difference between the the year of sale. ernment agency or see sections 103 and 141
proceeds of the maturing bill (par amount less through 150 of the Internal Revenue Code and
any tax withheld) and the purchase price of the If you buy a bond between interest payment the related regulations.
new Treasury security. However, you must re- dates, part of the purchase price represents in-
port the full amount of the interest income on terest accrued before the date of purchase. Obligations that are not bonds. In-
each of your Treasury bills at the time it reaches When that interest is paid to you, treat it as a re- TIP terest on a state or local government
maturity. turn of your capital investment, rather than inter- obligation may be tax exempt even if
est income, by reducing your basis in the bond. the obligation is not a bond. For example, inter-
Treasury notes and bonds. Treasury notes See Accrued interest on bonds, later in this est on a debt evidenced only by an ordinary
have maturity periods of at least 1 year, ranging chapter, for information on reporting the pay- written agreement of purchase and sale may be
up to 10 years. Maturity periods for Treasury ment. tax exempt. Also, interest paid by an insurer on
bonds are generally longer than 10 years. Both default by the state or political subdivision may
generally are issued in denominations of $100 be tax exempt.
to $1 million and both generally pay interest ev- Insurance
ery 6 months. Generally, you report this interest Registration requirement. A bond issued af-
for the year paid. When the notes or bonds ma- Life insurance proceeds paid to you as the ben- ter June 30, 1983, generally must be in regis-
ture, you can redeem these securities for face eficiary of the insured person usually are not tered form for the interest to be tax exempt.
value or use the proceeds from the maturing taxable. But if you receive the proceeds in in-
note or bond to reinvest in another note or bond stallments, you usually must report part of each Indian tribal government. Bonds issued after
of the same type and term. installment payment as interest income. 1982 by an Indian tribal government (including
Treasury notes and bonds are sold by auc- tribal economic development bonds issued af-
tion. Two types of bids are accepted: competi- For more information about insurance pro- ter February 17, 2009) are treated as issued by
tive bids and noncompetitive bids. If you make ceeds received in installments, see Pub. 525. a state. Interest on these bonds generally is tax
a competitive bid and a determination is made exempt if the bonds are part of an issue of
that the purchase price is less than the face Interest option on insurance. If you leave life which substantially all proceeds are to be used
value, you will receive a refund for the differ- insurance proceeds on deposit with an insur- in the exercise of any essential government
ence between the purchase price and the face ance company under an agreement to pay in- function. However, the essential government
value. This amount is considered original issue terest only, the interest paid to you is taxable. function requirement does not apply to tribal
discount. However, the original issue discount economic development bonds issued after Feb-
rules (discussed later) do not apply if the dis- Annuity. If you buy an annuity with life insur- ruary 17, 2009, for tax-exempt treatment. Inter-
count is less than one-fourth of 1% (0.0025) of ance proceeds, the annuity payments you re- est on private activity bonds (other than certain
the face amount, multiplied by the number of full ceive are taxed as pension and annuity income bonds for tribal manufacturing facilities) is taxa-
years from the date of original issue to maturity. from a nonqualified plan, not as interest in- ble.
See De minimis OID, later. If the purchase price come. See Pub. 939, General Rule for Pen-
is determined to be more than the face amount, sions and Annuities, for information on taxation Original issue discount. Original issue dis-
the difference is a premium. (See Bond Pre- of pension and annuity income from nonquali- count (OID) on tax-exempt state or local gov-
mium Amortization in chapter 3.) fied plans. ernment bonds is treated as tax-exempt inter-
est.
For other information on these notes or For information on the treatment of OID
bonds, write to: State or Local
when you dispose of a tax-exempt bond, see
Government Obligations Tax-exempt state and local government bonds,
Treasury Retail Securities Services later.
P.O. Box 9150 Interest you receive on an obligation issued by
Minneapolis, MN 55480-9150 a state or local government generally is not tax- Stripped bonds or coupons. For special
able. The issuer should be able to tell you rules that apply to stripped tax-exempt obliga-
whether the interest is taxable. The issuer also tions, see Stripped Bonds and Coupons, later.
Or, on the Internet, visit should give you a periodic (or year-end) state-
www.treasurydirect.gov. ment showing the tax treatment of the obliga- Information reporting requirement. If you
tion. If you invested in the obligation through a must file a tax return, you are required to show
trust, a fund, or other organization, that organi- any tax-exempt interest you received on your
Treasury inflation-protected securities zation should give you this information. return. This is an information reporting require-
ment only. It does not change tax-exempt inter-
(TIPS). These securities pay interest twice a Even if interest on the obligation is not est to taxable interest. See Reporting tax-ex-
year at a fixed rate, based on a principal ! subject to income tax, you may have to empt interest, later in this chapter.
amount adjusted to take into account inflation CAUTION report a capital gain or loss when you
and deflation. For the tax treatment of these se- sell it. Estate, gift, or generation-skipping tax
curities, see Inflation-Indexed Debt Instruments, may apply to other dispositions of the obliga- Taxable Interest
later. tion.
Interest on some state or local obligations is
Retirement, sale, or redemption. For infor- taxable.
mation on the retirement, sale, or redemption of Tax-Exempt Interest
U.S. government obligations, see Capital or Or- Federally guaranteed bonds. Interest on fed-
dinary Gain or Loss in chapter 4. Also, see Non- Interest on a bond used to finance government erally guaranteed state or local obligations is-
taxable Trades in chapter 4 for information operations generally is not taxable if the bond is sued after 1983 generally is taxable. This rule
about trading U.S. Treasury obligations for cer- issued by a state, the District of Columbia, a does not apply to interest on obligations guar-
tain other designated issues. U.S. possession, or any of their political subdivi- anteed by the following U.S. government agen-
sions. Political subdivisions include: cies.
Bonds Sold Between Interest • Port authorities, • Bonneville Power Authority (if the guaran-
Dates • Toll road commissions, tee was under the Northwest Power Act as
• Utility services authorities, in effect on July 18, 1984).
If you sell a bond between interest payment • Community redevelopment agencies, and • Department of Veterans Affairs.
dates, part of the sales price represents interest • Qualified volunteer fire departments (for • Federal home loan banks. (The guarantee
certain obligations issued after 1980). must be made after July 30, 2008, in

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connection with the original bond issue Also, a bond generally is considered a private 2002, to finance the construction and rehabilita-
during the period beginning on July 30, activity bond if the proceeds to be used to make tion of real property in the designated “Liberty
2008, and ending on December 31, 2010 or finance loans to persons other than govern- Zone” of New York City. Interest on these
(or a renewal or extension of a guarantee ment units is more than 5% of the proceeds or bonds is tax exempt.
so made), and the bank must meet safety $5 million (whichever is less).
and soundness requirements.) Market discount. Market discount on a tax-ex-
• Federal Home Loan Mortgage Corpora- Qualified bond. Interest on a private activ- empt bond is not tax exempt. If you bought the
tion. ity bond that is a qualified bond is tax exempt. A bond after April 30, 1993, you can choose to
• Federal Housing Administration. qualified bond is an exempt-facility bond (in- accrue the market discount over the period you
• Federal National Mortgage Association. cluding an enterprise zone facility bond, a New own the bond and include it in your income cur-
• Government National Mortgage Corpora- York Liberty bond, a Midwestern disaster area rently as taxable interest. See Market Discount
tion. bond, a Hurricane Ike disaster area bond, a Bonds, later. If you do not make that choice, or
• Resolution Funding Corporation. Gulf Opportunity Zone bond treated as an ex- if you bought the bond before May 1, 1993, any
• Student Loan Marketing Association. empt-facility bond, or any recovery zone facility gain from market discount is taxable when you
bond), qualified student loan bond, qualified dispose of the bond.
Tax credit bonds. Use Form 8912, Credit to small issue bond (including a tribal manufactur- For more information on the treatment of
Holders of Tax Credit Bonds, to claim the credit ing facility bond), qualified redevelopment market discount when you dispose of a tax-ex-
for the following tax credit bonds. bond, qualified mortgage bond (including a Gulf empt bond, see Discounted Debt Instruments,
• Clean renewable energy bond (CREB). Opportunity Zone bond, a Midwestern disaster later.
• New clean renewable energy bond area bond, or a Hurricane Ike disaster area
(NCREB). bond treated as a qualified mortgage bond),
• Qualified energy conservation bond qualified veterans' mortgage bond, or qualified
(QECB). 501(c)(3) bond (a bond issued for the benefit of
• Qualified zone academy bond (QZAB). certain tax-exempt organizations). Discount on
• Qualified school construction bond Interest you receive on these tax-exempt Debt Instruments
(QSCB). bonds, if issued after August 7, 1986, generally
• Build America bond (BAB). is a “tax preference item” and may be subject to
the alternative minimum tax. See Form 6251 Terms you may need to know
Generally, in lieu of, or in addition to, receiv- and its instructions for more information. (see Glossary):
ing periodic interest payments from the issuer, The interest on the following bonds is not a
the holder of the bond is allowed an income tax tax preference item and is not subject to the al- Market discount
credit. The credit compensates the holder for ternative minimum tax. Market discount bond
lending money to the issuer and functions as in- • Qualified 501(c)(3) bonds. Original issue discount (OID)
terest paid on the bond. • New York Liberty bonds. Premium
See the Instructions for Form 8912, Credit to • Gulf Opportunity Zone bonds.
Holders of Tax Credit Bonds, for details and in- • Midwestern disaster area bonds.
structions. • Hurricane Ike disaster area bonds. A debt instrument, such as a bond, note, de-
• Exempt facility bonds for qualified residen- benture, or other evidence of indebtedness,
Mortgage revenue bonds. The proceeds of tial rental projects issued after July 30, that bears no interest or bears interest at a
these bonds are used to finance mortgage 2008. lower than current market rate usually will be is-
loans for homebuyers. Generally, interest on • Qualified mortgage bonds issued after July sued at less than its face amount. This discount
state or local government home mortgage 30, 2008. is, in effect, additional interest income. The fol-
bonds issued after April 24, 1979, is taxable un- • Qualified veterans' mortgage bonds issued lowing are some types of discounted debt in-
less the bonds are qualified mortgage bonds or after July 30, 2008. struments.
qualified veterans' mortgage bonds. • U.S. Treasury bonds.
Qualified bonds issued in 2009 or 2010.
Arbitrage bonds. Interest on arbitrage bonds The interest on any qualified bond issued in • Corporate bonds.
issued by state or local governments after Octo- 2009 or 2010 is not a tax preference item and is • Municipal bonds.
ber 9, 1969, is taxable. An arbitrage bond is a not subject to the alternative minimum tax. For • Certificates of deposit.
bond any portion of the proceeds of which is ex- this purpose, a refunding bond (whether a cur- • Notes between individuals.
pected to be used to buy (or to replace funds rent or advanced refunding) is treated as issued • Stripped bonds and coupons.
used to buy) higher yielding investments. A on the date the refunded bond was issued (or • Collateralized debt obligations (CDOs).
bond is treated as an arbitrage bond if the is- on the date the original bond was issued in the The discount on these instruments (except mu-
suer intentionally uses any part of the proceeds case of a series of refundings). However, this nicipal bonds) is taxable in most instances. The
of the issue in this manner. rule does not apply to any refunding bond is- discount on municipal bonds generally is not
sued to refund any qualified bond issued during taxable (but see State or Local Government Ob-
Private activity bonds. Interest on a private 2004 through 2008 or after 2010. ligations, earlier, for exceptions). See also RE-
activity bond that is not a qualified bond (de- MICs, FASITs, and Other CDOs, later, for infor-
fined below) is taxable. Generally, a private ac- Qualified bonds issued after December mation about applying the rules discussed in
tivity bond is part of a state or local government 31, 2010. A portion of the interest on specified this section to the regular interest holder of a
bond issue that meets both the following re- private activity bonds issued after December real estate mortgage investment conduit, a fi-
quirements. 31, 2010, may be a tax preference item subject nancial asset securitization investment trust, or
to the alternative minimum tax. The tax prefer- other CDO.
1. More than 10% of the proceeds of the is- ence status will apply to the portion of the inter-
sue is to be used for a private business est that remains after reducing it by deductions
use. that would be allowed if the interest were taxa- Original Issue
2. More than 10% of the payment of the prin- ble. Discount (OID)
cipal or interest is: Enterprise zone facility bonds. Interest OID is a form of interest. You generally include
a. Secured by an interest in property to on certain private activity bonds issued by a OID in your income as it accrues over the term
be used for a private business use (or state or local government to finance a facility of the debt instrument, whether or not you re-
payments for this property), or used in an empowerment zone or enterprise ceive any payments from the issuer.
community is tax exempt.
b. Derived from payments for property A debt instrument generally has OID when
(or borrowed money) used for a pri- New York Liberty bonds. New York Lib- the instrument is issued for a price that is less
vate business use. erty bonds are bonds issued after March 9, than its stated redemption price at maturity. OID
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is the difference between the stated redemption b. The amount of the loan, plus the Qualified stated interest. In general, this
price at maturity and the issue price. amount of any outstanding prior loans is stated interest unconditionally payable in
between the same individuals, is cash or property (other than debt instruments of
All debt instruments that pay no interest be- $10,000 or less. the issuer) at least annually at a fixed rate.
fore maturity are presumed to be issued at a
discount. Zero coupon bonds are one example c. Avoiding any federal tax is not one of Acquisition premium. You bought a debt
of these instruments. the principal purposes of the loan. instrument at an acquisition premium if both the
following are true.
The OID accrual rules generally do not apply Form 1099-OID • You did not pay a premium.
to short-term obligations (those with a fixed ma- • The instrument's adjusted basis immedi-
turity date of 1 year or less from date of issue). The issuer of the debt instrument (or your ately after purchase (including purchase at
See Discount on Short-Term Obligations, later. broker, if you held the instrument through a original issue) was greater than its adjus-
broker) should give you Form 1099-OID, or a ted issue price. This is the issue price plus
For information about the sale of a debt in- similar statement, if the total OID for the calen- the OID previously accrued, minus any
strument with OID, see Original issue discount dar year is $10 or more. Form 1099-OID will payment previously made on the instru-
(OID) on debt instruments, later. show, in box 1, the amount of OID for the part of ment other than qualified stated interest.
the year that you held the bond. It also will Acquisition premium reduces the amount of
De minimis OID. You can treat the discount as show, in box 2, the stated interest you must in- OID includible in your income. For information
zero if it is less than one-fourth of 1% (0.0025) clude in your income. Box 8 shows OID on a about figuring the correct amount of OID to in-
of the stated redemption price at maturity multi- U.S. Treasury obligation for the part of the year clude in your income, see Figuring OID on
plied by the number of full years from the date you owned it and is not included in box 1. Box Long-Term Debt Instruments in Pub. 1212.
of original issue to maturity. This small discount 10 shows bond premium amortization. A copy
is known as “de minimis” OID. In the case of a of Form 1099-OID will be sent to the IRS. Do Refiguring periodic interest shown on Form
debt instrument providing for more than one not file your copy with your return. Keep it for 1099-OID. If you disposed of a debt instrument
stated principal payment (an installment obliga- your records. or acquired it from another holder during the
tion), the “de minimis” formula described above year, see Bonds Sold Between Interest Dates,
is modified. See Regulations section earlier, for information about the treatment of
1.1273-1(d)(3). In most cases, you must report the entire
amount in boxes 1, 2, and 8 of Form 1099-OID periodic interest that may be shown in box 2 of
Example 1. You bought a 10-year bond as interest income. But see Refiguring OID Form 1099-OID for that instrument.
with a stated redemption price at maturity of shown on Form 1099-OID, later in this discus-
$1,000, issued at $980 with OID of $20. sion, and also Original issue discount (OID) ad- Applying the OID Rules
One-fourth of 1% of $1,000 (stated redemption justment, later in this chapter, for more informa-
price) times 10 (the number of full years from tion. The rules for reporting OID depend on the date
the date of original issue to maturity) equals the long-term debt instrument was issued.
$25. Because the $20 discount is less than $25, Form 1099-OID not received. If you had OID
the OID is treated as zero. (If you hold the bond for the year but did not receive a Form Debt instruments issued after May 27, 1969
at maturity, you will recognize $20 ($1,000 − 1099-OID, you may have to figure the correct (after July 1, 1982, if a government instru-
$980) of capital gain.) amount of OID to report on your return. See ment), and before 1985. If you hold these
Pub. 1212 for details on how to figure the cor- debt instruments as capital assets, you must in-
Example 2. The facts are the same as in rect OID. clude a part of the discount in your gross in-
Example 1, except that the bond was issued at come each year that you own the instruments.
$950. The OID is $50. Because the $50 dis- Nominee. If someone else is the holder of re-
count is more than the $25 figured in Exam- cord (the registered owner) of an OID instru- Effect on basis. Your basis in the instru-
ple 1, you must include the OID in income as it ment belonging to you and receives a Form ment is increased by the amount of OID you in-
accrues over the term of the bond. 1099-OID on your behalf, that person must give clude in your gross income.
you a Form 1099-OID.
Debt instrument bought after original is- If you receive a Form 1099-OID that in- Debt instruments issued after 1984. For
sue. If you buy a debt instrument with de mini- cludes amounts belonging to another person, these debt instruments, you report the total OID
mis OID at a premium, the discount is not in- see Nominee distributions, later. that applies each year regardless of whether
cludible in income. If you buy a debt instrument you hold that debt instrument as a capital asset.
with de minimis OID at a discount, the discount Refiguring OID shown on Form 1099-OID. Effect on basis. Your basis in the instru-
is reported under the market discount rules. You may need to refigure the OID shown in ment is increased by the amount of OID you in-
See Market Discount Bonds, later in this chap- box 1 or box 8 of Form 1099-OID if either of the clude in your gross income.
ter. following apply.
• You bought the debt instrument after its
Exceptions to reporting OID as current in- original issue and paid a premium or an ac- Certificates of Deposit (CDs)
come. quisition premium.
The OID rules discussed here do not apply • The debt instrument is a stripped bond or a A CD is a debt instrument.
to the following debt instruments. stripped coupon (including certain zero
coupon instruments). See Figuring OID, If you buy a CD with a maturity of more than
1. Tax-exempt obligations. (However, see later in this chapter. 1 year, you must include in income each year a
Stripped tax-exempt obligations, later.)
See Original issue discount (OID) adjustment, part of the total interest due and report it in the
2. U.S. savings bonds. later in this chapter, for information about re- same manner as other OID.
3. Short-term debt instruments (those with a porting the correct amount of OID.
fixed maturity date of not more than 1 year Premium. You bought a debt instrument at This also applies to similar deposit arrange-
from the date of issue). a premium if its adjusted basis immediately af- ments with banks, building and loan associa-
4. Obligations issued by an individual before ter purchase was greater than the total of all tions, etc., including:
March 2, 1984. amounts payable on the instrument after the • Time deposits,
purchase date, other than qualified stated inter- • Bonus plans,
5. Loans between individuals, if all the follow- est. • Savings certificates,
ing are true. If you bought an OID debt instrument at a • Deferred income certificates,
a. The lender is not in the business of premium, you generally do not have to report • Bonus savings certificates, and
lending money. any OID as ordinary income. • Growth savings certificates.

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Bearer CDs. CDs issued after 1982 generally Stripped Bonds and Coupons coupon. For information about figuring the cor-
must be in registered form. Bearer CDs are rect amount of OID on these instruments to in-
CDs not in registered form. They are not issued If you strip one or more coupons from a bond clude in your income, see Figuring OID on Strip-
in the depositor's name and are transferable and sell the bond or the coupons, the bond and ped Bonds and Coupons in Pub. 1212. Owners
from one individual to another. coupons are treated as separate debt instru- of stripped bonds and coupons should not rely
Banks must provide the IRS and the person ments issued with OID. on the OID shown in Section II of the OID tables
redeeming a bearer CD with a Form 1099-INT. (available by going to IRS.gov and searching for
The holder of a stripped bond has the right “OID Tables”) because the amounts listed in
Time deposit open account arrangement. to receive the principal (redemption price) pay- Section II for stripped bonds or coupons are fig-
This is an arrangement with a fixed maturity ment. The holder of a stripped coupon has the ured without reference to the date or price at
date in which you make deposits on a schedule right to receive interest on the bond. which you acquired them.
arranged between you and your bank. But there
is no actual or constructive receipt of interest Stripped bonds and stripped coupons in- Stripped inflation-indexed debt instru-
until the fixed maturity date is reached. For in- clude: ments. OID on stripped inflation-indexed debt
stance, you and your bank enter into an ar- • Zero coupon instruments available through instruments is figured under the discount bond
rangement under which you agree to deposit the Department of the Treasury's Separate method. This method is described in Regula-
$100 each month for a period of 5 years. Inter- Trading of Registered Interest and Princi- tions section 1.1275-7(e).
est will be compounded twice a year at 7 / %, 1 2 pal of Securities (STRIPS) program and
but payable only at the end of the 5-year period. government-sponsored enterprises such Stripped tax-exempt obligations. You do not
You must include a part of the interest in your as the Resolution Funding Corporation and have to pay tax on OID on any stripped tax-ex-
income as OID each year. Each year the bank the Financing Corporation; and empt bond or coupon you bought before June
must give you a Form 1099-OID to show you • Instruments backed by U.S. Treasury se- 11, 1987. However, if you acquired it after Octo-
the amount you must include in your income for curities that represent ownership interests ber 22, 1986, you must accrue OID on it to de-
the year. in those securities, such as obligations termine its basis when you dispose of it. See
backed by U.S. Treasury bonds offered Original issue discount (OID) on debt instru-
Redemption before maturity. If, before the primarily by brokerage firms. ments, later.
maturity date, you redeem a deferred interest You may have to pay tax on part of the OID
account for less than its stated redemption price Seller. If you strip coupons from a bond and on stripped tax-exempt bonds or coupons that
at maturity, you can deduct OID that you previ- sell the bond or coupons, include in income the you bought after June 10, 1987. For information
ously included in income but did not receive. interest that accrued while you held the bond on figuring the taxable part, see Tax-Exempt
before the date of sale, to the extent you did not Bonds and Coupons under Figuring OID on
Renewable certificates. If you renew a CD at previously include this interest in your income. Stripped Bonds and Coupons in Pub. 1212.
maturity, it is treated as a redemption and a pur- For an obligation acquired after October 22,
chase of a new certificate. This is true regard- 1986, you also must include the market dis- Market Discount Bonds
less of the terms of renewal. count that accrued before the date of sale of the
stripped bond (or coupon) to the extent you did A market discount bond is any bond having
Face-Amount Certificates not previously include this discount in your in- market discount except:
come. • Short-term obligations (those with fixed
These certificates are subject to the OID rules. Add the interest and market discount that maturity dates of up to 1 year from the date
They are a form of endowment contracts issued you include in income to the basis of the bond of issue),
by insurance or investment companies for ei- and coupons. Allocate this adjusted basis be- • Tax-exempt obligations you bought before
ther a lump-sum payment or periodic payments, tween the items you keep and the items you May 1, 1993,
with the face amount becoming payable on the sell, based on the fair market value of the items. • U.S. savings bonds, and
maturity date of the certificate. The difference between the sale price of the • Certain installment obligations.
bond (or coupon) and the allocated basis of the
In general, the difference between the face bond (or coupon) is your gain or loss from the Market discount arises when the value of a
amount and the amount you paid for the con- sale. debt obligation decreases after its issue date.
tract is OID. You must include a part of the OID Treat any item you keep as an OID bond Generally, this is due to an increase in interest
in your income over the term of the certificate. originally issued and bought by you on the sale rates. If you buy a bond on the secondary mar-
date of the other items. If you keep the bond, ket, it may have market discount.
The issuer must give you a statement on treat the amount of the redemption price of the When you buy a market discount bond, you
Form 1099-OID indicating the amount you must bond that is more than the basis of the bond as can choose to accrue the market discount over
include in your income each year. OID. If you keep the coupons, treat the amount the period you own the bond and include it in
payable on the coupons that is more than the your income currently as interest income. If you
Inflation-Indexed basis of the coupons as OID. do not make this choice, the following rules
generally apply.
Debt Instruments Buyer. If you buy a stripped bond or stripped You must treat any gain when you dispose
If you hold an inflation-indexed debt instrument coupon, treat it as if it were originally issued on •
of the bond as ordinary interest income, up
(other than a Series I U.S. savings bond), you the date you buy it. If you buy a stripped bond, to the amount of the accrued market dis-
must report as OID any increase in the infla- treat as OID any excess of the stated redemp- count. See Discounted Debt Instruments,
tion-adjusted principal amount of the instrument tion price at maturity over your purchase price. later.
that occurs while you held the instrument during If you buy a stripped coupon, treat as OID any You must treat any partial payment of prin-
the year. In general, an inflation-indexed debt excess of the amount payable on the due date •
cipal on the bond as ordinary interest in-
instrument is a debt instrument on which the of the coupon over your purchase price. come, up to the amount of the accrued
payments are adjusted for inflation and defla- market discount. See Partial principal pay-
tion (such as Treasury Inflation-Protected Se- Figuring OID. The rules for figuring OID on
curities). You should receive Form 1099-OID stripped bonds and stripped coupons depend ments, later in this discussion.
from the payer showing the amount you must on the date the debt instruments were pur- • If you borrow money to buy or carry the
report as OID and any qualified stated interest chased, not the date issued. bond, your deduction for interest paid on
the debt is limited. See Limit on interest
paid to you during the year. For more informa- You must refigure OID shown on the Form deduction for market discount bonds, later.
tion, see Pub. 1212. 1099-OID you receive for a stripped bond or
Market discount. Market discount is the
amount of the stated redemption price of a
bond at maturity that is more than your basis in
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the bond immediately after you acquire it. You taching to your timely filed return a statement in in income currently. If you do not make this
treat market discount as zero if it is less than which you: choice, the following rules generally apply.
one-fourth of 1% (0.0025) of the stated redemp- • State that you have included market dis- • You must treat any gain when you sell, ex-
tion price of the bond multiplied by the number count in your gross income for the year un- change, or redeem the obligation as ordi-
of full years to maturity (after you acquire the der section 1278(b) of the Internal Reve- nary income, up to the amount of the rata-
bond). nue Code, and ble share of the discount. See Discounted
If a market discount bond also has OID, the • Describe the method you used to figure the Debt Instruments, later.
market discount is the sum of the bond's issue accrued market discount for the year. • If you borrow money to buy or carry the ob-
price and the total OID includible in the gross in- Once you make this choice, it will apply to all ligation, your deduction for interest paid on
come of all holders (for a tax-exempt bond, the market discount bonds you acquire during the the debt is limited. See Limit on interest
total OID that accrued) before you acquired the tax year and in later tax years. You cannot re- deduction for short-term obligations, later.
bond, reduced by your basis in the bond imme- voke your choice without the consent of the
diately after you acquired it. IRS. See Rev. Proc. 2022-14 for information on Short-term obligations for which no choice
how to revoke your election. is available. You must include any discount or
interest in current income as it accrues for any
Bonds acquired at original issue. Generally, Also, see Election To Report All Interest as short-term obligation (other than a tax-exempt
a bond you acquired at original issue is not a OID, later. If you make that election, you must obligation) that is:
market discount bond. If your adjusted basis in use the constant yield method. • Held by an accrual-basis taxpayer;
a bond is determined by reference to the adjus-
ted basis of another person who acquired the Effect on basis. You increase the basis of • Held primarily for sale to customers in the
bond at original issue, you also are considered your bonds by the amount of market discount ordinary course of your trade or business;
to have acquired it at original issue. you include in your income. • Held by a bank, regulated investment com-
pany, or common trust fund;
Exceptions. A bond you acquired at origi- Partial principal payments. If you receive a • Held by certain pass-through entities;
nal issue can be a market discount bond if ei- partial payment of principal on a market dis- • Identified as part of a hedging transaction;
ther of the following is true. count bond you acquired after October 22, or
• Your cost basis in the bond is less than the 1986, and you did not choose to include the dis- • A stripped bond or stripped coupon held
bond's issue price. count in income currently, you must treat the by the person who stripped the bond or
• The bond is issued in exchange for a mar- payment as ordinary interest income up to the coupon (or by any other person whose ba-
ket discount bond under a plan of reorgani- amount of the bond's accrued market discount. sis in the obligation is determined by refer-
zation. (This does not apply if the bond is Reduce the amount of accrued market discount ence to the basis in the hands of the per-
issued in exchange for a market discount reportable as interest at disposition by that son who stripped the bond or coupon).
bond issued before July 19, 1984, and the amount.
terms and interest rates of both bonds are Effect on basis. Increase the basis of your ob-
the same.) There are three methods you can use to fig-
ure accrued market discount for this purpose. ligation by the amount of discount you include in
income currently.
Accrued market discount. The accrued mar- 1. On the basis of the constant yield method,
ket discount is figured in one of two ways. described earlier. Figuring the accrued discount. Figure the
Ratable accrual method. Treat the market 2. In proportion to the accrual of OID for any accrued discount by using either the ratable ac-
discount as accruing in equal daily installments accrual period, if the debt instrument has crual method or the constant yield method dis-
during the period you hold the bond. Figure the OID. cussed in Accrued market discount, earlier.
daily installments by dividing the market dis- 3. In proportion to the amount of stated inter- Government obligations. For an obligation
count by the number of days after the date you est paid in the accrual period, if the debt described above that is a short-term govern-
acquired the bond, up to and including its ma- instrument has no OID. ment obligation, the amount you include in your
turity date. Multiply the daily installments by the
income for the current year is the accrued ac-
number of days you held the bond to figure your Under method (2) above, figure accrued quisition discount, if any, plus any other ac-
accrued market discount. market discount for a period by multiplying the crued interest payable on the obligation. The
total remaining market discount by a fraction. acquisition discount is the stated redemption
Constant yield method. Instead of using The numerator (top part) of the fraction is the price at maturity minus your basis.
the ratable accrual method, you can choose to OID for the period, and the denominator (bot-
figure the accrued discount using a constant in- tom part) is the total remaining OID at the be- If you choose to use the constant yield
terest rate (the constant yield method). Make ginning of the period. method to figure accrued acquisition discount,
this choice by attaching to your timely filed re- treat the cost of acquiring the obligation as the
turn a statement identifying the bond and stat- Under method (3) above, figure accrued issue price. If you choose to use this method,
ing that you are making a constant interest rate market discount for a period by multiplying the you cannot change your choice.
election. The choice takes effect on the date total remaining market discount by a fraction.
you acquired the bond. If you choose to use this The numerator is the stated interest paid in the Nongovernment obligations. For an obliga-
method for any bond, you cannot change your accrual period, and the denominator is the total tion listed above that is not a government obli-
choice for that bond. stated interest remaining to be paid at the be- gation, the amount you include in your income
For information about using the constant ginning of the accrual period. for the current year is the accrued OID, if any,
yield method, see Constant yield method under plus any other accrued interest payable. If you
Debt Instruments Issued After 1984 in Pub. Discount on choose the constant yield method to figure ac-
1212. To use this method to figure market dis- Short-Term Obligations crued OID, apply it by using the obligation's is-
count (instead of OID), treat the bond as having sue price.
been issued on the date you acquired it. Treat When you buy a short-term obligation (one with Choosing to include accrued acquisition
the amount of your basis (immediately after you a fixed maturity date of 1 year or less from the discount instead of OID. You can choose to
acquired the bond) as the issue price and apply date of issue), other than a tax-exempt obliga- report accrued acquisition discount (defined
the formula shown in Pub. 1212. tion, you generally can choose to include any earlier under Government obligations) rather
discount and interest payable on the obligation
Choosing to include market discount in in- than accrued OID on these short-term obliga-
come currently. You can make this choice if tions. Your choice will apply to the year for
you have not revoked a prior choice to include which it is made and to all later years and can-
market discount in income currently within the not be changed without the consent of the IRS.
last 5 calendar years. Make the choice by at- You must make your choice by the due date
of your return, including extensions, for the first

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year for which you are making the choice. At- U.S. Savings Bonds and Discount on Debt In- 2. You are claiming the interest exclusion un-
tach a statement to your return or amended re- struments, earlier. der the Education Savings Bond Program
turn indicating: (discussed earlier).
• Your name, address, and social security Example. On September 1, 2020, you
number; loaned another individual $2,000 at 4% com- 3. You received interest from a seller-fi-
• The choice you are making and that it is pounded annually. You are not in the business nanced mortgage, and the buyer used the
being made under section 1283(c)(2) of of lending money. The note stated that principal property as a home.
the Internal Revenue Code; and interest would be due on August 31, 2022. 4. You received a Form 1099-INT for U.S.
• The period for which the choice is being In 2022, you received $2,163.20 ($2,000 princi- savings bond interest that includes
made and the obligation to which it ap- pal and $163.20 interest). If you use the cash amounts you reported in a previous tax
plies; and method, you must include in income on your year.
• Any other information necessary to show 2022 return the $163.20 in interest you received
you are entitled to make this choice. in that year. 5. You received, as a nominee, interest that
actually belongs to someone else.
Choosing to include accrued discount and Constructive receipt. You constructively 6. You received a Form 1099-INT for interest
other interest in current income. If you ac- receive income when it is credited to your ac- on frozen deposits.
quire short-term discount obligations that are count or made available to you. You do not
not subject to the rules for current inclusion in need to have physical possession of it. For ex- 7. You received a Form 1099-INT for interest
income of the accrued discount or other inter- ample, you are considered to receive interest, on a bond you bought between interest
est, you can choose to have those rules apply. dividends, or other earnings on any deposit or payment dates.
This choice applies to all short-term obligations account in a bank, savings and loan, or similar 8. You are reporting OID in an amount less
you acquire during the year and in all later financial institution, or interest on life insurance than the amount shown on Form
years. You cannot change this choice without policy dividends left to accumulate, when they 1099-OID.
the consent of the IRS. are credited to your account and subject to your
The procedures to use in making this choice withdrawal. 9. You are reporting interest income of less
are the same as those described for choosing You constructively receive income on the than the amount shown on a Form 1099
to include acquisition discount instead of OID deposit or account even if you must: due to amortizable bond premium.
on nongovernment obligations in current in- • Make withdrawals in multiples of even
come. However, you should indicate that you amounts, In Part I, line 1, list each payer's name and the
are making the choice under section 1282(b)(2) • Give a notice to withdraw before making amount received from each. If you received a
of the Internal Revenue Code. the withdrawal, Form 1099-INT or Form 1099-OID from a bro-
Also, see the following discussion. If you • Withdraw all or part of the account to with- kerage firm, list the brokerage firm as the payer.
draw the earnings, or
make the election to report all interest currently • Pay a penalty on early withdrawals, unless Reporting tax-exempt interest. Total your
as OID, you must use the constant yield the interest you are to receive on an early tax-exempt interest (such as interest or accrued
method. withdrawal or redemption is substantially OID on certain state and municipal bonds, in-
less than the interest payable at maturity. cluding zero coupon municipal bonds) reported
on Form 1099-INT, box 8, and Form 1099-OID,
Election To Report box 11, and exempt-interest dividends from a
All Interest as OID Accrual method. If you use an accrual
method, you report your interest income when mutual fund or other regulated investment com-
Generally, you can elect to treat all interest on a you earn it, whether or not you have received it. pany reported on Form 1099-DIV, box 12. Add
debt instrument acquired during the tax year as Interest is earned over the term of the debt in- these amounts to any other tax-exempt interest
OID and include it in income currently. For pur- strument. you received. Report the total on line 2a of
Form 1040 or 1040-SR.
poses of this election, interest includes stated Form 1099-INT, box 9, and Form 1099-DIV,
interest, acquisition discount, OID, de minimis Example. If, in the previous example, you
OID, market discount, de minimis market dis- use an accrual method, you must include the in- box 13, show the tax-exempt interest subject to
count, and unstated interest as adjusted by any terest in your income as you earn it. You would the alternative minimum tax on Form 6251.
amortizable bond premium or acquisition pre- report the interest as follows: 2020, $26.67; These amounts already are included in the
mium. See Regulations section 1.1272-3. 2021, $81.06; and 2022, $55.47. amounts on Form 1099-INT, box 8, and Form
1099-DIV, box 12. Do not add the amounts in
Coupon bonds. Generally, interest on coupon Form 1099-INT, box 9, and Form 1099-DIV,
bonds is taxable in the year the coupon be- box 13, to, or subtract them from, the amounts
When To Report comes due and payable. It does not matter on Form 1099-INT, box 8, and Form 1099-DIV,
Interest Income when you mail the coupon for payment. box 12.
Do not report interest from an individual
retirement arrangement (IRA) as
Terms you may need to know How To Report CAUTION! tax-exempt interest.
(see Glossary):
Interest Income
Accrual method Form 1099-INT. Your taxable interest income,
Cash method Terms you may need to know except for interest from U.S. savings bonds and
(see Glossary): Treasury obligations, is shown in box 1 of Form
Nominee 1099-INT. Add this amount to any other taxable
When to report your interest income depends Original issue discount (OID) interest income you received. See the Form
1099-INT Instructions for Recipient if you have
on whether you use the cash method or an ac- interest from a security acquired at a premium.
crual method to report income. You must report all your taxable interest income
Cash method. Most individual taxpayers use Generally, you report all your taxable interest in- even if you do not receive a Form 1099-INT.
the cash method. If you use this method, you come on Form 1040 or 1040-SR, line 2b. Contact your financial institution if you do not
receive a Form 1099-INT by February 15. Your
generally report your interest income in the year Schedule B (Form 1040). You must com- identifying number may be truncated on any pa-
in which you actually or constructively receive it. plete Schedule B (Form 1040), Part I, if any of per Form 1099-INT you receive.
However, there are special rules for reporting the following apply. If you forfeited interest income because of
the discount on certain debt instruments. See
1. Your taxable interest income is more than the early withdrawal of a time deposit, the de-
$1,500. ductible amount will be shown on Form

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1099-INT in box 2. See Penalty on early with- If you forfeited interest or principal on the Example 2. Your uncle died and left you a
drawal of savings, later. obligation because of an early withdrawal, the $1,000 Series EE bond. You redeem the bond
Box 3 of Form 1099-INT shows the interest deductible amount will be shown in box 3. See for $1,000.
income you received from U.S. savings bonds, Penalty on early withdrawal of savings, later. Your uncle paid $500 for the bond, so $500
Treasury bills, Treasury notes, and Treasury Box 4 of Form 1099-OID will contain an of the amount you receive upon redemption is
bonds. Generally, add the amount shown in amount if you were subject to backup withhold- interest income. Your uncle's executor included
box 3 to any other taxable interest income you ing. Report the amount from box 4 on Form in your uncle's final return $200 of the interest
received. If part of the amount shown in box 3 1040 or 1040-SR, line 25b. that had accrued at the time of your uncle's
was previously included in your interest income, Box 5 shows the market discount that ac- death. You have to include only $300 in your in-
see U.S. savings bond interest previously re- crued on the debt instrument during the year come.
ported, later. If you redeemed U.S. savings while held by you for a covered security ac- The bank where you redeem the bond gives
bonds you bought after 1989 and you paid quired with OID, if you made an election under you a Form 1099-INT showing interest income
qualified educational expenses, see Interest ex- section 1278(b) to include market discount in of $500. You also receive a Form 1099-INT
cluded under the Education Savings Bond Pro- income as it accrues and you notified your showing taxable interest income of $300 from
gram, later. payer of the election in writing in accordance your savings account.
Box 4 of Form 1099-INT will contain an with Regulations section 1.6045-1(n)(5). You file Form 1040 or 1040-SR and com-
amount if you were subject to backup withhold- For a taxable covered security, box 6 shows plete Schedule B (Form 1040). On line 1 of
ing. Include the amount from box 4 on Form the amount of acquisition premium amortization Schedule B (Form 1040), you list the $500 and
1040 or 1040-SR, line 25b. for the year that reduces the amount of OID that $300 interest amounts shown on your Forms
Box 5 of Form 1099-INT shows your share is included as interest on your income tax re- 1099. Several rows above line 2, you put a sub-
of investment expenses of a single-class RE- turn. total of $800. Below this subtotal, enter “U.S.
MIC. This amount is included in box 1 and is not Box 9 of Form 1099-OID shows your share Savings Bond Interest Previously Reported”
deductible. of investment expenses of a single-class RE- and enter the $200 interest included in your un-
Box 6 of Form 1099-INT shows foreign tax MIC. This amount is not deductible. cle's final return. Subtract the $200 from the
paid. You may be able to claim this tax as a de- subtotal and enter $600 on line 2. You then
duction or a credit on your Form 1040 or U.S. savings bond interest previously re- complete the rest of the form.
1040-SR. See your tax return instructions. Box ported. If you received a Form 1099-INT for Worksheet for savings bonds distrib-
7 of Form 1099-INT shows the country or U.S. U.S. savings bond interest, the form may show uted from a retirement or profit-sharing
possession to which the foreign tax was paid. interest you do not have to report. See Form plan. If you cashed a savings bond acquired in
For a covered security, if you made an elec- 1099-INT for U.S. savings bond interest, earlier. a taxable distribution from a retirement or
tion under section 1278(b) to include market On Schedule B (Form 1040), Part I, line 1, profit-sharing plan (as discussed under U.S.
discount in income as it accrues and you noti- report all the interest shown on your Form Savings Bonds, earlier), your interest income
fied your payer of the election in writing in ac- 1099-INT. Then follow these steps. does not include the interest accrued before the
cordance with Regulations section 1.6045-1(n) 1. Several rows above line 2, enter a subtotal distribution and taxed as a distribution from the
(5), box 10 of Form 1099-INT shows the market of all interest listed on line 1. plan.
discount that accrued on the debt instrument
during the year while held by you. Report this 2. Below the subtotal enter “U.S. Savings Use the worksheet below to figure the
amount on your income tax return as directed in Bond Interest Previously Reported” and amount you subtract from the interest
the Instructions for Form 1040 or 1040-SR. enter amounts previously reported or inter- shown on Form 1099-INT.
For a covered security, box 11 shows the est accrued before you received the bond.
amount of premium amortization for the year, 3. Subtract these amounts from the subtotal A. Enter the amount of cash received upon
unless you notified the payer in writing in ac- and enter the result on line 2. redemption of the bond . . . . . . . . . . . . .
cordance with Regulations section 1.6045-1(n)
B. Enter the value of the bond at the time of
(5) that you did not want to amortize bond pre- Example 1. Your parents bought U.S. sav- distribution by the plan . . . . . . . . . . . . .
mium under section 171. If an amount is repor- ings bonds for you when you were a child. The
ted in this box, see the Instructions for Sched- bonds were issued in your name, and the inter- C. Subtract the amount on line B from the
ule B (Form 1040). If an amount is not reported est on the bonds was reported each year as it amount on line A. This is the amount of
in this box for a covered security acquired at a accrued. See Choice to report interest each interest accrued on the bond since it was
premium, the payer has reported a net amount year, earlier. distributed by the plan . . . . . . . . . . . . .
of interest in box 1, 3, 8, or 9, whichever is ap- In March 2022, you redeemed one of the D. Enter the amount of interest shown on
plicable. If the amount in this box is greater than bonds—a $1,000 Series EE bond. The bond your Form 1099-INT . . . . . . . . . . . . . . .
the amount of interest paid on the covered se- was originally issued in March 2003 for
curity, see Regulations section 1.171-2(a)(4). $500.00. When you redeemed the bond, you E. Subtract the amount on line C from the
received $1,018 for it. amount on line D. This is the amount you
Form 1099-OID. The taxable OID on a dis- The Form 1099-INT you received shows in- include in “U.S. Savings Bond Interest
counted obligation for the part of the year you terest income of $518. However, since the inter- Previously Reported” . . . . . . . . . . . . . .
owned it is shown in box 1 of Form 1099-OID. est on your savings bonds was reported yearly,
Include this amount in your total taxable interest you need only include the $1.60 interest that ac- Your employer should tell you the value of
income. But see Refiguring OID shown on Form crued from January 2022 to March 2022. each bond on the date it was distributed.
1099-OID, earlier. Your identifying number may On Schedule B (Form 1040), Part I, line 1, Example. You received a distribution of
be truncated on any paper Form 1099-OID you enter your interest income as shown on Form Series EE U.S. savings bonds in December
receive. 1099-INT—$518. If you had other taxable inter- 2019 from your company's profit-sharing plan.
You must report all taxable OID even if you est income, you would enter it next and then en- In March 2022, you redeemed a $100 Ser-
do not receive a Form 1099-OID. ter a subtotal, as described earlier, before going ies EE bond that was part of the distribution you
Box 2 of Form 1099-OID shows any taxable to the next step. Several rows above line 2, en- received in 2019. You received $89.60 for the
interest on the obligation other than OID. Add ter “U.S. Savings Bond Interest Previously Re- bond the company bought in May 2005. The
this amount to the OID shown in box 1 and in- ported” and enter $516.40 ($518 − $1.60). Sub- value of the bond at the time of distribution in
clude the result in your total taxable income. tract $516.40 from $518 and enter $1.60 on 2019 was $82.88. (This is the amount you inclu-
If you bought and/or sold an obligation dur- Schedule B (Form 1040), line 2. Add this ded on your 2019 return.) The bank gave you a
ing the year, see Bonds Sold Between Interest amount to your subtotal (if any) and in the total Form 1099-INT that shows $39.60 interest (the
Dates, earlier, for information about the treat- on Schedule B (Form 1040), line 4. total interest from the date the bond was pur-
ment of periodic interest that may be shown in
box 2 of Form 1099-OID. chased to the date of redemption). Since a part
of the interest was included in your income in
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2019, you need to include in your 2022 income subtotal of all interest income listed, enter “Ac- that paid this interest. Show the amount belong-
only the interest that accrued after the bond crued Interest” and the amount of accrued inter- ing to your sibling, $450, as a subtraction from a
was distributed to you. est you paid to the seller. That amount is taxa- subtotal of all interest on Schedule B (Form
On Schedule B (Form 1040), line 1, include ble to the seller, not you. Subtract that amount 1040) and identify this subtraction as a “Nomi-
all the interest shown on your Form 1099-INT from the interest income subtotal. Enter the re- nee Distribution.” (Your sibling will report the
as well as any other taxable interest income you sult on line 2b of Form 1040 or 1040-SR. $450 of interest income on any income tax re-
received. Several rows above line 2, put a sub- For more information, see Bonds Sold Be- turn your sibling files and identify you as the
total of all interest listed on line 1. Below this tween Interest Dates, earlier. payer of that amount.)
subtotal enter “U.S. Savings Bond Interest Pre-
viously Reported” and enter the amount figured Nominee distributions. If you received a Original issue discount (OID) adjustment. If
on the worksheet below. Form 1099-INT that includes an amount you re- you are reporting OID in an amount less than
ceived as a nominee for the real owner, report the amount shown on Form 1099-OID or other
A. Enter the amount of cash received upon the full amount shown as interest on the Form written statement (such as for a REMIC regular
redemption of the bond . . . . . . . . . . . $89.60 1099-INT on Part I, line 1 of Schedule B (Form interest), include the full amount of OID shown
B. Enter the value of the bond at the time of 1040). Then, below a subtotal of all interest in- on your Form 1099-OID or other statement on
distribution by the plan . . . . . . . . . . . . $82.88 come listed, enter “Nominee Distribution” and Schedule B (Form 1040), Part I, line 1. Show
C. Subtract the amount on line B from the the amount that actually belongs to someone OID you do not have to report below a subtotal
amount on line A. This is the amount of else. Subtract that amount from the interest in- of the interest and OID listed. Identify the
interest accrued on the bond since it amount as “OID Adjustment” and subtract it
was distributed by the plan . . . . . . . . . $6.72 come subtotal. Enter the result on line 2b of
D. Enter the amount of interest shown on Form 1040 or 1040-SR. from the subtotal.
your Form 1099-INT . . . . . . . . . . . . . . $39.60
E. Subtract the amount on line C from the File Form 1099-INT with the IRS. If you Penalty on early withdrawal of savings. If
amount on line D. This is the amount you received interest as a nominee in 2022, you you withdraw funds from a certificate of deposit
include in “U.S. Savings Bond Interest must file a Form 1099-INT for that interest with or other deferred interest account before matur-
Previously Reported” . . . . . . . . . . . . . $32.88 the IRS. Send Copy A of Form 1099-INT with a ity, you may be charged a penalty. The Form
Form 1096, Annual Summary and Transmittal 1099-INT or similar statement given to you by
Subtract $32.88 from the subtotal and enter the of U.S. Information Returns, to your Internal the financial institution will show the total
result on Schedule B (Form 1040), line 2. You Revenue Service Center by February 28, 2023 amount of interest in box 1 and will show the
then complete the rest of the form. (March 31, 2023, if you file Form 1099-INT elec- penalty separately in box 2. You must include in
tronically). Give the actual owner of the interest income all interest shown in box 1. You can de-
Interest excluded under the Education Sav- Copy B of the Form 1099-INT by January 31, duct the penalty on Schedule 1 (Form 1040),
ings Bond Program. Use Form 8815 to figure 2023. On Form 1099-INT, you should be listed line 18.
your interest exclusion when you redeem quali- as the “Payer.” Prepare one Form 1099-INT for
fied savings bonds and pay qualified higher ed- each other owner and show that person as the
ucation expenses during the same year. “Recipient.” However, you do not have to file Dividends and
For more information on the exclusion and Form 1099-INT to show payments for your
qualified higher education expenses, see the spouse. For more information about the report- Other Distributions
earlier discussion under Education Savings ing requirements and the penalties for failure to
Bond Program. file (or furnish) certain information returns, see Dividends can be distributions of money, stock,
the General Instructions for Certain Information or other property paid to you by a corporation or
Interest on seller-financed mortgage. If an Returns. by a mutual fund. You also may receive divi-
individual buys his or her home from you in a Similar rules apply to OID reported to you as dends through a partnership, an estate, a trust,
sale that you finance, you must report the a nominee on Form 1099-OID. You must file a or an association that is taxed as a corporation.
amount of interest received on Schedule B Form 1099-OID with Form 1096 to show the However, some amounts you receive called
(Form 1040), line 1. Include on line 1 the buy- proper distributions of the OID. dividends actually are interest income. See Div-
er's name, address, and SSN. If you do not, you idends that are actually interest, earlier.
may have to pay a $50 penalty. The buyer may Example. You and your sibling have a joint
have to pay a $50 penalty if he or she does not savings account that paid $1,500 interest for The most common kinds of distributions are:
give you this information. 2022. Your sibling deposited 30% of the funds • Ordinary dividends,
You also must give your name, address, and in this account, and you and your sibling have • Capital gain distributions, and
SSN (or EIN) to the buyer. If you do not, you agreed to share the yearly interest income in • Nondividend distributions.
may have to pay a $50 penalty. proportion to the amount each of you has inves-
ted. Because your SSN was given to the bank, Most distributions are paid in cash (check).
Frozen deposits. Even if you receive a Form you received a Form 1099-INT for 2022 that in- However, distributions can consist of more
1099-INT for interest on deposits that you could cludes the interest income earned belonging to stock, stock rights, other property, or services.
not withdraw at the end of 2022, you must ex- your sibling. This amount is $450, or 30% of the
clude these amounts from your gross income. total interest of $1,500. Form 1099-DIV. Most corporations use Form
(See Interest income on frozen deposits, ear- You must give your sibling a Form 1099-INT 1099-DIV to show you the distributions you re-
lier.) Do not include this income on line 2b of by January 31, 2023, showing $450 of interest ceived from them during the year. Keep this
Form 1040 or 1040-SR. On Schedule B (Form income your sibling earned for 2022. You also form with your records. You do not have to at-
1040), Part I, include the full amount of interest must send a copy of the nominee Form tach it to your tax return. Your identifying num-
shown on your Form 1099-INT on line 1. Sev- 1099-INT, along with Form 1096, to the Internal ber may be truncated on any paper Form
eral rows above line 2, put a subtotal of all inter- Revenue Service Center by February 28, 2023 1099-DIV you receive.
est income. Below this subtotal, enter “Frozen (March 31, 2023, if you file Form 1099-INT elec- Dividends not reported on Form
Deposits” and show the amount of interest that tronically). Show your own name, address, and 1099-DIV. Even if you do not receive a Form
you are excluding. Subtract this amount from SSN as that of the “Payer” on the Form 1099-DIV, you must still report all your taxable
the subtotal and enter the result on line 2. 1099-INT. Show your sibling's name, address, dividend income. For example, you may receive
and SSN in the blocks provided for identifica- distributive shares of dividends from partner-
Accrued interest on bonds. If you received a tion of the “Recipient.” ships or S corporations. These dividends are
Form 1099-INT that reflects accrued interest When you prepare your own federal income reported to you on Schedule K-1 (Form 1065)
paid on a bond you bought between interest tax return, report the total amount of interest in- and Schedule K-1 (Form 1120S).
payment dates, include the full amount shown come, $1,500, on Schedule B (Form 1040),
as interest on the Form 1099-INT on Sched- Part I, line 1, and identify the name of the bank Nominees. If someone receives distribu-
ule B (Form 1040), Part I, line 1. Then, below a tions as a nominee for you, that person will give

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you a Form 1099-DIV which will show distribu- • The dividends are not of the type listed during which you meet any of the following con-
tions received on your behalf. later under Dividends that are not qualified ditions.
If you receive a Form 1099-DIV that includes dividends. 1. You had an option to sell, were under a
amounts belonging to another person, see • You meet the holding period (discussed contractual obligation to sell, or had made
Nominees under How To Report Dividend In- next). (and not closed) a short sale of substan-
come, later, for more information. tially identical stock or securities.
Holding period. You must have held the stock
Form 1099-MISC. Certain substitute pay- for more than 60 days during the 121-day pe- 2. You were grantor (writer) of an option to
ments in lieu of dividends or tax-exempt interest riod that begins 60 days before the ex-dividend buy substantially identical stock or securi-
received by a broker on your behalf must be re- date. The ex-dividend date is the first date fol- ties.
ported to you on Form 1099-MISC, Miscellane- lowing the declaration of a dividend on which
ous Information, or a similar statement. See the buyer of a stock is not entitled to receive the 3. Your risk of loss is diminished by holding
also Reporting Substitute Payments, later. next dividend payment. When counting the one or more other positions in substan-
number of days you held the stock, include the tially similar or related property.
Incorrect amount shown on a Form 1099. If day you disposed of the stock, but not the day For information about how to apply condition
you receive a Form 1099 that shows an incor- you acquired it. See the examples below. (3), see Regulations section 1.246-5.
rect amount (or other incorrect information), you
should ask the issuer for a corrected form. The Exception for preferred stock. In the Qualified foreign corporation. A foreign cor-
new Form 1099 you receive should be denoted case of preferred stock, you must have held the poration is a qualified foreign corporation if it
“Corrected.” stock more than 90 days during the 181-day pe- meets any of the following conditions.
riod that begins 90 days before the ex-dividend
Dividends on stock sold. If stock is sold, ex- date if the dividends are due to periods totaling 1. The corporation is incorporated in a U.S.
changed, or otherwise disposed of after a divi- more than 366 days. If the preferred dividends possession.
dend is declared but before it is paid, the owner are due to periods totaling less than 367 days,
of record (usually the payee shown on the divi- the holding period in the preceding paragraph 2. The corporation is eligible for the benefits
dend check) must include the dividend in in- applies. of a comprehensive income tax treaty with
the United States that the Department of
come. the Treasury determines is satisfactory for
Example 1. You bought 5,000 shares of
Dividends received in January. If a mutual XYZ Corp. common stock on July 5, 2022. XYZ this purpose and that includes an ex-
fund (or other regulated investment company) Corp. paid a cash dividend of 10 cents per change of information program. For a list
or real estate investment trust (REIT) declares a share. The ex-dividend date was July 12, 2022. of those treaties, see Table 1-3.
dividend (including any exempt-interest divi- Your Form 1099-DIV from XYZ Corp. shows 3. The corporation does not meet (1) or (2)
dend or capital gain distribution) in October, $500 in box 1a (ordinary dividends) and in above, but the stock for which the divi-
November, or December, payable to sharehold- box 1b (qualified dividends). However, you sold dend is paid is readily tradable on an es-
ers of record on a date in one of those months the 5,000 shares on August 8, 2022. You held tablished securities market in the United
but actually pays the dividend during January of your shares of XYZ Corp. for only 34 days of States. See Readily tradable stock, later.
the next calendar year, you are considered to the 121-day period (from July 6, 2022, through
have received the dividend on December 31. August 8, 2022). The 121-day period began on Exception. A corporation is not a qualified
You report the dividend in the year it was de- May 13, 2022 (60 days before the ex-dividend foreign corporation if it is a passive foreign in-
clared. date), and ended on September 10, 2022. You vestment company during its tax year in which
have no qualified dividends from XYZ Corp. be- the dividends are paid or during its previous tax
cause you held the XYZ stock for less than 61 year.
Ordinary Dividends days. Controlled foreign corporation (CFC).
Dividends paid out of a CFC's earnings and
Ordinary dividends are the most common type Example 2. Assume the same facts as in profits that were not previously taxed are quali-
of distribution from a corporation or a mutual Example 1 except that you bought the stock on fied dividends if the CFC is otherwise a quali-
fund. They are paid out of earnings and profits July 11, 2022 (the day before the ex-dividend fied foreign corporation and the other require-
and are ordinary income to you. This means date), and you sold the stock on September 13, ments in this discussion are met. Certain
they are not capital gains. You can assume that 2022. You held the stock for 63 days (from July dividends paid by a CFC that would be treated
any dividend you receive on common or prefer- 12, 2022, through September 13, 2022). The as a passive foreign investment company but
red stock is an ordinary dividend unless the $500 of qualified dividends shown in box 1b of for section 1297(d) of the Internal Revenue
paying corporation or mutual fund tells you oth- your Form 1099-DIV are all qualified dividends Code may be treated as qualified dividends.
erwise. Ordinary dividends will be shown in because you held the stock for 61 days of the For more information, see Notice 2004-70,
box 1a of the Form 1099-DIV you receive. 121-day period (from July 12, 2022, through which can be found at IRS.gov/irb/
September 13, 2022). 2004-44_IRB#NOT-2004-70.
Qualified Dividends Example 3. You bought 10,000 shares of Readily tradable stock. Any stock or
ABC Mutual Fund common stock on July 5, American depositary receipt in respect of that
Qualified dividends are the ordinary dividends 2022. ABC Mutual Fund paid a cash dividend of stock is considered to satisfy requirement (3)
subject to the same 0%, 15%, or 20% maximum 10 cents per share. The ex-dividend date was under Qualified foreign corporation if it is listed
tax rate that applies to net capital gain. They July 12, 2022. The ABC Mutual Fund advises on a national securities exchange that is regis-
should be shown in box 1b of the Form you that the portion of the dividend eligible to be tered under section 6 of the Securities Ex-
1099-DIV you receive. treated as qualified dividends equals 2 cents change Act of 1934 or on the Nasdaq Stock
per share. Your Form 1099-DIV from ABC Mu- Market. For a list of the exchanges that meet
See the instructions for Form 1040 to calcu- tual Fund shows total ordinary dividends of these requirements, see National Securities
late the income tax on net capital gain and $1,000 and qualified dividends of $200. How- Exchange | Investor.gov.
qualified dividends. ever, you sold the 10,000 shares on August 8,
2022. You have no qualified dividends from
The maximum rate on qualified dividends ABC Mutual Fund because you held the ABC
applies only if all of the following requirements Mutual Fund stock for less than 61 days.
are met.
• The dividends must have been paid by a Holding period reduced where risk of
U.S. corporation or a qualified foreign cor- loss is diminished. When determining
poration. (See Qualified foreign corpora- whether you met the minimum holding period
tion, later.) discussed earlier, you cannot count any day

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Table 1-3. Income Tax Treaties Dividends Used To available at www.IRS.gov/Newsroom/
Buy More Stock Opportunity-Zones-Frequently-Asked-
Income tax treaties that the United States Questions.
has with the following countries satisfy The corporation in which you own stock may
requirement (2) under Qualified foreign have a dividend reinvestment plan. This plan Qualified Opportunity Investment. If you
corporation. lets you choose to use your dividends to buy held a qualified investment in a qualified oppor-
Australia Indonesia Romania (through an agent) more shares of stock in the tunity fund (QOF) at any time during the year,
Austria Ireland Russia corporation instead of receiving the dividends in you must file your return with Form 8997, Initial
Bangladesh Israel Federation cash. Most mutual funds also permit sharehold- and Annual Statement of Qualified Opportunity
Barbados Italy Slovak ers to automatically reinvest distributions in Fund Investments, attached. See Form 8997 in-
Belgium Jamaica Republic more shares in the fund, instead of receiving structions.
Bulgaria Japan Slovenia cash. If you use your dividends to buy more
Canada Kazakhstan South Africa stock at a price equal to its fair market value, Undistributed capital gains of mutual funds
China Korea Spain you must still report the dividends as income. and REITs. Some mutual funds and REITs
keep their long-term capital gains and pay tax
Cyprus Latvia Sri Lanka If you are a member of a dividend reinvest- on them. You must treat your share of these
Czech Lithuania Sweden ment plan that lets you buy more stock at a gains as distributions, even though you did not
Republic Luxembourg Switzerland price less than its fair market value, you must actually receive them. However, they are not in-
Denmark Malta Thailand report as dividend income the fair market value cluded on Form 1099-DIV. Instead, they are re-
Egypt Mexico Trinidad of the additional stock on the dividend payment ported to you in box 1a of Form 2439.
Estonia Morocco and date. Form 2439 also will show how much, if any,
Finland Netherlands Tobago of the undistributed capital gains is:
France New Zealand Tunisia You also must report as dividend income • Unrecaptured section 1250 gain (box 1b),
Germany Norway Turkey any service charge subtracted from your cash • Gain from qualified small business stock
Greece Pakistan Ukraine dividends before the dividends are used to buy (section 1202 gain, box 1c), or
Hungary Philippines United the additional stock. But you may be able to de- • Collectibles (28%) gain (box 1d).
Iceland Poland Kingdom duct the service charge. For information about these terms, see Capital
Gain Tax Rates in chapter 4.
India Portugal Venezuela In some dividend reinvestment plans, you The tax paid on these gains by the mutual
can invest more cash to buy shares of stock at
For the latest information about devel- a price less than fair market value. If you fund or REIT is shown in box 2 of Form 2439.
opments related to Pub. 550, such as choose to do this, you must report as dividend Basis adjustment. Increase your basis in
tax treaties between the United States income the difference between the cash you in- your mutual fund, or your interest in a REIT, by
and particular countries, go to www.IRS.gov/ vest and the fair market value of the stock you the difference between the gain you report and
Pub550. buy. When figuring this amount, use the fair the credit you claim for the tax paid.
market value of the stock on the dividend pay-
Dividends that are not qualified dividends. ment date.
Nondividend Distributions
The following dividends are not qualified divi-
dends. They are not qualified dividends even if Money Market Funds A nondividend distribution is a distribution that
they are shown in box 1b of Form 1099-DIV. is not paid out of the earnings and profits of a
• Capital gain distributions. Report amounts you receive from money mar- corporation or a mutual fund. You should re-
• Dividends paid on deposits with mutual ket funds as dividend income. Money market ceive a Form 1099-DIV or other statement
savings banks, cooperative banks, credit funds are a type of mutual fund and should not showing you the nondividend distribution. On
unions, U.S. building and loan associa- be confused with bank money market accounts Form 1099-DIV, a nondividend distribution will
tions, U.S. savings and loan associations, that pay interest. be shown in box 3. If you do not receive such a
federal savings and loan associations, and statement, you report the distribution as an ordi-
similar financial institutions. Report these Capital Gain Distributions nary dividend.
amounts as interest income.
• Dividends from a corporation that is a Capital gain distributions (also called capital Basis adjustment. A nondividend distribution
tax-exempt organization or farmer's coop- gain dividends) are paid to you or credited to reduces the basis of your stock. It is not taxed
erative during the corporation's tax year in your account by mutual funds (or other regula- until your basis in the stock is fully recovered.
which the dividends were paid or during ted investment companies) and real estate in- This nontaxable portion also is called a return of
the corporation's previous tax year. vestment trusts (REITs). They will be shown in capital; it is a return of your investment in the
• Dividends paid by a corporation on em- box 2a of the Form 1099-DIV you receive from stock of the company. If you buy stock in a cor-
ployer securities held on the date of record the mutual fund or REIT. poration in different lots at different times, and
by an employee stock ownership plan you cannot definitely identify the shares subject
(ESOP) maintained by that corporation. Report capital gain distributions as to the nondividend distribution, reduce the basis
• Dividends on any share of stock to the ex- long-term capital gains, regardless of how long of your earliest purchases first.
tent you are obligated (whether under a you owned your shares in the mutual fund or When the basis of your stock has been re-
short sale or otherwise) to make related REIT. See Capital gain distributions under How duced to zero, report any additional nondivi-
payments for positions in substantially sim- To Report Dividend Income, later in this chap- dend distribution you receive as a capital gain.
ilar or related property. ter. Whether you report it as a long-term or
• Payments in lieu of dividends, but only if short-term capital gain depends on how long
you know or have reason to know the pay- Qualified Opportunity Fund (QOF). Effective you have held the stock. See Holding Period in
ments are not qualified dividends. December 22, 2017, section 1400Z-2 provides chapter 4.
• Payments shown on Form 1099-DIV, a temporary deferral of inclusion in gross in-
box 1b, from a foreign corporation to the come for capital gains invested in QOFs, and Example 1. You bought stock in 2009 for
extent you know or have reason to know permanent exclusion of capital gains from the $100. In 2012, you received a nondividend dis-
the payments are not qualified dividends. sale or exchange of an investment in the QOF if tribution of $80. You did not include this amount
the investment is held for at least 10 years. See in your income, but you reduced the basis of
the Form 8949 instructions on how to report your stock to $20. You received a nondividend
your election to defer eligible gains invested in a distribution of $30 in 2022. The first $20 of this
QOF. For additional information, please see amount reduced your basis to zero. You report
Opportunity Zones Frequently Asked Questions
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the other $10 as a long-term capital gain for Distributions of Stock over the period during which the stock cannot
2022. You must report as a long-term capital be redeemed, as if it were original issue dis-
gain any nondividend distribution you receive and Stock Rights count on a debt instrument. See Original Issue
on this stock in later years. Distributions by a corporation of its own stock Discount (OID), earlier in this chapter.
Example 2. You bought shares in XYZ Mu- are commonly known as stock dividends. Stock The redemption premium is not a construc-
tual Fund in 2018 for $12 per share. In 2019, rights (also known as “stock options”) are distri- tive distribution, and is not taxable as a result, in
you received a nondividend distribution of $5 butions by a corporation of rights to acquire the the following situations.
per share. You reduced your basis in each corporation's stock. Generally, stock dividends 1. The stock was issued before October 10,
share by $5 to an adjusted basis of $7. In 2020, and stock rights are not taxable to you, and you 1990 (before December 20, 1995, if re-
you received a nondividend distribution of $1 do not report them on your return. deemable solely at the option of the is-
suer), and the redemption premium is
per share and further reduced your basis in Taxable stock dividends and stock rights. “reasonable.” (For stock issued before Oc-
each share to $6. In 2021, you received a non- Distributions of stock dividends and stock rights tober 10, 1990, only the part of the re-
dividend distribution of $2 per share. Your basis are taxable to you if any of the following apply. demption premium that is not “reasonable”
was reduced to $4 per share. In 2022, the non-
dividend distribution from the mutual fund was 1. You or any other shareholder have the is a constructive distribution.) The re-
$5 per share. You reduce your basis in each choice to receive cash or other property demption premium is reasonable if it is not
share to zero and report $1 of gain per share. instead of stock or stock rights. more than 10% of the issue price on stock
not redeemable for 5 years from the issue
See the Instructions for Form 8949 for details 2. The distribution gives cash or other prop- date or is in the nature of a penalty for
and more information. erty to some shareholders and an in- making a premature redemption.
For more information on Form 8949 crease in the percentage interest in the
TIP and Schedule D (Form 1040), see Re- corporation's assets or earnings and prof- 2. The stock was issued after October 9,
porting Capital Gains and Losses in its to other shareholders. 1990 (after December 19, 1995, if re-
deemable solely at the option of the is-
chapter 4. Also, see the Instructions for Form 3. The distribution is in convertible preferred suer), and the redemption premium is de
8949 and the Instructions for Schedule D (Form stock and has the same result as in (2). minimis. The redemption premium is de
1040).
4. The distribution gives preferred stock to minimis if it is less than one-fourth of 1%
some common stock shareholders and (0.0025) of the redemption price multiplied
Liquidating Distributions common stock to other common stock by the number of full years from the date
shareholders. of issue to the date redeemable.
Liquidating distributions, sometimes called liqui- 5. The distribution is on preferred stock. (The 3. The stock was issued after October 9,
dating dividends, are distributions you receive distribution, however, is not taxable if it is 1990, and must be redeemed at a speci-
during a partial or complete liquidation of a cor- an increase in the conversion ratio of con- fied time or is redeemable at your option,
poration. These distributions are, at least in vertible preferred stock made solely to but the redemption is unlikely because it is
part, one form of a return of capital. They may take into account a stock dividend, stock subject to a contingency outside your con-
be paid in one or more installments. You will re- split, or similar event that would otherwise trol (not including the possibility of default,
ceive Form 1099-DIV from the corporation result in reducing the conversion right.) insolvency, etc.).
showing you the amount of the liquidating distri-
bution in box 9 or 10. The term “stock” includes rights to acquire 4. The stock was issued after December 19,
stock, and the term “shareholder” includes a 1995, and is redeemable solely at the op-
Any liquidating distribution you receive is not holder of rights or convertible securities. tion of the issuer, but the redemption pre-
taxable to you until you have recovered the ba- mium is in the nature of a penalty for pre-
sis of your stock. After the basis of your stock If you receive taxable stock dividends or mature redemption or redemption is not
has been reduced to zero, you must report the stock rights, include their fair market value at more likely than not to occur. The redemp-
liquidating distribution as a capital gain. the time of distribution in your income. tion will be treated under a “safe harbor”
Whether you report the gain as a long-term or as not more likely than not to occur if all of
short-term capital gain depends on how long Constructive distributions. You must treat the following are true.
you have held the stock. See Holding Period in certain transactions that increase your propor- a. You and the issuer are not related un-
chapter 4. tionate interest in the earnings and profits or as- der the rules discussed in chapter 4
sets of a corporation as if they were distribu-
Stock acquired at different times. If you tions of stock or stock rights. These under Losses on Sales or Trades of
acquired stock in the same corporation in more constructive distributions are taxable if they Property, substituting “20%” for
than one transaction, you own more than one have the same result as a distribution described “50%.”
block of stock in the corporation. If you receive in (2), (3), (4), or (5) of the above discussion. b. There are no plans, arrangements, or
distributions from the corporation in complete This treatment applies to a change in your agreements that effectively require or
liquidation, you must divide the distribution stock's conversion ratio or redemption price, a are intended to compel the issuer to
among the blocks of stock you own in the fol- difference between your stock's redemption redeem the stock.
lowing proportion: the number of shares in that price and issue price, a redemption not treated c. The redemption would not reduce the
block over the total number of shares you own. as a sale or exchange of your stock, and any stock's yield.
Divide distributions in partial liquidation among other transaction having a similar effect on your
that part of the stock redeemed in the partial liq- interest in the corporation. Basis. Your basis in stock or stock rights re-
uidation. After the basis of a block of stock is re-
duced to zero, you must report the part of any Preferred stock redeemable at a pre- ceived in a taxable distribution is their fair mar-
later distribution for that block as a capital gain. mium. If you receive preferred stock having a ket value when distributed. If you receive stock
redemption price higher than its issue price, the or stock rights that are not taxable to you, see
Distributions less than basis. If the total difference (the redemption premium) generally Stocks and Bonds, later, for information on how
liquidating distributions you receive are less is taxable as a constructive distribution of addi- to figure their basis.
than the basis of your stock, you may have a tional stock on the preferred stock.
capital loss. You can report a capital loss only Fractional shares. You may not own enough
after you have received the final distribution in For stock issued before October 10, 1990, stock in a corporation to receive a full share of
liquidation that results in the redemption or can- you include the redemption premium in your in- stock if the corporation declares a stock divi-
cellation of the stock. Whether you report the come ratably over the period during which the dend. However, with the approval of the share-
loss as a long-term or short-term capital loss stock cannot be redeemed. For stock issued af- holders, the corporation may set up a plan in
depends on how long you held the stock. See ter October 9, 1990, you include the redemption which fractional shares are not issued but
Holding Period in chapter 4. premium on the basis of its economic accrual instead are sold, and the cash proceeds are
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given to the shareholders. Any cash you receive Exempt-interest dividends. Exempt-interest
for fractional shares under such a plan is trea- dividends you receive from a mutual fund or
ted as an amount realized on the sale of the other regulated investment company are not in- How To Report
fractional shares. Report this transaction on cluded in your taxable income. (However, see
Form 8949. Enter your gain or loss, the differ- Information reporting requirement, next.) Ex- Dividend Income
ence between the cash you receive and the ba- empt-interest dividends should be shown in
sis of the fractional shares sold, in column (h) of box 12 of Form 1099-DIV. Terms you may need to know
Schedule D (Form 1040) in Part I or Part II, (see Glossary):
whichever is appropriate. Information reporting requirement. Al-
though exempt-interest dividends are not taxa- Nominee
Report these transactions on Form ble, you must show them on your tax return if Restricted stock
! 8949 with the correct box checked. you have to file a return. See Reporting tax-ex-
CAUTION empt interest, earlier.
For more information on Form 8949 and
Schedule D (Form 1040), see Reporting Capital Alternative minimum tax treatment. Ex- Use Form 1040 or 1040-SR to report your divi-
Gains and Losses in chapter 4. Also, see the In- empt-interest dividends paid from specified pri- dend income. Report the total of your ordinary
structions for Form 8949 and the Instructions for vate activity bonds may be subject to the alter- dividends on line 3b of Form 1040 or 1040-SR.
Schedule D (Form 1040). native minimum tax. The exempt-interest Report qualified dividends on line 3a.
dividends subject to the alternative minimum
Example. You own one share of common tax should be shown in box 13 of Form Form 1099-DIV. If you owned stock on which
stock that you bought on January 5, 2013, for 1099-DIV. See Form 6251 and its instructions you received $10 or more in dividends and
$100. The corporation declared a common for more information. other distributions, you should receive a Form
stock dividend of 5% on June 30, 2022. The fair 1099-DIV. Even if you do not receive a Form
market value of the stock at the time the stock Dividends on insurance policies. Insurance 1099-DIV, you must report all your dividend in-
dividend was declared was $200. You were policy dividends the insurer keeps and uses to come.
paid $10 for the fractional-share stock dividend pay your premiums are not taxable. However, See Form 1099-DIV and its instructions for
under a plan described in the discussion above. you must report as taxable interest income the more information on how to report dividend in-
You figure your gain or loss as follows. interest that is paid or credited on dividends left come.
with the insurance company.
If dividends on an insurance contract (other Form 1040 or 1040-SR. You must complete
Fair market value of old stock . . . . $200.00 than a modified endowment contract) are dis- Schedule B (Form 1040), Part II, and attach it to
Fair market value of stock dividend tributed to you, they are a partial return of the your Form 1040 or 1040-SR, if:
(cash received) . . . . . . . . . . . . . . . . + 10.00 premiums you paid. Do not include them in your • Your ordinary dividends (Form 1099-DIV,
Fair market value of old stock and gross income until they are more than the total box 1a) are more than $1,500, or
stock dividend . . . . . . . . . . . . . . . . . $210.00 of all net premiums you paid for the contract. • You received, as a nominee, dividends
Basis (cost) of old stock (For information on the treatment of a distribu- that actually belong to someone else.
after the stock dividend tion from a modified endowment contract, see If your ordinary dividends are more than $1,500,
(($200 ÷ $210) × $100) . . . . . . . . . $95.24 Distribution Before Annuity Starting Date From you also must complete Schedule B (Form
Basis (cost) of stock dividend a Nonqualified Plan under Taxation of Nonperi- 1040), Part III.
(($10 ÷ $210) × $100) . . . . . . . . . . + 4.76 odic Payments in Pub. 575.) See instructions
Total . . . . . . . . . . . . . . . . . . . . . . . . . $100.00 for the Form 1040 or Form 1040-SR for where List on Schedule B (Form 1040), Part II,
to report. line 5, each payer's name and the ordinary divi-
dends you received. If your securities are held
Cash received . . . . . . . . . . . . . . . . . $10.00 by a brokerage firm (in “street name”), list the
Basis (cost) of stock dividend . . . . − 4.76 Dividends on veterans' insurance. Divi-
dends you receive on veterans' insurance poli- name of the brokerage firm shown on Form
Gain $5.24 cies are not taxable. In addition, interest on divi- 1099-DIV as the payer. If your stock is held by a
dends left with the Department of Veterans nominee who is the owner of record, and the
Because you had held the share of stock for Affairs is not taxable. nominee credited or paid you dividends on the
stock, show the name of the nominee and the
more than 1 year at the time the stock dividend Patronage dividends. Generally, patronage dividends you received or for which you were
was declared, your gain on the stock dividend is dividends you receive in money from a cooper- credited.
a long-term capital gain. ative organization are included in your income. Enter on line 6 the total of the amounts listed
Scrip dividends. A corporation that de- You should receive Form 1099-PATR, Taxable on line 5. (However, if you hold stock as a nomi-
clares a stock dividend may issue you a scrip Distributions Received from Cooperatives. nee, see Nominees, later.) Also, enter this total
certificate that entitles you to a fractional share. Do not include in your income patronage on line 3b of Form 1040 or 1040-SR.
The certificate generally is nontaxable when dividends you receive on:
you receive it. If you choose to have the corpo- • Property bought for your personal use, or Dividends received on restricted stock. Re-
ration sell the certificate for you and give you • Capital assets or depreciable property stricted stock is stock you get from your em-
the proceeds, your gain or loss is the difference bought for use in your business. But you ployer for services you perform and that is non-
between the proceeds and the part of your ba- must reduce the basis (cost) of the items transferable and subject to a substantial risk of
sis in the corporation's stock allocated to the bought. If the dividend is more than the ad- forfeiture. You do not have to include the value
certificate. justed basis of the assets, you must report of the stock in your income when you receive it.
However, if you receive a scrip certificate the excess as income. However, if you get dividends on restricted
stock, you must include them in your income as
that you can choose to redeem for cash instead These rules are the same whether the coop- wages, not dividends. See Restricted Property
of stock, the certificate is taxable when you re- erative paying the dividend is a taxable or in Pub. 525 for information on restricted stock
ceive it. You must include its fair market value in tax-exempt cooperative. dividends.
income on the date you receive it.
Your employer should include these divi-
Alaska Permanent Fund dividends. Do not dends in the wages shown on your Form W-2,
Other Distributions report these amounts as dividends. Instead, in- Wage and Tax Statement. If you also get a
clude these amounts on Schedule 1 (Form Form 1099-DIV for these dividends, list them on
You may receive any of the following distribu- 1040), line 8g. Schedule B (Form 1040), line 5, with the other
tions during the year. dividends you received. Enter a subtotal of all
your dividend income several rows above
line 6. Below the subtotal, enter “Dividends on

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restricted stock reported as wages on Form Capital gain distributions. If you received Report these transactions on Form
1040 or 1040-SR, line 1,” and enter the divi- capital gain distributions, you report them di- ! 8949 with the correct box checked.
dends included in your wages on line 1 of Form rectly on Form 1040 or 1040-SR, line 7; or on CAUTION
1040 or 1040-SR. Subtract this amount from the Schedule D (Form 1040), line 13, depending on For more information on Form 8949 and
subtotal and enter the result on line 6. your situation. If you received capital gain distri- Schedule D (Form 1040), see Reporting Capital
butions from a mutual fund or real estate invest- Gains and Losses in chapter 4. Also, see the In-
Election. You can choose to include the ment trust (REIT), the distributions of net real- structions for Form 8949 and the Instructions for
value of restricted stock in gross income as pay ized short-term capital gains are not treated as Schedule D (Form 1040).
for services. If you make this choice, report the capital gains. Instead, they are included on
dividends on the stock like any other dividends. Form 1099-DIV as ordinary dividends. Report Nominees. If you received ordinary dividends
List them on Part II, line 5, of Schedule B (Form them on your tax return as ordinary dividends. as a nominee (that is, the dividends are in your
1040), along with your other dividends (if the name but actually belong to someone else), in-
amount of ordinary dividends received from all Exceptions to filing Form 8949 and Sched- clude them on line 5 of Schedule B (Form
sources is more than $1,500). If you receive ule D (Form 1040). There are certain situa- 1040). Several rows above line 6, put a subtotal
both a Form 1099-DIV and a Form W-2 showing tions where you may not have to file Form 8949 of all dividend income listed on line 5. Below
these dividends, do not include the dividends in and/or Schedule D (Form 1040). this subtotal, enter “Nominee Distribution” and
your wages reported on line 1 of Form 1040 or show the amount received as a nominee. Sub-
1040-SR. Attach a statement to your Form 1040 Exception 1. You do not have to file Form
or 1040-SR explaining why the amount shown 8949 or Schedule D (Form 1040) if you have no tract the total of your nominee distributions from
on line 1 of your Form 1040 or 1040-SR is dif- capital losses and your only capital gains are the subtotal. Enter the result on line 6.
ferent from the amount shown on your Form capital gain distributions from Form(s) If you received a capital gain distribution or
W-2. 1099-DIV, box 2a. (If any Form(s) 1099-DIV you were allocated an undistributed capital gain as
receive have an amount in box 2b (unrecap- a nominee, report only the amount that belongs
Independent contractor. If you received tured section 1250 gain), box 2c (section 1202 to you on Form 1040 or 1040-SR, line 7; or
restricted stock for services as an independent gain), or box 2d (collectibles (28%) gain), you Schedule D (Form 1040), line 13, whichever is
contractor, the rules in the previous discussion do not qualify for this exception.) If you qualify appropriate. Attach a statement to your return
apply. Generally, you must treat dividends you for this exception, report your capital gain distri- showing the full amount you received or were
receive on the stock as income from self-em- butions directly on line 7 of Form 1040 or allocated and the amount you received or were
ployment. 1040-SR (and check the box). Also, use the allocated as a nominee.
Qualified Dividends and Capital Gain Tax Work- File Form 1099-DIV with the IRS. If you
Qualified dividends. Report qualified divi- sheet in the Form 1040 or 1040-SR instructions received dividends as a nominee in 2022, you
dends (Form 1099-DIV, box 1b) on line 3a of to figure your tax. must file a Form 1099-DIV (or Form 2439) for
Form 1040 or 1040-SR. The amount in box 1b
is already included in box 1a. Do not add the Exception 2. You must file Schedule D those dividends with the IRS. Send the Form
amount in box 1b to, or subtract it from, the (Form 1040), but generally do not have to file 1099-DIV with a Form 1096 to your Internal
amount in box 1a. Do not include any of the fol- Form 8949, if Exception 1 does not apply and Revenue Service Center by February 28, 2023
lowing on line 3a. your only capital gains and losses are: (March 31, 2023, if you file Form 1099-DIV
• Qualified dividends you received as a • Capital gain distributions; electronically). Give the actual owner of the divi-
nominee. See Nominees, later. • A capital loss carryover; dends Copy B of the Form 1099-DIV by Janu-
• Dividends on stock for which you did not • A gain from Form 2439; Form 6252, Install- ary 31, 2023. On Form 1099-DIV, you should be
meet the holding period. See Holding pe- ment Sale Income; or Part I of Form 4797, listed as the “Payer.” The other owner should
riod, earlier, under Qualified Dividends. Sales of Business Property; be listed as the “Recipient.” You do not, how-
• Dividends on any share of stock to the ex- • A gain or loss from Form 4684, Casualties ever, have to file a Form 1099-DIV to show pay-
tent you are obligated (whether under a and Thefts; Form 6781, Gains and Losses ments for your spouse. For more information
short sale or otherwise) to make related From Section 1256 Contracts and Strad- about the reporting requirements and the penal-
payments for positions in substantially sim- dles; or Form 8824; ties for failure to file (or furnish) certain informa-
ilar or related property. • A gain or loss from a partnership, S corpo- tion returns, see the General Instructions for
• Payments in lieu of dividends, but only if ration, estate, or trust; or Certain Information Returns and the Instructions
you know or have reason to know the pay- • Gains and losses from transactions for for Form 2439.
ments are not qualified dividends. which you received a Form 1099-B that
• Payments shown on Form 1099-DIV, shows basis was reported to the IRS and Liquidating distributions. If you receive a liq-
box 1b, from a foreign corporation to the for which you do not need to make any ad- uidating distribution on stock, the corporation
extent you know or have reason to know justments in column (g) of Form 8949 or will give you a Form 1099-DIV showing the liqui-
the payments are not qualified dividends. enter any codes in column (f) of Form dating distribution in boxes 9 and 10.
If you have qualified dividends, you must fig- 8949.
ure your tax by completing the Qualified Divi- Undistributed capital gains. Follow the Stripped
dends and Capital Gain Tax Worksheet in the Instructions for the Shareholder on Form 2439
Form 1040 or 1040-SR instructions or the to report undistributed capital gains and the tax Preferred Stock
Schedule D Tax Worksheet in the Schedule D paid by the mutual fund on those gains.
(Form 1040) instructions, whichever applies. If the dividend rights are stripped from certain
Investment interest deducted. If you Nondividend distributions. Report nondivi- preferred stock, the holder of the stripped pre-
claim a deduction for investment interest, you dend distributions (box 3 of Form 1099-DIV) ferred stock may have to include amounts in in-
may have to reduce the amount of your quali- only after your basis in the stock has been re- come equal to the amounts that would have
fied dividends that are eligible for the 0%, 15%, duced to zero. After the basis of your stock has been included if the stock were a bond with
or 20% tax rate. Reduce it by the qualified divi- been reduced to zero, you must show this ex- OID.
dends you choose to include in investment in- cess amount on Form 8949, Part I, if you held
come when figuring the limit on your investment the stock 1 year or less. Show it on Form 8949, Stripped preferred stock defined. Stripped
interest deduction. This is done on the Qualified Part II, if you held the stock for more than 1 preferred stock is any stock that meets both of
Dividends and Capital Gain Tax Worksheet or year. Enter the name of the company in column the following tests.
the Schedule D Tax Worksheet. For more infor- (a) of Form 8949. Report the amount of the ex- 1. There has been a separation in ownership
mation about the limit on investment interest, cess distribution in column (d) and your zero between the stock and any dividend on
see Interest Expenses in chapter 3. basis in column (e) of Form 8949. the stock that has not become payable.
2. The stock:

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a. Is limited and preferred as to divi- Revenue Code, and the regulations under If you hold a regular interest or CDO through
dends, those sections. a nominee (rather than directly), you can re-
b. Does not participate in corporate quest the information from the nominee.
growth to any significant extent, and Regular Interest
Allocated investment expenses. A sin-
c. Has a fixed redemption price. gle-class REMIC will report your share of its in-
A REMIC can have several classes (also known vestment expenses in box 5 of Form 1099-INT
Treatment of buyer. If you buy stripped pre- as “tranches”) of regular interests. A regular in- or box 9 of Form 1099-OID. This amount is not
ferred stock after April 30, 1993, you must in- terest unconditionally entitles the holder to re- deductible. A single-class REMIC is one that
clude certain amounts in your gross income ceive a specified principal amount (or other sim- generally would be classified as a trust for tax
while you hold the stock. These amounts are or- ilar amount). purposes if it had not elected REMIC status.
dinary income. They are equal to the amounts
you would have included in gross income if the A REMIC regular interest is treated as a Redemption of regular interests at maturity.
stock were a bond that: debt instrument for income tax purposes. Ac- Redemption of debt instruments at their matur-
cordingly, the OID, market discount, and in- ity is treated as a sale or exchange. You must
1. Was issued on the purchase date of the come reporting rules that apply to bonds and report redemptions on your tax return whether
stock, and other debt instruments as described earlier in or not you realize gain or loss on the transac-
2. Has OID equal to: this publication under Discount on Debt Instru- tion. Your basis is your adjusted issue price,
ments apply, with certain modifications dis- which includes any OID you previously reported
a. The redemption price for the stock, cussed below. in income.
minus
Any amount you receive on the retirement of
b. The price at which you bought the Generally, you report your income from a a debt instrument is treated as if you had sold or
stock. regular interest on line 2b of Form 1040 or exchanged that instrument. A debt instrument is
1040-SR. For more information on how to report retired when it is reacquired or redeemed by the
Include these amounts on Schedule 1 (Form interest and OID, see How To Report Interest issuer and canceled.
1040), line 8z. Income, earlier.
This treatment also applies to you if you ac- Sale or exchange of a regular interest.
quire the stock in such a way (for example, by Holders must use accrual method. Holders Some of your gain on the sale or exchange of a
gift) that your basis in the stock is determined of regular interests must use an accrual method REMIC regular interest may be ordinary in-
by using a buyer's basis. of accounting to report OID and interest in- come. The ordinary income part, if any, is:
come. Because income under an accrual • The amount that would have been inclu-
Treatment of person stripping stock. If you method is not determined by the receipt of ded in your income if the yield to maturity
strip the rights to one or more dividends from cash, you may have to include OID or interest on the regular interest had been 110% of
preferred stock, you are treated as having pur- income in your taxable income even if you have the applicable federal rate at the beginning
chased the stock. You are treated as making not received any cash payments. of your holding period, minus
the purchase on the date you disposed of the • The amount you included in your income.
dividend rights. Your adjusted basis in the pre- Forms 1099-INT and 1099-OID. You should
ferred stock is treated as your purchase price. receive a copy of Form 1099-INT or Form Residual Interest
The rules described in Treatment of buyer, ear- 1099-OID from the REMIC. See the General In-
lier, apply to you. structions for Certain Information Returns for in- A residual interest is an interest in a REMIC that
formation on when you should receive your is not a regular interest. It is designated as a re-
copy of Form 1099-INT or Form 1099-OID and sidual interest by the REMIC.
REMICs, FASITs, a written statement providing additional infor-
mation. The statement should contain enough
and Other CDOs information to enable you to figure your accrual If you acquire a residual interest in a REMIC,
of market discount or amortizable bond pre- you must take into account on a quarterly basis
Holders of interests in real estate mortgage in- mium. your daily portion of the taxable income or net
loss of the REMIC for each day during the tax
vestment conduits (REMICs), financial asset Form 1099-INT shows interest income that year you hold the residual interest. You must re-
securitization investment trusts (FASITs), and accrued to you for the period you held the regu- port these amounts as ordinary income or loss.
other collateralized debt obligations (CDOs) lar interest.
must follow special rules for reporting income
and any expenses from these investment prod- Form 1099-OID shows OID and interest, if Basis in the residual interest. Your basis in
ucts. any, that accrued to you for the period you held the residual interest is increased by taxable in-
the regular interest. You will not need to make come you take into account. Your basis is de-
any adjustments to the amounts reported even creased (but not below zero) by the cash or the
REMICs if you held the regular interest for only a part of fair market value of any property distributed to
the calendar year. However, if you bought the you, and by any net loss you have taken into
A REMIC is an entity formed for the purpose of regular interest at a premium or acquisition pre- account. If you sell or transfer your residual in-
holding a fixed pool of mortgages secured by mium, see Refiguring OID shown on Form terest, you must adjust your basis to reflect your
interests in real property. A REMIC issues regu- 1099-OID, earlier. share of the REMIC's taxable income or net
lar and residual interests to investors. A REMIC loss immediately before the sale or transfer.
generally is not treated as a corporation, part- You may not get a Form 1099. Corpora-
nership, or trust. For purposes of subtitle F of tions and other persons specified in Regula- See Wash Sales, in chapter 4, for more infor-
the Internal Revenue Code (Procedure and Ad- tions section 1.6049-7(c) will not receive Forms mation about selling a residual interest.
ministration), a REMIC generally is treated as a 1099. These persons and fiscal year taxpayers
partnership with the residual interest holders may obtain tax information by contacting the Treatment of distributions. You must include
treated as the partners. The regular interests REMIC or the issuer of the CDO, if they hold in your gross income the part of any distribution
are treated as debt instruments. their interest directly from the REMIC or issuer that is more than your adjusted basis. Treat the
of the CDO. Pub. 938, Real Estate Mortgage In- distribution as a gain from the sale or exchange
REMIC income or loss is not income or loss vestment Conduits (REMICs) Reporting Infor- of your residual interest.
from a passive activity. mation, explains how to request this informa- Schedule Q (Form 1066). If you hold a RE-
tion.
For more information about the qualifica- MIC residual interest, you should receive
tions and tax treatment that apply to a REMIC Pub. 938 is available only on the Inter- Schedule Q (Form 1066), Quarterly Notice to
and the interests of investors in a REMIC, see net at IRS.gov/pub938. Residual Interest Holder of REMIC Taxable In-
sections 860A through 860G of the Internal come or Net Loss Allocation, and instructions
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from the REMIC each quarter. Schedule Q Refiguring OID shown on Form 1099-OID, ear- For more information about your treatment
(Form 1066) will indicate your share of the RE- lier. of S corporation tax items, see Shareholder's
MIC's quarterly taxable income (or loss). Do not If you did not receive a Form 1099, see You Instructions for Schedule K-1 (Form 1120S).
attach Schedule Q (Form 1066) to your tax re- may not get a Form 1099, earlier.
turn. Keep it for your records. Limit on losses and deductions. The de-
Use Schedule E (Form 1040), Part IV, to re- duction for your share of losses and deductions
port your total share of the REMIC's taxable in- FASITs shown on Schedule K-1 (Form 1120S) is limited
to the adjusted basis of your stock and any debt
come (or loss) for each quarter included in your A financial asset securitization investment trust the corporation owes you. Any loss or deduc-
tax year. (FASIT) is an entity that securitizes debt obliga- tion not allowed because of this limit is carried
For more information about reporting your tions such as credit card receivables, home over and treated as a loss or deduction in the
income (or loss) from a residual interest in a equity loans, and automobile loans. next tax year.
REMIC, follow the Instructions for Schedule Q
(Form 1066) and Schedule E (Form 1040). A regular interest in a FASIT is treated as a Passive activity losses. Rules apply that
debt instrument. The rules described under Col- limit losses from passive activities. Your copy of
lateralized Debt Obligations (CDOs), earlier, Schedule K-1 (Form 1120S) and its instructions
Collateralized Debt apply to a regular interest in a FASIT, except will explain the limits and tell you where on your
Obligations (CDOs) that a holder of a regular interest in a FASIT return to report your share of S corporation
must use an accrual method of accounting to items from passive activities.
A CDO is a debt instrument, other than a RE- report OID and interest income.
MIC regular interest, that is secured by a pool of Form 8582. If you have a passive activity
mortgages or other evidence of debt and that For more information about FASITs, see loss from an S corporation, you must complete
has principal payments subject to acceleration. sections 860H through 860L of the Internal Rev- Form 8582 to figure the allowable loss to enter
(Note: While REMIC regular interests are collat- enue Code. on your return. See Pub. 925 for more informa-
eralized debt obligations, they have unique Beginning January 1, 2005, the special tion.
rules that do not apply to CDOs issued before ! rules for FASITs are repealed. How-
1987.) CDOs, also known as “pay-through CAUTION ever, the special rules still apply to any
bonds,” are commonly divided into different FASIT in existence on October 22, 2004, to the Investment Clubs
classes (also called “tranches”). extent that regular interests issued by the FA-
CDOs can be secured by a pool of mort- SIT before that date continue to remain out- An investment club is formed when a group of
gages, automobile loans, equipment leases, or standing in accordance with the original terms friends, neighbors, business associates, or oth-
credit card receivables. of issuance. ers pool their money to invest in stock or other
securities. The club may or may not have a writ-
For more information about the qualifica- ten agreement, a charter, or bylaws.
tions and the tax treatment that apply to an is- Usually the group operates informally with
suer of a CDO, see section 1272(a)(6) of the In- S Corporations
ternal Revenue Code and the regulations under members pledging to pay a regular amount into
that section. In general, an S corporation does not pay a tax the club monthly. Some clubs have a committee
on its income. Instead, its income and expen- that gathers information on securities, selects
The OID, market discount, and income-re- ses are passed through to the shareholders, the most promising securities, and recom-
porting rules that apply to bonds and other debt who then report these items on their own in- mends that the club invest in them. Other clubs
instruments, as described earlier in this chapter come tax returns. rotate these responsibilities among all their
members. Most clubs require all members to
under Discount on Debt Instruments, also apply If you are an S corporation shareholder, vote for or against all investments, sales,
to a CDO. your share of the corporation's current year in- trades, and other transactions.
You must include interest income from your come or loss and other tax items are taxed to
CDO in your gross income under your regular you whether or not you receive any amount. Identifying number. Each club must have an
method of accounting. Also, include any OID Generally, those items increase or decrease the EIN to use when filing its return. The club's EIN
accrued on your CDO during the tax year. basis of your S corporation stock, as appropri- also may have to be given to the payer of divi-
ate. For more information on basis adjustments dends or other income from investments recor-
Generally, you report your income from a for S corporation stock, see Stocks and Bonds, ded in the club's name. To obtain an EIN, apply
CDO on line 2b of Form 1040 or 1040-SR. For later. online at IRS.gov/Businesses/Small-
more information about reporting these Businesses-&-Self-Employed/Apply-for-an-
amounts on your return, see How To Report In- Generally, S corporation distributions, ex-
terest Income, earlier. cept dividend distributions, are considered a re- Employer-Identification-Number-(EIN)-Online or
turn of capital and reduce your basis in the file Form SS-4, Application for Employer Identi-
Forms 1099-INT and 1099-OID. You should stock of the corporation. The part of any distri- fication Number. See chapter 5, How To Get
receive a copy of Form 1099-INT or Form bution that is more than your basis is treated as Tax Help, for more information about how to get
1099-OID generally by January 31, 2023. See a gain from the sale or exchange of property. this form.
the General Instructions for Certain Information The corporation's distributions may be in the Investments in name of member. When
Returns for information on when you should re- form of cash or property. an investment is recorded in the name of one
ceive your copy of Form 1099-INT or Form S corporation distributions are not treated as club member, this member must give his or her
1099-OID and a written statement providing ad- dividends except in certain cases in which the SSN to the payer of investment income. (When
ditional information. The statement should con- corporation has accumulated earnings and an investment is held in the names of two or
tain enough information about the CDO to ena- profits from years before it became an S corpo- more club members, the SSN of only one mem-
ble you to figure your accrual of market discount ration. ber must be given to the payer.) This member is
or amortizable bond premium. considered the record owner for the actual
Form 1099-INT shows the interest income Reporting S corporation income, deduc- owner, the investment club. This member is a
paid to you for the period you held the CDO. tions, and credits. The S corporation should “nominee” and must file an information return
Form 1099-OID shows the OID accrued to send you a copy of Schedule K-1 (Form 1120S) with the IRS. For example, the nominee mem-
you and the interest, if any, paid to you for the showing your share of the S corporation's in- ber must file Form 1099-DIV for dividend in-
period you held the CDO. You should not need come, credits, and deductions for the tax year. come, showing the club as the owner of the div-
to make any adjustments to the amounts repor- You must report your distributive share of the S idend, his or her SSN, and the EIN of the club.
ted even if you held the CDO for only a part of corporation's income, gain, loss, deductions, or
the calendar year. However, if you bought the credits on the appropriate lines and schedules
CDO at a premium or acquisition premium, see of your Form 1040 or 1040-SR.
Chapter 1 Investment Income Page 25

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Tax Treatment of the Club Club as a Corporation
Generally, an investment club is treated as a An investment club formed after 1996 is taxed
partnership for federal tax purposes unless it as a corporation if: 2.
chooses otherwise. In some situations, how- • It is formed under a federal or state law
ever, it is taxed as a corporation or a trust. that refers to it as incorporated or as a cor-
poration, body corporate, or body politic;
Clubs formed before 1997. Before 1997, the • It is formed under a state law that refers to Tax Shelters and
rules for determining how an investment club is it as a joint-stock company or joint-stock
treated were different from those explained in association; or Other
the following discussions. An investment club • It chooses to be taxed as a corporation.
that existed before 1997 is treated for later
years the same way it was treated before 1997, Choosing to be taxed as a corporation. To Reportable
unless it chooses to be treated a different way choose to be taxed as a corporation, the club
under the new rules. To make that choice, the cannot be a trust (see Club as a Trust, later) or
club must file Form 8832, Entity Classification otherwise subject to special treatment under the Transactions
Election. tax law. The club must file Form 8832 to make
the choice.
Introduction
Club as a Partnership Filing requirement. If your club is taxed as a
corporation, it must file Form 1120, U.S. Corpo- Investments that yield tax benefits are some-
If your club is not taxed as a corporation or a ration Income Tax Return. In that case, you do times called “tax shelters.” In some cases, Con-
trust, it will be treated as a partnership. not report any of its income or expenses on gress has concluded that the loss of revenue is
Filing requirement. If your investment club is your individual return. All ordinary income and an acceptable side effect of special tax provi-
treated as a partnership, it must file Form 1065, expenses and capital gains and losses must be sions designed to encourage taxpayers to
U.S. Return of Partnership Income. However, reported on the Form 1120. Any distribution the make certain types of investments. In many ca-
as a partner in the club, you must report on your club makes that qualifies as a dividend must be ses, however, losses from tax shelters produce
individual return your share of the club's in- reported on Form 1099-DIV if total distributions little or no benefit to society, or the tax benefits
come, gains, losses, deductions, and credits for to the shareholder are $10 or more for the year. are exaggerated beyond those intended. Those
the club's tax year. (Its tax year generally must You must report any distributions you re- cases are called “abusive tax shelters.” An in-
be the same tax year as that of the partners ceive from the club on your individual return. vestment that is considered a tax shelter is sub-
owning a majority interest.) You must report You should receive a copy of Form 1099-DIV ject to restrictions, including the requirement
these items whether or not you actually receive from the club showing the distributions you re- that it be disclosed. See Disclosure of reporta-
any distribution from the partnership. ceived. ble transactions, later.
Some corporations can choose not to be
Schedule K-1 (Form 1065). You should re- taxed and have earnings taxed to the share- Topics
ceive a copy of Schedule K-1 (Form 1065) from holders. See S Corporations, earlier. This chapter discusses:
the partnership. The amounts shown on Sched- For more information about corporations,
ule K-1 (Form 1065) are your share of the part- see Pub. 542, Corporations. • Abusive Tax Shelters,
nership's income, deductions, and credits. Re- • Rules To Curb Abusive Tax Shelters,
port each amount on the appropriate lines and Club as a Trust • Investor Reporting,
schedules of your income tax return. • Penalties, and
The club's expenses for producing or col- In a few cases, an investment club is taxed as a • Whether To Invest.
lecting income, for managing investment prop- trust. In general, a trust is an arrangement
erty, or for determining any tax are listed sepa- through which trustees take title to property for Useful Items
rately on Schedule K-1 (Form 1065). the purpose of protecting or conserving it for the You may want to see:
For more information about reporting your beneficiaries under the ordinary rules applied in
income from a partnership, see the Sched- chancery or probate courts. An arrangement is Publication
ule K-1 (Form 1065) instructions. Also, see Pub. treated as a trust for tax purposes if its purpose
541, Partnerships. is to vest in trustees responsibility for protecting 538 538 Accounting Periods and Methods
and conserving property for beneficiaries who
Passive activity losses. Rules apply that cannot share in that responsibility and so are 561 561 Determining the Value of Donated
limit losses from passive activities. Your copy of not associates in a joint enterprise for the con- Property
Schedule K-1 (Form 1065) and its instructions duct of business for profit. If you need more in- 925 925 Passive Activity and At-Risk Rules
will tell you where on your return to report your formation about trusts, see Regulations section
share of partnership items from passive activi- 301.7701-4.
ties. If you have a passive activity loss from a Form (and Instructions)
partnership, you must complete Form 8582 to Filing requirement. If your club is taxed as a 8275 8275 Disclosure Statement
figure the amount of the allowable loss to enter trust, it must file Form 1041, U.S. Income Tax
on your tax return. Return for Estates and Trusts. You should re- 8275-R 8275-R Regulation Disclosure Statement
ceive a copy of Schedule K-1 (Form 1041) from
No social security coverage for investment the trust. Report the amounts shown on Sched- 8283 8283 Noncash Charitable Contributions
club earnings. If an investment club partner- ule K-1 (Form 1041) on the appropriate lines 8865 8865 Return of U.S. Persons With
ship's activities are limited to investing in sav- and schedules of your income tax return.
ings certificates, stock, or securities, and col- Respect to Certain Foreign
lecting interest or dividends for its members' Partnerships
accounts, a member's share of income is not
earnings from self-employment. You cannot vol- 8886 8886 Reportable Transaction Disclosure
untarily pay the self-employment tax to increase Statement
your social security coverage and ultimate ben- 8918 8918 Material Advisor Disclosure
efits.
Statement
8938 8938 Statement of Specified Foreign
Financial Assets
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See chapter 5, How To Get Tax Help, for infor- Rules To Curb the due date of the return (including any exten-
mation about getting these publications and sions) to the date you pay the penalty.
forms. Abusive Tax Shelters
Accounting method restriction. Tax
Congress has enacted a series of income tax shelters generally cannot use the cash method
laws designed to halt the growth of abusive tax of accounting.
Abusive Tax Shelters shelters. These provisions include the following.
Uniform capitalization rules. The uni-
Abusive tax shelters are marketing schemes in- Disclosure of reportable transactions. form capitalization rules generally apply to pro-
volving artificial transactions with little or no You must disclose information for each reporta- ducing property or acquiring it for resale. Under
economic reality. They often make use of unre- ble transaction in which you participate. See those rules, the direct cost and part of the indi-
alistic allocations, inflated appraisals, losses in Reportable Transaction Disclosure Statement, rect cost of the property must be capitalized or
connection with nonrecourse loans, mismatch- later. included in inventory. See Pub. 538 for uniform
ing of income and deductions, financing techni- Material advisors with respect to any report- capitalization rules.
ques that do not conform to standard commer- able transaction must disclose information
cial business practices, or mischaracterization about the transaction on Form 8918, Material Denial of deduction for interest on an
of the substance of the transaction. Despite ap- Advisor Disclosure Statement. To determine underpayment due to a reportable transac-
pearances to the contrary, the taxpayer gener- whether you are a material advisor to a transac- tion. You cannot deduct any interest you paid
ally risks little. tion, see the Instructions for Form 8918. or accrued on any part of an underpayment of
Material advisors will receive a reportable tax due to an understatement arising from a re-
Abusive tax shelters commonly involve transaction number for the disclosed reportable portable transaction if the relevant facts affect-
package deals designed from the start to gener- transaction. They must provide this number to ing the tax treatment of the item are not ade-
ate losses, deductions, or credits that will be far all persons to whom they acted as a material quately disclosed. See Reportable transaction,
more than the present or future investment. For advisor. They must provide the number at the later. This rule applies to reportable transac-
example, abusive tax shelters may promise in- time the transaction is entered into. If they do tions entered into in tax years beginning after
vestors from the start that future inflated ap- not have the number at that time, they must pro- October 22, 2004.
praisals will enable them to deduct charitable vide it within 60 days from the date the number
contribution deductions based on those ap- is mailed to them. For information on penalties Authority for Disallowance of Tax
praisals. (But see the appraisal requirements for failure to disclose and failure to maintain Benefits
discussed under Rules To Curb Abusive Tax lists, see sections 6707, 6707A, and 6708.
Shelters, later.) They are commonly marketed The IRS has published guidance concluding
in terms of the ratio of tax deductions allegedly Requirement to maintain list. Material that the claimed tax benefits of various abusive
available to each dollar invested. This ratio (or advisors must maintain a list of persons to tax shelters should be disallowed. The guid-
“write-off”) is frequently said to be several times whom they provide material aid, assistance, or ance is the IRS’s conclusion on how the law is
greater than one-to-one. advice on any reportable transaction. The list applied to a particular set of facts. Guidance is
must be available for inspection by the IRS, and published in the Internal Revenue Bulletin for
Because there are many abusive tax shel- the information required to be included on the taxpayers' information and also for use by IRS
ters, it is not possible to list all the factors you list must generally be kept for 7 years. See Reg- officials. So, if your return is examined and an
should consider in determining whether an of- ulations section 301.6112-1 for more informa- abusive tax shelter is identified and challenged,
fering is an abusive tax shelter. However, you tion (including what information is required to be published guidance dealing with that type of
should ask the following questions, which might included on the list). shelter, which disallows certain claimed tax
provide a clue to the abusive nature of the plan.
• Do the tax benefits far outweigh the eco- Confidentiality privilege. The confiden- shelter benefits, could serve as the basis for the
nomic benefits? tiality privilege between you and a federally au- examining official's challenge of the tax benefits
• Is this a transaction you would seriously thorized tax practitioner does not apply to writ- you claimed. In such a case, the examiner will
consider if you hoped to make a profit? Are ten communications made after October 21, not compromise even if you or your representa-
the tax benefits the primary reason for the 2004, regarding the promotion of your direct or tive believe you have authority for the positions
transaction? indirect participation in any tax shelter. taken on your tax return. In addition, the exam-
• Do shelter assets really exist and, if so, are iner can also assess penalties based on the
they insured for less than their purchase Appraisal requirement for donated prop- facts and circumstances.
price? erty. If you claim a deduction of more than
• Is there a nontax justification for the way $5,000 for an item or group of similar items of The courts are generally unsympa-
profits and losses are allocated to part- donated property, you must generally get a ! thetic to taxpayers involved in abusive
ners? qualified appraisal. See section 170 and Form CAUTION tax shelter schemes and have ruled in
• Do the facts and supporting documents 8283 for more information. If you claim a deduc- favor of the IRS in the majority of the cases in
make economic sense? For example, are tion of more than $500,000 for the donated which these shelters have been challenged.
there sales and resales of the tax shelter property, you must generally attach the quali-
property at ever increasing prices? fied appraisal to your return. If you file electroni-
• Does the investment plan involve a gim- cally, see Form 8453, U.S. Individual Income Investor Reporting
mick, device, or sham to hide the eco- Tax Transmittal for an IRS e-file Return, and its
nomic reality of the transaction? instructions. See Pub. 561 for information about You may be required to file a reportable trans-
• Does the promoter offer to backdate docu- appraisals. action disclosure statement.
ments after the close of the year? Are you Passive activity loss and credit limits.
instructed to backdate checks covering The passive activity loss and credit rules limit Reportable Transaction Disclosure
your investment? the amount of losses and credits that can be Statement
• Is your debt a real debt or are you assured claimed from passive activities and limit the
by the promoter that you will never have to amount that can offset nonpassive income, Use Form 8886 to disclose information for each
pay it? such as certain portfolio income from invest- reportable transaction in which you participated.
• Does this transaction involve laundering ments. See Pub. 925 for information about in- See Reportable transaction, later. Generally,
U.S. source income through foreign corpo- come, losses, and credits from passive activi- you must attach Form 8886 to your return for
rations incorporated in a tax haven and ties. each tax year in which you participated in the
owned by U.S. shareholders? transaction. Under certain circumstances, a
Interest on penalties. If you are assessed transaction must be disclosed within 90 days of
an accuracy-related or civil fraud penalty (as the transaction being identified as a listed trans-
discussed under Penalties, later), interest will action or a transaction of interest. See Listed
be imposed on the amount of the penalty from transaction, later. In addition, for the first year
Chapter 2 Tax Shelters and Other Reportable Transactions Page 27

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Form 8886 is attached to your return, you must information on exceptions, see Revenue Proce- ar07.html, as modified by Notice 2017-8,
send a copy of the form to: dure 2007-20 in Internal Revenue Bulletin 2017-3 I.R.B. 423, available at IRS.gov/irb/
2007-7, available at IRS.gov/irb/2007-07_IRB/ 2017-03_IRB/ar12.html.
Internal Revenue Service ar15.html.
OTSA Mail Stop 4915 Updates on reportable transactions. For
1973 Rulon White Blvd. Loss transaction. For individuals, a loss updates on listed transactions, loss transac-
Ogden, UT 84201 transaction is one that results in a deductible tions, and transactions of interest, go to
loss if the gross amount of the loss is at least $2 IRS.gov/Businesses/Corporations/Abusive-
million in a single tax year or $4 million in any Tax-Shelters-and-Transactions.
If you file your return electronically, the copy combination of tax years. A loss from a foreign
sent to The Office of Tax Shelter Analysis currency transaction under section 988 is a loss
(OTSA) must show exactly the same informa- transaction if the gross amount of the loss is at Penalties
tion, word for word, provided with the electroni- least $50,000 in a single tax year, whether or
cally filed return and it must be provided on the not the loss flows through from an S corporation Investing in an abusive tax shelter may lead to
official IRS Form 8886 or an exact copy of the or partnership. substantial expenses. First, the promoter gener-
form. If you use a computer-generated or sub- Certain losses (such as losses from casual- ally charges a substantial fee. If your return is
stitute Form 8886, it must be an exact copy of ties, thefts, and condemnations) are excepted examined by the IRS and a tax deficiency is de-
the official IRS form. from this category and do not have to be repor- termined, you will have to pay more taxes and
ted on Form 8886. For information on other ex- interest on the underpayment, possibly a 20%,
If you fail to file Form 8886 as required or fail ceptions, see Revenue Procedure 2013-11 in 30%, or even 40% accuracy-related penalty, or
to include any required information on the form, Internal Revenue Bulletin 2013-2, available at a 75% civil fraud penalty. You may also be sub-
you may have to pay a penalty. See Penalty for IRS.gov/irb/2013-02_IRB/ar09.html. See Up- ject to the penalty for failure to pay tax. These
failure to disclose a reportable transaction, dates on reportable transactions, later, for up- penalties are explained in the following para-
later. dates on loss transactions. graphs.
The following discussion briefly describes Transaction of interest. A transaction of Accuracy-related penalties. An accuracy-re-
reportable transactions. For more details, see interest is a transaction entered into after No- lated penalty of 20% can be imposed for under-
the Instructions for Form 8886. vember 1, 2006, that is the same as, or sub- payments of tax due to:
stantially similar to, one of the types of transac- • Negligence or disregard of rules or regula-
Reportable transaction. A reportable trans- tions that the IRS has identified by notice, tions,
action is any of the following. regulation, or other published guidance as a • Substantial understatement of tax,
• A listed transaction. transaction of interest. The IRS has identified • Substantial valuation misstatements (in-
• A confidential transaction. the following transactions of interest: creased to 40% for gross valuation mis-
• A transaction with contractual protection. • “Toggling” grantor trusts, as described in statements),
• A loss transaction. Notice 2007-73, 2007-36 I.R.B. 545, avail- • Transactions lacking economic substance
• A transaction of interest entered into after able at IRS.gov/irb/2007-36_IRB/ (increased to 40% for nondisclosed none-
November 1, 2006. ar20.html. conomic substance transactions), or
• Certain transactions involving contributions • Undisclosed foreign financial asset under-
Note. Transactions with a brief asset hold- of a successor member interest in a limited statements (40% for tax years beginning
ing period were removed from the definition of liability company, as described in Notice after March 18, 2010).
reportable transaction for transactions entered 2007-72, 2007-36 I.R.B. 544, available at If you are charged an accuracy-related pen-
into after August 2, 2007. IRS.gov/irb/2007-36_IRB/ar19.html. alty, interest will be imposed on the amount of
• Certain transactions involving the sale or the penalty from the due date of the return (in-
Listed transaction. A listed transaction is other disposition of all interests in a chari- cluding extensions) to the date you pay the
the same as, or substantially similar to, one of table remainder trust and claiming little or penalty.
the types of transactions the IRS has deter- no taxable gain, as described in Notice
mined to be a tax-avoidance transaction. These 2008-99, 2008-47 I.R.B. 1194, available at The 20% penalties do not apply to any un-
transactions have been identified in notices, IRS.gov/irb/2008-47_IRB/ar11.html. derpayment attributable to a reportable transac-
regulations, and other published guidance is- • Certain transactions involving a U.S. tax- tion understatement subject to an accuracy-re-
sued by the IRS. For a list of existing guidance, payer owning controlled foreign corpora- lated penalty (discussed later).
see Notice 2009-59 in Internal Revenue Bulletin tions (CFCs) that hold stock of a lower-tier Negligence or disregard of rules or reg-
2009-31, available at IRS.gov/irb/2009-31_IRB/ CFC through a domestic partnership to ulations. The penalty for negligence or disre-
ar07.html. See Updates on reportable transac- avoid reporting income, as described in gard of rules or regulations is imposed only on
tions, later, for updates on listed transactions. Notice 2009-7, 2009-3 I.R.B. 312, availa- the part of the underpayment due to negligence
ble at IRS.gov/irb/2009-03_IRB/ar10.html. or disregard of rules or regulations. The penalty
transaction is offered to you under conditions of •
Confidential transaction. A confidential Certain transactions denominated as an will not be charged if you can show you had
option, notional principal contract, forward reasonable cause for understating your tax and
confidentiality and for which you have paid an contract, or other derivative contract (“bas- that you acted in good faith.
advisor a minimum fee. A transaction is offered ket contracts”) to receive a return based on Negligence includes any failure to make a
under conditions of confidentiality if the advisor the performance of a basket of referenced reasonable attempt to comply with the provi-
who is paid the fee places a limit on your disclo- assets in an attempt to defer income rec- sions of the Internal Revenue Code. It also in-
sure of the tax treatment or tax structure of the ognition and/or convert short-term capital cludes any failure to keep adequate books and
transaction and the limit protects the confiden- gain and ordinary income to long-term cap- records. A return position that has a reasonable
tiality of the advisor's tax strategies. The trans- ital gain, as described in Notice 2015-74, basis is not negligence. See Regulation section
action is treated as confidential even if the con- 2015-46 I.R.B. 663, available at 1.6662-3(b)(1).
ditions of confidentiality are not legally binding IRS.gov/irb/2015-46_IRB/ar10.html. Disregard includes any careless, reckless,
•
on you. Transactions in which a taxpayer attempts or intentional disregard of rules or regulations.
Transaction with contractual protection. to reduce aggregate taxable income of the The penalty for disregard of rules and regu-
Generally, a transaction with contractual protec- taxpayer or related parties using contracts lations can be avoided if all the following are
tion is one in which you or a related party has that the parties treat as insurance con- true.
the right to a full or partial refund of fees if all or tracts and a related company the parties • You keep adequate books and records.
part of the intended tax consequences of the treat as a captive insurance company • You have a reasonable basis for your posi-
transaction are not sustained, or a transaction (“section 831(b) micro-captive”), as descri- tion on the tax issue.
for which the fees are contingent on realizing bed in Notice 2016-66, 2016-47 I.R.B. 745, • You make an adequate disclosure of your
the tax benefits from the transaction. For available at IRS.gov/irb/2016-47_IRB/ position.
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Use Form 8275 to make your disclosure and at- income. A transaction has economic substance Instead of, or in addition to, Form 8275
tach it to your return. To disclose a position con- for you as an individual taxpayer only if: ! or 8275-R, you may have to file Form
trary to a regulation, use Form 8275-R. Use • The transaction changes your economic CAUTION 8938, Statement of Specified Foreign
Form 8886 to disclose a reportable transaction. position in a meaningful way (apart from Financial Assets, with your tax return. See the
See Reportable transaction, earlier. federal income tax effects), and Instructions for Form 8938 for details.
• You have a substantial purpose (apart
Substantial understatement of tax. An from federal income tax effects) for enter- • Your acquisition, disposition, or substantial
change in ownership interest in a foreign
understatement is considered to be substantial ing into the transaction. partnership, reportable on Form 8865.
if it is more than the greater of:
• 10% of the tax required to be shown on the For purposes of determining whether eco- • Creation or transfer of money or property
return, or nomic substance exists, a transaction's profit to certain foreign trusts, reportable on
• $5,000. potential will only be taken into account if the Form 3520, Annual Return To Report
present value of the reasonably expected Transactions With Foreign Trusts and Re-
For tax years 2018 through 2025, if you claim pre-tax profit from the transaction is substantial ceipt of Certain Foreign Gifts.
any deduction allowed under section 199A, an compared to the present value of the expected
understatement is considered to be substantial net tax benefits that would be allowed if the Penalty for incorrect appraisals. The person
if it is more than the greater of: transaction were respected. who prepares an appraisal of the value of prop-
• 5% of the tax required to be shown on the If any part of your underpayment is due to erty may have to pay a penalty if:
return, or any disallowance of claimed tax benefits by rea- • He or she knows, or reasonably should
• $5,000. son of a transaction lacking economic sub- have known, that the appraisal would be
In general, “understatement” means the excess stance or failing to meet the requirements of used in connection with a return or claim
of: any similar rule of law, that part of your under- for refund; and
payment will be subject to the 20% accuracy-re- • The claimed value of the property on a re-
1. The amount of the tax required to be lated penalty even if you had a reasonable turn or claim for refund based on that ap-
shown on the return for the tax year; over cause and acted in good faith concerning that praisal results in a substantial valuation
2. The amount of the tax imposed which is part. misstatement or a gross valuation mis-
shown on the return, reduced by any re- Additionally, the penalty increases to 40% if statement. See Substantial valuation mis-
bate (within the meaning of section you do not adequately disclose, on your return statement, earlier.
6211(b)(2)). or in a statement attached to your return, the For details on the penalty amount and excep-
relevant facts affecting the tax treatment of a tions, see Pub. 561.
For items other than tax shelters, you can transaction that lacks economic substance. Rel-
file Form 8275 or Form 8275-R to disclose evant facts include any facts affecting the tax Penalty for failure to disclose a reportable
items that could cause a substantial understate- treatment of the transaction. transaction. If you fail to include any required
ment of income tax. In that way, you can avoid
the substantial understatement penalty if you You may be subject to a 20% penalty information regarding a reportable transaction
on a return or statement, you may have to pay a
have a reasonable basis for your position on the ! based on the excessive amount of an penalty of 75% of the decrease in tax shown on
tax issue. Disclosure of the tax shelter item on a CAUTION erroneous claim for an income tax re-
tax return does not reduce the amount of the fund or credit. If that excessive amount results your return as a result of such transaction (or
understatement. from a transaction found to be lacking economic that would have resulted if the transaction were
Also, the understatement penalty will not be substance, it will NOT be treated as due to rea- respected for federal tax purposes). See Re-
imposed if you can show there was reasonable sonable cause. portable transaction, earlier. For an individual,
cause for the underpayment caused by the un- the minimum penalty is $5,000 and the maxi-
derstatement and that you acted in good faith. Undisclosed foreign financial asset un- mum is $10,000 (or $100,000 for a listed trans-
An important factor in establishing reasonable derstatement. For tax years beginning after action). This penalty is in addition to any other
cause and good faith will be the extent of your March 18, 2010, you may be liable for a 40% penalty that may be imposed.
effort to determine your proper tax liability under penalty for an understatement of your tax liabil- The IRS may rescind or abate the penalty
the law. ity due to an undisclosed foreign financial asset. for failing to disclose a reportable transaction
An undisclosed foreign financial asset is any under certain limited circumstances but cannot
Substantial valuation misstatement. In asset for which an information return, required rescind the penalty for failing to disclose a listed
general, you are liable for a 20% penalty for a to be provided under sections 6038, 6038B, transaction. See Revenue Procedure 2007-21,
substantial valuation misstatement if all the fol- 6038D, 6046A, or 6048 for any tax year, is not as updated by Treasury Decision 9686 and An-
lowing are true. provided. The penalty applies to any part of an nouncement 2016-1, for information on rescis-
• The value or adjusted basis of any prop- underpayment related to the following undis- sion.
erty claimed on the return is 150% or more closed foreign financial assets.
of the correct amount. • Any foreign business you control, reporta- Accuracy-related penalty for a reportable
• You underpaid your tax by more than ble on Form 5471, Information Return of transaction understatement. If you have a
$5,000 because of the misstatement. U.S. Persons With Respect To Certain reportable transaction understatement, you
• You cannot establish that you had reason- Foreign Corporations, or Form 8865, Re- may have to pay a penalty equal to 20% of the
able cause for the underpayment and that turn of U.S. Persons With Respect to Cer- amount of that understatement. This applies to
you acted in good faith. tain Foreign Partnerships. any item due to a listed transaction or other re-
You may be assessed a penalty of 40% for a • Certain transfers of property to a foreign portable transaction with a significant purpose
gross valuation misstatement. If you misstate corporation or partnership, reportable on of avoiding or evading federal income tax. The
the value or the adjusted basis of property by Form 926, Return by a U.S. Transferor of penalty is 30% rather than 20% for the part of
200% or more of the amount determined to be Property to a Foreign Corporation, or cer- any reportable transaction understatement if the
correct, you will be assessed a penalty of 40%, tain distributions to a foreign person, re- transaction was not properly disclosed.
instead of 20%, of the amount you underpaid portable on Form 8865. This penalty does not apply to the part of an
because of the gross valuation misstatement. • Your ownership interest in an otherwise understatement on which the fraud penalty,
The penalty rate is also 40% if the property's undisclosed foreign financial asset, report- gross valuation misstatement penalty, or pen-
correct value or adjusted basis is zero. able on Form 8275 or 8275-R. See the In- alty for nondisclosure of noneconomic sub-
structions for Form 8275 or Form 8275-R. stance transactions is imposed.
Transaction lacking economic sub-
stance. The economic substance doctrine only Civil fraud penalty. If any underpayment of
applies to an individual that entered into a trans- tax on your return is due to fraud, a penalty of
action in connection with a trade or business or 75% of the underpayment will be added to your
an activity engaged in for the production of tax.

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Joint return. The fraud penalty on a joint See chapter 5, How To Get Tax Help, for infor- your portfolio income. Portfolio income includes
return applies to a spouse only if some part of mation about getting these publications and gross income from interest, dividends, annui-
the underpayment is due to the fraud of that forms. ties, or royalties that is not derived in the ordi-
spouse. nary course of a trade or business. It also in-
cludes gains or losses (not derived in the
Failure to pay tax. If a deficiency is assessed Limits on Deductions ordinary course of a trade or business) from the
and is not paid within 10 days of the demand for sale or trade of property (other than an interest
payment, you may be penalized with up to a Your deductions for investment expenses may in a passive activity) producing portfolio income
25% addition to tax if the failure to pay contin- be limited by: or held for investment. This includes capital
ues. • The at-risk rules, gain distributions from mutual funds (and other
• The passive activity loss limits, or regulated investment companies (RICs)) and
Whether To Invest • The limit on investment expenses. real estate investment trusts (REITs).
You cannot use passive activity losses to
The at-risk rules and passive activity rules offset Alaska Permanent Fund dividends.
There could be adverse tax consequences, are explained briefly in this section. The limit on
such as additional tax owed and a substantial investment interest is explained later in this Expenses. Do not include in the computa-
amount of penalties and interest that will result if chapter under Interest Expenses. tion of your passive activity income or loss:
the claimed tax benefits are disallowed. You • Expenses (other than interest) that are
should carefully consider the risks of investing At-risk rules. Special at-risk rules apply to clearly and directly allocable to your portfo-
in a tax shelter and seek competent legal and fi- most income-producing activities. These rules lio income, or
nancial advice. limit the amount of loss you can deduct to the • Interest expense properly allocable to port-
amount you risk losing in the activity. Generally, folio income.
this is the cash and the adjusted basis of prop- However, this interest and other expenses may
erty you contribute to the activity. It also in- be subject to other limits. These limits are ex-
cludes money you borrow for use in the activity plained in the rest of this chapter.
if you are personally liable for repayment or if
you use property not used in the activity as se- Additional information. For more informa-
3. curity for the loan. For more information, see tion about determining and reporting income
Pub. 925. and losses from passive activities, see Pub.
925.
Passive activity losses and credits. The
Investment amount of losses and tax credits you can claim
from passive activities is limited. Generally, you Interest Expenses
are allowed to deduct passive activity losses
Expenses only up to the amount of your passive activity in- This section discusses interest expenses you
come. Also, you can use credits from passive may be able to deduct as an investor.
activities only against tax on the income from
Terms you may need to know passive activities. There are exceptions for cer- For information on business interest, see
(see Glossary): tain activities, such as rental real estate activi- chapter 4 of Pub. 535.
At-risk rules ties.
You generally cannot deduct personal inter-
Passive activity Passive activity. A passive activity is gen- est. However, you can deduct qualified home
Portfolio income erally any activity involving the conduct of any mortgage interest, as explained in Pub. 936,
trade or business in which you do not materially Home Mortgage Interest Deduction, and inter-
participate and any rental activity. However, if est on certain student loans, as explained in
you are involved in renting real estate, the activ- Pub. 970, Tax Benefits for Education.
Topics ity is not a passive activity if both of the follow-
This chapter discusses: ing are true. Investment Interest
• More than one-half of the personal serv-
• Limits on Deductions, ices you perform during the year in all If you borrow money to buy property you hold
• Interest Expenses, trades or businesses are performed in real for investment, the interest you pay is invest-
• Bond Premium Amortization, property trades or businesses in which you ment interest. You can deduct investment inter-
• Nondeductible Interest Expenses, materially participate. est subject to the limit discussed later. How-
• How To Report Investment Interest • You perform more than 750 hours of serv- ever, you cannot deduct interest you incurred to
Expenses, and ices during the year in real property trades produce tax-exempt income. See Tax-exempt
• When To Report Investment Expenses. or businesses in which you materially par- income, later. You also cannot deduct interest
ticipate. expenses on straddles discussed under Interest
Useful Items The term “trade or business” generally means expense and carrying charges on straddles,
You may want to see: any activity that involves the conduct of a trade later.
or business, is conducted in anticipation of
Publication starting a trade or business, or involves certain Investment interest does not include any
research or experimental expenditures. How- qualified home mortgage interest or any interest
535 535 Business Expenses ever, it does not include rental activities or cer- taken into account in computing income or loss
tain activities treated as incidental to holding from a passive activity.
925 925 Passive Activity and At-Risk Rules property for investment.
929 929 Tax Rules for Children and You are considered to materially participate Investment property. Property held for invest-
Dependents in an activity if you are involved on a regular, ment includes property that produces interest,
continuous, and substantial basis in the opera- dividends, annuities, or royalties not derived in
Form (and Instructions) tions of the activity. the ordinary course of a trade or business. It
also includes property that produces gain or
Schedule A (Form 1040) Schedule A (Form 1040) Itemized Other income (nonpassive income). loss (not derived in the ordinary course of a
Deductions Generally, you can use losses from passive ac- trade or business) from the sale or trade of
tivities only to offset income from passive activi- property producing these types of income or
4952 4952 Investment Interest Expense ties. You cannot use passive activity losses to held for investment (other than an interest in a
Deduction offset your other income, such as your wages or passive activity). Investment property also
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includes an interest in a trade or business activ- Payments on debt may require new alloca- Limit on interest deduction for market dis-
ity in which you did not materially participate tion. As you repay a debt used for more than count bonds. The amount you can deduct for
(other than a passive activity). one purpose, you must reallocate the balance. interest expense you paid or accrued during the
You must first reduce the amount allocated to year to buy or carry a market discount bond
Partners, shareholders, and beneficia- personal purposes by the repayment. You then may be limited. This limit does not apply if you
ries. To determine your investment interest, reallocate the rest of the debt to find what part is accrue the market discount and include it in
combine your share of investment interest from for investment purposes. your income currently.
a partnership, S corporation, estate, or trust Under this limit, the interest is deductible
with your other investment interest. Example 3. If, in Example 2, you repay only to the extent it is more than:
$500 on November 1, the entire repayment is
Allocation of Interest Expense applied against the amount allocated to per- 1. The total interest and OID includible in
sonal purposes. The debt balance is now allo- gross income for the bond for the year,
If you borrow money for business, personal pur- cated as $8,000 for investment purposes and plus
poses, or investment, you must allocate the $1,500 for personal purposes. Until the next re- 2. The market discount for the number of
debt among those purposes. Only the interest allocation is necessary, 84% ($8,000 ÷ $9,500) days you held the bond during the year.
expense on the part of the debt used for invest- of the debt and the interest expense is allocated
ment purposes is treated as investment ex- to investment. Figure the amount in (2) above using the rules
pense. The allocation is not affected by the use for figuring accrued market discount in chap-
of property that secures the debt. Pass-through entities. If you use borrowed ter 1 under Market Discount Bonds.
funds to buy an interest in a partnership or S
Example 1. You borrow $10,000 and use corporation, then the interest on those funds Interest not deducted due to limit. In the
$8,000 to buy stock. You use the other $2,000 must be allocated based on the assets of the year you dispose of the bond, you can deduct
to buy items for your home. Because 80% of the entity. If you contribute to the capital of the en- any interest expense you were not allowed to
debt is used for, and allocated to, investment tity, you can make the allocation using any rea- deduct in earlier years because of the limit.
purposes, 80% of the interest on that debt is in- sonable method. Choosing to deduct disallowed interest
vestment interest. The other 20% is nondeducti- expense before the year of disposition. You
ble personal interest. Additional allocation rules. For more infor- can choose to deduct disallowed interest ex-
mation about allocating interest expense, see pense in any year before the year you dispose
Debt proceeds received in cash. If you re- chapter 4 of Pub. 535. of the bond, up to your net interest income from
ceive debt proceeds in cash, the proceeds are the bond during the year. The rest of the disal-
generally not treated as investment property. When To Deduct Investment lowed interest expense remains deductible in
Debt proceeds deposited in account. If you Interest the year you dispose of the bond.
deposit debt proceeds in an account, that de- Net interest income. This is the interest in-
posit is treated as investment property, regard- If you use the cash method of accounting, you come (including OID) from the bond that you in-
less of whether the account bears interest. But, must pay the interest before you can deduct it. clude in income for the year, minus the interest
if you withdraw the funds and use them for an- expense paid or accrued during the year to pur-
other purpose, you must reallocate the debt to If you use an accrual method of accounting, chase or carry the bond.
determine the amount considered to be for in- you can deduct interest over the period it ac-
vestment purposes. crues, regardless of when you pay it. For an ex- Limit on interest deduction for short-term
ception, see Unpaid expenses owed to related obligations. If the current income inclusion
Example 2. Assume in Example 1 that you party, later in this chapter. rules discussed in chapter 1 under Discount on
borrowed the money on March 1 and immedi- Short-Term Obligations do not apply to you, the
ately bought the stock for $8,000. You did not Example. You borrowed $1,000 on August amount you can deduct for interest expense
buy the household items until June 1. You had 19, 2022, payable in 90 days at 4% interest. On you paid or accrued during the year to buy or
deposited the $2,000 in the bank. You had no November 18, 2022, you paid this with a new carry a short-term obligation is limited.
other transactions on the bank account until note for $1,010, due on February 17, 2023. If The interest is deductible only to the extent it
June. You did not sell the stock, and you made you use the cash method of accounting, you is more than:
no principal payments on the debt. You paid in- cannot deduct any part of the $10 interest on • The amount of acquisition discount or OID
terest from another account. The $8,000 is trea- your return for 2022 because you did not ac- on the obligation for the tax year, plus
ted as being used for an investment purpose. tually pay it. If you use an accrual method, you • The amount of any interest payable on the
The $2,000 is treated as being used for an in- may be able to deduct a portion of the interest obligation for the year that is not included
vestment purpose for the 3-month period. Your on the loans through December 31, 2022, on in income because of your accounting
total interest expense for 3 months on this debt your return for 2022. method (other than interest taken into ac-
is investment interest. In June, when you spend count in determining the amount of acquis-
the $2,000 for household items, you must begin Interest paid in advance. Generally, if you ition discount or OID).
to allocate 80% of the debt and the interest ex- pay interest in advance for a period that goes
pense to investment purposes and 20% to per- beyond the end of the tax year, you must The method of determining acquisition discount
sonal purposes. spread the interest over the tax years to which it and OID for short-term obligations is discussed
belongs under the OID rules discussed in chap- in chapter 1 under Discount on Short-Term Ob-
Amounts paid within 30 days. If you re- ter 1. You can deduct in each year only the in- ligations.
ceive loan proceeds in cash or if the loan pro- terest for that year. Interest not deducted due to limit. In the
ceeds are deposited in an account, you can year you dispose of the obligation, or, if you
treat any payment (up to the amount of the pro- Interest on margin accounts. If you are a choose, in another year in which you have net
ceeds) made from any account you own, or cash method taxpayer, you can deduct interest interest income from the obligation, you can de-
from cash, as made from those proceeds. This on margin accounts to buy taxable securities as duct any interest expense you were not allowed
applies to any payment made within 30 days investment interest in the year you paid it. You to deduct for an earlier year because of the
before or after the proceeds are received in are considered to have paid interest on these limit. Follow the same rules provided in the ear-
cash or deposited in your account. accounts only when you actually pay the broker lier discussion under Limit on interest deduction
If you received the loan proceeds in cash, or when payment becomes available to the for market discount bonds.
you can treat the payment as made on the date broker through your account. Payment may be-
you received the cash instead of the date you come available to the broker through your ac-
actually made the payment. count when the broker collects dividends or in-
terest for your account, or sells securities held
for you or received from you.
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Limit on Deduction Example. Your 8-year-old son has interest expense). See Pub. 925 for information about
income of $2,400, which you choose to report passive activities.
Generally, your deduction for investment inter- on your own return. You enter $2,400 on Form
est expense is limited to your net investment in- 8814, lines 1a and 4, and $100 on lines 6 and Example. Ted is a partner in a partnership
come. 12, and complete Part II. You also enter $100 that operates a business. However, he does not
on Schedule 1 (Form 1040), line 8z. Your in- materially participate in the partnership's busi-
You can carry over the amount of invest- vestment income includes this $100. ness. Ted's interest in the partnership is consid-
ment interest you could not deduct because of ered a passive activity.
this limit to the next tax year. The interest car- Child's qualified dividends. If part of the Ted's investment income from interest and
ried over is treated as investment interest paid amount you report is your child's qualified divi- dividends (other than qualified dividends) is
or accrued in that next year. dends, that part (which is reported on Form $10,000. His investment expenses (other than
You can carry over disallowed investment 1040, line 3a) generally does not count as in- interest) are $3,200. His investment interest ex-
interest to the next tax year even if it is more vestment income. However, you can choose to pense is $8,000. Ted also has income from the
than your taxable income in the year the interest include all or part of it in investment income, as partnership of $2,000.
was paid or accrued. explained under Choosing to include qualified Ted figures his net investment income and
dividends, earlier. the limit on his investment interest expense de-
Your investment income also includes the duction in the following way.
Net Investment Income amount on Form 8814, line 12 (or, if applicable,
the reduced amount figured next under Child's
Determine the amount of your net investment Alaska Permanent Fund dividends). Total investment income . . . . . . . . . . . . . . $10,000
income by subtracting your investment expen- Minus: Investment expenses (other than
ses (other than interest expense) from your in- Child's Alaska Permanent Fund divi- interest) . . . . . . . . . . . . . . . . . . . . . . . . . 3,200
vestment income. dends. If part of the amount you report is your Net investment income . . . . . . . . . . . . . . . $6,800
child's Alaska Permanent Fund dividends, that
Investment income. Generally, investment in- part does not count as investment income. To Deductible investment interest expense for
the year . . . . . . . . . . . . . . . . . . . . . . . . . $6,800
come includes your gross income from property figure the amount of your child's income that
held for investment such as interest, dividends, you can consider your investment income, start The $2,000 of income from the passive ac-
annuities, and royalties. Investment income with the amount on Form 8814, line 6. Multiply tivity is not used in determining Ted's net invest-
does not include Alaska Permanent Fund divi- that amount by a percentage that is equal to the ment income. His investment interest deduction
dends. It also does not include qualified divi- Alaska Permanent Fund dividends divided by for the year is limited to $6,800, the amount of
dends or net capital gain unless you choose to the total amount on Form 8814, line 4. Subtract his net investment income.
include them. the result from the amount on Form 8814,
line 12.
Choosing to include qualified dividends. Form 4952
Investment income generally does not include Example. Your 10-year-old child has taxa-
qualified dividends, discussed in chapter 1. ble interest income of $4,000 and Alaska Per- Use Form 4952 to figure your deduction for in-
However, you can choose to include all or part manent Fund dividends of $2,000. You choose vestment interest. See Form 4952 for more in-
of your qualified dividends in investment in- to report this on your return. You enter $4,000 formation.
come. on Form 8814, line 1a; $2,000 on line 2a; and
You make this choice by completing Form $6,000 on line 4. You then enter $3,700 on Exception to use of Form 4952. You do not
4952, line 4g, according to its instructions. Form 8814, lines 6 and 12; and Schedule 1 have to complete Form 4952 or attach it to your
If you choose to include any of your qualified (Form 1040), line 8z. You figure the amount of return if you meet all of the following tests.
dividends in investment income, you must re- your child's income that you can consider your • Your investment income from interest and
duce your qualified dividends that are eligible investment income as follows. ordinary dividends minus any qualified div-
for the lower capital gains tax rates by the same idends is more than your investment inter-
amount. est expense.
$3,700 − ($3,700 × ($2,000 ÷ $6,000)) = • You do not have any other deductible in-
Choosing to include net capital gain. In- $2,467 vestment expenses.
vestment income generally does not include net
capital gain from disposing of investment prop- You include the result, $2,467, on Form 4952, • You have no carryover of investment inter-
erty (including capital gain distributions from line 4a. est expense from 2021.
mutual funds). However, you can choose to in- Child's capital gain distributions. If part If you meet all of these tests, you can deduct
clude all or part of your net capital gain in in- of the amount you report is your child's capital all of your investment interest.
vestment income. gain distributions, that part (which is reported
You make this choice by completing Form on Schedule D (Form 1040), line 13; or Form
4952, line 4g, according to its instructions. 1040, line 7) generally does not count as invest- Bond Premium
If you choose to include any of your net cap- ment income. However, you can choose to in-
ital gain in investment income, you must reduce clude all or part of it in investment income, as Amortization
your net capital gain that is eligible for the lower explained under Choosing to include net capital
capital gains tax rates by the same amount. gain, earlier. If you pay a premium to buy a bond, the pre-
For more information about the capital gains Your investment income also includes the mium is part of your basis in the bond. If the
rates, see Capital Gain Tax Rates in chapter 4. amount on Form 8814, line 12 (or, if applicable, bond yields taxable interest, you can choose to
Before making either choice, consider the reduced amount figured under Child's amortize the premium. This generally means
TIP the overall effect on your tax liability. Alaska Permanent Fund dividends, earlier). that each year, over the life of the bond, you
use a part of the premium to reduce the amount
Compare your tax if you make one or of interest includible in your income. If you
both of these choices with your tax if you do not. Investment expenses. Investment expenses
are your allowed deductions (other than interest make this choice, you must reduce your basis in
expense) directly connected with the production the bond by the amortization for the year.
Investment income of child reported on pa- of investment income.
rent's return. Investment income includes the If the bond yields tax-exempt interest, you
part of your child's interest and dividend income Losses from passive activities. Income or must amortize the premium. This amortized
you choose to report on your return. If the child expenses that you used in computing income or amount is not deductible in determining taxable
does not have qualified dividends, Alaska Per- loss from a passive activity are not included in income. However, each year, you must reduce
manent Fund dividends, or capital gain distribu- determining your investment income or invest- your basis in the bond (and tax-exempt interest
tions, this is the amount on line 6 of Form 8814. ment expenses (including investment interest otherwise reportable on your tax return) by the
Include it on line 4a of Form 4952. amortization for the year.
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If you acquire a security, such as a bond, at them are likely to show the yield at the date of see section 5 of Revenue Procedure 2022-14 in
a premium, you may receive a Form 1099-INT purchase. Internal Revenue Bulletin 2022-7. You can find
or Form 1099-OID. See the instructions on Revenue Procedure 2022-14 at IRS.gov/irb/
those forms to determine if the amounts of inter- Step 2: Determine the accrual periods. 2022-07_IRB#REV-PROC-2022-14.
est reported to you have been reduced by am- You can choose the accrual periods to use.
ortizable bond premium for the period. They may be of any length and may vary in
length over the term of the bond, but each ac- How To Report Amortization
Bond premium. Bond premium is the amount crual period can be no longer than 1 year, and (Taxable Bonds)
by which your basis in the bond right after you each scheduled payment of principal or interest
get it is more than the total of all amounts paya- must occur either on the first or the final day of Subtract the bond premium amortization from
ble on the bond after you get it (other than pay- an accrual period. The computation is simplest your interest income from these bonds.
ments of qualified stated interest). For example, if accrual periods are the same as the intervals
a bond with a maturity value of $1,000 generally between interest payment dates. Report the bond's interest on Schedule B
would have a $50 premium if you buy it for Step 3: Determine the bond premium for (Form 1040), line 1. Under your last entry on
$1,050. the accrual period. To do this, multiply your line 1, put a subtotal of all interest listed on
Special rules to determine amounts pay- adjusted acquisition price at the beginning of line 1. Below this subtotal, enter the amortizable
able on a bond. For special rules that apply to the accrual period by your yield. Then, subtract bond premium allocable to the interest pay-
determine the amounts payable on a variable the result from the qualified stated interest for ments for the year and label this amount “ABP
rate bond, an inflation-indexed debt instrument, the period. Adjustment.” Subtract this amount from the sub-
a bond that provides for certain alternative pay- Your adjusted acquisition price at the begin- total, and enter the result on line 2.
ment schedules (for example, a bond callable ning of the first accrual period is the same as
prior to the stated maturity date of the bond), or your basis. After that, it is your basis decreased Bond premium amortization more than in-
a bond that provides for remote or incidental by the amount of bond premium amortized for terest. If the amount of your bond premium
contingencies, see Regulations section earlier periods, and the amount of any payment amortization for an accrual period is more than
1.171-3. previously made on the bond other than a pay- the qualified stated interest for the period, you
ment of qualified stated interest. can include the difference in Other Itemized De-
Basis. In general, your basis for figuring ductions on Schedule A (Form 1040), line 16.
bond premium amortization is the same as your Example. On February 1, 2021, you bought But your deduction is limited to the amount
basis for figuring any loss on the sale of the a taxable bond for $110,000. The bond has a by which your total interest inclusions on the
bond. However, you may need to use a different stated principal amount of $100,000, payable at bond in prior accrual periods is more than your
basis for: maturity on February 1, 2028, making your pre- total bond premium deductions on the bond in
• Convertible bonds, mium $10,000 ($110,000 − $100,000). The prior periods. Any amount you cannot deduct
• Bonds you got in a trade, and bond pays qualified stated interest of $10,000 because of this limit can be carried forward to
• Bonds whose basis has to be determined on February 1 of each year. Your yield is the next accrual period.
using the basis of the person who transfer- 8.07439% compounded annually. You choose
red the bond to you. to use annual accrual periods ending on Febru- Pre-1998 election to amortize bond pre-
See Regulations section 1.171-1(e). ary 1 of each year. To find your bond premium mium. Generally, if you first elected to amor-
amortization for the accrual period ending on tize bond premium before 1998, the above
Dealers. A dealer in taxable bonds (or anyone February 1, 2022, you multiply the adjusted ac- treatment of the premium does not apply to
who holds them mainly for sale to customers in quisition price at the beginning of the period bonds you acquired before 1988.
the ordinary course of a trade or business, or ($110,000) by your yield. When you subtract Bonds acquired before October 23,
who would properly include bonds in inventory the result ($8,881.83) from the qualified stated 1986. The amortization of the premium on
at the close of the tax year) cannot claim a de- interest for the period ($10,000), you find that these bonds is a miscellaneous itemized de-
duction for amortizable bond premium. your bond premium amortization for the period duction not subject to the 2%-of-adjus-
See section 75 of the Internal Revenue is $1,118.17. ted-gross-income limit.
Code for the treatment of bond premium by a Special rules to figure amortization. For Bonds acquired after October 22, 1986,
dealer in tax-exempt bonds. special rules to figure the bond premium amorti- but before 1988. The amortization of the pre-
zation on a variable rate bond, an inflation-in- mium on these bonds is investment interest ex-
How To Figure Amortization dexed debt instrument, a bond that provides for pense subject to the investment interest limit,
certain alternative payment schedules (for ex- unless you choose to treat it as an offset to in-
For bonds issued after September 27, 1985, ample, a bond callable prior to the stated matur- terest income on the bond.
you must amortize bond premium using a con- ity date of the bond), or a bond that provides for
stant yield method on the basis of the bond's remote or incidental contingencies, see Regula-
yield to maturity, determined by using the tions section 1.171-3.
Nondeductible Interest
bond's basis and compounding at the close of
each accrual period. Choosing To Amortize Expenses
Constant yield method. Figure the bond pre- You choose to amortize the premium on taxable Some interest expenses that you incur as an in-
mium amortization for each accrual period as bonds by reporting the amortization for the year vestor are not deductible.
follows. on your income tax return for the first tax year
Step 1: Determine your yield. Your yield you want the choice to apply. You should attach Single-premium life insurance, endowment,
is the discount rate that, when used in figuring a statement to your return that you are making and annuity contracts. You cannot deduct in-
the present value of all remaining payments to this choice under section 171. See How To Re- terest on money you borrow to buy or carry a
be made on the bond (including payments of port Amortization next. single-premium life insurance, endowment, or
annuity contract.
qualified stated interest), produces an amount This choice is binding for the year you make
equal to your basis in the bond. Figure the yield it and for later tax years. It applies to all taxable Used as collateral. If you use a single-pre-
as of the date you got the bond. It must be con- bonds you own in the year you make the choice mium annuity contract as collateral to obtain or
stant over the term of the bond and must be fig- and also to those you acquire in later years. continue a mortgage loan, you cannot deduct
ured to at least two decimal places when ex- any interest on the loan that is collateralized by
pressed as a percentage. You can change your decision to amortize the annuity contract. Figure the amount of inter-
If you do not know the yield, consult your bond premium only with the written approval of est expense disallowed by multiplying the cur-
broker or tax advisor. Databases available to the IRS. To request approval, use Form 3115. rent interest rate on the mortgage loan by the
For more information on requesting approval,
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lesser of the amount of the annuity contract Interest expense and carrying charges on (Form 1040). Enter your deductible investment
used as collateral or the amount of the loan. straddles. You cannot deduct interest and car- interest expense on Schedule A (Form 1040),
rying charges allocable to personal property line 9. Include any deductible short sale expen-
Borrowing on insurance. Generally, you can- that is part of a straddle. The nondeductible in- ses. (See Short Sales in chapter 4 for informa-
not deduct interest on money you borrow to buy terest and carrying charges are added to the tion on these expenses.) Also attach a comple-
or carry a life insurance, endowment, or annuity basis of the straddle property. However, this ted Form 4952 if you used that form to figure
contract if you plan to systematically borrow treatment does not apply if: your investment interest expense.
part or all of the increases in the cash value of • All the offsetting positions making up the
the contract. This rule applies to the interest on straddle either consist of one or more Investment expenses from nonpublicly of-
the total amount borrowed to buy or carry the qualified covered call options and the op- fered mutual fund or real estate mortgage
contract, not just the interest on the borrowed tioned stock, or consist of section 1256 investment conduit (REMIC). If you hold an
increases in the cash value. contracts (and the straddle is not part of a interest in a nonpublicly offered mutual fund,
larger straddle); or your investment expenses will be shown in
Tax-exempt income. You cannot deduct inter- • The straddle is a hedging transaction. box 6 of Form 1099-DIV. Publicly offered mu-
est expenses you incur to produce tax-exempt tual funds are discussed later.
income, such as interest on money you borrow For information about straddles, including defi-
to buy tax-exempt securities or shares in a mu- nitions of the terms used in this discussion, see If you hold an interest in a REMIC, any ex-
tual fund or other regulated investment com- Straddles in chapter 4. penses relating to your residual interest invest-
pany that distributes only exempt-interest divi- Interest includes any amount you pay or in- ment will be shown on Schedule Q (Form
dends. cur in connection with personal property used in 1066), line 3b. Any expenses relating to your
a short sale. However, you must first apply the regular interest investment will appear in box 5
Short-sale expenses. The rule disallowing rules discussed under Payments in lieu of divi- of Form 1099-INT or box 9 of Form 1099-OID.
a deduction for interest expenses on debt pro- dends in chapter 4. Including mutual fund or REMIC expen-
ceeds used to purchase tax-exempt securities To determine the interest on market dis- ses in income. Your share of the investment
applies to amounts you pay in connection with count bonds and short-term obligations that are expenses of a REMIC or a nonpublicly offered
personal property used in a short sale or part of a straddle, you must first apply the rules mutual fund, as described above, is considered
amounts paid by others for the use of any collat- discussed under Limit on interest deduction for to be an indirect deduction through that
eral in connection with the short sale. However, market discount bonds and Limit on interest de- pass-through entity. You must include in your
it does not apply to the expenses you incur if duction for short-term obligations, earlier. gross income an amount equal to the expenses
you deposit cash as collateral for the property allocated to you, whether or not you are able to
used in the short sale and the cash does not Nondeductible amount. Figure the non- claim a deduction for those expenses. If you are
earn a material return during the period of the deductible interest and carrying charges on a shareholder in a nonpublicly offered mutual
sale. Short sales are discussed under Short straddle property as follows. fund, you must include on your return the full
Sales in chapter 4. 1. Add: amount of ordinary dividends or other distribu-
tions of stock, as shown in box 1a of Form
Expenses for both tax-exempt and taxa- a. Interest on indebtedness incurred or 1099-DIV. If you are a residual interest holder in
ble income. You may have expenses that are continued to buy or carry the personal a REMIC, you must report as ordinary income
for both tax-exempt and taxable income. If you property, and on Schedule E (Form 1040) the total amounts
cannot specifically identify what part of the ex-
penses is for each type of income, you can di- b. All other amounts (including charges shown on Schedule Q (Form 1066), lines 1b
vide the expenses, using reasonable propor- to insure, store, or transport the per- and 3b. If you are a REMIC regular interest
tions based on facts and circumstances. You sonal property) paid or incurred to holder, you must include the amount of any ex-
must attach a statement to your return showing carry the personal property. pense allocation you received on Form 1040 or
1040-SR, line 2b.
how you divided the expenses and stating that 2. Subtract from the amount in (1):
each deduction claimed is not based on tax-ex- Publicly offered mutual funds. Most mutual
empt income. a. Interest (including OID) includible in
One accepted method for dividing expenses gross income for the year on the per- funds are publicly offered. These mutual funds,
is to do it in the same proportion that each type sonal property, generally, are traded on an established securi-
ties exchange. These funds do not pass invest-
of income is to the total income. If the expenses b. Any income from the personal prop- ment expenses through to you. Instead, the div-
relate in part to capital gains and losses, include erty treated as ordinary income on the idend income they report to you in box 1a of
the gains, but not the losses, in figuring this pro- disposition of short-term government Form 1099-DIV is already reduced by your
portion. To find the part of the expenses that is obligations or as ordinary income un- share of investment expenses. As a result, you
for the tax-exempt income, divide your tax-ex- der the market discount and cannot deduct the expenses on your return.
empt income by the total income and multiply short-term bond provisions—see Dis-
your expenses by the result. count on Debt Instruments in chap- Include the amount from box 1a of Form
ter 1, 1099-DIV in your income.
Example. You received $6,000 in interest A publicly offered mutual fund is one
income; $4,800 was tax exempt and $1,200 c. The dividends includible in gross in-
was taxable. In earning this income, you had come for the year from the personal TIP that:
$500 of expenses. You cannot specifically iden- property, and
1. Is continuously offered pursuant to a pub-
tify the amount of each expense item that is for d. Any payment on a loan of the per- lic offering,
each income item, so you must divide your ex- sonal property for use in a short sale
penses. 80% ($4,800 tax-exempt interest divi- that is includible in gross income. 2. Is regularly traded on an established se-
ded by $6,000 total interest) of your expenses curities market, and
is for the tax-exempt income. You cannot de- Basis adjustment. Add the nondeductible
duct $400 (80% of $500) of the expenses. You amount to the basis of your straddle property. 3. Is held by or for no fewer than 500 persons
at any time during the year.
can deduct $100 (the rest of the expenses) be-
cause they are for the taxable interest. Contact your mutual fund if you are not sure
How To Report whether it is publicly offered.
State income taxes. If you itemize your
deductions, you can deduct, as taxes, state in- Investment Interest For information on how to report amortizable
come taxes on interest income that is exempt bond premium, see Bond Premium Amortiza-
from federal income tax. But you cannot deduct, Expenses
tion, earlier in this chapter.
as either taxes or investment expenses, state
income taxes on other exempt income. To deduct your investment interest expenses,
you must itemize deductions on Schedule A
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Property used in a trade or business is not in- Form (and Instructions)
vestment property. Schedule D (Form 1040)
When To Report Schedule D (Form 1040) Capital Gains
Form 1099-B. If you sold property such as and Losses
Investment Expenses stocks, bonds, mutual funds, or certain com- 6781 6781 Gains and Losses From Section
modities through a broker during the year, the 1256 Contracts and Straddles
If you use the cash method to report income broker should send you, for each sale, a Form 8582 8582 Passive Activity Loss Limitations
and expenses, you generally deduct your ex- 1099-B, Proceeds From Broker and Barter Ex-
penses, except for certain prepaid interest, in change Transactions. You should receive the 8824 8824 Like-Kind Exchanges
the year you pay them. Form 1099-B for 2022 by February 15, 2023. It 8949 8949 Sales and Other Dispositions of
If you use an accrual method, you generally will show the gross proceeds from the sale. The Capital Assets
deduct your expenses when you incur a liability IRS will also get a copy of Form 1099-B from
for them, rather than when you pay them. the broker. See chapter 5, How To Get Tax Help, for infor-
Use the Form 1099-B received from your mation about getting these publications and
See also When To Deduct Investment Inter- broker to complete Form 8949, Sales and Other forms.
est, earlier in this chapter. Dispositions of Capital Assets. If you sold a cov-
ered security in 2022, your broker will send you
Unpaid expenses owed to related party. If a Form 1099-B that shows your basis. This will What Is a
you use an accrual method, you cannot deduct help you complete Form 8949. Generally, a
interest and other expenses owed to a related covered security is a security you acquired after Sale or Trade?
cash-basis person until payment is made and 2010, with certain exceptions explained in the
the amount is includible in the gross income of Instructions for Form 8949.
that person. The relationship, for purposes of Terms you may need to know
this rule, is determined as of the end of the tax For more information on Form 8949 (see Glossary):
year for which the interest or expense would TIP and Schedule D (Form 1040), see Re- Equity option
otherwise be deductible. If a deduction is de- porting Capital Gains and Losses in
nied under this rule, this rule will continue to ap- this chapter. Also see the Instructions for Form Futures contract
ply even if your relationship with the person 8949 and the Instructions for Schedule D (Form Marked-to-market rule
ceases to exist before the amount is includible 1040). Nonequity option
Options dealer
in the gross income of that person. Regulated futures contract
This rule generally applies to those relation- Nominees. If someone receives gross pro- Section 1256 contract
ships listed in chapter 4 under Related Party ceeds as a nominee for you, that person will
Transactions. It also applies to accruals by part- give you a Form 1099-B, which will show gross Short sale
nerships to partners, partners to partnerships, proceeds received on your behalf.
shareholders to S corporations, and S corpora- If you receive a Form 1099-B that includes
tions to shareholders. gross proceeds belonging to another person, This section explains what is a sale or trade. It
see Nominees, later, under Reporting Capital also explains certain transactions and events
The postponement of deductions for unpaid Gains and Losses for more information. that are treated as sales or trades.
expenses and interest under the related party
rule does not apply to OID, regardless of when Other property transactions. Certain trans- A sale is generally a transfer of property for
payment is made. This rule also does not apply fers of property are discussed in other IRS pub- money or a mortgage, note, or other promise to
to loans with below-market interest rates or to lications. These include: pay money.
certain payments for the use of property and • Sale of your main home, discussed in Pub. A trade is a transfer of property for other
services when the lender or recipient has to in- 523, Selling Your Home; property or services, and may be taxed in the
clude payments periodically in income, even if a • Installment sales, covered in Pub. 537; same way as a sale.
payment has not been made. • Various types of transactions involving
business property, discussed in Pub. 544, Sale and purchase. Ordinarily, a transaction
Sales and Other Dispositions of Assets; is not a trade when you voluntarily sell property
• Transfers of property at death, covered in for cash and immediately buy similar property to
Pub. 559; and replace it. The sale and purchase are two sepa-
• Disposition of an interest in a passive ac- rate transactions. But see Like-Kind Exchanges
tivity, discussed in Pub. 925. under Nontaxable Trades, later.
4.
Topics Redemption of stock. A redemption of stock
This chapter discusses: is treated as a sale or trade and is subject to the
capital gain or loss provisions unless the re-
Sales and demption is a dividend or other distribution on
• What Is a Sale or Trade,
• Basis of Investment Property, stock.
Trades of • Adjusted Basis, Dividend versus sale or trade. Whether a
• How To Figure Gain or Loss, redemption is treated as a sale, trade, dividend,
Investment • Nontaxable Trades, or other distribution depends on the circumstan-
• Transfers Between Spouses, ces in each case. Both direct and indirect own-
• Related Party Transactions, ership of stock will be considered. The redemp-
Property • Capital Gains and Losses, tion is treated as a sale or trade of stock if:
• Reporting Capital Gains and Losses, and • The redemption is not essentially equiva-
• Special Rules for Traders in Securities or lent to a dividend—see Dividends and
Commodities. Other Distributions in chapter 1,
Introduction • There is a substantially disproportionate
This chapter explains the tax treatment of sales Useful Items redemption of stock,
and trades of investment property. You may want to see: • There is a complete redemption of all the
stock of the corporation owned by the
Investment property. This is property that Publication shareholder, or
produces investment income. Examples include • The redemption is a distribution in partial
stocks, bonds, and Treasury bills and notes. 551 551 Basis of Assets liquidation of a corporation.
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Redemption or retirement of bonds. A re- you can deduct these payments as losses in the party described under Related Party Transac-
demption or retirement of bonds or notes at years you actually make the payments. Do not tions, later in this chapter.
their maturity is generally treated as a sale or deduct them in the year the stock became
trade. See Stocks, stock rights, and bonds and worthless. Exception for nonmarketable securities.
Discounted Debt Instruments, later. You are not treated as having made a construc-
In addition, a significant modification of a How to report loss. Report worthless securi- tive sale solely because you entered into a con-
bond is treated as a trade of the original bond ties on Form 8949, Part I or Part II, whichever tract for sale of any stock, debt instrument, or
for a new bond. For details, see Regulations applies. partnership interest that is not a marketable se-
curity if it settles within 1 year of the date you
section 1.1001-3. Report your worthless securities trans- enter into it.
actions on Form 8949 with the correct
Surrender of stock. A surrender of stock by a CAUTION! box checked for these transactions. Exception for certain closed transac-
dominant shareholder who retains ownership of See Form 8949 and the Instructions for Form tions. Do not treat a transaction as a construc-
more than half of the corporation's voting 8949. tive sale if all of the following are true.
shares is treated as a contribution to capital
rather than as an immediate loss deductible 1. You closed the transaction on or before
from taxable income. The surrendering share- Filing a claim for refund. If you do not claim a the 30th day after the end of your tax year.
holder must reallocate his or her basis in the loss for a worthless security on your original re- 2. You held the appreciated financial position
surrendered shares to the shares he or she re- turn for the year it becomes worthless, you can throughout the 60-day period beginning on
tains. file a claim for a credit or refund due to the loss. the date you closed the transaction.
You must use Form 1040-X, Amended U.S. In-
Trade of investment property for an annu- dividual Income Tax Return, to amend your re- 3. Your risk of loss was not reduced at any
ity. The transfer of investment property to a turn for the year the security became worthless. time during that 60-day period by holding
corporation, trust, fund, foundation, or other or- You must file it within 7 years from the date your certain other positions.
ganization, in exchange for a fixed annuity con- original return for that year had to be filed, or 2 If a closed transaction is reestablished in a
tract that will make guaranteed annual pay- years from the date you paid the tax, whichever substantially similar position during the 60-day
ments to you for life, is a taxable trade. If the is later. (Claims not due to worthless securities period beginning on the date the first transac-
present value of the annuity is more than your or bad debts must generally be filed within 3 tion was closed, this exception still applies if the
basis in the property traded, you have a taxable years from the date a return is filed, or 2 years reestablished position is closed before the 30th
gain in the year of the trade. Figure the present from the date the tax is paid, whichever is later.) day after the end of your tax year in which the
value of the annuity according to factors used For more information about filing a claim, see first transaction was closed and, after that clos-
by commercial insurance companies issuing Pub. 556. ing, (2) and (3) above are true.
annuities. This exception also applies to successive
Transfer by inheritance. The transfer of prop- Constructive Sales short sales of an entire appreciated financial
erty of a decedent to the executor or administra- of Appreciated position. For more information, see Revenue
Ruling 2003-1 in Internal Revenue Bulletin
tor of the estate, or to the heirs or beneficiaries, Financial Positions 2003-3. This bulletin is available at
is not a sale or other disposition. No taxable IRS.gov/pub/irs-irbs/irb03-03.pdf.
gain or deductible loss results from the transfer. You are treated as having made a constructive
sale when you enter into certain transactions in- Appreciated financial position. This is any
Termination of certain rights and obliga- volving an appreciated financial position (de- interest in stock, a partnership interest, or a
tions. The cancellation, lapse, expiration, or fined later) in stock, a partnership interest, or debt instrument (including a futures or forward
other termination of a right or obligation (other certain debt instruments. You must recognize contract, a short sale, or an option) if disposing
than a securities futures contract) with respect gain as if the position were disposed of at its fair of the interest would result in a gain.
to property that is a capital asset (or that would market value on the date of the constructive
be a capital asset if you acquired it) is treated sale. This gives you a new holding period for Exceptions. An appreciated financial posi-
as a sale. Any gain or loss is treated as a capital the position that begins on the date of the con- tion does not include the following.
gain or loss. structive sale. Then, when you close the trans- 1. Any position from which all of the appreci-
This rule does not apply to the retirement of action, you reduce your gain (or increase your ation is accounted for under
a debt instrument. See Redemption or retire- loss) by the gain recognized on the constructive marked-to-market rules, including section
ment of bonds, earlier. sale. 1256 contracts (described later under
Section 1256 Contracts Marked to Mar-
Constructive sale. You are treated as having ket).
Worthless Securities made a constructive sale of an appreciated fi-
Stocks, stock rights, and bonds (other than nancial position if you: 2. Any position in a debt instrument if:
those held for sale by a securities dealer) that • Enter into a short sale of the same or sub- a. The position unconditionally entitles
became completely worthless during the tax stantially identical property, the holder to receive a specified prin-
year are treated as though they were sold on • Enter into an offsetting notional principal cipal amount;
the last day of the tax year. This affects whether contract relating to the same or substan-
your capital loss is long term or short term. See tially identical property, b. The interest payments (or other simi-
Holding Period, later. • Enter into a futures or forward contract to lar amounts) with respect to the posi-
deliver the same or substantially identical tion are payable at a fixed rate or a
Worthless securities also include securities property (including a forward contract that variable rate described in Regulations
that you abandon after March 12, 2008. To provides for cash settlement), or section 1.860G-1(a)(3); and
abandon a security, you must permanently sur- • Acquire the same or substantially identical c. The position is not convertible, either
render and relinquish all rights in the security property (if the appreciated financial posi- directly or indirectly, into stock of the
and receive no consideration in exchange for it. tion is a short sale, an offsetting notional issuer (or any related person).
All the facts and circumstances determine principal contract, or a futures or forward
whether the transaction is properly character- contract). 3. Any hedge with respect to a position de-
scribed in (2).
ized as an abandonment or other type of trans- You are also treated as having made a con-
action, such as an actual sale or exchange, structive sale of an appreciated financial posi- Certain trust instruments treated as
contribution to capital, dividend, or gift. tion if a person related to you enters into a stock. For the constructive sale rules, an inter-
If you are a cash basis taxpayer and make transaction described above with a view toward est in an actively traded trust is treated as stock
payments on a negotiable promissory note that avoiding the constructive sale treatment. For unless substantially all of the value of the
you issued for stock that became worthless, this purpose, a related person is any related property held by the trust is debt that qualifies
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for the exception to the definition of an appreci- • Is traded in the interbank market, and Dealer securities futures contract. For
ated financial position (explained in (2) above). • Is entered into at arm's length at a price any dealer in securities futures contracts or op-
determined by reference to the price in the tions on those contracts, this is a securities fu-
Sale of appreciated financial position. A interbank market. tures contract (or option on such a contract)
transaction treated as a constructive sale of an Bank forward contracts with maturity dates that:
appreciated financial position is not treated as a longer than the maturities ordinarily available for • Is entered into by the dealer (or, in the
constructive sale of any other appreciated fi- regulated futures contracts are considered to case of an option, is purchased or granted
nancial position, as long as you continue to hold meet the definition of a foreign currency con- by the dealer) in the normal course of the
the original position. However, if you hold an- tract if the above three conditions are satisfied. dealer's activity of dealing in this type of
other appreciated financial position and dispose contract (or option); and
of the original position before closing the trans- Special rules apply to certain foreign cur- Is traded on a qualified board or exchange
action that resulted in the constructive sale, you rency transactions. These transactions may re- •
(as defined under Regulated futures con-
are treated as if, at the same time, you con- sult in ordinary gain or loss treatment. For de- tract, earlier).
structively sold the other appreciated financial tails, see Internal Revenue Code section 988
position. and Regulations sections 1.988-1(a)(7) and A securities futures contract that is not a dealer
1.988-3. securities futures contract is treated as descri-
bed later under Securities Futures Contracts.
Section 1256 Contracts Nonequity option. This is any listed option
Marked to Market (defined later) that is not an equity option. Non- Marked-to-Market Rules
equity options include debt options, commodity
If you hold a section 1256 contract at the end of futures options, currency options, and A section 1256 contract that you hold at the end
the tax year, you must generally treat it as sold broad-based stock index options. A of the tax year will generally be treated as sold
at its fair market value on the last business day broad-based stock index is based on the value at its fair market value on the last business day
of the tax year. of a group of diversified stocks or securities of the tax year, and you must recognize any
(such as the Standard and Poor's 500 index). gain or loss that results. That gain or loss is
taken into account in figuring your gain or loss
Section 1256 Contract Warrants based on a stock index that are when you later dispose of the contract, as
economically substantially identical in all mate- shown in the Example under 60/40 rule below.
A section 1256 contract is any: rial respects to options based on a stock index
• Regulated futures contract, are treated as options based on a stock index. Hedging exception. The marked-to-market
• Foreign currency contract, rules do not apply to hedging transactions. See
• Nonequity option, Cash-settled options. Cash-settled op-
• Dealer equity option, or tions based on a stock index and either traded Hedging Transactions, later.
• Dealer securities futures contract. on or subject to the rules of a qualified board of
exchange are nonequity options if the SEC de- 60/40 rule. Under the marked-to-market sys-
Exceptions. A section 1256 contract does termines that the stock index is broad based. tem, 60% of your capital gain or loss will be
not include: This rule does not apply to options estab- treated as a long-term capital gain or loss, and
• Interest rate swaps, lished before the SEC determines that the stock 40% will be treated as a short-term capital gain
• Currency swaps, index is broad based. or loss. This is true regardless of how long you
• Basis swaps, actually held the property.
• Interest rate caps, Listed option. This is any option traded on,
• Interest rate floors, or subject to the rules of, a qualified board or Example. On June 1, 2021, you bought a
• Commodity swaps, exchange (as discussed earlier under Regula- regulated futures contract for $50,000. On De-
• Equity swaps, ted futures contract). A listed option, however, cember 31, 2021 (the last business day of your
• Equity index swaps, does not include an option that is a right to ac- tax year), the fair market value of the contract
• Credit default swaps, or quire stock from the issuer. was $57,000. You recognized a $7,000 gain on
your 2021 tax return. You treated 60% of the
• Similar agreements. gain as long-term capital gain and 40% as
Dealer equity option. This is any listed option
For more details, including definitions of these that, for an options dealer: short-term capital gain.
terms, see section 1256. • Is an equity option, On February 1, 2022, you sold the contract
• Is bought or granted by that dealer in the for $56,000. Because you recognized a $7,000
Regulated futures contract. This is a con- normal course of the dealer's business ac- gain on your 2021 return, you recognize a
tract that: tivity of dealing in options, and $1,000 loss ($57,000 − $56,000) on your 2022
• Provides that amounts which must be de- • Is listed on the qualified board of exchange tax return, treated as 60% long-term and 40%
posited to, or can be withdrawn from, your where that dealer is registered. short-term capital loss.
margin account depend on daily market
conditions (a system of marking to mar- An “options dealer” is any person registered Limited partners or entrepreneurs. The
ket); and with an appropriate national securities ex- 60/40 rule does not apply to dealer equity op-
• Is traded on, or subject to the rules of, a change as a market maker or specialist in listed tions or dealer securities futures contracts that
qualified board of exchange. A qualified options. result in capital gain or loss allocable to limited
board of exchange is a domestic board of partners or limited entrepreneurs (defined later
trade designated as a contract market by Equity option. This is any option: under Hedging Transactions). Instead, these
the Commodity Futures Trading Commis- • To buy or sell stock, or gains or losses are treated as short term.
sion, any board of trade or exchange ap- • That is valued directly or indirectly by refer-
proved by the Secretary of the Treasury, or ence to any stock or narrow-based security Terminations and transfers. The
a national securities exchange registered index. marked-to-market rules also apply if your obli-
with the Securities and Exchange Commis- Equity options include options on a group of gation or rights under section 1256 contracts
sion (SEC). stocks only if the group is a narrow-based stock are terminated or transferred during the tax
index. year. In this case, use the fair market value of
Foreign currency contract. This is a contract each section 1256 contract at the time of termi-
that: nation or transfer to determine the gain or loss.
• Requires delivery of a foreign currency that Terminations or transfers may result from any
has positions traded through regulated fu- offsetting, delivery, exercise, assignment, or
tures contracts (or settlement of which de- lapse of your obligation or rights under section
pends on the value of that type of foreign 1256 contracts.
currency),
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Loss carryback election. An individual hav- deferral of net gain from section 1256 contracts, child (including a legally adopted child), grand-
ing a net section 1256 contracts loss (defined see section 1400Z-2. See the Form 8949 in- child, or parent of an individual who actively
later) can generally elect to carry this loss back structions for how to report. participates in the management of the entity.
3 years instead of carrying it over to the next
year. See How To Report, later, for information How To Report Hedging loss limit. If you are a limited part-
about reporting this election on your return. ner or entrepreneur in a syndicate, the amount
The loss carried back to any year under this If you disposed of regulated futures or foreign of a hedging loss you can claim is limited. A
election cannot be more than the net section currency contracts in 2022 (or had unrealized “hedging loss” is the amount by which the allow-
1256 contracts gain in that year. In addition, the profit or loss on these contracts that were open able deductions in a tax year that resulted from
amount of loss carried back to an earlier tax at the end of 2021 or 2022), you should receive a hedging transaction (determined without re-
year cannot increase or produce a net operat- Form 1099-B from your broker. gard to the limit) are more than the income re-
ing loss for that year. ceived or accrued during the tax year from this
The loss is carried to the earliest carryback Form 6781. Use Part I of Form 6781 to report transaction.
year first, and any unabsorbed loss amount can your gains and losses from all section 1256 Any hedging loss allocated to you for the tax
then be carried to each of the next 2 tax years. contracts that are open at the end of the year or year is limited to your taxable income for that
In each carryback year, treat 60% of the carry- that were closed out during the year. This in- year from the trade or business in which the
back amount as a long-term capital loss and cludes the amount shown in box 11 of Form hedging transaction occurred. Ignore any hedg-
40% as a short-term capital loss from section 1099-B. Then enter the net amount of these ing transaction items in determining this taxable
1256 contracts. gains and losses on Schedule D (Form 1040), income. If you have a hedging loss that is disal-
If only a portion of the net section 1256 con- line 4 or line 11, as appropriate. Include a copy lowed because of this limit, you can carry it over
tracts loss is absorbed by carrying the loss of Form 6781 with your income tax return. to the next tax year as a deduction resulting
back, the unabsorbed portion can be carried If the Form 1099-B you receive includes a from a hedging transaction.
forward, under the capital loss carryover rules, straddle or hedging transaction, defined later, it If the hedging transaction relates to property
to the year following the loss. For more informa- may be necessary to show certain adjustments other than stock or securities, the limit on hedg-
tion, see Capital Losses, later. Figure your capi- on Form 6781. Follow the Form 6781 instruc- ing losses applies if the limited partner or entre-
tal loss carryover as if, for the loss year, you tions for completing Part I. preneur is an individual.
had an additional short-term capital gain of 40% The limit on hedging losses does not apply
of the amount of net section 1256 contracts loss Loss carryback election. To carry back your to any hedging loss to the extent that it is more
absorbed in the carryback years and an addi- loss under the election procedures described than all your unrecognized gains from hedging
tional long-term capital gain of 60% of the ab- earlier, file Form 1040-X or Form 1045, Applica- transactions at the end of the tax year that are
sorbed loss. In the carryover year, treat any tion for Tentative Refund, for the year to which from the trade or business in which the hedging
capital loss carryover from losses on section you are carrying the loss with an amended transaction occurred. The term “unrecognized
1256 contracts as if it were a loss from section Form 6781 and an amended Schedule D (Form gain” has the same meaning as defined under
1256 contracts for that year. 1040) attached. Follow the instructions for com- Loss Deferral Rules, later.
pleting Form 6781 for the loss year to make this
Net section 1256 contracts loss. This election. Sale of property used in a hedge. Once you
loss is the lesser of: identify personal property as being part of a
• The net capital loss for your tax year deter- hedging transaction, you must treat gain from
mined by taking into account only the gains Hedging Transactions its sale or exchange as ordinary income, not
and losses from section 1256 contracts, or capital gain.
• The capital loss carryover to the next tax The marked-to-market rules, described earlier,
year determined without this election. do not apply to hedging transactions. A transac-
tion is a hedging transaction if both of the fol- Self-Employment Income
Net section 1256 contracts gain. This lowing conditions are met.
gain is the lesser of: Gains and losses derived in the ordinary course
• The capital gain net income for the carry- 1. You entered into the transaction in the nor- of a commodity or option dealer's trading in sec-
back year determined by taking into ac- mal course of your trade or business pri- tion 1256 contracts and property related to
count only gains and losses from section marily to manage the risk of: these contracts are included in net earnings
1256 contracts, or a. Price changes or currency fluctua- from self-employment. See the Instructions for
• The capital gain net income for that year. tions on ordinary property you hold (or Schedule SE (Form 1040). In addition, the rules
Figure your net section 1256 contracts gain for will hold); or relating to contributions to self-employment re-
tirement plans apply. For information on retire-
any carryback year without regard to the net b. Interest rate or price changes, or cur- ment plan contributions, see Pub. 560 and Pub.
section 1256 contracts loss for the loss year or rency fluctuations, on your current or 590-A.
any later tax year. future borrowings or ordinary obliga-
tions.
Traders in section 1256 contracts. Gain or
loss from the trading of section 1256 contracts 2. You clearly identified the transaction as Basis of
is capital gain or loss subject to the being a hedging transaction before the
marked-to-market rules. However, this does not close of the day on which you entered Investment Property
apply to contracts held for purposes of hedging into it.
property if any loss from the property would be This hedging transaction exception does not Terms you may need to know
an ordinary loss. apply to transactions entered into by or for any (see Glossary):
Treatment of underlying property. The syndicate. A syndicate is a partnership, S cor- Basis
determination of whether an individual's gain or poration, or other entity (other than a regular Fair market value
loss from any property is ordinary or capital gain corporation) that allocates more than 35% of its Original issue discount (OID)
or loss is made without regard to the fact that losses to limited partners or limited entrepre-
the individual is actively engaged in dealing in neurs. A limited entrepreneur is a person who
or trading section 1256 contracts related to that has an interest in an enterprise (but not as a
property. limited partner) and who does not actively par- Basis is a way of measuring your investment in
ticipate in its management. However, an inter- property for tax purposes. You must know the
Deferral of net gain from section 1256 con- est is not considered held by a limited partner or basis of your property to determine whether you
tracts due to investment in Qualified Oppor- entrepreneur if the interest holder actively par- have a gain or loss on its sale or other disposi-
tunity Fund. For special rules relating to the ticipates (or did so for at least 5 full years) in the tion.
management of the entity, or is the spouse,
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Investment property you buy normally has Example. You trade A Company stock for time of the gift is $9,000. You later sell the prop-
an original basis equal to its cost. If you get B Company stock having a fair market value of erty for $9,500. Your basis for figuring gain is
property in some way other than buying it, such $1,200. If the adjusted basis of the A Company $10,000, and $9,500 minus $10,000 results in a
as by gift or inheritance, its fair market value stock is less than $1,200, you have a taxable $500 loss. Your basis for figuring loss is $9,000,
may be important in figuring the basis. gain on the trade. If the adjusted basis of the A and $9,500 minus $9,000 results in a $500
Company stock is more than $1,200, you have gain. You have neither gain nor loss.
a deductible loss on the trade. The basis of your
Cost Basis B Company stock is $1,200. If you later sell the Fair market value equal to or more than do-
The basis of property you buy is usually its cost. B Company stock for $1,300, you will have a nor's adjusted basis. If the fair market value
The cost is the amount you pay in cash, debt gain of $100. of the property at the time of the gift was equal
to or more than the donor's adjusted basis just
obligations, or other property or services. before the gift, your basis for gain or loss on its
Property Received
Unstated interest. If you buy property on a in Nontaxable Trades sale or other disposition is the donor's adjusted
time-payment plan that charges little or no inter- basis plus or minus any required adjustments to
est, the basis of your property is your stated If you have a nontaxable trade, you do not rec- basis during the period you hold the property.
purchase price, minus the amount considered ognize gain or loss until you dispose of the real Also, you may be allowed to add to the donor's
to be unstated interest. You generally have un- property you received in the trade. See Nontax- adjusted basis all or part of any gift tax paid, de-
stated interest if your interest rate is less than able Trades, later. pending on the date of the gift.
the applicable federal rate. For more informa- Gift received after 1976. If you received
tion, see Unstated Interest and Original Issue The basis of property you received in a non- property as a gift after 1976, your basis is the
Discount (OID) in Pub. 537. taxable or partly nontaxable trade is generally donor's adjusted basis increased by the part of
the same as the adjusted basis of the property the gift tax paid that was for the net increase in
you gave up. Increase this amount by any cash value of the gift. You figure this part by multiply-
Basis Other Than Cost you paid, additional costs you had, and any ing the gift tax paid on the gift by a fraction. The
gain recognized. Reduce this amount by any numerator (top part) is the net increase in value
There are times when you must use a basis cash or unlike property you received, any loss of the gift and the denominator (bottom part) is
other than cost. In these cases, you may need recognized, and any liability of yours that was the amount of the gift.
to know the property's fair market value or the assumed or treated as assumed. The net increase in value of the gift is the fair
adjusted basis of the previous owner.
market value of the gift minus the donor's adjus-
Fair market value. This is the price at which Property Received ted basis. The amount of the gift is its value for
the property would change hands between a From Your Spouse gift tax purposes after reduction by any annual
buyer and a seller, neither being forced to buy exclusion and marital or charitable deduction
or sell and both having reasonable knowledge If property is transferred to you from your that applies to the gift.
of all the relevant facts. Sales of similar prop- spouse (or former spouse, if the transfer is inci-
erty, around the same date, may be helpful in dent to your divorce), your basis is the same as Example. In 2022, you received a gift of
figuring fair market value. your spouse's or former spouse's adjusted ba- property from your mother. At the time of the
sis just before the transfer. See Transfers Be- gift, the property had a fair market value of
tween Spouses, later. $101,000 and an adjusted basis to her of
Property Received for Services $40,000. The amount of the gift for gift tax pur-
Recordkeeping. The transferor must poses was $85,000 ($101,000 minus the
If you receive investment property for services, give you the records necessary to de- $16,000 annual exclusion), and your mother
you must include the property's fair market RECORDS termine the adjusted basis and holding
paid a gift tax of $19,600. You figure your basis
value in income. The amount you include in in- period of the property as of the date of the in the following way:
come then becomes your basis in the property. transfer.
If the services were performed for a price that Fair market value . . . . . . . . . . . . . . . . . $101,000
was agreed to beforehand, this price will be ac- Minus: Adjusted basis . . . . . . . . . . . . . . 40,000
cepted as the fair market value of the property if Property Received as a Gift
there is no evidence to the contrary. Net increase in value of gift . . . . . . . . . . . $ 61,000
To figure your basis in property that you re-
Restricted property. If you receive, as pay- ceived as a gift, you must know its adjusted ba- Gift tax paid . . . . . . . . . . . . . . . . . . . . . $ 19,600
ment for services, property that is subject to sis to the donor just before it was given to you, Multiplied by 0.718 ($61,000 ÷
certain restrictions, your basis in the property is its fair market value at the time it was given to $85,000) . . . . . . . . . . . . . . . . . . . . . . . 0.718
Gift tax due to net increase in value . . . . . $ 14,073
generally its fair market value when it becomes you, the amount of any gift tax paid on it, and Plus: Adjusted basis of property to
substantially vested. Property becomes sub- the date it was given to you. your mother . . . . . . . . . . . . . . . . . . . . . 40,000
stantially vested when it is transferable or is no Your basis in the property $ 54,073
longer subject to substantial risk of forfeiture, Fair market value less than donor's adjus-
whichever happens first. See Restricted Prop- ted basis. If the fair market value of the prop-
erty in Pub. 525 for more information. erty at the time of the gift was less than the do- Part sale, part gift. If you get property in a
nor's adjusted basis just before the gift, your transfer that is partly a sale and partly a gift,
Bargain purchases. If you buy investment basis for gain on its sale or other disposition is your basis is the larger of the amount you paid
property at less than fair market value, as pay- the same as the donor's adjusted basis plus or for the property or the transferor's adjusted ba-
ment for services, you must include the differ- minus any required adjustments to basis during sis in the property at the time of the transfer.
ence in income. Your basis in the property is the the period you hold the property. Your basis for Add to that amount the amount of any gift tax
price you pay plus the amount you include in in- loss is its fair market value at the time of the gift paid on the gift, as described in the preceding
come. plus or minus any required adjustments to basis discussion. For figuring loss, your basis is limi-
during the period you hold the property. ted to the property's fair market value at the
time of the transfer.
Property Received No gain or loss. If you use the basis for
in Taxable Trades figuring a gain and the result is a loss, and then Gift tax information. For information on gift
use the basis for figuring a loss and the result is tax, see Pub. 559. For information on figuring
If you received investment property in trade for a gain, you will have neither a gain nor a loss. the amount of gift tax to add to your basis, see
other property, the basis of the new property is Property Received as a Gift in Pub. 551.
its fair market value at the time of the trade un- Example. You receive a gift of investment
less you received the property in a nontaxable property having an adjusted basis of $10,000 at
trade. the time of the gift. The fair market value at the
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Property Received as Inheritance For information about other adjustments to ba- Bonds. These methods of identification
sis, see Pub. 551. also apply to bonds sold or transferred.
Before or after 2010. If you inherited property
from a decedent who died before or after 2010, Identification not possible. If you buy
or who died in 2010 and the executor of the de- Stocks and Bonds and sell securities at various times in varying
quantities and you cannot adequately identify
cedent's estate elected not to file Form 8939, The basis of stocks or bonds you own is gener- the shares you sell, the basis of the securities
Allocation of Increase in Basis for Property Ac- ally the purchase price plus the costs of pur- you sell is the basis of the securities you ac-
quired From a Decedent, your basis in that chase, such as commissions and recording or quired first. Except for certain mutual fund
property is generally its fair market value (its ap- transfer fees. If you acquired stock or bonds shares, discussed later, you cannot use the
praised value on Form 706, United States Es- other than by purchase, your basis is usually average price per share to figure gain or loss on
tate (and Generation-Skipping Transfer) Tax determined by fair market value or the previous the sale of the shares.
Return) on: owner's adjusted basis as discussed earlier un-
• The date of the decedent's death; or der Basis Other Than Cost. Example. You bought 100 shares of stock
• The later alternate valuation date if the es-
tate qualifies for, and elects to use, alter- The basis of stock must be adjusted for cer- of XYZ Corporation in 2007 for $10 per share.
nate valuation. tain events that occur after purchase. For exam- In January 2008, you bought another 200
ple, if you receive more stock from nontaxable shares for $11 per share. In July 2008, you
In certain circumstances, the executor of an stock dividends or stock splits, you must reduce gave your son 50 shares. In December 2010,
estate (or other person) required to file Form the basis of your original stock. You must also you bought 100 shares for $9 per share. In April
706 after July 15, 2015, will be required to pro- reduce your basis when you receive nondivi- 2022, you sold 130 shares. You cannot identify
vide a Schedule A (Form 8971) to you as a ben- dend distributions (discussed in chapter 1). the shares you disposed of, so you must use
eficiary who receives or is to receive property These distributions, up to the amount of your the stock you acquired first to figure the basis.
from the estate. If you receive Schedule A basis, are a nontaxable return of capital. The shares of stock you gave your son had a
(Form 8971), use the final estate tax value of basis of $500 (50 × $10). You figure the basis of
the property reported on the Schedule A to de- The IRS partners with companies that the 130 shares of stock you sold in April 2022
termine your basis in the property. TIP offer Form 8949 and Schedule D (Form as follows:
If no Form 706 was filed, or the executor 1040) software that can import trades
was not required to provide you Schedule A from many brokerage firms and accounting soft- 50 shares (50 × $10) balance of stock
(Form 8971), use the appraised value on the ware to help you keep track of your adjusted bought in 2007 . . . . . . . . . . . . . . . . . . . . $ 500
date of death for state inheritance or transmis- basis in securities. To find out more, go to 80 shares (80 × $11) stock bought in
sion taxes. For stocks and bonds, if no Form IRS.gov/Filing/Filing-Options. January 2008 . . . . . . . . . . . . . . . . . . . . . 880
706 was filed and there are no state inheritance Total basis of stock sold in 2022 $1,380
or transmission taxes, see the Form 706 in- Identifying stock or bonds sold. If you can
structions for figuring the fair market value of adequately identify the shares of stock or the Shares in a mutual fund or real estate in-
the stocks and bonds on the date of the dece- bonds you sold, their basis is the cost or other vestment trust (REIT). The basis of shares in
dent's death. basis of the particular shares of stock or bonds. a mutual fund (or other regulated investment
Appreciated property you gave the dece- Adequate identification. You will make company) or a REIT is generally figured in the
dent. Your basis in certain appreciated prop- an adequate identification if you show that cer- same way as the basis of other stock and usu-
erty that you inherited is the decedent's adjus- tificates representing shares of stock from a lot ally includes any commissions or load charges
ted basis in the property immediately before that you bought on a certain date or for a certain paid for the purchase.
death rather than its fair market value. This ap- price were delivered to your broker or other Example. You bought 100 shares of Fund
plies to appreciated property that you or your agent. A for $10 per share. You paid a $50 commis-
spouse gave the decedent as a gift during the Broker holds stock. If you have left the sion to the broker for the purchase. Your cost
1-year period ending on the date of death. Ap- stock certificates with your broker or other basis for each share is $10.50 ($1,050 ÷ 100).
preciated property is any property whose fair agent, you will make an adequate identification Commissions and load charges. The
market value on the day you gave it to the dece- if you: fees and charges you pay to acquire or redeem
•
dent was more than its adjusted basis. Tell your broker or other agent the particu- shares of a mutual fund are not deductible. You
More information. See Pub. 551 for more in- lar stock to be sold or transferred at the can usually add acquisition fees and charges to
formation on the basis of inherited property, in- time of the sale or transfer, and your cost of the shares and thereby increase
cluding community property, property held by a • Receive a written confirmation of this from your basis. A fee paid to redeem the shares is
surviving tenant in a joint tenancy or tenancy by your broker or other agent within a reason- usually a reduction in the redemption price
the entirety, a qualified joint interest, and a farm able time. (sales price).
or closely held business. Stock identified this way is the stock sold or You cannot add your entire acquisition fee
transferred even if stock certificates from a dif- or load charge to the cost of the mutual fund
Inherited in 2010 and executor elected to ferent lot are delivered to the broker or other shares acquired if all of the following conditions
file Form 8939. If you inherited property from agent. apply.
a decedent who died in 2010 and the executor
made the election to file Form 8939, see Pub. Single stock certificate. If you bought 1. You get a reinvestment right because of
4895 to figure your basis. Pub. 4895 is available stock in different lots at different times and you the purchase of the shares or the payment
at IRS.gov/Pub4895. hold a single stock certificate for this stock, you of the fee or charge.
will make an adequate identification if you: 2. You dispose of the shares within 90 days
• Tell your broker or other agent the particu- of the purchase date.
Adjusted Basis lar stock to be sold or transferred when
you deliver the certificate to your broker or 3. You acquire new shares in the same mu-
Before you can figure any gain or loss on a sale, other agent, and tual fund or another mutual fund, for which
exchange, or other disposition of property or fig- • Receive a written confirmation of this from the fee or charge is reduced or waived be-
ure allowable depreciation, depletion, or amorti- your broker or other agent within a reason- cause of the reinvestment right you got
zation, you must usually make certain adjust- able time. when you acquired the original shares.
ments (increases and decreases) to the basis
of the property. The result of these adjustments If you sell part of the stock represented by a The amount of the original fee or charge in
to the basis is the adjusted basis. single certificate directly to the buyer instead of excess of the reduction in (3) is added to the
through a broker, you will make an adequate cost of the original shares. The rest of the origi-
Adjustments to the basis of stocks and identification if you keep a written record of the nal fee or charge is added to the cost basis of
bonds are explained in the following discussion. particular stock that you intend to sell.
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Table 4-1. Mutual Fund Record
Acquired 1 Adjusted 2 Sold or Redeemed
Mutual Fund Number of Cost per Adjustment to Basis per Share Basis per Date Number
Date Shares Share Share of Shares

1 Include share received from reinvestment of distributions.
2 Cost plus or minus adjustments.
the new shares (unless all three conditions Table 4-1. This is a worksheet you can New and old stock identical. If the new
above also apply to the purchase of the new use to keep track of the adjusted basis stock you received as a nontaxable dividend is
shares). RECORDS of your mutual fund shares. Enter the identical to the old stock on which the dividend
cost per share when you acquire new shares was declared, divide the adjusted basis of the
Choosing average basis for mutual fund and any adjustments to their basis when the ad- old stock by the number of shares of old and
shares. You can choose to use the average justment occurs. This worksheet will help you new stock. The result is your basis for each
basis of mutual fund shares if you acquired the figure the adjusted basis when you sell or re- share of stock.
identical shares at various times and prices, or deem shares.
you acquired the shares after 2011 in connec- Example 1. You owned one share of com-
tion with a dividend reinvestment plan (DRP), mon stock that you bought for $45. The corpo-
and left them on deposit in an account kept by a Automatic investment service. If you partici-
custodian or agent. The methods you can use pate in an automatic investment service, your ration distributed two new shares of common
to figure average basis are explained later. basis for each share of stock, including frac- stock for each share held. You then had three
tional shares, bought by the bank or other agent shares of common stock. Your basis in each
Undistributed capital gains. If you had to is the purchase price plus a share of the brok- share is $15 ($45 ÷ 3).
include in your income any undistributed capital er's commission.
gains of the mutual fund or REIT, increase your Example 2. You owned two shares of com-
basis in the stock by the difference between the DRPs. If you participate in a DRP and receive mon stock. You bought one for $30 and the
amount you included and the amount of tax stock from the corporation at a discount, your other for $45. The corporation distributed two
paid for you by the fund or REIT. See Undistrib- basis is the full fair market value of the stock on new shares of common stock for each share
uted capital gains of mutual funds and REITs in the dividend payment date. You must include held. You had six shares after the distribu-
chapter 1. the amount of the discount in your income. tion—three with a basis of $10 each ($30 ÷ 3)
and three with a basis of $15 each ($45 ÷ 3).
Reinvestment right. This is the right to Public utilities. If, before 1986, you exclu-
acquire mutual fund shares in the same or an- ded from income the value of stock you had re- New and old stock not identical. If the
other mutual fund without paying a fee or load ceived under a qualified public utility reinvest- new stock you received as a nontaxable divi-
charge, or by paying a reduced fee or load ment plan, your basis in that stock is zero. dend is not identical to the old stock on which it
charge. was declared, the basis of the new stock is fig-
Stock dividends. Stock dividends are distribu- ured differently. Divide the adjusted basis of the
The original cost basis of mutual fund tions made by a corporation of its own stock. old stock between the old and the new stock in
shares you acquire by reinvesting your distribu- Generally, stock dividends are not taxable to the ratio of the fair market value of each lot of
tions is the amount of the distributions used to you. However, see Distributions of Stock and stock to the total fair market value of both lots
purchase each full or fractional share. This rule Stock Rights in chapter 1 for some exceptions. on the date of distribution of the new stock.
applies even if the distribution is an exempt-in- If the stock dividends are not taxable, you must
terest dividend that you do not report as in- divide your basis for the old stock between the Example. You bought a share of common
come. old and new stock. stock for $100. Later, the corporation distrib-
uted a share of preferred stock for each share
of common stock held. At the date of
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distribution, your common stock had a fair mar- 100 shares × $22 = $2,200, basis of old stock add it to the basis of the stock used to close the
ket value of $150 and the preferred stock had a short sale.
fair market value of $50. You figure the basis of 100 shares × $30 = $3,000, market value of old stock See Payments in lieu of dividends, later, for
the old and new stock by dividing your $100 ba- information about deducting payments in lieu of
sis between them. The basis of your common 10 rights × $3 = $30, market value of rights dividends.
stock is $75 (($150 ÷ $200) × $100), and the
basis of the new preferred stock is $25 (($50 ÷ ($3,000 ÷ $3,030) × $2,200 = $2,178.22, new basis Premiums on bonds. If you buy a bond at a
$200) × $100). of old stock premium, the premium is treated as part of your
Stock bought at various times. Figure ($30 ÷ $3,030) × $2,200 = $21.78, basis of rights basis in the bond. If you choose to amortize the
premium paid on a taxable bond, you must re-
the basis of stock dividends received on stock duce the basis of the bond by the amortized
you bought at various times and at different pri- If you sell the rights, the basis for figuring
ces by allocating to each lot of stock the share gain or loss is $2.18 ($21.78 ÷ 10) per right. If part of the premium each year over the life of
of the stock dividends due to it. you exercise the rights, the basis of the stock the bond.
you acquire is the price you pay ($26) plus the For a taxable bond acquired at a premium
Taxable stock dividends. If your stock basis of the right exercised ($2.18), or $28.18 that is a covered security, unless you instruct
dividend is taxable when you receive it, the ba- per share. The remaining basis of the old stock your broker that you do not want to amortize
sis of your new stock is its fair market value on is $21.78 per share. premium, your broker will report income on the
the date of distribution. The basis of your old bond and your basis in the bond by amortizing
stock does not change. Investment property received in liquidation. premium. Your broker may report the amount of
In general, if you receive investment property as premium amortization for a tax year separately
Stock splits. Figure the basis of stock splits in a distribution in partial or complete liquidation of from the amount of gross interest income in
the same way as stock dividends if identical a corporation and if you recognize gain or loss boxes 11 and 12 of Form 1099-INT or box 10 of
stock is distributed on the stock held. when you acquire the property, your basis in the Form 1099-OID, or may report net interest in
property is its fair market value at the time of the boxes 1 and 3 of Form 1099-INT or box 2 of
Stock rights. A stock right is a right to acquire distribution. Form 1099-OID.
a corporation's stock. It may be exercised, it Although you cannot deduct the premium on
may be sold if it has a market value, or it may S corporation stock. You must increase your a tax-exempt bond, you must amortize it to de-
expire. Stock rights are rarely taxable when you basis in stock of an S corporation by your pro termine your adjusted basis in the bond. You
receive them. See Distributions of Stock and rata share of the following items. must reduce the basis of the bond by the pre-
Stock Rights in chapter 1. • All income items of the S corporation, in- mium you amortized for the period you held the
Taxable stock rights. If you receive stock cluding tax-exempt income, that are sepa- bond. For a tax-exempt covered security ac-
rights that are taxable, the basis of the rights is rately stated and passed through to you as quired at a premium, box 13 of Form 1099-INT
their fair market value at the time of distribution. a shareholder. or box 10 of Form 1099-OID shows the amount
The basis of the old stock does not change. • The nonseparately stated income of the S of bond premium amortization allocable to the
corporation. interest paid during the tax year. If a net amount
Nontaxable stock rights. If you receive • The amount of the deduction for depletion of interest appears in box 8 or 9 of Form
nontaxable stock rights and allow them to ex- (other than oil and gas depletion) that is 1099-INT, whichever is applicable, box 13 of
pire, they have no basis. more than the basis of the property being Form 1099-INT should be blank. If a net amount
If you exercise or sell the nontaxable stock depleted. of interest appears in box 2 of Form 1099-OID,
rights and if, at the time of distribution, the stock You must decrease your basis in stock of an box 10 of Form 1099-OID should be blank.
rights had a fair market value of 15% or more of S corporation by your pro rata share of the fol- See Bond Premium Amortization in chap-
the fair market value of the old stock, you must lowing items. ter 3 for more information.
divide the adjusted basis of the old stock be- • Distributions by the S corporation that were
tween the old stock and the stock rights. Use a not included in your income. Market discount on bonds. If you include
ratio of the fair market value of each to the total • All loss and deduction items of the S cor- market discount on a bond in income currently,
fair market value of both at the time of distribu- poration that are separately stated and increase the basis of your bond by the amount
tion. passed through to you. of market discount you include in your income.
If the fair market value of the stock rights • Any nonseparately stated loss of the S cor- See Market Discount Bonds in chapter 1 for
was less than 15%, their basis is zero. How- poration. more information.
ever, you can choose to divide the basis of the • Any expense of the S corporation that is
old stock between the old stock and the stock not deductible in figuring its taxable in- Bonds purchased at par value. A bond pur-
rights. To make the choice, attach a statement come and not properly chargeable to a chased at par value (face amount) has no pre-
to your return for the year in which you received capital account. mium or discount. When you sell or otherwise
the rights, stating that you choose to divide the • The amount of your deduction for depletion dispose of the bond, you figure the gain or loss
basis of the stock. of oil and gas wells to the extent the de- by comparing the bond proceeds to the pur-
Basis of new stock. If you exercise the duction is not more than your share of the chase price of the bond.
stock rights, the basis of the new stock is its adjusted basis of the wells. Example. You purchased a bond several
cost plus the basis of the stock rights exercised. However, your basis in the stock cannot be re- years ago for its par value of $10,000. You sold
duced below zero. the bond this year for $10,100. You have a gain
Example. You own 100 shares of ABC of $100. However, if you had sold the bond for
Company stock, which cost you $22 per share. Qualified small business stock. If you $9,900, you would have a loss of $100.
The ABC Company gave you 10 nontaxable bought this stock as replacement property for
stock rights that would allow you to buy 10 more other qualified small business stock you sold at Acquisition discount on short-term obliga-
shares at $26 per share. At the time the stock a gain, you must reduce the basis of this re- tions. If you include acquisition discount on a
rights were distributed, the stock had a market placement stock by the amount of any post- short-term obligation in your income currently,
value of $30, not including the stock rights. poned gain on the earlier sale. See Gains on increase the basis of the obligation by the
Each stock right had a market value of $3. The Qualified Small Business Stock, later. amount of acquisition discount you include in
market value of the stock rights was less than your income. See Discount on Short-Term Obli-
15% of the market value of the stock, but you Short sales. If you cannot deduct payments gations in chapter 1 for more information.
chose to divide the basis of your stock between you make to a lender in lieu of dividends on
the stock and the rights. You figure the basis of stock used in a short sale, the amount you pay
the rights and the basis of the old stock as fol- to the lender is a capital expense, and you must
lows:

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Original issue discount (OID) on debt in- receive plus the fair market value of any prop- Special Rules for Mutual
struments. Increase the basis of a debt instru- erty or services you receive.
ment by the OID you include in your income. If you finance the buyer's purchase of your Funds
See Original Issue Discount (OID) in chapter 1. property and the debt instrument does not pro-
If your debt instrument is a covered security, vide for adequate stated interest, the unstated To figure your gain or loss when you dispose of
your broker will report a basis amount that is ad- interest that you must report as ordinary income mutual fund shares, you need to determine
justed for OID included in income. will reduce the amount realized from the sale. which shares were sold and the basis of those
For more information, see Pub. 537. shares. If your shares in a mutual fund were ac-
quired all on the same day and for the same
Discounted tax-exempt obligations. OID If a buyer of property issues a debt instru- price, figuring their basis is not difficult. How-
on tax-exempt obligations is generally not taxa- ment to the seller of the property, the amount ever, shares are generally acquired at various
ble. However, when you dispose of a tax-ex- realized is determined by reference to the issue times, in various quantities, and at various pri-
empt obligation issued after September 3, price of the debt instrument, which may or may ces. Therefore, figuring your basis can be more
1982, that you acquired after March 1, 1984, not be the fair market value of the debt instru- difficult. You can choose to use either a cost ba-
you must accrue OID on the obligation to deter- ment. See Regulations section 1.1001-1(g). sis or an average basis to figure your gain or
mine its adjusted basis. The accrued OID is However, if the debt instrument was previously loss.
added to the basis of the obligation to deter- issued by a third party (one not part of the sale
mine your gain or loss. If your tax-exempt obli- transaction), the fair market value of the debt in-
gation is a covered security, your broker will re- strument is used to determine the amount real- Cost Basis
port a basis amount that is adjusted for ized.
tax-exempt OID. You can figure your gain or loss using a cost ba-
For information on determining OID on a Fair market value. Fair market value is the sis only if you did not previously use an average
long-term obligation, see Debt Instruments Is- price at which property would change hands basis for a sale, exchange, or redemption of
sued After July 1, 1982, and Before 1985 or between a buyer and a seller, neither being other shares in the same mutual fund.
Debt Instruments Issued After 1984, whichever forced to buy or sell and both having reasona-
applies, in Pub. 1212 under Figuring OID on ble knowledge of all the relevant facts. To figure cost basis, you can choose one of
Long-Term Debt Instruments. the following methods.
If the tax-exempt obligation has a maturity of Example. You trade A Company stock • Specific share identification.
1 year or less, accrue OID under the rules for with an adjusted basis of $7,000 for B Company • First-in first-out (FIFO).
acquisition discount on short-term obligations. stock with a fair market value of $10,000, which
See Discount on Short-Term Obligations in is your amount realized. Your gain is $3,000 Specific share identification. If you ade-
chapter 1. ($10,000 – $7,000). If you also receive a note quately identify the shares you sold, you can
for $6,000 that has an issue price of $6,000, use the adjusted basis of those particular
Stripped tax-exempt obligation. If you your gain is $9,000 ($10,000 + $6,000 – shares to figure your gain or loss.
acquired a stripped tax-exempt bond or coupon $7,000). You will adequately identify your mutual
after October 22, 1986, you must accrue OID
on it to determine its adjusted basis when you Debt paid off. A debt against the property, fund shares, even if you bought the shares in
dispose of it. For stripped tax-exempt bonds or or against you, that is paid off as a part of the different lots at various prices and times, if you:
coupons acquired after June 10, 1987, part of transaction or that is assumed by the buyer 1. Specify to your broker or other agent the
this OID may be taxable. You accrue the OID on must be included in the amount realized. This is particular shares to be sold or transferred
these obligations in the manner described in true even if neither you nor the buyer is person- at the time of the sale or transfer, and
chapter 1 under Stripped Bonds and Coupons. ally liable for the debt. For example, if you sell
Increase your basis in the stripped tax-ex- or trade property that is subject to a nonre- 2. Receive confirmation in writing from your
empt bond or coupon by the taxable and non- course loan, the amount you realize generally broker or other agent within a reasonable
taxable accrued OID. Also increase your basis includes the full amount of the note assumed by time of your specification of the particular
by the interest that accrued (but was not paid the buyer even if the amount of the note is more shares sold or transferred.
and was not previously reflected in your basis) than the fair market value of the property. You continue to have the burden of proving
before the date you sold the bond or coupon. In
addition, for bonds acquired after June 10, Example. You sell stock that you had your basis in the specified shares at the time of
1987, add to your basis any accrued market pledged as security for a bank loan of $8,000. sale or transfer.
discount not previously reflected in basis. Your basis in the stock is $6,000. The buyer FIFO. If your shares were acquired at different
pays off your bank loan and pays you $20,000 times or at different prices and you cannot iden-
in cash. The amount realized is $28,000
How To Figure ($20,000 + $8,000). Your gain is $22,000 tify which shares you sold, use the basis of the
($28,000 – $6,000). shares you acquired first as the basis of the
Gain or Loss shares sold. In other words, the oldest shares
Payment of cash. If you trade property you own are considered sold first. You should
You figure gain or loss on a sale or trade of and cash for other property, the amount you re- keep a separate record of each purchase and
property by subtracting the adjusted basis of alize is the fair market value of the property you any dispositions of the shares until all shares
the property from the amount you realize on the receive. Determine your gain or loss by sub- purchased at the same time have been dis-
sale or trade. tracting the cash you pay and the adjusted ba- posed of completely.
sis of the property you trade in from the amount Table 4-2 illustrates the use of the FIFO
Gain. If the amount you realize from a sale or you realize. If the result is a positive number, it method to figure the cost basis of shares sold,
trade is more than the adjusted basis of the is a gain. If the result is a negative number, it is compared with the use of the average basis
property you transfer, the difference is a gain. a loss. method (discussed next).

Loss. If the adjusted basis of the property you No gain or loss. You may have to use a basis Average Basis
transfer is more than the amount you realize, for figuring gain that is different from the basis
the difference is a loss. used for figuring loss. In this case, you may You can use the average basis method to de-
have neither a gain nor a loss. See No gain or termine the basis of shares of stock if the
Amount realized. The amount you realize loss in the discussion on the basis of property shares are identical to each other, you acquired
from a sale or trade of property is everything you received as a gift under Basis Other Than them at different times and different prices and
you receive for the property minus your expen- Cost, earlier. left them in an account with a custodian or
ses related to the sale (such as redemption agent, and either:
fees, sales commissions, sales charges, or exit • They are shares in a mutual fund (or other
fees). Amount realized includes the money you regulated investment company);
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• They are shares you hold in connection election. After revoking your election, your basis 1. Enter the total adjusted basis of all the
with a DRP, and all the shares you hold in in the shares of stock to which the revocation shares you owned in the fund just before
connection with the DRP are treated as applies is the basis before averaging. the sale. (If you made an earlier sale of
covered securities (defined later); or shares in this fund, add the adjusted
• You acquired them after 2011 in connec- You may be able to find the average basis of any shares you still owned after
tion with a DRP. TIP basis of your shares from information the last sale and the adjusted basis of
provided by the fund. any shares you acquired after that
sale.) . . . . . . . . . . . . . . . . . . . . . . . . $4,800
Average basis is determined by averaging
the basis of all shares of identical stock in an Average basis method illustrated. Table 4-2 2. Enter the total number of shares you
account regardless of how long you have held illustrates the average basis method of shares owned in the fund just before the
the stock. However, shares of stock in a DRP sold, compared with the use of the FIFO sale . . . . . . . . . . . . . . . . . . . . . . . . . 300
are not identical to shares of stock with the method to figure cost basis (discussed earlier). 3. Divide the amount on line 1 by the
same CUSIP number that are not in a DRP. The Even though you include all unsold shares amount on line 2. This is your average
basis of each share of identical stock in the ac- of identical stock in an account to figure aver- basis per share . . . . . . . . . . . . . . . . $ 16
count is the aggregate basis of all shares of that age basis, you may have both short-term and 4. Enter the number of shares you
stock in the account divided by the aggregate long-term gains or losses when you sell these sold . . . . . . . . . . . . . . . . . . . . . . . . . 150
number of shares. shares. To determine your holding period, the 5. Multiply the amount on line 3 by the
shares disposed of are considered to be those amount on line 4. This is the basis of
Transition rule from double-category acquired first. the shares you sold . . . . . . . . . . . . . $2,400
method. You may no longer use the dou-
ble-category method for figuring your average Example. You bought 400 identical shares Remaining shares. The average basis of
basis. If you were using the double-category in the LJO Mutual Fund: 200 shares on May 11, the shares you still hold after a sale of some of
method for stock you acquired before April 1, 2021, and 200 shares on May 16, 2022. On No- your shares is the same as the average basis of
2011, and you sell, exchange, or otherwise dis- vember 16, 2022, you sold 300 shares. The ba- the shares sold. The next time you make a sale,
pose of that stock on or after April 1, 2011, you sis of all 300 shares sold is the same, but you your average basis will still be the same, unless
must figure the average basis of this stock by held 200 shares for more than 1 year, so your you have acquired additional shares (or have
averaging together all identical shares of stock gain or loss on those shares is long term. You made a subsequent adjustment to basis).
in the account on April 1, 2011, regardless of held 100 shares for 1 year or less, so your gain
the holding period. or loss on those shares is short term. Example 2. The facts are the same as in
How to figure the basis of shares sold. Example 1, except that you sold an additional
Election of average basis method for cov- To figure the basis of shares you sell, use the 50 shares on December 9, 2022. You do not
ered securities. To make the election to use steps in the following worksheet. need to refigure the average basis of the 150
the average basis method for your covered se- shares you owned at that time because you ac-
curities, you must send written notice to the 1. Enter the total adjusted basis of all the quired or sold no shares, and had no other ad-
custodian or agent who keeps the account. The shares you owned in the fund just before justments to basis, since the last sale. Your ba-
written notice can be made electronically. You the sale. (If you made an earlier sale of sis is the $16 per share figured earlier.
must also notify your broker that you have made shares in this fund, add the adjusted
the election. Generally, a covered security is a basis of any shares you still owned after Example 3. The facts are the same as in
security you acquired after 2010, with certain the last sale and the adjusted basis of Example 1, except that you bought an addi-
any shares you acquired after that
exceptions explained in the Instructions for sale.) . . . . . . . . . . . . . . . . . . . . . . . . $ tional 150 identical shares at $14 per share on
Form 8949. September 9, 2022, and then sold 50 shares on
You can make the election to use the aver- 2. Enter the total number of shares you December 9, 2022. The total adjusted basis of
owned in the fund just before the
age basis method at any time. The election will sale . . . . . . . . . . . . . . . . . . . . . . . . . all the shares you owned just before the sale is
be effective for sales or other dispositions of $4,500, figured as follows.
stocks that occur after you notify the custodian 3. Divide the amount on line 1 by the
or agent of your election. Your election must amount on line 2. This is your average 1. Basis of remaining shares ($16 x
basis per share . . . . . . . . . . . . . . . . . $
identify each account with that custodian or 150) . . . . . . . . . . . . . . . . . . . . . . . . $2,400
agent and each stock in that account to which 4. Enter the number of shares you sold . . . 2. Cost of shares acquired on 9/9/2022
($14 x 150) . . . . . . . . . . . . . . . . . . . . $2,100
the election applies. The election can also indi- 5. Multiply the amount on line 3 by the 3. Total adjusted basis of all shares owned
cate that it applies to all accounts with a custo- amount on line 4. This is the basis of the ($2,400 + $2,100) . . . . . . . . . . . . . . . $4,500
dian or agent, including accounts you later es- shares you sold . . . . . . . . . . . . . . . . $
tablish with the custodian or agent.
The basis of the shares sold is $750 ($15 per
Election of average basis method for non- Example 1. You bought 300 identical share), figured as follows.
covered securities. For noncovered securi- shares in the LJP Mutual Fund: 100 shares in
ties, you elect to use the average basis method 2018 for $1,000 ($10 per share); 100 shares in 1. Enter the total adjusted basis of all the
on your income tax return for the first tax year 2019 for $1,200 ($12 per share); and 100 shares you owned in the fund just before
that the election applies. You make the election shares in 2020 for $2,600 ($26 per share). the sale. (If you made an earlier sale of
by showing on your return that you used the Thus, the total cost of your shares was $4,800 shares in this fund, add the adjusted
average basis method in reporting gain or loss ($1,000 + $1,200 + $2,600). On May 6, 2022, basis of any shares you still owned after
on the sale or other disposition. you sold 150 shares. The basis of the shares the last sale and the adjusted basis of
you sold is $2,400 ($16 per share), figured as any shares you acquired after that
Revoking the average basis method elec- follows. sale.) . . . . . . . . . . . . . . . . . . . . . . . . $4,500
tion. You can revoke an election to use the 2. Enter the total number of shares you
owned in the fund just before the
average basis method for your covered securi- sale . . . . . . . . . . . . . . . . . . . . . . . . . 300
ties by sending written notice to the custodian
or agent holding the stock for which you want to 3. Divide the amount on line 1 by the
revoke the election. The election must generally amount on line 2. This is your average
basis per share . . . . . . . . . . . . . . . . $ 15
be revoked by the earlier of 1 year after you
make the election or the date of the first sale, 4. Enter the number of shares you
transfer, or disposition of the stock following the sold . . . . . . . . . . . . . . . . . . . . . . . . . 50
election. The revocation applies to all the stock 5. Multiply the amount on line 3 by the
you hold in an account that is identical to the amount on line 4. This is the basis of
shares of stock for which you are revoking the the shares you sold . . . . . . . . . . . . . $ 750

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Table 4-2. Example of How To Figure Basis of Shares Sold property before the end of the 45-day pe-
riod, you are automatically treated as hav-
This is an example showing two different ways to figure basis. It compares the cost basis using the FIFO method with the ing met the 45-day written notice require-
average basis method. ment.
Date Action Share Price No. of Shares Total Shares 6. The property to be received must be re-
Owned ceived by the earlier of:
2/10/2020 Invest $4,000 $25 160 160 a. The 180th day after the date on which
8/11/2020 Invest $4,800 $20 240 400 you transfer the property given up in
12/15/2020 Reinvest $300 the trade; or
dividend $30 10 410 b. The due date, including extensions,
10/2/2022 Sell 210 shares for $32 210 200 for your tax return for the year in
$6,720 which the transfer of the property
given up occurs.
COST BASIS To figure the basis of the 210 shares sold on 10/2/2022, use the share price of the first If you trade property with a related party in a
(FIFO) 210 shares you bought, namely the 160 shares you purchased on 2/10/2020 and 50 of
those purchased on 8/11/2020. like-kind exchange, a special rule may apply.
See Related Party Transactions, later in this
$4,000 (cost of 160 shares on 2/10/2020) chapter. Also, see chapter 1 of Pub. 544 for
+ $1,000 (cost of 50 shares on 8/11/2020) more information on exchanges of business
Basis = $5,000 property and special rules for exchanges using
qualified intermediaries or involving multiple
properties.
AVERAGE BASIS To figure the basis of the 210 shares sold on 10/2/2022, use the average basis of all
410 shares owned on 10/2/2022. Transition rule for exchanges of personal
$9,100 (cost of 410 shares) or intangible property. Under the Tax Cuts
÷ 410 (number of shares) and Jobs Act, section 1031 only applies to ex-
$22.20 (average basis per share) changes of real property, other than real prop-
erty held primarily for sale. Before enactment of
the new tax law, section 1031 also applied to
$22.20 certain exchanges of personal or intangible
× 210 property. A transition rule in the new law pro-
Basis = $4,662 vides that section 1031 will still apply to a quali-
fying exchange of personal or intangible prop-
erty if the taxpayer disposed of the exchanged
Shares received as gift. If your account Like-Kind Exchanges property on or before December 31, 2017, or
includes shares that you received by gift, and
the fair market value of the shares at the time of If you trade business or investment real prop- received replacement property on or before De-
the gift was not more than the donor's basis, erty solely for other business or investment real cember 31, 2017.
special rules apply. You cannot choose to use property of a like kind, you do not pay tax on Partly nontaxable exchange. If you receive
the average basis for the account unless you any gain or deduct any loss from the trade. To money or property that is not like-kind property
state in writing that you will treat the basis of the be nontaxable, a trade must meet all six of the in addition to the like-kind property, and the pre-
gift shares as the fair market value at the time following conditions. ceding six conditions are met, you have a partly
you acquire the shares. You must provide this
written statement when you make the election 1. The property must be business or invest- nontaxable trade. You are taxed on any gain
to use the average basis method, as described ment property. You must hold both the you realize, but only up to the amount of the
under Election of average basis method for cov- property you trade and the property you money and the fair market value of the property
ered securities and Election for average basis receive for productive use in your trade or that is not like-kind you receive. You cannot de-
method for noncovered securities, earlier, or business or for investment. Neither prop- duct a loss.
when you transfer the gift shares to an account erty may be property used for personal
for which you have made the average basis purposes, such as your home or family Like-kind property and unlike property
method election, whichever is later. The state- car. transferred. If you give up unlike property in
addition to the like-kind property, you must rec-
ment must be effective for any gift shares identi- 2. The property you trade and the property ognize gain or loss on the unlike property you
cal to the gift shares to which the average basis you receive must be real property. give up. The gain or loss is the difference be-
method election applies that you acquire at any tween the adjusted basis of the unlike property
time and must remain in effect as long as the 3. There must be a trade of like-kind prop-
election remains in effect. erty. The trade of real estate for real estate and its fair market value.
is a trade of like-kind property. The trade
When there is a sale, exchange, or re- of an apartment house for a store building Like-kind property and money transferred.
demption of your shares in a fund, is a trade of like-kind property. Real prop- If conditions (1)–(6) above are met, you have a
RECORDS keep the confirmation statement you erty located in the United States and real nontaxable trade even if you pay money in addi-
receive. The statement shows the price you re- property located outside the United States tion to the like-kind property.
ceived for the shares and other information you are not like-kind property. Basis of property received. You figure your
need to report gain or loss on your return.
4. The property must not be held primarily for basis in property received in a nontaxable or
sale. The property you trade and the prop- partly nontaxable trade as explained under Ba-
erty you receive must not be property you sis Other Than Cost, earlier.
Nontaxable Trades sell to customers, such as merchandise.
How to report. You must report the trade of
This section discusses trades that generally do 5. The property to be received must be iden- like-kind property on Form 8824. If you figure a
not result in a taxable gain or a deductible loss. tified in writing within 45 days after the recognized gain or loss on Form 8824, report it
For more information on nontaxable trades, see date you transfer the property given up in on Schedule D (Form 1040) or on Form 4797,
chapter 1 of Pub. 544, Sales and Other Disposi- the trade. If you received the replacement whichever applies.
tions of Assets. For information on using Form 4797, see
chapter 4 of Pub. 544.

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Corporate Stocks • The issuer or a related person is required If you are in a bankruptcy or a similar pro-
to redeem or purchase the stock. ceeding and you transfer property to a control-
The following trades of corporate stocks gener- • The issuer or a related person has the right led corporation under a plan, other than a reor-
ally do not result in a taxable gain or a deducti- to redeem the stock, and on the issue ganization, you must recognize gain to the
ble loss. date, it is more likely than not that the right extent the stock you receive in the exchange is
will be exercised. used to pay off your debts.
Corporate reorganizations. In some instan- • The dividend rate on the stock varies with For this purpose, to be in control of a corpo-
ces, a company will give you common stock for reference to interest rates, commodity pri- ration, you or your group of transferors must
preferred stock, preferred stock for common ces, or similar indices. own, immediately after the exchange, at least
stock, or stock in one corporation for stock in For a detailed definition of nonqualified prefer- 80% of the total combined voting power of all
another corporation. If this is a result of a red stock, see section 351(g)(2) of the Internal classes of stock entitled to vote and at least
merger, recapitalization, transfer to a controlled Revenue Code. 80% of the outstanding shares of each class of
corporation, bankruptcy, corporate division, cor- nonvoting stock of the corporation.
porate acquisition, or other corporate reorgani- Convertible stocks and bonds. You will gen- If this provision applies to you, you may
zation, you do not recognize gain or loss. erally not have a recognized gain or loss if you have to attach to your return a complete state-
convert bonds into stock or preferred stock into ment of all facts pertinent to the exchange. For
Example 1. On April 11, 2022, KP1 Corpo- common stock of the same corporation accord- details, see Regulations section 1.351-3.
ration was acquired by KP2 Corporation. You ing to a conversion privilege in the terms of the Money or other property received. If, in
held 100 shares of KP1 stock with a basis of bond or the preferred stock certificate. an otherwise nontaxable trade of property for
$3,500. As a result of the acquisition, you re-
ceived 70 shares of KP2 stock in exchange for Example. In November, you bought for $1 corporate stock, you also receive money or
your KP1 stock. You do not recognize gain or a right issued by XYZ Corporation entitling you, property other than stock, you may have a taxa-
loss on the transaction. Your basis in the 70 on payment of $99, to subscribe to a bond is- ble gain. However, you are taxed only up to the
shares of the new stock is still $3,500. sued by that corporation. amount of money plus the fair market value of
On December 5, you subscribed to the the other property you receive. The rules for fig-
Example 2. On July 18, 2022, RGB Corpo- bond, which was issued on December 12. The uring taxable gain in this situation generally fol-
ration divests itself of SFH Corporation. You bond contained a clause stating that you would low those for a partly nontaxable exchange dis-
hold 75 shares of RGB stock with a basis of receive one share of XYZ Corporation common cussed earlier under Like-Kind Exchanges. If
$5,400. You receive 25 shares of SFH stock as stock on surrender of one bond and the pay- the property you give up includes depreciable
a result of the spin-off. You do not recognize ment of $50. property, the taxable gain may have to be re-
any gain or loss on the transaction. You receive Later, you presented the bond and $50 and ported as ordinary income because of deprecia-
information from RGB Corporation that your ba- received one share of XYZ Corporation com- tion. (See chapter 3 of Pub. 544.) No loss is rec-
sis in SFH stock is equal to 10.9624% of your mon stock. You did not have a recognized gain ognized.
basis in RGB stock ($5,400). Thus, your basis or loss. This is true whether the fair market Nonqualified preferred stock (described ear-
in SFH stock is $592. Your basis in RGB stock value of the stock was more or less than $150 lier under Stock for stock of the same corpora-
(after the spin-off) is $4,808 ($5,400 – $592). on the date of the conversion. tion) received is generally treated as property
The basis of your share of stock is $150 ($1 other than stock.
Note. In the case of a distribution, the di- + $99 + $50). Your holding period is split. Your Basis of stock or other property re-
vesting corporation should send you informa- holding period for the part based on your own- ceived. The basis of the stock you receive is
tion that includes details on how to allocate ba- ership of the bond ($100 basis) begins on De- generally the adjusted basis of the property you
sis between the old and new stock. Keep this cember 5. Your holding period for the part transfer. Increase this amount by any amount
information until the period of limitations expires based on your cash investment ($50 basis) be- that was treated as a dividend, plus any gain
for the year in which you dispose of the stock in gins on the day after you acquired the share of recognized on the trade. Decrease this amount
a taxable disposition. Usually, this is 3 years stock. by any cash you received and the fair market
from the date the return was due or filed, or 2 value of any other property you received.
years from the date the tax was paid, whichever Bonds for stock of another corporation. The basis of any other property you receive
is later. Generally, if you convert the bonds of one cor- is its fair market value on the date of the trade.
poration into common stock of another corpora-
Stock for stock of the same corporation. tion, according to the terms of the bond issue,
You can exchange common stock for common you must recognize gain or loss up to the differ- Exchange of Shares in One
stock or preferred stock for preferred stock in ence between the fair market value of the stock Mutual Fund For Shares in
the same corporation without having a recog- received and the adjusted basis of the bonds Another Mutual Fund
nized gain or loss. This is true for a trade be- exchanged. In some instances, however, such
tween two stockholders as well as a trade be- as trades that are part of mergers or other cor- Any exchange of shares in one fund for shares
tween a stockholder and the corporation. porate reorganizations, you will have no recog- in another fund is a taxable exchange. This is
If you receive cash for fractional shares, see nized gain or loss if certain requirements are true even if you exchange shares in one fund
Fractional shares in chapter 1. met. For more information about the tax conse- for shares in another fund within the same fam-
quences of converting securities of one corpo- ily of funds. Report any gain or loss on the
Money or other property received. If in ration into common stock of another corpora- shares you gave up as a capital gain or loss in
an otherwise nontaxable trade you receive tion, under circumstances such as those just the year in which the exchange occurs. Usually,
money or other property in addition to stock, described, consult the respective corporations you can add any service charge or fee paid in
then your gain on the trade, if any, is taxed, but and the terms of the bond issue. This informa- connection with an exchange to the cost of the
only up to the amount of the money or other tion is also available on the prospectus of the shares acquired. For an exception, see Com-
property. Any loss is not recognized. bond issue. missions and load charges, earlier.
If you received cash for fractional shares,
see Fractional shares in chapter 1. Property for stock of a controlled corpora-
Nonqualified preferred stock. Nonquali- tion. If you transfer property to a corporation Insurance Policies
fied preferred stock is generally treated as prop- solely in exchange for stock in that corporation, and Annuities
erty other than stock. Generally, this applies to and immediately after the trade you are in con-
preferred stock with one or more of the follow- trol of the corporation, you will ordinarily not rec- You will not have a recognized gain or loss if the
ing features. ognize a gain or loss. This rule applies both to insured or annuitant is the same under both
• The holder has the right to require the is- individuals and to groups who transfer property contracts and you trade:
suer or a related person to redeem or pur- to a corporation. It does not apply if the corpora- • A life insurance contract for another life in-
chase the stock. tion is an investment company. surance contract or for an endowment or
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an annuity contract or for a qualified the period you held an equity interest in the mu-
long-term care insurance contract, tual company.
• An endowment contract for another en- Related Party
dowment contract that provides for regular If you received cash in exchange for your
payments beginning at a date no later than equity interest, you must recognize a capital Transactions
the beginning date under the old contract gain. If you held an equity interest for more than
or for an annuity contract or for a qualified 1 year, your gain is long term. Special rules apply to the sale or trade of prop-
long-term insurance contract, erty between related parties.
• An annuity contract for an annuity contract
or for a qualified long-term care insurance U.S. Treasury
Gain on Sale or Trade
contract, or Notes or Bonds
of Depreciable Property
• A qualified long-term care insurance con-
tract for a qualified long-term care insur- You can trade certain issues of U.S. Treasury
ance contract. obligations for other issues, designated by the Your gain from the sale or trade of property to a
Secretary of the Treasury, with no gain or loss related party may be ordinary income, rather
You may also not have to recognize gain or loss recognized on the trade. than capital gain, if the property can be depreci-
from an exchange of a portion of an annuity ated by the party receiving it. See chapter 2 in
contract for another annuity contract. For trans- See the discussion in chapter 1 under U.S. Pub. 544 for more information.
fers completed before October 24, 2011, see Treasury Bills, Notes, and Bonds for information
Revenue Ruling 2003-76 and Revenue Proce- about income from these investments.
dure 2008-24 in Internal Revenue Bulletin Like-Kind Exchanges
2008-13. Revenue Ruling 2003-76 is available
at IRS.gov/irb/2003-33_IRB#RR-2003-76. Rev- Transfers Between Generally, if you trade business or investment
enue Procedure 2008-24 is available at real property for other business or investment
IRS.gov/irb/2008-13_IRB#RP-2008-24. For Spouses real property of a like kind, no gain or loss is
transfers completed on or after October 24, recognized. See Like-Kind Exchanges under
2011, see Revenue Ruling 2003-76, above, and Generally, no gain or loss is recognized on a Nontaxable Trades, earlier.
Revenue Procedure 2011-38 in Internal Reve- transfer of property from an individual to (or in
nue Bulletin 2011-30. Revenue Procedure trust for the benefit of) a spouse or, if incident to This rule also applies to trades of real prop-
2011-38 is available at IRS.gov/irb/ a divorce, a former spouse. This nonrecognition erty between related parties, defined next under
2011-30_IRB#RP-2011-38. For tax years be- rule does not apply in the following situations. Losses on Sales or Trades of Property. How-
ginning after 2010, amounts received as an an- • The recipient spouse or former spouse is a ever, if either you or the related party disposes
nuity for a period of 10 years or more, or for the nonresident alien. of the like-kind property within 2 years after the
lives of one or more individuals, under any por- • Property is transferred in trust and liability trade, you both must report any gain or loss not
tion of an annuity, endowment, or life insurance exceeds basis. Gain must be recognized recognized on the original trade on your return
contract, are treated as a separate contract and to the extent the amount of the liabilities for the year in which the later disposition oc-
are considered partial annuities. A portion of an assumed by the trust, plus any liabilities on curs.
annuity, endowment, or life insurance contract the property, exceed the adjusted basis of
may be annuitized, provided that the annuitiza- the property. This rule generally does not apply to:
tion period is for 10 years or more or for the • An installment obligation is transferred in • Dispositions due to the death of either rela-
lives of one or more individuals. The investment trust. For information on the disposition of ted party,
in the contract is allocated between the part of an installment obligation, see Pub. 537. • Involuntary conversions (see chapter 1 of
the contract from which amounts are received • Certain stock redemptions, which are taxa- Pub. 544), or
as an annuity and the part of the contract from ble to a spouse under the tax law, a di- • Trades and later dispositions whose main
which amounts are not received as an annuity. vorce or separation instrument, or a valid purpose is not the avoidance of federal in-
written agreement, discussed in Regula- come tax.
Exchanges of contracts not included in this tions section 1.1041-2.
list, such as an annuity contract for an endow-
ment contract, or an annuity or endowment con- Any transfer of property to a spouse or for- If a property holder's risk of loss on the prop-
tract for a life insurance contract, are taxable. mer spouse on which gain or loss is not recog- erty is substantially diminished during any pe-
nized is treated by the recipient as a gift and is riod, that period is not counted in determining
not considered a sale or exchange. The recipi- whether the property was disposed of within 2
Demutualization of Life ent's basis in the property will be the same as years. The property holder's risk of loss is sub-
Insurance Companies the adjusted basis of the giver immediately be- stantially diminished by:
fore the transfer. This carryover basis rule ap- • The holding of a put on the property,
A life insurance company may change from a plies whether the adjusted basis of the transfer- • The holding by another person of a right to
mutual company to a stock company. This is red property is less than, equal to, or greater acquire the property, or
commonly called demutualization. If you were a than either its fair market value at the time of • A short sale or any other transaction.
policyholder or annuitant of the mutual com- transfer or any consideration paid by the recipi-
pany, you may have received either stock in the ent. This rule applies for purposes of determin- Losses on Sales or
stock company or cash in exchange for your ing loss as well as gain. Any gain recognized on Trades of Property
equity interest in the mutual company. a transfer in trust increases the basis.
If the demutualization transaction qualifies A transfer of property is incident to a divorce You cannot deduct a loss on the sale or trade of
as a tax-free reorganization under section if the transfer occurs within 1 year after the date property, other than a distribution in complete
368(a)(1) of the Internal Revenue Code, no gain on which the marriage ends, or if the transfer is liquidation of a corporation, if the transaction is
or loss is recognized on the exchange. Your related to the ending of the marriage. For more directly or indirectly between you and the fol-
holding period for the new stock includes the information, see Property Settlements in Pub. lowing related parties.
period you held an equity interest in the mutual 504, Divorced or Separated Individuals. • Members of your family. This includes only
company as a policyholder or annuitant. your brothers and sisters, half-brothers
and half-sisters, spouse, ancestors (pa-
If the demutualization transaction does not rents, grandparents, etc.), and lineal de-
qualify as a tax-free reorganization under sec- scendants (children, grandchildren, etc.).
tion 368(a)(1) of the Internal Revenue Code, • A partnership in which you directly or indi-
you must recognize a capital gain or loss. Your rectly own more than 50% of the capital in-
holding period for the stock does not include terest or the profits interest.
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• A corporation in which you directly or indi- trust is considered owned proportionately by or Wash sale
rectly own more than 50% in value of the for its shareholders, partners, or beneficiaries.
outstanding stock (see Constructive own-
ership of stock, later). Rule 2. An individual is considered to own
• A tax-exempt charitable or educational or- the stock directly or indirectly owned by or for This section discusses the tax treatment of
ganization directly or indirectly controlled, his or her family. Family includes only brothers gains and losses from different types of invest-
in any manner or by any method, by you or and sisters, half-brothers and half-sisters, ment transactions.
by a member of your family, whether or not spouse, ancestors, and lineal descendants.
Character of gain or loss. You need to clas-
this control is legally enforceable. Rule 3. An individual owning, other than by sify your gains and losses as either ordinary or
In addition, a loss on the sale or trade of prop- applying rule 2, any stock in a corporation is capital gains or losses. You then need to clas-
erty is not deductible if the transaction is directly considered to own the stock directly or indi- sify your capital gains and losses as either short
or indirectly between the following related par- rectly owned by or for his or her partner. term or long term. If you have long-term gains
ties. Rule 4. When applying rule 1, 2, or 3, stock and losses, you must identify your 28% rate
• A grantor and fiduciary, or the fiduciary and constructively owned by a person under rule 1 gains and losses. If you have a net capital gain,
beneficiary, of any trust. is treated as actually owned by that person. But you must also identify any unrecaptured section
• Fiduciaries of two different trusts, or the fi- stock constructively owned by an individual un- 1250 gain.
duciary and beneficiary of two different der rule 2 or rule 3 is not again treated as The correct classification and identification
trusts, if the same person is the grantor of owned by that individual for applying either rule helps you figure the limit on capital losses and
both trusts. 2 or rule 3 to make another person the con- the correct tax on capital gains. For information
• A trust fiduciary and a corporation of which structive owner of the stock. about determining whether your capital gain or
more than 50% in value of the outstanding loss is short term or long term, see Holding Pe-
stock is directly or indirectly owned by or Property received from a related party. If riod, later. For information about 28% rate gain
for the trust, or by or for the grantor of the you sell or trade at a gain property you acquired or loss and unrecaptured section 1250 gain,
trust. from a related party, you recognize the gain see Capital Gain Tax Rates, later.
• A corporation and a partnership if the only to the extent that it is more than the loss
same persons own more than 50% in value previously disallowed to the related party. This Capital or Ordinary
of the outstanding stock of the corporation rule applies only if you are the original trans-
and more than 50% of the capital interest feree and you acquired the property by pur- Gain or Loss
or the profits interest in the partnership. chase or exchange. This rule does not apply if
• Two S corporations if the same persons the related party's loss was disallowed because If you have a taxable gain or a deductible loss
own more than 50% in value of the out- of the wash sale rules, described later under from a transaction, it may be either a capital
standing stock of each corporation. Wash Sales. gain or loss or an ordinary gain or loss, depend-
• Two corporations, one of which is an S ing on the circumstances. Generally, a sale or
corporation, if the same persons own more If you sell or trade at a loss property you ac- trade of a capital asset (defined next) results in
than 50% in value of the outstanding stock quired from a related party, you cannot recog- a capital gain or loss. A sale or trade of a non-
of each corporation. nize the loss that was not allowed to the related capital asset generally results in ordinary gain
• An executor and a beneficiary of an estate party. or loss. Depending on the circumstances, a
(except in the case of a sale or trade to sat- Example 1. Your brother sells you stock gain or loss on a sale or trade of property used
isfy a monetary bequest). for $7,600. His cost basis is $10,000. Your in a trade or business may be treated as either
• Two corporations that are members of the brother cannot deduct the loss of $2,400. Later, capital or ordinary, as explained in Pub. 544. In
same controlled group (under certain con- you sell the same stock to an unrelated party for some situations, part of your gain or loss may
ditions, however, these losses are not dis- $10,500, realizing a gain of $2,900. Your report- be a capital gain or loss, and part may be an or-
allowed but must be deferred). able gain is $500 (the $2,900 gain minus the dinary gain or loss.
• Two partnerships if the same persons own, $2,400 loss not allowed to your brother).
directly or indirectly, more than 50% of the Capital Assets and
capital interests or the profit interests in Example 2. If, in Example 1, you sold the Noncapital Assets
both partnerships. stock for $6,900 instead of $10,500, your rec-
ognized loss is only $700 (your $7,600 basis For the most part, everything you own and use
Multiple property sales or trades. If you sell minus $6,900). You cannot deduct the loss that for personal purposes, pleasure, or investment
or trade to a related party a number of blocks of was not allowed to your brother. is a capital asset. Some examples are:
stock or pieces of property in a lump sum, you Stocks or bonds held in your personal ac-
must figure the gain or loss separately for each •
block of stock or piece of property. The gain on count;
each item may be taxable. However, you can- Capital Gains • A house owned and used by you and your
family;
not deduct the loss on any item. Also, you can- and Losses • Household furnishings;
not reduce gains from the sales of any of these A car used for pleasure or commuting;
items by losses on the sales of any of the other •
• Coin or stamp collections;
items. Terms you may need to know • Gems and jewelry; and
(see Glossary):
Indirect transactions. You cannot deduct • Gold, silver, or any other metal.
your loss on the sale of stock through your Call
broker if, under a prearranged plan, a related Commodity future Any property you own is a capital asset, ex-
party buys the same stock you had owned. This Conversion transaction cept the following noncapital assets.
does not apply to a trade between related par- Forward contract 1. Property held mainly for sale to customers
ties through an exchange that is purely coinci- Limited partner or property that will physically become a
dental and is not prearranged. Listed option part of the merchandise for sale to cus-
Nonequity option tomers. For an exception, see Capital as-
Constructive ownership of stock. In deter- Options dealer set treatment for self-created musical
mining whether a person directly or indirectly Put works, later.
owns any of the outstanding stock of a corpora- Regulated futures contract
tion, the following rules apply. Section 1256 contract 2. Depreciable property used in your trade or
Straddle business, even if fully depreciated.
Rule 1. Stock directly or indirectly owned
by or for a corporation, partnership, estate, or 3. Real property used in your trade or busi-
ness.
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4. A patent; invention, model, or design Personal use property. Property held for tions with a fixed maturity date of not more than
(whether or not patented); a secret for- personal use only, rather than for investment, is 1 year from the date of issue.
mula or process; a copyright; a literary, a capital asset, and you must report a gain from However, to the extent you previously inclu-
musical, or artistic composition; a letter or its sale as a capital gain. However, you cannot ded the discount in income, you do not have to
memorandum; or similar property, held by: deduct a loss from selling personal use prop- include it in income again. See Discount on
a. A person whose personal efforts cre- erty. Short-Term Obligations in chapter 1 for more in-
formation.
ated such property; Capital asset treatment for self-created mu-
b. In the case of a letter, memorandum, sical works. You can elect to treat musical Tax-exempt state and local government
or similar property, a person for whom compositions and copyrights in musical works bonds. If these bonds were originally issued at
such property was prepared or pro- as capital assets when you sell or exchange a discount before September 4, 1982, or you
duced; or them if: acquired them before March 2, 1984, treat your
c. Acquired under circumstances (for • Your personal efforts created the property, part of OID as tax-exempt interest. To figure
or your gain or loss on the sale or trade of these
example, by gift) entitling you to the • You acquired the property under circum- bonds, reduce the amount realized by your part
basis of the person who created the stances (for example, by gift) entitling you of OID.
property or for whom it was prepared to the basis of the person who created the If the bonds were issued after September 3,
or produced. property or for whom it was prepared or 1982, and acquired after March 1, 1984, in-
For an exception to this rule, see Capi- produced. crease the adjusted basis by your part of OID to
tal asset treatment for self-created musical You must make a separate election for each figure gain or loss. For more information on the
works, later. musical composition (or copyright in a musical basis of these bonds, see Discounted tax-ex-
5. Accounts or notes receivable acquired in work) sold or exchanged during the tax year. empt obligations, earlier in this chapter.
the ordinary course of a trade or business Make the election by the due date (including ex- Any gain from market discount is usually
for services rendered or from the sale of tensions) of the income tax return for the tax taxable on disposition or redemption of tax-ex-
property described in (1). year of the sale or exchange. Make the election empt bonds. If you bought the bonds before
on Form 8949 and Schedule D (Form 1040) by May 1, 1993, the gain from market discount is
6. U.S. Government publications, including treating the sale or exchange as the sale or ex- capital gain. If you bought the bonds after April
the Congressional Record, that you re- change of a capital asset, according to Form 30, 1993, the gain from market discount is ordi-
ceived: 8949 and Schedule D (Form 1040) and their nary income.
a. From the U.S. Government (or any separate instructions. You figure market discount by subtracting
governmental agency) for an amount You can revoke the election if you have IRS the price you paid for the bond from the sum of
other than the normal sales price, or approval. To get IRS approval, you must submit the original issue price of the bond and the
a request for a letter ruling under the appropri- amount of accumulated OID from the date of is-
b. Under circumstances (such as by gift) ate IRS revenue procedure. See, for example, sue that represented interest to any earlier hold-
that entitle you to the basis of some- Revenue Procedure 2020-1, available at ers. For more information, see Market Discount
one who received the publication for IRS.gov/irb/2020-01_IRB#REV-PROC-2020-1. Bonds in chapter 1.
an amount other than the normal Alternatively, you are granted an automatic A loss on the sale or other disposition of a
sales price. 6-month extension from the due date of your in- tax-exempt state or local government bond is
7. Certain commodities derivative financial come tax return (excluding extensions) to re- deductible as a capital loss.
instruments held by commodities deriva- voke the election, provided you timely file your
tives dealers. For more information, see income tax return, and within this 6-month ex- Redeemed before maturity. If a state or
section 1221 of the Internal Revenue tension period, you file Form 1040-X that treats local bond issued before June 9, 1980, is re-
Code. the sale or exchange as the sale or exchange of deemed before it matures, the OID is not taxa-
property that is not a capital asset. ble to you.
8. Hedging transactions, but only if the trans- If a state or local bond issued after June 8,
action is clearly identified as a hedging 1980, is redeemed before it matures, the part of
transaction before the close of the day on Discounted Debt Instruments OID earned while you hold the bond is not taxa-
which it was acquired, originated, or en- ble to you. However, you must report the un-
tered into. For more information, see the Treat your gain or loss on the sale, redemption, earned part of OID as a capital gain.
definition of hedging transaction, earlier, or retirement of a bond or other debt instrument
and the discussion of hedging transac- originally issued at a discount or bought at a Example. On July 1, 2011, the date of is-
tions under Commodity Futures, later. discount as capital gain or loss, except as ex- sue, you bought a 20-year, 6% municipal bond
plained in the following discussions. for $800. The face amount of the bond was
9. Supplies of a type you regularly use or $1,000. The $200 discount was OID. At the time
consume in the ordinary course of your Short-term government obligations. Treat the bond was issued, the issuer had no inten-
trade or business. gains on short-term federal, state, or local gov- tion of redeeming it before it matured. The bond
ernment obligations (other than tax-exempt ob- was callable at its face amount beginning 10
Investment property. Investment property is ligations) as ordinary income up to your ratable years after the issue date.
a capital asset. Any gain or loss from its sale or share of the acquisition discount. This treatment The issuer redeemed the bond at the end of
trade is generally a capital gain or loss. applies to obligations with a fixed maturity date 11 years (July 1, 2022) for its face amount of
Gold, silver, stamps, coins, gems, etc. of not more than 1 year from the date of issue. $1,000 plus accrued annual interest of $60. The
These are capital assets except when they are Acquisition discount is the stated redemption OID earned during the time you held the bond,
held for sale by a dealer. Any gain or loss from price at maturity minus your basis in the obliga- $73, is not taxable. The $60 accrued annual in-
their sale or trade is generally a capital gain or tion. terest is also not taxable. However, you must
loss. However, do not treat these gains as in- report the unearned part of OID, $127 ($200 −
come to the extent you previously included the $73), as a capital gain.
Stocks, stock rights, and bonds. All of discount in income. See Discount on
these, including stock received as a dividend, Short-Term Obligations in chapter 1 for more in- Long-term debt instruments issued after
are capital assets except when they are held for formation. 1954 and before May 28, 1969 (or before
sale by a securities dealer. However, see Los- July 2, 1982, if a government instrument). If
ses on Section 1244 (Small Business) Stock Short-term nongovernment obligations. you sell, trade, or redeem for a gain one of
and Losses on Small Business Investment Treat gains on short-term nongovernment obli- these debt instruments, the part of your gain
Company Stock, later. gations as ordinary income up to your ratable that is not more than your ratable share of OID
share of OID. This treatment applies to obliga- at the time of sale or redemption is ordinary

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income. The rest of the gain is capital gain. If, on its disposition. If you did not choose to in- Obligations required to be in registered
however, there was an intention to call the debt clude the discount in income as it accrued, you form. Any obligation must be in registered
instrument before maturity, all of your gain that must report gain as ordinary interest income up form unless:
is not more than the entire OID is treated as or- to the instrument's accrued market discount. • It is issued by a natural person,
dinary income at the time of the sale. This treat- See Market Discount Bonds in chapter 1. The • It is not of a type offered to the public,
ment of taxable gain also applies to corporate rest of the gain is capital gain. • It has a maturity at the date of issue of not
instruments issued after May 27, 1969, under a However, a different rule applies if you dis- more than 1 year, or
written commitment that was binding on May pose of a market discount bond that was: • It was issued before 1983.
27, 1969, and at all times thereafter. • Issued before July 19, 1984; and
• Purchased by you before May 1, 1993. Deposit in Insolvent or
Long-term debt instruments issued after Bankrupt Financial Institution
May 27, 1969 (or after July 1, 1982, if a gov- In that case, any gain is treated as interest in-
ernment instrument). If you hold one of these come up to the amount of your deferred interest
debt instruments, you must include a part of deduction for the year you dispose of the bond. If you lose money you have on deposit in a
OID in your gross income each year you own The rest of the gain is capital gain. (The limit on bank, credit union, or other financial institution
the instrument. Your basis in that debt instru- the interest deduction for market discount that becomes insolvent or bankrupt, you may
ment is increased by the amount of OID that bonds is discussed in chapter 3 under When To be able to deduct your loss in one of two ways.
you have included in your gross income. See Deduct Investment Interest.) • Casualty loss.
Original Issue Discount (OID) in chapter 1. Report the sale or trade of a market discount • Nonbusiness bad debt (short-term capital
If you sell or trade the debt instrument be- bond in Form 8949, Part I or Part II, whichever loss).
fore maturity, your gain is a capital gain. How- is appropriate. Use the table How To Complete You can no longer claim any miscella-
ever, if at the time the instrument was originally Form 8949, Columns (f) and (g) in the Instruc- ! neous itemized deductions, including
issued there was an intention to call it before its tions for Form 8949 to help you figure the CAUTION the deduction for an ordinary loss on
maturity, your gain is generally ordinary income amounts to report for a sale or trade of a market deposits in insolvent or bankrupt financial insti-
to the extent of the entire OID reduced by any discount bond. Also report the amount of ac- tutions.
amounts of OID previously includible in your in- crued market discount in column (g) as interest
come. In this case, the rest of the gain is capital income on Schedule B (Form 1040), line 1, and
gain. identify it as “Accrued Market Discount.” Casualty loss. If you can reasonably estimate
your loss, you can treat the estimated loss as a
An intention to call a debt instrument before Report your sales or trades of a market casualty loss in the current year.
maturity means there is a written or oral agree- TIP discount bond on Form 8949 with the If you claim a casualty loss, attach Form
ment or understanding not provided for in the correct box checked for these transac- 4684 to your return. Each loss must be reduced
debt instrument between the issuer and original tions. See Form 8949 and the Instructions for by $100. The amount of your casualty loss may
holder that the issuer will redeem the debt in- Form 8949. be limited. See Pub. 547.
strument before maturity. In the case of debt in- You cannot choose this method if:
struments that are part of an issue, the agree- Retirement of debt instrument. Any amount • You own at least 1% of the financial institu-
ment or understanding must be between the you receive on the retirement of a debt instru- tion,
issuer and the original holders of a substantial ment is treated in the same way as if you had • You are an officer of the institution, or
amount of the debt instruments in the issue. sold or traded that instrument. • You are related to such an owner or officer.
You are related if you and the owner or offi-
Example 1. On February 9, 2021, you Notes of individuals. If you hold an obligation cer are “related parties,” as defined earlier
bought at original issue for $7,600, Jones Cor- of an individual issued with OID after March 1, under Related Party Transactions, or if you
poration's 10-year, 5% bond which has a stated 1984, you must generally include the OID in are the aunt, uncle, nephew, or niece of
redemption price at maturity of $10,000. On your income currently, and your gain or loss on the owner or officer.
February 13, 2022, you sold the bond for its sale or retirement is generally capital gain or If the actual loss that is finally determined is
$9,040. Assume you have included $334 of OID loss. An exception to this treatment applies if more than the amount you deducted as an esti-
in your gross income (including the amount ac- the obligation is a loan between individuals and mated loss, you can claim the excess loss as a
crued for 2022) and increased your basis in the all the following requirements are met. nonbusiness bad debt. If the actual loss is less
bond by that amount. Your basis is now $7,934. • The lender is not in the business of lending than the amount deducted as an estimated
If at the time of the original issue there was no money. loss, you must include in income (in the final de-
intention to call the bond before maturity, your • The amount of the loan, plus the amount of termination year) the excess loss claimed. See
gain of $1,106 ($9,040 amount realized minus any outstanding prior loans, is $10,000 or Recoveries in Pub. 525.
$7,934 adjusted basis) is capital gain. less.
Example 2. If, in Example 1, at the time of • Avoiding federal tax is not one of the prin- Nonbusiness bad debt. If you do not choose
cipal purposes of the loan.
original issue there was an intention to call the to deduct your estimated loss as a casualty loss
bond before maturity, your entire gain is ordi- If the exception applies, or the obligation or an ordinary loss, you wait until the year the
nary income. You figure this as follows: was issued before March 2, 1984, you do not amount of the actual loss is determined and de-
include the OID in your income currently. When duct it as a nonbusiness bad debt in that year.
1. Entire OID ($10,000 stated redemption you sell or redeem the obligation, the part of Report it as a short-term capital loss on Form
price at maturity minus $7,600 issue your gain that is not more than your accrued 8949, Part I, line 1, as explained under How to
price) . . . . . . . . . . . . . . . . . . . . . . . . $2,400 share of OID at that time is ordinary income. report bad debts, later.
2. Minus: Amount previously included The rest of the gain, if any, is capital gain. Any
in income . . . . . . . . . . . . . . . . . . . . . 334 loss on the sale or redemption is capital loss. Sale of Annuity
3. Maximum amount of ordinary
income . . . . . . . . . . . . . . . . . . . . . . . $2,066
Bearer Obligations The part of any gain on the sale of an annuity
Because the amount in (3) is more than your contract before its maturity date that is based
gain of $1,106, your entire gain is ordinary in- You cannot deduct any loss on an obligation re- on interest accumulated on the contract is ordi-
come. quired to be in registered form that is instead nary income.
held in bearer form. In addition, any gain on the
Market discount bonds. If the debt instru- sale or other disposition of the obligation is ordi- Conversion Transactions
ment has market discount and you chose to in- nary income. However, if the issuer was subject
clude the discount in income as it accrued, in- to a tax when the obligation was issued, then Generally, all or part of a gain on a conversion
crease your basis in the debt instrument by the you can deduct any loss, and any gain may transaction is treated as ordinary income. This
accrued discount to figure capital gain or loss qualify for capital gain treatment. applies to gain on the disposition or other
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termination of any position you held as part of a Net investment. To determine your net in- the ordinary course of your business primarily to
conversion transaction you entered into after vestment in a conversion transaction, include manage the risk of interest rate or price
April 30, 1993. the fair market value of any position at the time changes or currency fluctuations on borrow-
it becomes part of the transaction. This means ings, ordinary property, or ordinary obligations.
A conversion transaction is any transaction your net investment will generally be the total (Generally, ordinary property or obligations are
that meets both of these tests. amount you invested, less any amount you re- those that cannot produce capital gain or loss
1. Substantially all of your expected return ceived for entering into the position (for exam- under any circumstances.) For example, the off-
from the transaction is due to the time ple, a premium you received for writing a call). set or exercise of a futures contract that pro-
tects against price changes in your business in-
value of your net investment. In other Position with built-in loss. A special rule ap- ventory results in an ordinary gain or loss.
words, the return on your investment is, in plies when a position with a built-in loss be- For more information about hedging trans-
substance, like interest on a loan. comes part of a conversion transaction. A actions, see Regulations section 1.1221-2.
2. The transaction is one of the following. built-in loss is any loss you would have realized Also, see Hedging Transactions under Section
a. A straddle as defined under Strad- if you had disposed of or otherwise terminated 1256 Contracts Marked to Market, earlier.
dles, later, but including any set of off- the position at its fair market value at the time it
setting positions on stock established became part of the conversion transaction. If you have multiple transactions in the
before October 22, 2004. When applying the conversion transaction commodity futures market during the
rules to a position with a built-in loss, use the RECORDS year, the burden of proof is on you to
b. Any transaction in which you acquire position's fair market value at the time it be- show which transactions are hedging transac-
property (whether or not actively tra- came part of the transaction. But, when you dis- tions. Clearly identify any hedging transactions
ded) at substantially the same time pose of or otherwise terminate the position in a on your books and records before the end of
that you contract to sell the same transaction in which you recognize gain or loss, the day you entered into the transaction. It may
property, or substantially identical you must recognize the built-in loss. The con- be helpful to have separate brokerage accounts
property, at a price set in the contract. version transaction rules do not affect whether for your hedging and nonhedging transactions.
c. Any other transaction that is marketed the built-in loss is treated as an ordinary or capi- For specific requirements concerning identifica-
or sold as producing capital gains tal loss. tion of hedging transactions and the underlying
item, items, or aggregate risk being hedged,
from a transaction described in (1). see Regulations section 1.1221-2(f).
Netting rule for certain conversion transac-
Amount treated as ordinary income. The tions. Before determining the amount of gain
amount of gain treated as ordinary income is treated as ordinary income, you can net certain Gains From Certain Constructive
the smaller of: gains and losses from positions of the same Ownership Transactions
• The gain recognized on the disposition or conversion transaction. To do this, you have to
other termination of the position, or dispose of all the positions within a 14-day pe- If you have a gain from a constructive owner-
• The “applicable imputed income amount.” riod that is within a single tax year. You cannot ship transaction entered into after July 11,
net the built-in loss against the gain. 1999, involving a financial asset (discussed
Applicable imputed income amount. Figure You can net gains and losses only if later) and the gain would normally be treated as
this amount as follows. you identify the conversion transaction long-term capital gain, all or part of the gain
1. Figure the amount of interest that would RECORDS as an identified netting transaction on may be treated instead as ordinary income. In
have accrued on your net investment in your books and records. Each position of the addition, if any gain is treated as ordinary in-
the conversion transaction for the period conversion transaction must be identified be- come, your tax is increased by an interest
ending on the earlier of: fore the end of the day on which the position charge.
becomes part of the conversion transaction. For
a. The date you dispose of the position, conversion transactions entered into before Constructive ownership transactions. The
or February 20, 1996, this requirement is met if the following are constructive ownership transac-
b. The date the transaction stops being identification was made by that date. tions.
a conversion transaction. • A notional principal contract in which you
To figure this amount, use an interest Options dealers and commodities traders. have the right to receive all or substantially
rate equal to 120% of the “applicable rate,” These rules do not apply to options dealers and all of the investment yield on a financial as-
defined later. commodities traders. set and you are obligated to reimburse all
or substantially all of any decline in value
2. Subtract from (1) the amount treated as How to report. Use Form 6781 to report con- of the financial asset.
ordinary income from any earlier disposi- version transactions. See the instructions for • A forward or futures contract to acquire a
tion or other termination of a position held lines 11 and 13 of Form 6781. financial asset.
as part of the same conversion transac- • The holding of a call option and writing of a
put option on a financial asset at substan-
tion. Commodity Futures tially the same strike price and maturity
Applicable rate. If the term of the conver- date.
sion transaction is indefinite, the applicable rate A commodity futures contract is a standardized,
is the federal short-term rate in effect under exchange-traded contract for the sale or pur- This provision does not apply if all the posi-
section 6621(b) during the period of the conver- chase of a fixed amount of a commodity at a fu- tions are marked to market. Marked-to-market
sion transaction, compounded daily. ture date for a fixed price. rules for section 1256 contracts are discussed
in detail under Section 1256 Contracts Marked
In all other cases, the applicable rate is the to Market, earlier.
“applicable federal rate” determined as if the If the contract is a regulated futures contract,
conversion transaction were a debt instrument the rules described earlier under Section 1256 Financial asset. A financial asset, for this
and compounded semiannually. Contracts Marked to Market apply to it. purpose, is any equity interest in a pass-through
The rates discussed above are published by entity. Pass-through entities include partner-
the IRS in the Internal Revenue Bulletin. The In- The termination of a commodity futures con- ships, S corporations, trusts, regulated invest-
ternal Revenue Bulletin is available through tract generally results in capital gain or loss un- ment companies, and REITs.
IRS.gov. You can also find applicable federal less the contract is a hedging transaction.
rates in the Index of Applicable Federal Rates Amount of ordinary income. Long-term cap-
(AFR) Rulings at https://apps.IRS.gov/app/ Hedging transaction. A futures contract that ital gain is treated as ordinary income to the ex-
picklist/list/federalRates.html. is a hedging transaction generally produces or- tent it is more than the net underlying long-term
See chapter 5, How To Get Tax Help, for in- dinary gain or loss. A futures contract is a hedg- capital gain. The net underlying long-term capi-
formation on contacting the IRS. ing transaction if you enter into the contract in tal gain is the net capital gain you would have
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realized if you acquired the asset for its fair mar- the qualifications of section 1244 stock, see Do not reduce the basis of the stock for any
ket value on the date the constructive owner- section 1244 of the Internal Revenue Code and other purpose.
ship transaction was opened and sold the asset its regulations.
for its fair market value on the date the transac- Example. You transfer property with an
tion was closed. If you do not establish the The stock must be issued to the person tak- adjusted basis of $1,000 and a fair market value
amount of net underlying long-term capital gain ing the loss. You must be the original owner of $250 to a corporation for its section 1244
by clear and convincing evidence, it is treated of the stock to be allowed ordinary loss treat- stock. The basis of your stock is $1,000, but to
as zero. ment. To claim a deductible loss on stock is- figure the ordinary loss under these rules, the
sued to your partnership, you must have been a basis of your stock is $250 ($1,000 − $750). If
More information. For more information partner when the stock was issued and have re- you later sell the section 1244 stock for $200,
about constructive ownership transactions, see mained so until the time of the loss. You add your $800 loss is an ordinary loss of $50 and a
section 1260 of the Internal Revenue Code. your distributive share of the partnership loss to capital loss of $750.
any individual section 1244 stock loss you may
Losses on Section 1244 have before applying the ordinary loss limit. Contributions to capital. If the basis of your
section 1244 stock has increased, through con-
(Small Business) Stock Stock distributed by partnership. If your tributions to capital or otherwise, you must treat
partnership distributes the stock to you, you this increase as applying to stock that is not
Subject to the limitations discussed under Ordi- cannot treat any later loss on that stock as an section 1244 stock when you figure an ordinary
nary loss limit, later, you can deduct as an ordi- ordinary loss. loss on its sale.
nary loss, rather than as a capital loss, a loss on
the sale, trade, or worthlessness of section Stock sold through underwriter. Stock
1244 stock. Report the loss on Form 4797, sold through an underwriter is not section 1244 Example. You buy 100 shares of section
line 10. Any loss in excess of the amounts de- stock unless the underwriter only acted as a 1244 stock for $10,000. You are the original
scribed in Ordinary loss limit, later, should be selling agent for the corporation. owner. You later make a $2,000 contribution to
reported on Form 8949. capital that increases the total basis of the 100
Stock dividends and reorganizations. shares to $12,000. You then sell the 100 shares
Any gain on section 1244 stock is a capital Stock you receive as a stock dividend qualifies for $9,000 and have a loss of $3,000. You can
gain if the stock is a capital asset in your hands. as section 1244 stock if: deduct only $2,500 ($3,000 × $10,000/$12,000)
Do not offset gains against losses that are • You receive it from a small business corpo- as an ordinary loss under these rules. The re-
within the ordinary loss limit, explained later in ration in which you own stock, and maining $500 is a capital loss.
this discussion, even if the transactions are in • The stock you own meets the requirements Recordkeeping. You must keep re-
stock of the same company. Report the gain on when the stock dividend is distributed. cords sufficient to show your stock
Form 8949. If you trade your section 1244 stock for new RECORDS qualifies as section 1244 stock. Your
stock in the same corporation in a reorganiza- records must also distinguish your section 1244
If you must figure a net operating loss, any tion that qualifies as a recapitalization or that is stock from any other stock you own in the cor-
ordinary loss from the sale of section 1244 only a change in identity, form, or place of or- poration.
stock is a business loss. ganization, the new stock is section 1244 stock
if the stock you trade meets the requirements
Ordinary loss limit. The amount you can de- when the trade occurs. Losses on Small Business
duct as an ordinary loss is limited to $50,000 If you hold section 1244 stock and other Investment Company Stock
each year. On a joint return, the limit is stock in the same corporation, not all of the
$100,000, even if only one spouse has this type stock you receive as a stock dividend or in a re- A small business investment company (SBIC) is
of loss. If your loss is $110,000 and your organization will qualify as section 1244 stock. one that is licensed and operated under the
spouse has no loss, you can deduct $100,000 Only that part based on the section 1244 stock Small Business Investment Act of 1958.
as an ordinary loss on a joint return. The re- you hold will qualify.
maining $10,000 is a capital loss. If you are an investor in SBIC stock, you can
Example. Your basis for 100 shares of X deduct as an ordinary loss, rather than a capital
Section 1244 (small business) stock. This common stock is $1,000. These shares qualify loss, a loss from the sale, trade, or worthless-
is stock issued for money or property (other as section 1244 stock. If, as a nontaxable stock ness of that stock. A gain from the sale or trade
than stock and securities) in a domestic small dividend, you receive 50 more shares of com- of that stock is a capital gain. Do not offset your
business corporation. During its 5 most recent mon stock, the basis of which is determined gains and losses, even if they are on stock of
tax years before the loss, this corporation must from the 100 shares you own, the 50 shares are the same company.
have derived more than 50% of its gross re- also section 1244 stock.
ceipts from other than royalties, rents, divi- If you also own stock in the corporation that How to report. You report this type of ordinary
dends, interest, annuities, and gains from sales is not section 1244 stock when you receive the loss on Form 4797, Part II, line 10. In addition to
and trades of stocks or securities. If the corpo- stock dividend, you must divide the shares you the information required by the form, you must
ration was in existence for at least 1 year, but receive as a dividend between the section 1244 include the name and address of the company
less than 5 years, the 50% test applies to the stock and the other stock. Only the shares from that issued the stock. If applicable, also include
tax years ending before the loss. If the corpora- the former can be section 1244 stock. the reason the stock is worthless and the ap-
tion was in existence less than 1 year, the 50% proximate date it became worthless. Report a
test applies to the entire period the corporation Contributed property. To determine ordinary capital gain from the sale of SBIC stock on
was in existence before the day of the loss. loss on section 1244 stock you receive in a Form 8949.
However, if the corporation's deductions (other trade for property, you have to reduce the basis
than the net operating loss and dividends re- of the stock if: Short sale. If you close a short sale of SBIC
ceived deductions) were more than its gross in- • The adjusted basis (for figuring loss) of the stock with other SBIC stock you bought only for
come during this period, this 50% test does not property, immediately before the trade, that purpose, any loss you have on the sale is a
apply. was more than its fair market value; and capital loss. See Short Sales, later in this chap-
The corporation must have been largely an • The basis of the stock is determined by the ter, for more information.
operating company for ordinary loss treatment basis of the property.
to apply.
If the stock was issued before July 19, 1984, Reduce the basis of the stock by the difference Holding Period
the stock must be common stock. If issued after between the adjusted basis of the property and
July 18, 1984, the stock may be either common its fair market value at the time of the trade. You If you sold or traded investment property, you
or preferred. For more information about the re- reduce the basis only to figure the ordinary loss. must determine your holding period for the
quirements of a small business corporation or property. Your holding period determines
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whether any capital gain or loss was a old property, your holding period for the new as 60% long term and 40% short term, regard-
short-term or a long-term capital gain or loss. property begins on the day following the date less of how long the contracts were held. See
you acquired the old property. Section 1256 Contracts Marked to Market, ear-
Long-term or short-term. If you hold invest- lier.
ment property more than 1 year, any capital Property received as a gift. If you receive a
gain or loss is a long-term capital gain or loss. If gift of property and your basis is determined by Option exercised. Your holding period for
you hold the property 1 year or less, any capital the donor's adjusted basis, your holding period property you acquire when you exercise an op-
gain or loss is a short-term capital gain or loss. is considered to have started on the same day tion begins the day after you exercise the op-
To determine how long you held the invest- the donor's holding period started. tion.
ment property, begin counting on the date after If your basis is determined by the fair market
the day you acquired the property. The day you value of the property, your holding period starts Wash sales. Your holding period for substan-
disposed of the property is part of your holding on the day after the date of the gift. tially identical stock or securities you acquire in
period. a wash sale includes the period you held the old
Inherited property. If you inherited property stock or securities.
Example. If you bought investment prop- from someone who died before or after 2010, or
erty on January 31, 2021, and sold it on Janu- from someone who died in 2010 and the execu- Qualified small business stock. Your hold-
ary 29, 2022, your holding period is not more tor of the decedent’s estate did not elect to file ing period for stock you acquired in a tax-free
than 1 year and you have a short-term capital Form 8939, your capital gain or loss on any rollover of gain from a sale of qualified small
gain or loss. If you sold it on February 6, 2022, later disposition of that property is treated as business stock, described later under Gains on
your holding period is more than 1 year and you long-term gain or loss, regardless of how long Qualified Small Business Stock, includes the
have a long-term capital gain or loss. you held the property. If you acquired the prop- period you held the old stock.
erty from someone who died in 2010 and the
Securities traded on an established market. executor made the election to file Form 8939, Commodity futures. Your holding period for a
For securities traded on an established securi- see Pub. 4895 to determine your holding pe- commodity received in satisfaction of a com-
ties market, your holding period begins the day riod. Pub. 4895 is available at IRS.gov/pub/irs- modity futures contract, other than a regulated
after the trade date you bought the securities, prior/P4895-2011.pdf. futures contract subject to Internal Revenue
and ends on the trade date you sold them. Code section 1256, includes your holding pe-
Real property bought. To figure how long riod for the futures contract if you held the con-
Do not confuse the trade date with the you have held real property bought under an tract as a capital asset.
! settlement date, which is the date by unconditional contract, begin counting on the
CAUTION which the stock must be delivered and Securities futures contract. Your holding
day after you received title to it or on the day af-
payment must be made. ter you took possession of it and assumed the period for a security received in satisfaction of a
burdens and privileges of ownership, whichever securities futures contract, other than one that
Example. You are a cash method, calen- happened first. However, taking delivery or pos- is a section 1256 contract, includes your hold-
dar year taxpayer. You sold stock on December session of real property under an option agree- ing period for the futures contract if you held the
31, 2022. According to the rules of the stock ex- ment is not enough to start the holding period. contract as a capital asset.
change, the sale was closed by delivery of the The holding period cannot start until there is an Your holding period for a security received
stock and payment of the sale price in January actual contract of sale. The holding period of in satisfaction of a securities futures contract to
2023. You received payment of the sale price the seller cannot end before that time. sell, other than one that is a section 1256 con-
on that same day. Report your gain or loss on tract, is determined by the rules that apply to
your 2022 return, even though you received the Real property repossessed. If you sell real short sales, discussed later under Short Sales.
payment in 2023. The gain or loss is long term property but keep a security interest in it, and
or short term depending on whether you held then later repossess the property under the Loss on mutual fund or REIT stock held 6
the stock more than 1 year. Your holding period terms of the sales contract, your holding period months or less. If you hold stock in a mutual
ended on December 31. for a later sale includes the period you held the fund (or other regulated investment company)
property before the original sale and the period or REIT for 6 months or less and then sell it at a
U.S. Treasury notes and bonds. The holding after the repossession. Your holding period loss (other than under a periodic liquidation
period of U.S. Treasury notes and bonds sold at does not include the time between the original plan), special rules may apply.
auction on the basis of yield starts the day after sale and the repossession. That is, it does not
the Secretary of the Treasury, through news re- include the period during which the first buyer Capital gain distributions received. The
leases, gives notification of acceptance to suc- held the property. However, the holding period loss (after reduction for any exempt-interest div-
cessful bidders. The holding period of U.S. for any improvements made by the first buyer idends you received, as explained later) is trea-
Treasury notes and bonds sold through an of- begins at the time of repossession. ted as a long-term capital loss up to the total of
fering on a subscription basis at a specified any capital gain distributions you received and
yield starts the day after the subscription is sub- Stock dividends. The holding period for stock your share of any undistributed capital gains.
mitted. you received as a taxable stock dividend begins Any remaining loss is short-term capital loss.
on the date of distribution.
Reinvested distributions. If your dividends
Automatic investment service. In determin- The holding period for new stock you re- and capital gain distributions are reinvested in
ing your holding period for shares bought by the ceived as a nontaxable stock dividend begins new shares, the holding period of each new
bank or other agent, full shares are considered on the same day as the holding period of the share begins the day after that share was pur-
bought first and any fractional shares are con- old stock. This rule also applies to stock ac- chased. Therefore, if you sell both the new
sidered bought last. Your holding period starts quired in a spin-off, which is a distribution of shares and the original shares, you might have
on the day after the bank's purchase date. If a stock or securities in a controlled corporation. both short-term and long-term gains and losses.
share was bought over more than one purchase
date, your holding period for that share is a split Nontaxable stock rights. Your holding period Example. On April 1, 2022, you bought a
holding period. A part of the share is considered for nontaxable stock rights includes the holding mutual fund share for $20. On June 17, 2022,
to have been bought on each date that stock period of the underlying stock. The holding pe- the mutual fund paid a capital gain distribution
was bought by the bank with the proceeds of riod for stock acquired through the exercise of of $2 per share, which is taxed as a long-term
available funds. stock rights begins on the date the right was ex- capital gain. On July 15, 2022, you sold the
ercised.
Nontaxable trades. If you acquire investment share for $17.50. If it were not for the capital
gain distribution, your loss would be a
property in a trade for other investment property Section 1256 contracts. Gains or losses on short-term loss of $2.50 ($20 − $17.50). How-
and your basis for the new property is deter- section 1256 contracts open at the end of the ever, the part of the loss that is not more than
mined, in whole or in part, by your basis in the year, or terminated during the year, are treated the capital gain distribution ($2) must be
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reported as a long-term capital loss. The re- Deductible nonbusiness bad debts. To be deduction for your payments on the debt unless
maining $0.50 of the loss can be reported as a deductible, nonbusiness bad debts must be to- you can show either that your reason for making
short-term capital loss. tally worthless. You cannot deduct a partly the guarantee was to protect your investment or
worthless nonbusiness debt. that you entered the guarantee transaction with
Exempt-interest dividends on mutual a profit motive. If you make the guarantee as a
fund stock. If you received exempt-interest Genuine debt required. A debt must be favor to friends and do not receive any consid-
dividends on the stock, at least part of your loss genuine for you to deduct a loss. A debt is gen- eration in return, your payments are considered
is disallowed. You can deduct only the amount uine if it arises from a debtor-creditor relation- a gift and you cannot take a deduction.
of loss that is more than the exempt-interest ship based on a valid and enforceable obliga-
dividends. Report the loss as a short-term capi- tion to repay a fixed or determinable sum of Example 1. Henry Lloyd, an officer and
tal loss. On Form 8949, Part I, line 1, column money. principal shareholder of the Spruce Corpora-
(d), increase the sales price by the amount of tion, guaranteed payment of a bank loan the
exempt-interest dividends, but do not increase Loan or gift. For a bad debt, you must
it to more than the cost or other basis shown in show there was an intention at the time of the corporation received. The corporation defaulted
column (e). transaction to make a loan and not a gift. If you on the loan and Henry made full payment. Be-
lend money to a relative or friend with the un- cause he guaranteed the loan to protect his in-
For more information on Form 8949 derstanding that it may not be repaid, it is con- vestment in the corporation, Henry can take a
TIP and Schedule D (Form 1040), see the sidered a gift and not a loan. You cannot take a nonbusiness bad debt deduction.
Instructions for Form 8949 and the In- bad debt deduction for a gift. There cannot be a
structions for Schedule D (Form 1040). bad debt unless there is a true creditor-debtor Example 2. Milt and Pat are co-workers.
relationship between you and the person or or- Milt, as a favor to Pat, guarantees a note at their
Example. On January 10, 2022, you ganization that owes you the money. local credit union. Pat does not pay the note
bought a mutual fund share for $40. On Febru- When minor children borrow from their pa- and declares bankruptcy. Milt pays off the note.
ary 7, 2022, the mutual fund paid a $5 dividend rents to pay for their basic needs, there is no However, since he did not enter into the guar-
from tax-exempt interest, which is not taxable to genuine debt. A bad debt cannot be deducted antee agreement to protect an investment or to
you. On February 14, 2022, you sold the share for such a loan. make a profit, Milt cannot take a bad debt de-
duction.
for $34. If it were not for the tax-exempt divi- Basis in bad debt required. To deduct a
dend, your loss would be $6 ($40 − $34). How- bad debt, you must have a basis in it—that is, Deductible in year paid. Unless you have
ever, you must increase the sales price from you must have already included the amount in rights against the borrower, discussed next, a
$34 to $39 (to account for the $5 portion of the your income or loaned out your cash. For exam- payment you make on a loan you guaranteed is
loss that is not deductible). You can deduct only ple, you cannot claim a bad debt deduction for deductible in the year you make the payment.
$1 as a short-term capital loss. court-ordered child support not paid to you by Rights against the borrower. When you
your former spouse. If you are a cash method make payment on a loan you guaranteed, you
Loss on stock that paid qualified dividends. taxpayer (most individuals are), you generally may have the right to take the place of the
Any loss on the sale or trade of stock must be cannot take a bad debt deduction for unpaid lender (the right of subrogation). The debt is
treated as a long-term capital loss to the extent salaries, wages, rents, fees, interest, dividends, then owed to you. If you have this right or some
you received, from that stock, qualified divi- and similar items. other right to demand payment from the bor-
dends (defined in chapter 1) that are extraordi-
rower, you cannot take a bad debt deduction
nary dividends. This is true regardless of how When deductible. You can take a bad debt until these rights become totally worthless.
long you actually held the stock. Generally, an deduction only in the year the debt becomes
extraordinary dividend is a dividend that equals worthless. You do not have to wait until a debt Debts owed by political parties. You cannot
or exceeds 10% (5% in the case of preferred is due to determine whether it is worthless. A take a nonbusiness bad debt deduction for any
stock) of your adjusted basis in the stock. debt becomes worthless when there is no lon- worthless debt owed to you by:
ger any chance that the amount owed will be • A political party;
Nonbusiness Bad Debts paid. • A national, state, or local committee of a
It is not necessary to go to court if you can political party; or
If someone owes you money that you cannot show that a judgment from the court would be • A committee, association, or organization
collect, you have a bad debt. You may be able uncollectible. You must only show that you have that either accepts contributions or spends
to deduct the amount owed to you when you fig- taken reasonable steps to collect the debt. money to influence elections.
ure your tax for the year the debt becomes Bankruptcy of your debtor is generally good evi-
worthless. dence of the worthlessness of at least a part of Mechanics' and suppliers' liens. Workers
an unsecured and unpreferred debt. and material suppliers may file liens against
There are two kinds of bad debts—business If your bad debt is the loss of a deposit in a property because of debts owed by a builder or
and nonbusiness. A business bad debt, gener- financial institution, see Deposit in Insolvent or contractor. If you pay off the lien to avoid fore-
ally, is one that comes from operating your Bankrupt Financial Institution, earlier. closure and loss of your property, you are enti-
trade or business and is deductible as a busi- tled to repayment from the builder or contractor.
ness loss. All other bad debts are nonbusiness Filing a claim for refund. If you do not de- If the debt is uncollectible, you can take a bad
bad debts and are deductible as short-term duct a bad debt on your original return for the debt deduction.
capital losses. year it becomes worthless, you can file a claim
for a credit or refund due to the bad debt. To do Insolvency of contractor. You can take a bad
Example. An architect made personal this, use Form 1040-X to amend your return for debt deduction for the amount you deposit with
loans to several friends who were not clients. the year the debt became worthless. You must a contractor if the contractor becomes insolvent
She could not collect on some of these loans. file it within 7 years from the date your original and you are unable to recover your deposit. If
They are deductible only as nonbusiness bad return for that year had to be filed, or 2 years the deposit is for work unrelated to your trade or
debts because the architect was not in the busi- from the date you paid the tax, whichever is business, it is a nonbusiness bad debt deduc-
ness of lending money and the loans do not later. (Claims not due to bad debts or worthless tion.
have any relationship to her business. securities must generally be filed within 3 years
from the date a return is filed, or 2 years from Secondary liability on home mortgage. If
Business bad debts. For information on busi- the date the tax is paid, whichever is later.) For the buyer of your home assumes your mort-
ness bad debts of an employee, see Pub. 529, more information about filing a claim, see Pub. gage, you may remain secondarily liable for re-
Miscellaneous Deductions. For information on 556. payment of the mortgage loan. If the buyer de-
other business bad debts, see chapter 10 of faults on the loan and the house is then sold for
Pub. 535. Loan guarantees. If you guarantee a debt that less than the amount outstanding on the mort-
becomes worthless, you cannot take a bad debt gage, you may have to make up the difference.

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You can take a bad debt deduction for the short sale closed in 2022 but you did not get a on the date of the short sale, or if you acquired
amount you pay to satisfy the mortgage if you Form 1099-B for it because you entered into it the substantially identical property after the
cannot collect it from the buyer. before 2011, report it on a Form 8949 in Part I short sale and by the date of closing the short
or Part II (whichever applies). In column (a), en- sale, then:
Worthless securities. If you own securities ter (for example) “100 sh. XYZ Co. — 2010 Rule 1. Your gain, if any, when you close
that become totally worthless, you can take a short sale closed.” Fill in the other columns ac- the short sale is a short-term capital gain;
deduction for a loss, but not for a bad debt. See cording to their instructions. Report the short and
Worthless Securities under What Is a Sale or sale the same way if you received a 2022 Form Rule 2. The holding period of the substan-
Trade, earlier in this chapter. 1099-B that does not show proceeds (sales tially identical property begins on the date
price). of the closing of the short sale or on the
Recovery of a bad debt. If you deducted a date of the sale of this property, whichever
bad debt and in a later tax year you recover Exception if property becomes worthless. comes first.
(collect) all or part of it, you may have to include A different rule applies if the property sold short
the amount you recover in your gross income. becomes substantially worthless. In that case, Losses. If, on the date of the short sale,
However, you can exclude from gross income you must recognize gain as if the short sale you held substantially identical property for
the amount recovered up to the amount of the were closed when the property became sub- more than 1 year, any loss you realize on the
deduction that did not reduce your tax in the stantially worthless. short sale is a long-term capital loss, even if you
year deducted. See Recoveries in Pub. 525. held the property used to close the sale for 1
Exception for constructive sales. Entering year or less. Certain losses on short sales of
How to report bad debts. Deduct nonbusi- into a short sale may cause you to be treated as stock or securities are also subject to wash sale
ness bad debts as short-term capital losses on having made a constructive sale of property. In treatment. For information, see Wash Sales,
Form 8949. that case, you will have to recognize gain on the later.
On Form 8949, Part I, line 1, enter the name date of the constructive sale. For details, see
of the debtor and “bad debt statement attached” Constructive Sales of Appreciated Financial Po- Mixed straddles. Under certain elections,
in column (a). Enter your basis in the bad debt sitions, earlier. you can avoid the treatment of loss from a short
in column (e) and enter zero in column (d). Use sale as long term under the special rule. These
a separate line for each bad debt. Example. On May 6, 2022, you bought elections are for positions that are part of a
100 shares of Baker Corporation stock for mixed straddle. See Other elections, later, for
Make sure you report your bad debt(s) $1,000. On September 9, 2022, you sold short more information about these elections.
! (and any other short-term transactions 100 shares of similar Baker stock for $1,600.
CAUTION for which you did not receive a Form
You made no other transactions involving Baker Reporting Substitute Payments
1099-B) on Form 8949 with box C checked. stock for the rest of 2022 and the first 30 days
For each bad debt, attach a statement to of 2023. Your short sale is treated as a con- If any broker transferred your securities for use
your return that contains: structive sale of an appreciated financial posi- in a short sale or similar transaction and re-
• A description of the debt, including the tion because a sale of your Baker stock on the ceived certain substitute dividend payments on
amount, and the date it became due; date of the short sale would have resulted in a your behalf while the short sale was open, that
• The name of the debtor, and any business gain. You recognize a $600 short-term capital broker must give you a Form 1099-MISC or a
or family relationship between you and the gain from the constructive sale and your new similar statement reporting the amount of these
debtor; holding period in the Baker stock begins on payments. Form 1099-MISC must be used for
• The efforts you made to collect the debt; September 9. those substitute payments totaling $10 or more
and that are known on the payment's record date to
• Why you decided the debt was worthless. Short-Term or Long-Term be in lieu of an exempt-interest dividend, a capi-
For example, you could show that the bor- Capital Gain or Loss tal gain dividend, a return of capital distribution,
rower has declared bankruptcy, or that le- or a dividend subject to a foreign tax credit, or
gal action to collect would probably not re- As a general rule, you determine whether you that are in lieu of tax-exempt interest. Do not
sult in payment of any part of the debt. have short-term or long-term capital gain or loss treat these substitute payments as dividends or
on a short sale by the amount of time you ac- interest. Instead, report the substitute payments
Short Sales tually hold the property eventually delivered to shown on Form 1099-MISC as “Other income”
the lender to close the short sale. on Schedule 1 (Form 1040), line 8z.
A short sale occurs when you agree to sell
property you do not own (or own but do not Example. Even though you do not own Substitute payment. A substitute payment
wish to sell). You make this type of sale in two any stock of Ace Corporation, you contract to means a payment in lieu of:
steps. sell 100 shares of it, which you borrow from • Tax-exempt interest (including OID) ac-
• You sell short. You borrow property and your broker. After 13 months, when the price of crued while the short sale was open; and
deliver it to a buyer. the stock has risen, you buy 100 shares of Ace • A dividend, if the ex-dividend date is after
• You close the sale. At a later date, you ei- Corporation stock and immediately deliver them the transfer of stock for use in a short sale
ther buy substantially identical property to your broker to close out the short sale. Your and before the closing of the short sale.
and deliver it to the lender or make delivery loss is a short-term capital loss because your
out of property you held at the time of the holding period for the delivered property is less Payments in lieu of dividends. If you borrow
sale. Delivery of property borrowed from than 1 day. stock to make a short sale, you may have to re-
another lender does not satisfy this re- mit to the lender payments in lieu of the divi-
quirement. Special rules. Special rules may apply to dends distributed while you maintain your short
gains and losses from short sales of stocks, se- position. You can deduct these payments only if
You do not realize gain or loss until delivery of curities, and commodity and securities futures you hold the short sale open at least 46 days
property to close the short sale. You will have a (other than certain straddles) if you held or ac- (more than 1 year in the case of an extraordi-
capital gain or loss if the property used to close quired property substantially identical to prop- nary dividend, as defined later) and you itemize
the short sale is a capital asset. erty that sold short. But if the amount of prop- your deductions.
The Instructions for Form 1099-B discuss erty you sold short is more than the amount of You deduct these payments as investment
when you should receive a Form 1099-B for that substantially identical property, the special interest on Schedule A (Form 1040). See Inter-
short sales. For more information, see the In- rules do not apply to the gain or loss on the ex- est Expenses in chapter 3 for more information.
structions for Form 1099-B. cess. If you close the short sale by the 45th day
Gains and holding period. If you held the after the date of the short sale (1 year or less in
Reporting a short sale. Report any short substantially identical property for 1 year or less the case of an extraordinary dividend), you can-
sale on Form 8949 in the year it closes. If a not deduct the payment in lieu of the dividend
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you make to the lender. Instead, you must in- However, you add the disallowed loss of $250 More or less stock bought than sold. If the
crease the basis of the stock used to close the to the cost of the new stock, $800, to obtain number of shares of substantially identical stock
short sale by that amount. your basis in the new stock, which is $1,050. or securities you buy within 30 days before or
To determine how long a short sale is kept after the sale is either more or less than the
open, do not include any period during which Example 2. You are an employee of a cor- number of shares you sold, you must determine
you hold, have an option to buy, or are under a poration with an incentive pay plan. Under this the particular shares to which the wash sale
contractual obligation to buy substantially iden- plan, you are given 10 shares of the corpora- rules apply. You do this by matching the shares
tical stock or securities. tion's stock as a bonus award. You include the bought with an equal number of the shares
If your payment is made for a liquidating dis- fair market value of the stock in your gross in- sold. Match the shares bought in the same or-
tribution or nontaxable stock distribution, or if come as additional pay. You later sell these der that you bought them, beginning with the
you buy more shares equal to a stock distribu- shares at a loss. If you receive another bonus first shares bought. The shares or securities so
tion issued on the borrowed stock during your award of substantially identical stock within 30 matched are subject to the wash sale rules.
short position, you have a capital expense. You days of the sale, you cannot deduct your loss
must add the payment to the cost of the stock on the sale. Example 1. You bought 100 shares of M
sold short. stock on September 20, 2021, for $5,000. On
Options and futures contracts. The wash December 13, 2021, you bought 50 shares of
Exception. If you close the short sale sale rules apply to losses from sales or trades substantially identical stock for $2,750. On De-
within 45 days, the deduction for amounts you of contracts and options to acquire or sell stock cember 20, 2021, you bought 25 shares of sub-
pay in lieu of dividends will be disallowed only or securities. They do not apply to losses from stantially identical stock for $1,125. On January
to the extent the payments are more than the sales or trades of commodity futures contracts 3, 2022, you sold for $4,000 the 100 shares you
amount you receive as ordinary income from and foreign currencies. See Coordination of bought in September. You have a $1,000 loss
the lender of the stock for the use of collateral Loss Deferral Rules and Wash Sale Rules, on the sale. However, because you bought 75
with the short sale. This exception does not ap- later, for information about the tax treatment of shares of substantially identical stock within 30
ply to payments in place of extraordinary divi- losses on the disposition of positions in a strad- days before the sale, you cannot deduct the
dends. dle. loss ($750) on 75 shares. You can deduct the
loss ($250) on the other 25 shares. The basis of
Extraordinary dividends. If the amount of any Securities futures contract to sell. Los- the 50 shares bought on December 13, 2021, is
dividend you receive on a share of preferred ses from the sale, exchange, or termination of a increased by two-thirds (50 ÷ 75) of the $750
stock equals or exceeds 5% (10% in the case of securities futures contract to sell are generally disallowed loss. The new basis of those shares
other stock) of the amount realized on the short treated in the same manner as losses from the is $3,250 ($2,750 + $500). The basis of the 25
sale, the dividend you receive is an extraordi- closing of a short sale, discussed later in this shares bought on December 20, 2021, is in-
nary dividend. section under Short sales. creased by the rest of the loss to $1,375
Warrants. The wash sale rules apply if you ($1,125 + $250).
Wash Sales sell common stock at a loss and, at the same
time, buy warrants for common stock of the Example 2. You bought 100 shares of M
You cannot deduct losses from sales or trades same corporation. But if you sell warrants at a stock on September 16, 2021. On January 28,
of stock or securities in a wash sale unless the loss and, at the same time, buy common stock 2022, you sold those shares at a $1,000 loss.
loss was incurred in the ordinary course of your in the same corporation, the wash sale rules ap- On each of the 4 days from February 1, 2022, to
business as a dealer in stock or securities. ply only if the warrants and stock are consid- February 4, 2022, you bought 50 shares of sub-
ered substantially identical, as discussed next. stantially identical stock. You cannot deduct
A wash sale occurs when you sell or trade your $1,000 loss. You must add half the disal-
stock or securities at a loss and within 30 days Substantially identical. In determining lowed loss ($500) to the basis of the 50 shares
before or after the sale you: whether stock or securities are substantially bought on February 1. Add the other half ($500)
1. Buy substantially identical stock or securi- identical, you must consider all the facts and to the basis of the shares bought on February 2.
ties, circumstances in your particular case. Ordina-
rily, stocks or securities of one corporation are Loss and gain on same day. Loss from a
2. Acquire substantially identical stock or se- not considered substantially identical to stocks wash sale of one block of stock or securities
curities in a fully taxable trade, or securities of another corporation. However, cannot be used to reduce any gains on identical
3. Acquire a contract or option to buy sub- they may be substantially identical in some ca- blocks sold the same day.
stantially identical stock or securities, or ses. For example, in a reorganization, the
stocks and securities of the predecessor and Example. During 2016, you bought 100
4. Acquire substantially identical stock for successor corporations may be substantially shares of X stock on each of three occasions.
your individual retirement arrangement identical. You paid $158 per share for the first block of
(IRA) or Roth IRA. Similarly, bonds or preferred stock of a cor- 100 shares, $100 per share for the second
poration are not ordinarily considered substan- block, and $95 per share for the third block. On
If you sell stock and your spouse or a corpora- tially identical to the common stock of the same December 27, 2021, you sold 300 shares of X
tion you control buys substantially identical corporation. However, where the bonds or pre- stock for $125 per share. On January 10, 2022,
stock, you also have a wash sale. ferred stock are convertible into common stock you bought 250 shares of identical X stock. You
If your loss was disallowed because of the of the same corporation, the relative values, cannot deduct the loss of $33 per share on the
wash sale rules, add the disallowed loss to the price changes, and other circumstances may first block because within 30 days after the date
cost of the new stock or securities (except in (4) make these bonds or preferred stock and the of sale you bought 250 identical shares of X
above). The result is your basis in the new stock common stock substantially identical. For ex- stock. In addition, you cannot reduce the gain
or securities. This adjustment postpones the ample, preferred stock is substantially identical realized on the sale of the second and third
loss deduction until the disposition of the new to the common stock if the preferred stock: blocks of stock by this loss.
stock or securities. Your holding period for the • Is convertible into common stock,
new stock or securities includes the holding pe- • Has the same voting rights as the common Dealers. The wash sale rules do not apply to a
riod of the stock or securities sold. stock, dealer in stock or securities if the loss is from a
• Is subject to the same dividend restric- transaction made in the ordinary course of busi-
Example 1. You buy 100 shares of X stock tions, ness.
for $1,000. You sell these shares for $750 and • Trades at prices that do not vary signifi- Short sales. The wash sale rules apply to a
within 30 days from the sale you buy 100 cantly from the conversion ratio, and loss realized on a short sale if you sell, or enter
shares of the same stock for $800. Because • Is unrestricted as to convertibility. into another short sale of, substantially identical
you bought substantially identical stock, you stock or securities within a period beginning 30
cannot deduct your loss of $250 on the sale.
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days before the date the short sale is complete exchange, or termination of the contract will chased expired, enter the expiration date in col-
and ending 30 days after that date. generally have the same character as gain or umn (c) and enter “Expired” in column (d). If an
For purposes of the wash sale rules, a short loss from transactions in the property to which option that was granted (written) expired, enter
sale is considered complete on the date the the contract relates. Any capital gain or loss on the expiration date in column (b) and enter “Ex-
short sale is entered into if: a sale, exchange, or termination of a contract to pired” in column (e). Fill in the other columns as
• On that date, you own stock or securities sell property will be considered short term, re- appropriate.
identical to those sold short (or by that date gardless of how long you hold the contract. If a call option you sold was exercised and
you enter into a contract or option to ac- These contracts are not section 1256 contracts the option premium you received was not re-
quire that stock or those securities); and (unless they are dealer securities futures con- flected in the sales price shown on the Form
• You later deliver the stock or securities to tracts). 1099-B you received, enter the premium as a
close the short sale. positive number in column (g) of Form 8949 and
Otherwise, a short sale is not considered Options enter “E” in column (f).
complete until the property is delivered to close
the sale. Options are generally subject to the rules de- Puts and Calls
This treatment also applies to losses from scribed in this section. If the option is part of a
the sale, exchange, or termination of a securi- straddle, the Loss Deferral Rules covered later Puts and calls are options on securities and are
ties futures contract to sell. under Straddles may also apply. For special covered by the rules just discussed for options.
rules that apply to nonequity options and dealer The following are specific applications of these
Example. On June 4, you buy 100 shares equity options, see Section 1256 Contracts rules to holders and writers of options that are
of stock for $1,000. You sell short 100 shares of Marked to Market, earlier. bought, sold, or “closed out” in transactions on
a national securities exchange, such as the Chi-
the stock for $750 on October 15. On October Gain or loss from the sale or trade of an op- cago Board Options Exchange. (But see Sec-
16, you buy 100 shares of the same stock for tion to buy or sell property that is a capital asset tion 1256 Contracts Marked to Market, earlier,
$750. You close the short sale on November 19 in your hands, or would be if you acquired it, is for special rules that may apply to nonequity op-
by delivering the shares bought on June 4. You capital gain or loss. If the property is not or tions and dealer equity options.) These rules
cannot deduct the $250 loss ($1,000 − $750) would not be a capital asset, the gain or loss is are also presented in Table 4-3.
because the date of entering into the short sale ordinary gain or loss.
(October 15) is considered the date the sale is
Puts and calls are issued by writers (gran-
complete for wash sale purposes and you Example 1. You purchased an option to tors) to holders for cash premiums. They are
bought substantially identical stock within 30 buy 100 shares of XYZ Company stock. The ended by exercise, closing transaction, or
days from that date. stock increases in value, and you sell the option lapse.
Residual interests in a real estate mortgage for more than you paid for it. Your gain is capital
investment conduit (REMIC). The wash sale gain because the stock underlying the option A “put option” is the right to sell to the writer,
rules will generally apply to the sale of your re- would have been a capital asset in your hands. at any time before a specified future date, a sta-
sidual interest in a REMIC if, during the period Example 2. The facts are the same as in ted number of shares at a specified price. Con-
beginning 6 months before the sale of the inter- Example 1, except the stock decreases in value versely, a “call option” is the right to buy from
est and ending 6 months after that sale, you ac- and you sell the option for less than you paid for the writer of the option, at any time before a
quire any residual interest in any REMIC or any it. Your loss is a capital loss. specified future date, a stated number of shares
interest in a taxable mortgage pool that is com- of stock at a specified price.
parable to a residual interest. REMICs are dis- Option not exercised. If you have a loss be-
cussed in chapter 1. cause you did not exercise an option to buy or Holders of puts and calls. If you buy a put or
sell, you are considered to have sold or traded a call, you may not deduct its cost. It is a capital
Nondeductible wash sale loss. If you re- the option on the date it expired. expenditure.
ceived a Form 1099-B, box 1g will show the If you sell the put or the call before you exer-
amount of wash sale loss disallowed if: Writer of option. If you write (grant) an op- cise it, the difference between its cost and the
• The stock or securities sold were covered tion, how you report your gain or loss depends amount you receive for it is either a long-term or
securities, and on whether it was exercised. short-term capital gain or loss, depending on
• The substantially identical stock or securi- If you are not in the business of writing op- how long you held it.
ties you bought had the same CUSIP num- tions and an option you write on stocks, securi- If the option expires, its cost is either a
bers as the stock or securities you sold ties, commodities, or commodity futures is not long-term or short-term capital loss, depending
and were bought in the same account as exercised (or repurchased), the amount you re- on your holding period, which ends on the expi-
the stock or securities you sold. ceive is a short-term capital gain. ration date.
However, you cannot deduct a loss from a If you exercise a call, add its cost to the ba-
wash sale even if it is not reported on Form If an option requiring you to buy or sell prop- sis of the stock you bought. If you exercise a
1099-B. erty is exercised, see Writers of puts and calls, put, reduce your amount realized on the sale of
later. the underlying stock by the cost of the put when
How to report. Report a wash sale transac- figuring your gain or loss. Any gain or loss on
tion in Part I or Part II of Form 8949 with the ap- Section 1256 contract options. Gain or loss the sale of the underlying stock is long term or
propriate box checked. Complete all columns. is recognized on the exercise of an option on a short term depending on your holding period for
Enter “W” in column (f). Enter as a positive section 1256 contract. Section 1256 contracts the underlying stock.
number in column (g) the amount of the loss not are defined under Section 1256 Contracts
allowed. See the Instructions for Form 8949. Marked to Market, earlier. Put option as short sale. Buying a put op-
tion is generally treated as a short sale, and the
Cash settlement option. A cash settlement exercise, sale, or expiration of the put is a clos-
Securities Futures Contracts option is treated as an option to buy or sell ing of the short sale. See Short Sales, earlier. If
property. A cash settlement option is any option you have held the underlying stock for 1 year or
A securities futures contract is a contract of sale that on exercise is settled in, or could be settled less at the time you buy the put, any gain on the
for future delivery of a single security or of a in, cash or property other than the underlying exercise, sale, or expiration of the put is a
narrow-based security index. property. short-term capital gain. The same is true if you
buy the underlying stock after you buy the put
Gain or loss from the contract will generally How to report. Report on Form 8949 gain or but before its exercise, sale, or expiration. Your
be treated in a manner similar to gain or loss loss from the closing or expiration of an option holding period for the underlying stock begins
from transactions in the underlying security. that is not a section 1256 contract but is a capi- on the earliest of:
This means gain or loss from the sale, tal asset in your hands. If an option you pur- • The date you dispose of the stock,
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Table 4-3. Puts and Calls 4. Section 1256 contracts. The facts are
the same as in (1), except the options
Puts were nonequity options, subject to the
rules for section 1256 contracts. If you
When a put: If you are the holder: If you are the writer: were a buyer of the options, you would
Is exercised Reduce your amount realized from Reduce your basis in the stock you recognize a short-term capital loss of
the sale of the underlying stock by buy by the amount you received for $1,600, and a long-term capital loss of
the cost of the put. the put. $2,400. If you were a writer of the options,
you would recognize a short-term capital
Expires Report the cost of the put as a capital Report the amount you received for gain of $1,600, and a long-term capital
loss on the date it expires.* the put as a short-term capital gain. gain of $2,400. See Section 1256 Con-
tracts Marked to Market, earlier, for more
Is sold by the holder Report the difference between the This does not affect you. (But if you information.
cost of the put and the amount you buy back the put, report the
receive for it as a capital gain or loss.* difference between the amount you
pay and the amount you received for Straddles
the put as a short-term capital gain
or loss.) This section discusses the loss deferral rules
that apply to the sale or other disposition of po-
Calls sitions in a straddle. These rules do not apply to
the straddles described under Exceptions, later.
When a call: If you are the holder: If you are the writer: A straddle is any set of offsetting positions
Is exercised Add the cost of the call to your basis Increase your amount realized on on personal property. For example, a straddle
in the stock purchased. sale of the stock by the amount you may consist of a purchased option to buy and a
received for the call. purchased option to sell on the same number of
shares of the security, with the same exercise
Expires Report the cost of the call as a capital Report the amount you received for price and period.
loss on the date it expires.* the call as a short-term capital gain.
Personal property. This is any actively tra-
Is sold by the holder Report the difference between the This does not affect you. (But if you ded property. It includes stock options and con-
cost of the call and the amount you buy back the call, report the tracts to buy stock but generally does not in-
receive for it as a capital gain or loss.* difference between the amount you clude stock.
pay and the amount you received for Straddle rules for stock. Although stock
the call as a short-term capital gain is generally excluded from the definition of per-
or loss.) sonal property when applying the straddle rules,
it is included in the following two situations.
* See Holders of puts and calls and Writers of puts and calls in the accompanying text to find whether your gain or
loss is short term or long term. 1. The stock is of a type that is actively tra-
ded, and at least one of the offsetting posi-
• The date you exercise the put, you receive for the put or call is a short-term tions is a position on that stock or substan-
• The date you sell the put, or capital gain or loss. tially similar or related property.
• The date the put expires. 2. The stock is in a corporation formed or
Examples of nondealer transactions. availed of to take positions in personal
Writers of puts and calls. If you write (grant) 1. Expiration. Ten JJJ call options were is- property that offset positions taken by any
a put or a call, do not include the amount you sued on April 8, 2022, for $4,000. These shareholder.
receive for writing it in your income at the time equity options expired in December 2022
of receipt. Carry it in a deferred account until: without being exercised. If you were a Note. For positions established before Oc-
• Your obligation expires; holder (buyer) of the options, you would tober 22, 2004, condition 1 above does not ap-
• You buy, in the case of a put, or sell, in the recognize a short-term capital loss of ply. Instead, personal property includes stock if
case of a call, the underlying stock when $4,000. If you were a writer of the options, condition 2 above applies or the stock was part
the option is exercised; or you would recognize a short-term capital of a straddle in which at least one of the offset-
• You engage in a closing transaction. gain of $4,000. ting positions was:
If your obligation expires, the amount you re- • An option to buy or sell the stock or sub-
ceived for writing the call or put is short-term 2. Closing transaction. The facts are the stantially identical stock or securities,
capital gain. same as in (1), except that on May 6, A securities futures contract on the stock
2022, the options were sold for $6,000. If •
If a put you write is exercised and you buy you were the holder of the options who or substantially identical stock or securi-
the underlying stock, decrease your basis in the sold them, you would recognize a ties, or
stock by the amount you received for the put. short-term capital gain of $2,000. If you • A position on substantially similar or rela-
Your holding period for the stock begins on the were the writer of the options and you ted property (other than stock).
date you buy it, not on the date you wrote the bought them back, you would recognize a Position. A position is an interest in personal
put. short-term capital loss of $2,000. property. A position can be a forward or futures
If a call you write is exercised and you sell
the underlying stock, increase your amount re- 3. Exercise. The facts are the same as in contract or an option.
alized on the sale of the stock by the amount (1), except that the options were exercised An interest in a loan denominated in a for-
you received for the call when figuring your gain on May 20, 2022. The buyer adds the cost eign currency is treated as a position in that cur-
or loss. The gain or loss is long term or short of the options to the basis of the stock rency. For the straddle rules, foreign currency
term depending on your holding period of the bought through the exercise of the op- for which there is an active interbank market is
stock. tions. The writer adds the amount received considered to be actively traded personal prop-
If you enter into a closing transaction by from writing the options to the amount re- erty. See also Foreign currency contract, ear-
paying an amount equal to the value of the put alized from selling the stock to figure gain lier.
or call at the time of the payment, the difference or loss. The gain or loss is short term or
between the amount you pay and the amount long term depending upon the holding pe- Offsetting position. This is a position that
riod of the stock. substantially reduces any risk of loss you may
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have from holding another position. However, if market value immediately before the settlement The identified straddle rules also apply to
a position is part of a straddle that is not an and as having sold the property used to physi- positions that are or have been a liability or obli-
identified straddle (described later), do not treat cally settle the position at its fair market value. gation to you (for example, a debt obligation
it as offsetting to a position that is part of an you issued, a written option, or a notional princi-
identified straddle. Exceptions. The loss deferral rules do not ap- pal contract you entered into).
ply to: Neither you nor anyone else can take into
Presumed offsetting positions. Two or account any loss on a position that is part of an
more positions will be presumed to be offsetting 1. Positions established after October 21,
if: 2004, comprising an identified straddle; identified straddle to the extent the loss increa-
ses the basis of any positions that offset the
• The positions are established in the same 2. Certain straddles consisting of qualified loss position in the identified straddle.
personal property (or in a contract for this covered call options and the stock to be
property), and the value of one or more po- purchased under the options; Note. For positions established before Oc-
sitions varies inversely with the value of tober 22, 2004, identified straddles have to
one or more of the other positions; 3. Hedging transactions, described earlier meet two additional conditions.
• The positions are in the same personal under Section 1256 Contracts Marked to
property, even if this property is in a sub- Market; and 1. All the original positions that you identify
stantially changed form, and the positions' 4. Straddles consisting entirely of section were acquired on the same day.
values vary inversely as described in the 1256 contracts, as described earlier under 2. All the positions included in condition 1
first condition; Section 1256 Contracts Marked to Market were disposed of on the same day during
• The positions are in debt instruments with (but see Identified straddle, later). the tax year, or none of the positions were
a similar maturity, and the positions' values disposed of by the end of the tax year.
vary inversely as described in the first con- Note. For positions established before Oc-
dition; tober 22, 2004, the loss deferral rules also do Also, the losses from positions are deferred un-
• The positions are sold or marketed as off- not apply to a straddle that is an identified strad- til you dispose of all the positions in the strad-
setting positions, whether or not the posi- dle at the end of the tax year. dle. The rule discussed above for increasing the
tions are called a straddle, spread, butter- basis of each of the positions does not apply.
fly, or any similar name; or Identified straddle. Any straddle (other
• The aggregate margin requirement for the than a straddle described in (2) or (3) above) is Qualified covered call options and op-
positions is lower than the sum of the mar- an identified straddle if all the following condi- tioned stock. A straddle is not subject to the
gin requirements for each position if held tions exist. loss deferral rules for straddles if both of the fol-
separately. • You clearly identified the straddle on your lowing are true.
records before the close of the day on • All the offsetting positions consist of one or
Related persons. To determine if two or which you acquired it. more qualified covered call options and the
more positions are offsetting, you will be treated • For straddles acquired after December 29, stock to be purchased from you under the
as holding any position your spouse holds dur- 2007, you identified the positions in the options.
ing the same period. If you take into account straddle that are offsetting with respect to • The straddle is not part of a larger straddle.
part or all of the gain or loss for a position held one another (for example, position A off- But see Special year-end rule, later, for an ex-
by a flow-through entity, such as a partnership sets position D, and position B offsets po- ception.
or trust, you are also considered to hold that po- sition C). A qualified covered call option is any option
sition. • The straddle is not part of a larger straddle. you grant to purchase stock you hold (or stock
If there is a loss from any position in an iden- you acquire in connection with granting the op-
Loss Deferral Rules tified straddle, you must increase the basis of tion), but only if all the following are true.
each of the positions that offset the loss posi- • The option is traded on a national securi-
Generally, you can deduct a loss on the dispo- tion in the identified straddle. The increase is ties exchange or other market approved by
sition of one or more positions only to the extent the loss multiplied by the following fraction: the Secretary of the Treasury.
the loss is more than any unrecognized gain • The option is granted more than 30 days
you have on offsetting positions. Unused losses before its expiration date.
are treated as sustained in the next tax year. Unrecognized gain (if any) on the offsetting For covered call options entered into
position
after July 28, 2002, the option is granted
Unrecognized gain. This is: The total unrecognized gain on all positions not more than 12 months before its expira-
• The amount of gain you would have had on that offset the loss position in the identified tion date or satisfies term limitation and
an open position if you had sold it on the straddle
qualified benchmark requirements pub-
last business day of the tax year at its fair For this purpose, your unrecognized gain is lished in the Internal Revenue Bulletin.
market value; and the excess of the fair market value of the posi- • The option is not a deep-in-the-money op-
• The amount of gain realized on a position tion that is part of an identified straddle at the tion.
if, as of the end of the tax year, gain has time you incur a loss on another position in the • You are not an options dealer who granted
been realized but not recognized. identified straddle, over the fair market value of the option in connection with your activity
Example. On July 8, 2022, you entered that position when you identified it as a position of dealing in options.
into a straddle. On December 11, 2022, you in the straddle. • Gain or loss on the option is capital gain or
closed one position of the straddle at a loss of If the application of the above rule does not loss.
$15,000. On December 30, 2022, the end of result in the increase in basis of any offsetting A deep-in-the-money option is an option
your tax year, you have an unrecognized gain of position in the identified straddle, you must in- with a strike price lower than the lowest quali-
$12,750 in the offsetting open position. On your crease the basis of each of the offsetting posi- fied benchmark (LQB). The strike price is the
2022 return, your deductible loss on the posi- tions in the straddle in a manner that: price at which the option is to be exercised.
tion you closed is limited to $2,250 ($15,000 − • Is reasonable, Strike prices are listed in the financial sections
$12,750). You must carry forward the unused • Is consistently applied by you, of many newspapers. The LQB is the highest
loss of $12,750. • Is consistent with the purposes of the iden- available strike price that is less than the appli-
tified straddle rules, and cable stock price. However, the LQB for an op-
Note. If you physically settle a position es- • Results in a total increase in the basis of tion with a term of more than 90 days and a
tablished after October 21, 2004, that is part of those offsetting positions equal to the loss. strike price of more than $50 is the sec-
a straddle by delivering property to which the If you adopt an allocation method under this ond-highest available strike price that is less
position relates (and you would realize a loss on rule, you must describe that method in your than the applicable stock price.
that position if you terminated it), you are trea- books and records.
ted as having terminated the position for its fair
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The availability of strike prices for equity op- See the Form 6781 instructions for how to re- Example 1. On November 4, 2022, you
tions with flexible terms does not affect the de- port these gains and losses. entered into offsetting long and short positions
termination of the LQB for an option that is not in non-section 1256 contracts. On November
an equity option with flexible terms. Coordination of Loss Deferral 11, 2022, you disposed of the long position at a
The applicable stock price for any stock for Rules and Wash Sale Rules $10 loss. On November 18, 2022, you entered
which an option has been granted is: into a new long position (successor position)
1. The closing price of the stock on the most Rules similar to the wash sale rules apply to any that is offsetting to the retained short position,
recent day on which that stock was traded disposition of a position or positions of a strad- but not substantially identical to the long posi-
before the date on which the option was dle. First apply Rule 1, explained next, then ap- tion disposed of on November 11. You held
granted; or ply Rule 2. However, Rule 1 applies only if both positions through year end, at which time
stocks or securities make up a position that is there was $10 of unrecognized gain in the suc-
2. The opening price of the stock on the day part of the straddle. If a position in the straddle cessor long position and no unrecognized gain
on which the option was granted, but only does not include stock or securities, use Rule 2. in the offsetting short position. Under these cir-
if that price is greater than 110% of the cumstances, the entire $10 loss will be disal-
price determined in (1). Rule 1. You cannot deduct a loss on the dis- lowed for 2022 because there is $10 of unrec-
If the applicable stock price is $25 or less, position of shares of stock or securities that ognized gain in the successor long position.
the LQB will be treated as not less than 85% of make up the positions of a straddle if, within a
the applicable stock price. If the applicable period beginning 30 days before the date of that Example 2. The facts are the same as in
stock price is $150 or less, the LQB will be trea- disposition and ending 30 days after that date, Example 1, except that at year end you have $4
ted as not less than an amount that is $10 be- you acquired substantially identical stock or se- of unrecognized gain in the successor long po-
low the applicable stock price. curities. Instead, the loss will be carried over to sition and $6 of unrecognized gain in the offset-
the following tax year, subject to any further ap- ting short position. Under these circumstances,
Example. On May 13, 2022, you held XYZ plication of Rule 1 in that year. This rule will also the entire $10 loss will be disallowed for 2022
stock and you wrote an XYZ/September call op- apply if you entered into a contract or option to because there is a total of $10 of unrecognized
tion with a strike price of $120. The closing acquire the stock or securities within the time gain in the successor long position and offset-
price of one share of XYZ stock on May 12, period described above. See Loss carryover, ting short position.
2022, was $130.25. The strike prices of all XYZ/ later, for more information about how to treat
September call options offered on May 13, the loss in the following tax year. Example 3. The facts are the same as in
Example 1, except that at year end you have $8
2022, were as follows: $110, $115, $120, $125, Dealers. If you are a dealer in stock or se- of unrecognized gain in the successor long po-
$130, and $135. Because the option has a term curities, this loss treatment will not apply to any sition and $8 of unrecognized loss in the offset-
of more than 90 days, the LQB is $125, the sec- losses you sustained in the ordinary course of ting short position. Under these circumstances,
ond-highest strike price that is less than your business. $8 of the total $10 realized loss will be disal-
$130.25, the applicable stock price. The call op- lowed for 2022 because there is $8 of unrecog-
tion is a deep-in-the-money option because its Example. You are not a dealer in stock or nized gain in the successor long position.
strike price is lower than the LQB. As a result, securities. On December 2, 2022, you bought
the option is not a qualified covered call option, stock in XX Corporation (XX stock) and an off- Loss carryover. If you have a disallowed loss
and the loss deferral rules apply if you closed setting put option. On December 9, 2022, there that resulted from applying Rule 1 and Rule 2,
out the option or the stock at a loss during the was $20 of unrealized gain in the put option and you must carry it over to the next tax year and
year. you sold the XX stock at a $20 loss. By Decem- apply Rule 1 and Rule 2 to that carryover loss.
Capital loss on qualified covered call ber 16, 2022, the value of the put option had de- For example, a loss disallowed in 2021 under
options. If you hold stock and you write a clined, eliminating all unrealized gain in the po- Rule 1 will not be allowed in 2022, unless the
qualified covered call option on that stock with a sition. On December 16, you bought a second substantially identical stock or securities (which
strike price less than the applicable stock price, XX stock position that is substantially identical caused the loss to be disallowed in 2021) were
treat any loss from the option as long-term capi- to the XX stock you sold on December 9. At the disposed of during 2022. In addition, the carry-
tal loss if, at the time the loss was realized, gain end of the year, there is no unrecognized gain over loss will not be allowed in 2022 if Rule 1 or
on the sale or exchange of the stock would be in the put option or in the XX stock. Under these Rule 2 disallows it.
treated as long-term capital gain. The holding circumstances, the $20 loss will be disallowed
period of the stock does not include any period for 2022 under Rule 1 because, within a period Example. The facts are the same as in the
during which you are the writer of the option. beginning 30 days before December 9 and end- example under Rule 1. On December 23, 2023,
ing 30 days after that date, you bought stock you sell the second XX stock at a $20 loss and
Special year-end rule. The loss deferral substantially identical to the XX stock you sold. there is $40 of unrecognized gain in the put op-
rules for straddles apply if all the following are tion. Under these circumstances, you cannot
true. Rule 2. You cannot deduct a loss on the dis- deduct in 2023 either the $20 loss disallowed in
• The qualified covered call options are position of less than all the positions of a strad- 2022 or the $20 loss you incurred for the De-
closed, or the stock is disposed of at a loss dle (your loss position) to the extent that any un- cember 23, 2023, sale of XX stock. Rule 1 does
during any tax year. recognized gain at the close of the tax year in not apply because the substantially identical XX
• Gain on disposition of the stock or gain on one or more of the following positions is more stock was sold during the year and no substan-
the options is includible in gross income in than any loss disallowed under Rule 1. tially identical stock or securities were bought
a later tax year. • Successor positions. within the 61-day period. However, Rule 2 does
• The stock or options were held less than • Offsetting positions to the loss position. apply because there is $40 of unrecognized
30 days after the closing of the options or • Offsetting positions to any successor posi- gain in the put option, an offsetting position to
the disposition of the stock. tion. the loss positions.
Successor position. A successor position Capital loss carryover. If the sale of a loss
How To Report Gains is a position that is or was at any time offsetting position would have resulted in a capital loss,
and Losses (Form 6781) to a second position if both the following condi- you treat the carryover loss as a capital loss on
tions are met. the date it is allowed, even if you would treat the
As a general rule, report each position (whether • The second position was offsetting to the gain or loss on any successor positions as ordi-
or not it is part of a straddle) on which you have loss position that was sold. nary income or loss. Likewise, if the sale of a
unrecognized gain at the end of the tax year • The successor position is entered into dur- loss position (in the case of section 1256 con-
and the amount of this unrecognized gain in ing a period beginning 30 days before and tracts) would have resulted in a 60% long-term
Part III of Form 6781. Use Part II of Form 6781 ending 30 days after the sale of the loss capital loss and a 40% short-term capital loss,
to figure your gains and losses on straddles. position. you treat the carryover loss under the 60/40
rule, even if you would treat any gain or loss on
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any successor positions as 100% long-term or or loss from the sale or exchange of a capi- Other elections. You can avoid the 60%
short-term capital gain or loss. tal asset. long-term capital loss treatment required for a
• The sale of no position in the straddle, non-section 1256 loss position that is part of a
Exceptions. The rules for coordinating strad- other than a section 1256 contract, would mixed straddle, described earlier, if you choose
dle losses and wash sales do not apply to the result in a long-term capital gain or loss. either of the two following elections to offset
following loss situations. • You have not made a straddle-by-straddle gains and losses for these positions.
• Loss on the sale of one or more positions identification election (Election B) or mixed • Election B. Make a separate identification
in a hedging transaction. (Hedging trans- straddle account election (Election C), of the positions of each mixed straddle for
actions are described under Section 1256 both discussed later. which you are electing this treatment (the
Contracts Marked to Market, earlier.) straddle-by-straddle identification method).
• Loss on the sale of a loss position in a Example. On March 4, 2022, you entered • Election C. Establish a mixed straddle ac-
mixed straddle account. (See Mixed strad- into a long gold forward contract. On July 15, count for a class of activities for which
dle account (Election C), later.) 2022, you entered into an offsetting short gold gains and losses will be recognized and
• Loss on the sale of a position that is part of regulated futures contract. You did not make an offset on a periodic basis.
a straddle consisting only of section 1256 election to offset gains and losses from posi- These two elections are alternatives to the
contracts. tions in a mixed straddle. On August 5, 2022, mixed straddle election. You can choose only
you disposed of the long forward contract at a one of the three elections. Use Form 6781 to in-
Holding Period and loss. Because the gold forward contract was dicate your election choice by checking box A,
Loss Treatment Rules part of a mixed straddle and the disposition of B, or C, whichever applies.
this non-section 1256 position would not result
The holding period of a position in a straddle in long-term capital loss, the loss recognized on Straddle-by-straddle identification elec-
generally begins no earlier than the date on the termination of the gold forward contract will tion (Election B). Under this election, you
which the straddle ends (the date you no longer be treated as a 60% long-term and 40% must clearly identify each position that is part of
hold an offsetting position). This rule does not short-term capital loss. the identified mixed straddle by the earlier of:
apply to any position you held more than 1 year • The close of the day the identified mixed
before you established the straddle. But see Exceptions. The special holding period and straddle is established, or
Exceptions, later. loss treatment for straddle positions does not • The time the position is disposed of.
apply to positions that:
Example. On March 8, 2021, you acquired • Constitute part of a hedging transaction; If you dispose of a position in the mixed strad-
gold. On January 10, 2022, you entered into an • Are included in a straddle consisting only dle before the end of the day on which the
offsetting short gold forward contract (nonregu- of section 1256 contracts; or straddle is established, this identification must
lated futures contract). On April 1, 2022, you • Are included in a mixed straddle account be made by the time you dispose of the posi-
disposed of the short gold forward contract at (Election C), discussed later. tion. You are presumed to have properly identi-
fied a mixed straddle if independent verification
no gain or loss. On April 8, 2022, you sold the is used.
gold at a gain. Because the gold had been held Mixed Straddle Elections If you make this election, any positions you
for 1 year or less before the offsetting short po- held on the day before the election are deemed
sition was entered into, the holding period for If you disposed of a position in a mixed straddle sold for their fair market value at the close of the
the gold begins on April 1, 2022, the date the and make one of the elections described in the last business day before the day of the election.
straddle ended. Gain recognized on the sale of following discussions, report your gain or loss For elections made on or before August 18,
the gold will be treated as short-term capital as indicated in those discussions. If you do not 2014, take this gain or loss into account when
gain. make any of the elections, report your gain or figuring taxable income for the year in which the
loss in Part II of Form 6781. If you disposed of election was made. For elections made after
Loss treatment. Treat the loss on the sale of the section 1256 component of the straddle, en- August 18, 2014, take this gain or loss into ac-
one or more positions (the loss position) of a ter the recognized loss (line 10, column (h)) or count in the year you would have reported the
straddle as a long-term capital loss if both the your gain (line 12, column (f)) in Part I of Form gain or loss if the identified mixed straddle had
following are true. 6781, on line 1. Do not include it on line 11 or not been established. In addition, when the gain
• You held (directly or indirectly) one or more 13 (Part II). or loss that accrued prior to the time the identi-
offsetting positions to the loss position on fied mixed straddle was established is taken
the date you entered into the loss position. Mixed straddle election (Election A). You into account, it will have the same character it
• You would have treated all gain or loss on can elect out of the marked-to-market rules, dis- would have had if the identified mixed straddle
one or more of the straddle positions as cussed under Section 1256 Contracts Marked had not been established. See Regulations
long-term capital gain or loss if you had to Market, earlier, for all section 1256 contracts section 1.1092(b)-6 for details.
sold these positions on the day you en- that are part of a mixed straddle. Instead, the The basic tax treatment of gain or loss under
tered into the loss position. gain and loss rules for straddles will apply to this election depends on which side of the
these contracts. However, if you make this elec- straddle produced the total net gain or loss. If
Mixed straddles. Special rules apply to a tion for an option on a section 1256 contract, the net gain or loss from the straddle is due to
loss position that is part of a mixed straddle and the gain or loss treatment discussed earlier un- the section 1256 contracts, gain or loss is trea-
that is a non-section 1256 position. A mixed der Options will apply, subject to the gain and ted as 60% long-term capital gain or loss and
straddle is a straddle: loss rules for straddles. 40% short-term capital gain or loss. Enter the
• That is not part of a larger straddle, You can make this election if: net gain or loss in Part I of Form 6781 and iden-
• In which all positions are held as capital • At least one (but not all) of the positions is tify the election by checking box B.
assets, a section 1256 contract, and If the net gain or loss is due to the non-sec-
• In which at least one (but not all) of the po- • Each position forming part of the straddle tion 1256 positions, gain or loss is short-term
sitions is a section 1256 contract, and is clearly identified as being part of that capital gain or loss. See the Form 6781 instruc-
• For which the mixed straddle election straddle on the day the first section 1256 tions for how to report the net gain or loss.
(Election A, discussed later) has not been contract forming part of the straddle is ac- For the specific application of the rules of
made. quired. this election, see Regulations sections
Treat the loss as 60% long-term capital loss If you make this election, it will apply for all 1.1092(b)-3T and 1.1092(b)-6.
and 40% short-term capital loss if all the follow- later years as well. It cannot be revoked without
ing conditions apply. the consent of the IRS. If you made this elec- Example 1. Straddle established on or be-
• Gain or loss from the sale of one or more tion, check box A of Form 6781. Do not report fore August 18, 2014. On April 2, 2014, you en-
of the straddle positions that are section the section 1256 component in Part I. tered into a non-section 1256 position and an
1256 contracts would be considered gain offsetting section 1256 contract. You also made
a valid election to treat this straddle as an
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identified mixed straddle. On April 9, 2014, you      of the total annual account net loss can be trea-       Generally,  to  qualify  for  the  election,  the 
disposed of the non-section 1256 position at a        ted  as  short-term  capital  loss.  Any  remaining     ESOP or cooperative must own at least 30% of 
$600 loss and the section 1256 contract at an         loss is treated as long-term capital loss.              the outstanding stock of the corporation that is-
$800  gain.  Under  these  circumstances,  the        The election to establish one or more mixed             sued the qualified securities. Also, the qualified 
$600 loss on the non-section 1256 position was        straddle  accounts  for  each  tax  year  must  be      replacement  property  must  have  been  issued 
offset against the $800 gain on the section 1256      made  by  the  due  date  (without  extensions)  of     by a domestic operating corporation.
contract. The net gain of $200 from the straddle      your income tax return for the immediately pre-
was treated as 60% long-term capital gain and         ceding  tax  year.  If  you  begin  trading  in  a  new How to make the election.  You must make 
40% short-term capital gain because it was due        class  of  activities  during  a  tax  year,  you  must the election no later than the due date (includ-
to the section 1256 contract.                         make the election for the new class of activities       ing extensions) for filing your tax return for the 
                                                      by the later of either:                                 year in which you sold the stock. If your original 
Example 2.     Straddle established after Au-         •    The due date of your return for the immedi-        return  was  filed  on  time,  you  may  make  the 
gust 18, 2014. On December 2, 2021, you en-                ately preceding tax year (without exten-           election  on  an  amended  return  filed  no  later 
tered into a non-section 1256 position for $100.           sions), or                                         than 6 months after the due date of your return 
At the end of the day on January 24, 2022, the        •    60 days after you entered into the first           (excluding extensions). Enter “Filed pursuant to 
position  had  a  value  of  $500.  On  January  25,       mixed straddle in the new class of activi-         section 301.9100-2” at the top of the amended 
2022,  you  entered  into  an  offsetting  section         ties.                                              return and file it at the same address you used 
1256 position. You elected to treat the straddle      You  make  the  election  on  Form  6781  by            for your original return.
as an identified mixed straddle.                      checking  box  C.  Attach  Form  6781  to  your  in-    How  to  report  and  postpone  gain.     Re-
On  February  10,  2022,  you  closed  out  the       come tax return for the immediately preceding           port  the  sale  in  Part  II  of  Form  8949  as  you 
section  1256  contract  at  a  $500  loss  and  dis- tax year, or file it within 60 days, if that applies.   would if you were not making the election. Then 
posed  of  the  non-section  1256  position  for      Report the annual account net gain or loss from         enter “R” in column (f). Enter the amount of the 
$975. Prior to entering into the identified mixed     a  mixed  straddle  account  in  Part  II  of  Form     postponed  gain  as  a  negative  number  in  col-
straddle, you had a $400 unrealized short-term        6781. In addition, you must attach a statement          umn (g). Put it in parentheses to show it is neg-
capital  gain  on  the  non-section  1256  position.  to Form 6781 specifically designating the class         ative.  Complete  all  remaining  columns.  If  the 
When  you  disposed  of  the  non-section  1256       of activities for which a mixed straddle account        actual  postponed  gain  is  different  from  the 
position on February 10, 2022, you recognized         is established.                                         amount you report, file an amended return.
the  $400  gain.  This  gain  is  figured  as  though For  the  specific  application  of  the  rules  of 
you  had  disposed  of  the  position  on  the  day   this election,  see     Regulations        section              Report your sales of stock to ESOPs or 
prior to establishing the identified mixed strad-     1.1092(b)-4T.                                           !       certain  cooperatives  on  Form  8949 
dle.                                                                                                          CAUTION with the correct box checked for these 
You also realized a gain of $475 ($975 pro-           Interest  expense  and  carrying  charges               transactions.  See  Form  8949  and  the  Instruc-
ceeds  –  $500  value  before  entering  into  the    relating  to  mixed  straddle  account  posi-           tions for Form 8949.
identified mixed straddle). This gain is offset by    tions.  You cannot deduct interest and carrying         Also attach the following statements.
the $500 loss on the section 1256 contract for a      charges that are allocable to any positions held 
net loss of $25. This net loss is recognized and      in  a  mixed  straddle  account.  Treat  these          1. A “statement of election” that indicates you 
treated as 60% long-term capital loss and 40%         charges as an adjustment to the annual account            are making an election under section 
short-term capital loss attributable to the section   net  gain  or  loss  and  allocate  them  proportion-     1042(a) of the Internal Revenue Code and 
1256 contract.                                        ately  between  the  net  short-term  and  the  net       that includes the following information.
                                                      long-term capital gains or losses.
Mixed  straddle  account  (Election  C).              To find the amount of interest and carrying               a. A description of the securities sold, in-
You  may  elect  to  establish  one  or  more  ac-    charges that is not deductible and that must be                 cluding the type and number of 
counts for determining gains and losses from all      added  to  the  annual  account  net  gain  or  loss,           shares, the date of the sale, the 
positions in a mixed straddle. You must estab-        apply the rules described earlier to the positions              amount realized on the sale, and the 
lish a separate mixed straddle account for each       held in the mixed straddle account. See Interest                adjusted basis of the securities.
separate designated class of activities.              expense  and  carrying  charges  on  straddles  in        b. The name of the ESOP or cooperative 
Generally, you must determine gain or loss            chapter 3.                                                      to which the qualified securities were 
for each position in a mixed straddle account as      For special rules on the deferral of gain rela-                 sold.
of  the  close  of  each  business  day  of  the  tax ted to a straddle where the gain is invested in a         c. For a sale that was part of a single in-
year. You offset the net section 1256 contracts       Qualified  Opportunity  Fund,  see  section                     terrelated transaction under a prear-
against  the  net  non-section  1256  positions  to   1400Z-2 for more details.                                       ranged agreement between taxpayers 
determine the “daily account net gain or loss.”
If  the  daily  account  amount  is  due  to                                                                          involving other sales of qualified se-
non-section 1256 positions, the amount is trea-       Sales of Stock to Employee                                      curities, the names and identifying 
ted as short-term capital gain or loss. If the daily  Stock Ownership Plans                                           numbers of the other taxpayers under 
account  amount  is  due  to  section  1256  con-                                                                     the agreement and the number of 
tracts, the amount is treated as 60% long-term        (ESOPs) or Certain                                              shares sold by the other taxpayers.
and 40% short-term capital gain or loss.              Cooperatives
                                                                                                              2. A notarized “statement of purchase” de-
On the last business day of the tax year, you                                                                   scribing the qualified replacement prop-
determine the “annual account net gain or loss”       If you sold qualified securities held for at least 3      erty, date of purchase, and the cost of the 
for  each  account  by  netting  the  daily  account  years to an ESOP or eligible worker-owned co-             property and declaring the property to be 
amounts for that account for the tax year. The        operative, you may be able to elect to postpone           qualified replacement property for the 
“total annual account net gain or loss” is deter-     all or part of the gain on the sale if you bought         qualified stock you sold. The statement 
mined  by  netting  the  annual  account  amounts     qualified  replacement  property  (certain  securi-       must have been notarized no later than 30 
for all mixed straddle accounts that you had es-      ties) within the period that began 3 months be-           days after the purchase. If you have not 
tablished.                                            fore  the  sale  and  ended  12  months  after  the       yet purchased the qualified replacement 
The  net  amounts  keep  their  long-term  or         sale. If you make the election, you must recog-           property, you must attach the notarized 
short-term  classification.  However,  no  more       nize gain on the sale only to the extent the pro-         “statement of purchase” to your income 
than  50%  of  the  total  annual  account  net  gain ceeds  from  the  sale  exceed  the  cost  of  the        tax return for the year following the elec-
for  the  tax  year  can  be  treated  as  long-term  qualified replacement property.                           tion year (or the election will not be valid).
capital  gain.  Any  remaining  gain  is  treated  as 
short-term capital gain. Also, no more than 40%       You  must  reduce  the  basis  of  the  replace-        3. A verified written statement of the domes-
                                                      ment  property  by  any  postponed  gain.  If  you        tic corporation whose employees are cov-
                                                      dispose of any replacement property, you may              ered by the ESOP acquiring the securities, 
                                                      have to recognize all of the postponed gain.
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or of any authorized officer of the coopera- For more information about tests 6 and 7, see • The replacement stock is qualified small
tive, consenting to the taxes under sec- the regulations under section 1202 of the Inter- business stock.
tions 4978 and 4979A of the Internal Rev- nal Revenue Code. • The replacement stock continues to meet
enue Code on certain dispositions, and the active business requirement for small
prohibited allocations of the stock pur- Active business test. A corporation meets business stock for at least the first 6
chased by the ESOP or cooperative. this test for any period of time if, during that pe- months after you buy it.
riod, both the following are true.
More information. For details, see section • It was an eligible corporation, defined be- Amount of gain recognized. If you make the
1042 of the Internal Revenue Code and Regula- low. choice described in this section, you must rec-
tions section 1.1042-1T. • It used at least 80% (by value) of its assets ognize the capital gain only up to the following
in the active conduct of at least one quali- amount.
Gains on Qualified • The amount realized on the sale, minus
fied trade or business, defined below.
• The cost of any qualified small business
Small Business Stock Exception for Specialized Small Busi- stock you bought during the 60-day period
ness Investment Company (SSBIC). Any beginning on the date of sale (and did not
This section discusses two provisions of the law SSBIC is treated as meeting the active busi- previously take into account on an earlier
that may apply to gain from the sale or trade of ness test. An SSBIC is an eligible corporation li- sale of qualified small business stock).
qualified small business stock. You may qualify censed to operate under section 301(d) of the
for a tax-free rollover of all or part of the gain. Small Business Investment Act of 1958, as in If this amount is less than the amount of your
You may be able to exclude gain from your in- effect on May 13, 1993. capital gain, you can postpone the rest of that
come. gain. If this amount equals or is more than the
Eligible corporation. This is any U.S. cor- amount of your capital gain, you must recognize
Qualified small business stock. This is poration other than: the full amount of your gain.
stock that meets all the following tests. • A Domestic International Sales Corpora-
tion (DISC) or a former DISC; Basis of replacement stock. You must sub-
1. It must be stock in a C corporation. • A corporation that has made, or whose tract the amount of postponed gain from the ba-
2. It must have been originally issued after subsidiary has made, an election under sis of your replacement stock.
August 10, 1993. section 936 of the Internal Revenue Code;
• A regulated investment company; Holding period of replacement stock. Your
3. The corporation must have total gross as- • A REIT; holding period for the replacement stock in-
sets of $50 million or less at all times after • A REMIC; cludes your holding period for the stock sold,
August 9, 1993, and before it issued the • Certain financial asset securitization in- except for the purpose of applying the 6-month
stock. Its total gross assets immediately vestment trusts (FASITs); or holding period requirement for choosing to roll
after it issued the stock must also be $50 • A cooperative. over the gain on its sale.
million or less.
When figuring the corporation's total Qualified trade or business. This is any Pass-through entity. A pass-through entity (a
gross assets, you must also count the as- trade or business other than: partnership, S corporation, or mutual fund or
sets of any predecessor of the corpora- • One involving services performed in the other regulated investment company) may also
tion. In addition, you must treat all corpora- fields of health, law, engineering, architec- make the choice to postpone gain. The benefit
tions that are members of the same ture, accounting, actuarial science, per- of the postponed gain applies to your share of
parent-subsidiary controlled group as one forming arts, consulting, athletics, financial the entity's postponed gain if you held an inter-
corporation. services, or brokerage services; est in the entity for the entire period the entity
• One whose principal asset is the reputa- held the stock.
4. You must have acquired the stock at its tion or skill of one or more employees; If a pass-through entity sold qualified small
original issue, directly or through an under- • Any banking, insurance, financing, leasing, business stock held for more than 6 months and
writer, in exchange for money or other investing, or similar business; you held an interest in the entity for the entire
property (not including stock), or as pay • Any farming business (including the busi- period the entity held the stock, you may also
for services provided to the corporation ness of raising or harvesting trees); choose to postpone gain if you, rather than the
(other than services performed as an un- • Any business involving the production or pass-through entity, buy the replacement stock
derwriter of the stock). In certain cases, extraction of products for which percent- within the 60-day period.
your stock may also meet this test if you age depletion can be claimed; or
acquired it from another person who met • Any business of operating a hotel, motel, How to report gain. Report the entire gain re-
this test, or through a conversion or trade restaurant, or similar business. alized from the sale in Part I or Part II of Form
of qualified small business stock that you
held. 8949. To make the election to postpone gain,
Rollover of Gain report the gain as you would if you were not
5. The corporation must have met the active making the election. Enter “R” in column (f). En-
business test, defined next, and must You may qualify for a tax-free rollover of capital ter the amount of the postponed gain as a nega-
have been a C corporation during sub- gain from the sale of qualified small business tive number in column (g). Put it in parentheses
stantially all the time you held the stock. stock held more than 6 months. This means to show it is negative. Complete all remaining
6. Within the period beginning 2 years before that, if you buy certain replacement stock and columns.
and ending 2 years after the stock was is- make the choice described in this section, you Report these transactions on Form
sued, the corporation cannot have bought postpone part or all of your gain. ! 8949 with the correct box checked.
more than a de minimis amount of its CAUTION See Form 8949 and the Instructions for
stock from you or a related party. You postpone the gain by adjusting the ba- Form 8949.
7. Within the period beginning 1 year before sis of the replacement stock as described in Ba-
and ending 1 year after the stock was is- sis of replacement stock, later. This postpones You must make the choice to postpone gain
sued, the corporation cannot have bought your gain until the year you dispose of the re- no later than the due date (including exten-
more than a de minimis amount of its placement stock. sions) for filing your tax return for the year in
which you sold the stock. If your original return
stock from anyone, unless the total value was filed on time, you may make the choice on
of the stock it bought is 5% or less of the You can make this choice if you meet all the an amended return filed no later than 6 months
total value of all its stock. following tests. after the due date of your return (excluding ex-
• You buy replacement stock during the tensions). Enter “Filed pursuant to section
60-day period beginning on the date of the 301.9100-2” at the top of the amended return
sale.

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and file it at the same address you used for your 1. You sell or trade stock in a corporation • Certain transactions you do not have to re-
original return. that qualifies as an empowerment zone port on Form 8949;
business during substantially all of the • Gain from Form 2439 or 6252 or Part I of
Section 1202 Exclusion time you held the stock. Form 4797;
2. You acquired the stock after December • Gain or loss from Form 4684, 6781, or
You can generally exclude from your income up 21, 2000, and before February 18, 2009. 8824;
to 50% of your gain from the sale or trade of • Gain or loss from a partnership, S corpora-
qualified small business stock held by you for 3. The gain from the sale or exchange of the tion, estate, or trust;
more than 5 years. The exclusion can be up to stock is attributable to periods on or before • Capital gain distributions not reported di-
75% for stock acquired after February 17, 2009, December 31, 2018. rectly on your Form 1040; and
• Capital loss carryover from the previous
and no later than September 27, 2010, and up Condition 1 will still be met if the corporation year to the current year.
to 100% for stock acquired after September 27, ceased to qualify after the 5-year period that be-
2010. The exclusion can be up to 60% for cer- gins on the date you acquired the stock. How- On Form 8949, enter all sales and ex-
tain empowerment zone business stock for gain ever, the gain that qualifies for the 60% exclu- changes of capital assets, including stocks,
attributable to periods on or before December sion cannot be more than the gain you would bonds, etc., and real estate (if not reported on
31, 2018. The 60% exclusion doesn't apply to have had if you had sold the stock on the date Form 4684, 4797, 6252, 6781, 8824, or line 1a
gain attributable to periods after December 31, the corporation ceased to qualify. or 8a of Schedule D (Form 1040). Include these
2018. See Empowerment zone business stock, transactions even if you did not receive a Form
later. The eligible gain minus your section 1202 Note. If either the 75% or 100% exclusion 1099-B or Form 1099-S, Proceeds From Real
exclusion is a 28% rate gain. See Capital Gain applies, then the 60% exclusion does not apply. Estate Transactions, for the transaction. Report
Tax Rates, later. short-term gains or losses in Part I. Report
long-term gains or losses in Part II. Use as
SSBIC stock. If the stock is SSBIC stock you Exclusion of Gain From DC many Forms 8949 as you need.
bought as replacement property for publicly tra- Zone Assets
ded securities you sold at a gain before 2018, Exceptions to filing Form 8949 and Sched-
you must reduce the basis of the stock by the If you sold or exchanged a District of Columbia ule D (Form 1040). There are certain situa-
amount of any postponed gain on that earlier Enterprise Zone (DC Zone) asset that you ac- tions where you may not have to file Form 8949
sale. But do not reduce your basis by that quired after 1997 and before 2012 and held for and/or Schedule D (Form 1040).
amount when figuring your section 1202 exclu- more than 5 years, you may be able to exclude Exception 1. You do not have to file Form
sion. the amount of qualified capital gain that you 8949 or Schedule D (Form 1040) if you have no
would otherwise include in income. The exclu-
Limit on eligible gain. The amount of your sion applies to an interest in, or property of, cer- capital losses and your only capital gains are
gain from the stock of any one issuer that is eli- tain businesses operating in the District of Co- capital gain distributions from box 2a of Form(s)
gible for the exclusion in 2022 is limited to the lumbia. 1099-DIV. If any Form 1099-DIV you receive
greater of: has an amount in box 2b (unrecaptured section
• Ten times your basis in all qualified stock How to report. Report the sale or exchange 1250 gain), box 2c (section 1202 gain), or
of the issuer you sold or exchanged during on Form 8949, Part II, as you would if you were box 2d (collectibles (28%) gain), you do not
the year; or not taking the exclusion. Enter “X” in column (f) qualify for this exception.
• $10 million ($5 million for married individu- and enter the amount of the exclusion as a neg- If you qualify for this exception, report your
als filing separately), minus the amount of ative number in column (g). Put the amount in capital gain distributions directly on Form 1040,
gain from the stock of the same issuer you parentheses to show it is negative. See the in- line 7, and check the box on that line. Also use
used to figure your exclusion in earlier structions for Form 8949, columns (f), (g), and the Qualified Dividends and Capital Gain Tax
years. (h). Complete all remaining columns. Worksheet in the Instructions for Forms 1040 to
figure your tax.
How to report gain. Report the sale or ex- Exception 2. You must file Schedule D
change on Form 8949, Part II, with the appropri- Rollover of Gain From
(Form 1040), but generally do not have to file
ate box checked, as you would if you were not Empowerment Zone Assets Form 8949, if Exception 1 above does not apply
taking the exclusion. Then enter “Q” in column and your only capital gains and losses are:
(f) and enter the amount of the excluded gain as The election to roll over gain from the sale of • Capital gain distributions;
a negative number in column (g). Put it in paren- empowerment zone assets doesn’t apply to • A capital loss carryover;
theses to show it is negative. Complete all re- sales in tax years beginning after 2020. See • A gain from Form 2439 or 6252 or Part I of
maining columns. If you are completing line 18 section 1397B. Form 4797;
of Schedule D (Form 1040), enter as a positive • A gain or loss from Form 4684, 6781, or
number the amount of the exclusion on line 2 of 8824;
the 28% Rate Gain Worksheet in the Sched- Reporting Capital • A gain or loss from a partnership, S corpo-
ule D (Form 1040) instructions. But if you ex- ration, estate, or trust; or
clude 60% of the gain, enter / of the exclusion. 2 3 Gains and Losses Gains and losses from transactions for
If you exclude 75% of the gain, enter / of the 1 3 •
which you received a Form 1099-B that
exclusion. If you exclude 100% of the gain, do Generally, report capital gains and losses on shows basis was reported to the IRS, for
not enter an amount. Form 8949. Complete Form 8949 before you which the Ordinary box in box 2 is not
complete line 1b, 2, 3, 8b, 9, or 10 of Sched- checked, and for which you do not need to
Report these transactions on Form ule D (Form 1040). make any adjustments in column (g) of
! 8949 with the correct box checked. Form 8949 or enter any codes in column (f)
CAUTION See Form 8949 and the Instructions for Use Form 8949 to report:
Form 8949. • The sale or exchange of a capital asset not of Form 8949.
reported on another form or schedule,
More information. For information about ad- • Gains from involuntary conversions (other Installment sales. You cannot use the install-
ditional requirements that may apply, see sec- than from casualty or theft) of capital as- ment method to report a gain from the sale of
tion 1202 of the Internal Revenue Code. sets not held for business or profit, stock or securities traded on an established se-
• Nonbusiness bad debts, and curities market. You must report the entire gain
Empowerment zone business stock. You • Worthlessness of a security. in the year of sale (the year in which the trade
date occurs).
can exclude up to 60% of your gain if you meet Use Schedule D (Form 1040) to report:
all the following additional requirements. Overall gain or loss from transactions re- At-risk rules. Special at-risk rules apply to
•
ported on Form 8949; most income-producing activities. These rules
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limit the amount of loss you can deduct to the Discount Adjustment in Column (g) in those in- Service Center by February 28, 2023 (March
amount you risk losing in the activity. The at-risk structions to figure the adjusted accrued market 31, 2023, if you file Form 1099-B or Form
rules also apply to a loss from the sale or trade discount. Also report the amount of accrued 1099-S electronically). Give the actual owner of
of an asset used in an activity to which the market discount as interest income on Sched- the proceeds Copy B of the Form 1099-B or
at-risk rules apply. For more information, see ule B (Form 1040), line 1, and identify it as “Ac- Form 1099-S by February 15, 2023. On Form
Pub. 925. Use Form 6198, At-Risk Limitations, crued Market Discount.” See the Instructions for 1099-B, you should be listed as the “Payer.”
to figure the amount of loss you can deduct. Form 8949 for more information. The actual owner should be listed as the “Re-
cipient.” On Form 1099-S, you should be listed
Passive activity gains and losses. If you Form 1099-CAP transactions. If a corpora- as the “Filer.” The actual owner should be listed
have gains or losses from a passive activity, tion in which you own stock has had a change as the “Transferor.” You do not have to file a
you may also have to report them on Form in control or a substantial change in capital Form 1099-B or Form 1099-S to show proceeds
8582. In some cases, the loss may be limited structure, you should receive Form 1099-CAP, for your spouse. For more information about the
under the passive activity rules. Refer to Form Changes in Corporate Control and Capital reporting requirements and the penalties for
8582 and its instructions for more information Structure, from the corporation. Use the Form failure to file (or furnish) certain information re-
about reporting capital gains and losses from a 1099-CAP to fill in Form 8949. If your computa- turns, see the General Instructions for Certain
passive activity. tions show that you would have a loss because Information Returns.
of the change, do not enter any amounts on
Form 1099-B transactions. If you sold prop- Form 8949 or Schedule D (Form 1040) as a re- Sale of property bought at various times. If
erty, such as stocks, bonds, or certain com- sult of this transaction. you sell a block of stock or other property that
modities, through a broker, you should receive Report the aggregate amount received you bought at various times, report the
Form 1099-B from the broker. Use the Form shown in box 2 of Form 1099-CAP as the sales short-term gain or loss from the sale on one row
1099-B to complete Form 8949 and/or Sched- price in column (d) of either Part I or Part II of in Part I of Form 8949 and the long-term gain or
ule D (Form 1040). Form 8949, whichever applies. loss on one row in Part II of Form 8949. Enter
If you received a Form 1099-B for a transac- “Various” in column (b) for the “Date acquired.”
tion, you usually report the transaction on Form Form 1099-S transactions. If you sold or tra-
8949. Report the proceeds shown in box 1d of ded reportable real estate, you should generally Sale expenses. On Form 8949, include in col-
Form 1099-B in column (d) of either Part I or receive from the real estate reporting person a umn (g) any expense of sale, such as broker's
Part II of Form 8949, whichever applies. Form 1099-S showing the gross proceeds. fees, commissions, state and local transfer
Include in column (g) any selling expenses “Reportable real estate” is defined as any taxes, and option premiums, unless you repor-
or option premiums not reflected in box 1d or present or future ownership interest in any of ted the net sales price in column (d). If you in-
box 1e of Form 1099-B. If you include a selling the following. clude an expense of sale in column (g), enter
expense in column (g), enter “E” in column (f). • Improved or unimproved land, including air “E” in column (f).
Enter the basis shown in box 1e in column space.
(e). If the basis shown on Form 1099-B is not • Inherently permanent structures, including Short-term gains and losses. Capital gain or
correct, see the table How To Complete Form any residential, commercial, or industrial loss on the sale or trade of investment property
8949, Columns (f) and (g), in the Instructions for building. held 1 year or less is a short-term capital gain or
Form 8949 for the adjustment you must make. If • A condominium unit and its accessory fix- loss. You report it in Part I of Form 8949.
no basis is shown on Form 1099-B, enter the tures and common elements, including You combine your share of short-term capi-
correct basis of the property in column (e). See land. tal gain or loss from partnerships, S corpora-
the instructions for Form 1099-B, Form 8949, • Stock in a cooperative housing corporation tions, and fiduciaries, and any short-term capital
and Schedule D (Form 1040) for more informa- (as defined in section 216 of the Internal loss carryover, with your other short-term capi-
tion. Revenue Code). tal gains and losses to figure your net
• Any noncontingent interest in standing tim- short-term capital gain or loss on line 7 of
Example 1. You sold 100 shares of Fund ber. Schedule D (Form 1040).
HIJ for $2,500. You paid a $75 commission to A “real estate reporting person” could in- Long-term gains and losses. A capital gain
the broker for handling the sale. Your Form clude the buyer's attorney, your attorney, the ti- or loss on the sale or trade of investment prop-
1099-B shows that the net sales proceeds, tle or escrow company, a mortgage lender, your erty held more than 1 year is a long-term capital
$2,425 ($2,500 − $75), were reported to the broker, the buyer's broker, or the person acquir- gain or loss. You report it in Part II of Form
IRS. Report $2,425 in column (d) of Form 8949. ing the biggest interest in the property. 8949.
Complete columns (a), (b), (c), and (e). Your Form 1099-S will show the gross pro- You also report the following in Part II of
Example 2. You sold 200 shares of Fund ceeds from the sale or exchange in box 2. See Schedule D (Form 1040).
KLM for $10,000. You paid a $100 commission the Instructions for Form 8949 and the Instruc- • Undistributed long-term capital gains from
at the time of the sale. The broker reported the tions for Schedule D (Form 1040) for how to re- a mutual fund (or other regulated invest-
gross proceeds to the IRS on Form 1099-B, so port these transactions and include them in Part ment company) or REIT.
on Form 8949, you enter “E” in column (f), I or Part II of Form 8949, as appropriate. How- • Your share of long-term capital gains or
$10,000 in column (d), and $100 as a negative ever, report like-kind exchanges on Form 8824 losses from partnerships, S corporations,
adjustment in column (g). Complete all remain- instead. and fiduciaries.
ing columns. It is unlawful for any real estate reporting • All capital gain distributions from mutual
funds and REITs not reported directly on
Section 1256 contracts and straddles. person to separately charge you for complying Form 1040, line 7.
Use Form 6781 to report gains and losses from with the requirement to file Form 1099-S. • Long-term capital loss carryovers.
section 1256 contracts and straddles before en-
tering these amounts on Schedule D (Form Nominees. If you receive gross proceeds as a The result after combining these items with
1040). Include a copy of Form 6781 with your nominee (that is, the gross proceeds are in your your other long-term capital gains and losses is
income tax return. name but actually belong to someone else), see your net long-term capital gain or loss (line 15 of
the Instructions for Form 8949 for how to report Schedule D (Form 1040)).
Market discount bonds. Report the sale these amounts on Form 8949.
or trade of a market discount bond on Part I or Total net gain or loss. To figure your total net
Part II of Form 8949, whichever is appropriate. File Form 1099-B or Form 1099-S with gain or loss, combine your net short-term capi-
See the table How To Complete Form 8949, the IRS. If you received gross proceeds as a tal gain or loss (Schedule D (Form 1040), line 7)
Columns (f) and (g), in the Instructions for Form nominee in 2022, you must file a Form 1099-B with your net long-term capital gain or loss
8949 to help you figure the amounts to report or Form 1099-S for those proceeds with the (Schedule D (Form 1040), line 15). Enter the re-
for a sale or trade of a market discount bond. IRS. Send the Form 1099-B or Form 1099-S sult on Schedule D (Form 1040), Part III,
Use the Worksheet for Accrued Market with a Form 1096 to your Internal Revenue line 16. If your losses are more than your gains,
Chapter 4 Sales and Trades of Investment Property Page 65

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Worksheet 4-1. Capital Loss Carryover Worksheet                                                                                  Keep for Your Records
Use this worksheet to figure your capital loss carryovers from 2022 to 2023 if Schedule D (Form 1040), line 21, is a loss 
and (a) that loss is a smaller loss than the loss on Schedule D (Form 1040), line 16, or (b) if the amount on your 2022 
Form 1040, line 15, would be less than zero if you could enter a negative amount on that line. Otherwise, you do not have 
any carryovers.
    1. Enter the amount from Form 1040, line 15. If the amount would have been a loss, if you could enter a 
       negative number on that line, enclose the amount in parentheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                   1.   
    2. Enter the loss from Schedule D (Form 1040), line 21, as a positive amount . . . . . . . . . . . . . . . . . . . . . . . .                                       2.   
    3. Combine lines 1 and 2. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 3.   
    4. Enter the smaller of line 2 or line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         4.   
       If line 7 of Schedule D is a loss, go to line 5; otherwise, enter -0- on line 5 and go to line 9.
    5. Enter the loss from Schedule D (Form 1040), line 7, as a positive amount . . . . . . . . . . . . . . . . . . . . . . . . .                                      5.   
    6. Enter any gain from Schedule D (Form 1040), line 15. If a loss, enter -0- . . . . . . . . . . .                       6.  
    7. Add lines 4 and 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.   
    8. Short-term capital loss carryover to 2023. Subtract line 7 from line 5. If zero or less, enter -0- . . . . .                                                    8.   
       If line 15 of Schedule D is a loss, go to line 9; otherwise, skip lines 9 through 13.
    9. Enter the loss from Schedule D (Form 1040), line 15, as a positive amount . . . . . . . . . . . . . . . . . . . . . . . .                                       9.   
10.    Enter any gain from Schedule D (Form 1040), line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . .          10.   
11.    Subtract line 5 from line 4. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   11.   
12.    Add lines 10 and 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   12.  
13. Long-term capital loss carryover to 2023. Subtract line 12 from line 9. If zero or less, enter -0- . . . . .                                                       13.  

see Capital Losses, next. If both lines 15 and 16              year's long-term capital gains before it reduces        capital loss limits discussed earlier still apply in 
of your Schedule D (Form 1040) are gains and                   that year's short-term capital gains.                   this situation. The decedent's estate cannot de-
your  taxable  income  on  your  Form  1040  is                                                                        duct any of the loss or carry it over to following 
greater than zero, see   Capital Gain Tax Rates,               Figuring  your  carryover.   The  amount  of            years.
later.                                                         your capital loss carryover is the amount of your 
                                                               total net loss that is more than the lesser of:           Joint  and  separate  returns.                     If  you  and 
Capital Losses                                                 1. Your allowable capital loss deduction for            your spouse once filed separate returns and are 
                                                               the year, or                                            now filing a joint return, combine your separate 
                                                                                                                       capital  loss  carryovers.  However,  if  you  and 
If your capital losses are more than your capital              2. Your taxable income increased by your al-            your  spouse  once  filed  a  joint  return  and  are 
gains,  you  can  claim  a  capital  loss  deduction.          lowable capital loss deduction for the year.            now filing separate returns, any capital loss car-
                                                                                                                       ryover  from  the  joint  return  can  be  deducted 
Report the deduction on Form 1040, line 7, en-                 If your deductions are more than your gross             only  on  the  return  of  the  spouse  who  actually 
closed in parentheses.                                         income for the tax year, use your negative taxa-        had the loss.
Limit  on  deduction.    Your  allowable  capital              ble income in figuring the amount in (2) above.
loss  deduction,  figured  on  Schedule  D  (Form              Complete Worksheet  4-1  to  determine  the 
1040), is the lesser of:                                       part of your capital loss that you can carry over.      Capital Gain Tax Rates

•   $3,000 ($1,500 if you are married and file a               Example.        Bob and Shelly sold securities in       The tax rates that apply to a net capital gain are 
    separate return), or                                       2022.  The  sales  resulted  in  a  capital  loss  of   generally lower than the tax rates that apply to 
•   Your total net loss as shown on line 16 of                 $7,000. They had no other capital transactions.         other income. These lower rates are called the 
    Schedule D (Form 1040).                                    Their  taxable  income  was  $26,000.  On  their        maximum capital gain rates.
You can use your total net loss to reduce your                 joint 2022 return, they can deduct $3,000. The 
income dollar for dollar, up to the $3,000 limit.              unused  part  of  the  loss,  $4,000  ($7,000  −          The  term  “net  capital  gain”  means  the 
                                                               $3,000), can be carried over to 2023.                   amount by which your net long-term capital gain 
Capital loss carryover.  If you have a total net               If  their  capital  loss  had  been  $2,000,  their     for  the  year  is  more  than  your  net  short-term 
loss on line 16 of Schedule D (Form 1040) that                 capital loss deduction would have been $2,000.          capital loss.
is more than the yearly limit on capital loss de-              They would have no carryover.
ductions, you can carry over the unused part to                                                                          For  2022,  the  maximum  capital  gain  rates 
the next year and treat it as if you had incurred it           Use  short-term  losses  first.       When  you         are  0%,  15%,  20%,  25%,  and  28%.  See           Ta-
in  that  next  year.  If  part  of  the  loss  is  still  un- figure  your  capital  loss  carryover,  use  your      ble 4-4 for details.
used, you can carry it over to later years until it            short-term capital losses first, even if you incur-
is completely used up.                                         red  them  after  a  long-term  capital  loss.  If  you        If  you  figure  your  tax  using  the  maxi-
When  you  figure  the  amount  of  any  capital               have  not  reached  the  limit  on  the  capital  loss    TIP  mum  capital  gain  rate  and  the  regular 
loss carryover to the next year, you must take                 deduction after using the short-term capital los-              tax computation results in a lower tax, 
the  current  year's  allowable  deduction  into  ac-          ses,  use  the  long-term  capital  losses  until  you  the regular tax computation applies.
count,  whether  or  not  you  claimed  it  and                reach the limit.
whether or not you filed a return for the current              Decedent's  capital  loss.   A  capital  loss             Example.   All  of  your  net  capital  gain  is 
year.                                                          sustained by a decedent during his or her last          from selling collectibles, so the capital gain rate 
When you carry over a loss, it remains long                    tax  year  (or  carried  over  to  that  year  from  an would be 28%. If you are otherwise subject to a 
term or short term. A long-term capital loss you               earlier year) can be deducted only on the final         rate lower than 28%, the 28% rate does not ap-
carry over to the next tax year will reduce that               income  tax  return  filed  for  the  decedent.  The    ply.

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Investment interest deducted. If you claim a • You do not have to file Schedule D (Form or commodities you held for investment. Report
deduction for investment interest, you may have 1040) and you received capital gain distri- sales from those securities or commodities on
to reduce the amount of your net capital gain butions. (See Exceptions to filing Form Form 8949 and Schedule D (Form 1040), as
that is eligible for the capital gain tax rates. Re- 8949 and Schedule D (Form 1040 ), ear- appropriate, not Form 4797. See the Instruc-
duce it by the amount of the net capital gain you lier.) tions for Form 8949 and the Instructions for
choose to include in investment income when • Schedule D (Form 1040), lines 15 and 16, Schedule D (Form 1040).
figuring the limit on your investment interest de- are both more than zero.
duction. This is done on the Schedule D Tax Note. You may be a trader in some securi-
Worksheet or the Qualified Dividends and Capi- Alternative minimum tax. These capital gain ties or commodities and have some securities
tal Gain Tax Worksheet. For more information rates are also used in figuring alternative mini- or commodities that are not held in connection
about the limit on investment interest, see Inter- mum tax. with your activities as a trader, such as those
est Expenses in chapter 3. held for investment. The special rules for mark-
ing to market discussed here do not apply to the
28% rate gain. This gain includes gain or loss Special Rules for securities or commodities held for investment.
from the sale of collectibles and the eligible gain You must keep detailed records to distinguish
from the sale of qualified small business stock Traders in Securities those securities or commodities. The securities
minus the section 1202 exclusion. or commodities held for investment must be
or Commodities identified as such in your records on the day
Collectibles gain or loss. This is gain or you acquired them (for example, by holding
loss from the sale or trade of a work of art, rug, Special rules apply if you are a trader in securi- them in a separate brokerage account) specifi-
antique, metal (such as gold, silver, and plati- ties or commodities in the business of buying cally identified under section 475.
num bullion), gem, stamp, coin, or alcoholic and selling securities or commodities for your
beverage held more than 1 year. own account. To be engaged in business as a Expenses. Interest expense and other invest-
Collectibles gain includes gain from the sale trader in securities or commodities, you must ment expenses that an investor would deduct
of an interest in a partnership, S corporation, or meet all the following conditions. on Schedule A (Form 1040) are deducted by a
trust due to unrealized appreciation of collecti- • You must seek to profit from daily market trader on Schedule C (Form 1040), Profit or
bles. movements in the prices of securities or Loss From Business, if the expenses are from
commodities and not from dividends, inter- the trading business. Commissions and other
Gain on qualified small business stock. est, or capital appreciation. costs of acquiring or disposing of securities or
If you realized a gain from qualified small busi- • Your activity must be substantial. commodities (depending upon which election
ness stock that you held more than 5 years, you • You must carry on the activity with continu- was made) are not deductible but must be used
can generally exclude some or all of your gain ity and regularity. to figure gain or loss. The limit on investment in-
under section 1202. The eligible gain minus
your section 1202 exclusion is a 28% rate gain. The following facts and circumstances terest expense, which applies to investors,
See Gains on Qualified Small Business Stock, should be considered in determining if your ac- does not apply to interest paid or incurred in a
earlier in this chapter. tivity is a securities or commodities trading busi- trading business.
ness.
Unrecaptured section 1250 gain. Generally, • Typical holding periods for securities or Self-employment tax. Gains and losses from
this is any part of your capital gain from selling commodities bought and sold. selling securities or commodities as a trader are
section 1250 property (real property) that is due • The frequency and dollar amount of your not subject to self-employment tax. This is true
to depreciation (but not more than your net sec- trades during the year. whether the election is made or not. For an ex-
tion 1231 gain), reduced by any net loss in the • The extent to which you pursue the activity ception that applies to section 1256 contracts,
28% group. Use the Unrecaptured Section to produce income for a livelihood. see Self-Employment Income, earlier.
1250 Gain Worksheet in the Schedule D (Form • The amount of time you devote to the ac-
1040) instructions to figure your unrecaptured tivity. How To Make the
section 1250 gain. For more information about Mark-to-Market Election
section 1250 property and section 1231 gain, If your trading activities do not meet the
see chapter 3 of Pub. 544. above definition of a business, you are consid- To make the mark-to-market election for 2023,
ered an investor, and not a trader. It does not you must have filed an election statement no
Tax computation using maximum capital matter whether you call yourself a trader or a later than the due date for your 2022 return
gain rates. Use the Qualified Dividends and “day trader.” (without regard to extensions). The statement
Capital Gain Tax Worksheet or the Schedule D must be attached to that return or with a prop-
Tax Worksheet (whichever applies) to figure How To Report erly filed request for extension of time to file that
your tax if you have qualified dividends or net 2022 return (Form 4868, Application for Auto-
capital gain. You have net capital gain if Sched- Transactions from trading activities result in matic Extension of Time To File U.S. Individual
ule D (Form 1040), lines 15 and 16, are both capital gains and losses (unless a section Income Tax Return). The statement must have
gains. 475(f) election has been made) and must be re- included the following information.
Schedule D Tax Worksheet. Use the ported on Form 8949 and Schedule D (Form • That you are making an election under
Schedule D Tax Worksheet in the Schedule D 1040), as appropriate. Losses from these trans- section 475(f)(1) or (f)(2) of the Internal
(Form 1040) instructions to figure your tax if: actions are subject to the limit on capital losses Revenue Code.
• You have to file Schedule D (Form 1040); explained earlier in this chapter. • The first tax year for which the election is
and effective.
• Schedule D (Form 1040), line 18 (28% rate Mark-to-market election made. If you made • The trade or business for which you are
gain) or line 19 (unrecaptured section 1250 the section 475(f) mark-to-market election, you making the election.
gain), is more than zero. should report all gains and losses from trading
as ordinary gains and losses in Part II of Form If you are a new taxpayer and not required
Qualified Dividends and Capital Gain 4797, instead of as capital gains and losses on to file a 2022 income tax return, you make the
Tax Worksheet. If you do not have to use the Form 8949 and Schedule D (Form 1040). In that election for 2022 by placing the above state-
Schedule D Tax Worksheet (as explained case, securities or commodities (depending ment in your books and records no later than
above) and any of the following apply, use the upon which election was made) held at the end March 15, 2023. Attach a copy of the statement
Qualified Dividends and Capital Gain Tax Work- of the year in your business as a trader are to your 2023 return.
sheet in the Instructions for Form 1040 to figure marked to market by treating them as if they
your tax. were sold for fair market value on the last busi- If your method of accounting for 2022 is in-
• You received qualified dividends. (See ness day of the year and gain or loss is recog- consistent with the mark-to-market election, you
Qualified Dividends in chapter 1.) nized. But do not mark to market any securities must change your method of accounting for
Chapter 4 Sales and Trades of Investment Property Page 67

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Table 4-4. What Is Your Maximum Capital Gain Rate?                                                          (Forms  1099),  you  have  several  options  to 
                                                                                                            choose from to prepare and file your tax return. 
                                                                           THEN your                        You can prepare the tax return yourself, see if 
                                                                           maximum                          you qualify for free tax preparation, or hire a tax 
                                                                           capital gain                     professional to prepare your return.
IF your net capital gain is from...    AND...                              rate is...                       Free  options  for  tax  preparation.   Go  to 
collectibles gain                                                          28%                              IRS.gov  to  see  your  options  for  preparing  and 
                                                                                                            filing your return online or in your local commun-
eligible gain on qualified small                                                                            ity, if you qualify, which include the following.
business stock minus the section                                                                            • Free File. This program lets you prepare 
1202 exclusion                                                             28%                                and file your federal individual income tax 
unrecaptured section 1250 gain                                             25%                                return for free using brand-name tax-prep-
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1 “Other gain” means any gain that is not collectibles gain, gain on small business stock, or                      Also,  the  IRS  offers  Free  Fillable 
unrecaptured section 1250 gain.                                                                               Forms, which can be completed online and 
                                                                                                              then  filed  electronically  regardless  of  in-
                                                                                                              come.
securities  under  Revenue  Procedure  2022-14 
(or  its  successor),  available  at IRS.gov/irb/                                                           Using online tools to help prepare your re-
2022-07_IRB#REV-PROC-2022-14.  Revenue                                                                      turn. Go to IRS.gov/Tools for the following.
Procedure  2022-14  requires  you  to  file  Form    5.                                                     • The Earned Income Tax Credit Assistant 
3115,  Application  for  Change  in  Accounting                                                               (IRS.gov/EITCAssistant) determines if 
Method.  Follow  its  instructions.  Enter  “64”  on                                                          you’re eligible for the earned income credit 
line 1a of the Form 3115.                                                                                     (EIC).
                                                     How To Get Tax                                         • The Online EIN Application IRS.gov/EIN (       ) 
 Once you make the election, it will apply to                                                                 helps you get an employer identification 
2023 and all later tax years, unless you get per-    Help                                                     number (EIN) at no cost.
mission from the IRS to revoke it. The effect of                                                            • The Tax Withholding Estimator IRS.gov/ (
making  the  election  is  described  under          If  you  have  questions  about  a  tax  issue;  need    W4app) makes it easier for you to estimate 
Mark-to-market election made, earlier.               help preparing your tax return; or want to down-         the federal income tax you want your em-
                                                     load free publications, forms, or instructions, go       ployer to withhold from your paycheck. 
 For  more  information  on  this  election,  see    to IRS.gov to find resources that can help you           This is tax withholding. See how your with-
Revenue Procedure 99-17, on page 52 of Inter-        right away.                                              holding affects your refund, take-home 
nal Revenue Bulletin 1999-7 at                                                                                pay, or tax due.
IRS.gov/pub/irs-irbs/irb99-07.pdf.                   Preparing  and  filing  your  tax  return.  After      • The First-Time Homebuyer Credit Account 
                                                     receiving  all  your  wage  and  earnings  state-        Look-up IRS.gov/HomeBuyer (    ) tool pro-
                                                     ments (Forms W-2, W-2G, 1099-R, 1099-MISC,               vides information on your repayments and 
                                                     1099-NEC, etc.); unemployment compensation               account balance.
                                                     statements  (by  mail  or  in  a  digital  format)  or • The Sales Tax Deduction Calculator 
                                                     other  government  payment  statements  (Form            (IRS.gov/SalesTax) figures the amount you 
                                                     1099-G); and interest, dividend, and retirement          can claim if you itemize deductions on 
                                                     statements  from  banks  and  investment  firms          Schedule A (Form 1040).
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Getting answers to your tax ques- • Youtube.com/irsvideosmultilingua. curely access information about your federal tax
tions. On IRS.gov, you can get • Youtube.com/irsvideosASL. account.
up-to-date information on current • View the amount you owe and a break-
events and changes in tax law. Watching IRS videos. The IRS Video portal down by tax year.
(IRSVideos.gov) contains video and audio pre- • See payment plan details or apply for a
• IRS.gov/Help: A variety of tools to help you sentations for individuals, small businesses, new payment plan.
get answers to some of the most common and tax professionals. • Make a payment or view 5 years of pay-
tax questions. ment history and any pending or sched-
• IRS.gov/ITA: The Interactive Tax Assistant, Online tax information in other languages. uled payments.
a tool that will ask you questions and, You can find information on IRS.gov/ • Access your tax records, including key
based on your input, provide answers on a MyLanguage if English isn’t your native lan- data from your most recent tax return, and
number of tax law topics. guage. transcripts.
• IRS.gov/Forms: Find forms, instructions, View digital copies of select notices from
•
and publications. You will find details on Free Over-the-Phone Interpreter (OPI) Serv- the IRS.
the most recent tax changes and interac- ice. The IRS is committed to serving our multi- • Approve or reject authorization requests
tive links to help you find answers to your lingual customers by offering OPI services. The from tax professionals.
questions. OPI Service is a federally funded program and • View your address on file or manage your
• You may also be able to access tax law in- is available at Taxpayer Assistance Centers communication preferences.
formation in your electronic filing software. (TACs), other IRS offices, and every VITA/TCE
return site. The OPI Service is accessible in Tax Pro Account. This tool lets your tax pro-
Need someone to prepare your tax return? more than 350 languages. fessional submit an authorization request to ac-
cess your individual taxpayer IRS online
There are various types of tax return preparers, Accessibility Helpline available for taxpay- account. For more information, go to IRS.gov/
including enrolled agents, certified public ac- ers with disabilities. Taxpayers who need in- TaxProAccount.
countants (CPAs), accountants, and many oth- formation about accessibility services can call
ers who don’t have professional credentials. If 833-690-0598. The Accessibility Helpline can Using direct deposit. The fastest way to re-
you choose to have someone prepare your tax answer questions related to current and future ceive a tax refund is to file electronically and
return, choose that preparer wisely. A paid tax accessibility products and services available in choose direct deposit, which securely and elec-
preparer is: alternative media formats (for example, braille, tronically transfers your refund directly into your
• Primarily responsible for the overall sub- large print, audio, etc.). The Accessibility Help- financial account. Direct deposit also avoids the
stantive accuracy of your return, line does not have access to your IRS account. possibility that your check could be lost, stolen,
• Required to sign the return, and For help with tax law, refunds, or account-rela- destroyed, or returned undeliverable to the IRS.
• Required to include their preparer tax iden- ted issues, go to IRS.gov/LetUsHelp. Eight in 10 taxpayers use direct deposit to re-
tification number (PTIN).
ceive their refunds. If you don’t have a bank ac-
Note. Form 9000, Alternative Media Prefer- count, go to IRS.gov/DirectDeposit for more in-
Although the tax preparer always signs the re- ence, or Form 9000(SP) allows you to elect to formation on where to find a bank or credit
turn, you're ultimately responsible for providing receive certain types of written correspondence union that can open an account online.
all the information required for the preparer to in the following formats.
prepare tax returns for others should have a •
accurately prepare your return. Anyone paid to Standard Print. Getting a transcript of your return. The
thorough understanding of tax matters. For • Large Print. quickest way to get a copy of your tax transcript
is to go to IRS.gov/Transcripts. Click on either
more information on how to choose a tax pre- • Braille. “Get Transcript Online” or “Get Transcript by
parer, go to Tips for Choosing a Tax Preparer
on IRS.gov. • Audio (MP3). Mail” to order a free copy of your transcript. If
you prefer, you can order your transcript by call-
• Plain Text File (TXT).
Coronavirus. Go to IRS.gov/Coronavirus for ing 800-908-9946.
links to information on the impact of the corona- • Braille Ready File (BRF).
virus, as well as tax relief available for individu- Reporting and resolving your tax-related
als and families, small and large businesses, Disasters. Go to Disaster Assistance and identity theft issues.
and tax-exempt organizations. Emergency Relief for Individuals and • Tax-related identity theft happens when
Businesses to review the available disaster tax someone steals your personal information
Employers can register to use Business relief. to commit tax fraud. Your taxes can be af-
Services Online. The Social Security Adminis- fected if your SSN is used to file a fraudu-
tration (SSA) offers online service at SSA.gov/ Getting tax forms and publications. Go to lent return or to claim a refund or credit.
employer for fast, free, and secure online W-2 IRS.gov/Forms to view, download, or print all The IRS doesn’t initiate contact with tax-
filing options to CPAs, accountants, enrolled the forms, instructions, and publications you •
payers by email, text messages (including
agents, and individuals who process Form W-2, may need. Or, you can go to IRS.gov/ shortened links), telephone calls, or social
Wage and Tax Statement, and Form W-2c, OrderForms to place an order. media channels to request or verify per-
Corrected Wage and Tax Statement. sonal or financial information. This in-
Getting tax publications and instructions in
IRS social media. Go to IRS.gov/SocialMedia eBook format. You can also download and cludes requests for personal identification
to see the various social media tools the IRS view popular tax publications and instructions numbers (PINs), passwords, or similar in-
uses to share the latest information on tax (including the Instructions for Form 1040) on formation for credit cards, banks, or other
changes, scam alerts, initiatives, products, and mobile devices as eBooks at IRS.gov/eBooks. financial accounts.
• Go to IRS.gov/IdentityTheft, the IRS Iden-
services. At the IRS, privacy and security are tity Theft Central webpage, for information
our highest priority. We use these tools to share Note. IRS eBooks have been tested using
public information with you. Don’t post your so- Apple's iBooks for iPad. Our eBooks haven’t on identity theft and data security protec-
cial security number (SSN) or other confidential been tested on other dedicated eBook readers, tion for taxpayers, tax professionals, and
information on social media sites. Always pro- and eBook functionality may not operate as in- businesses. If your SSN has been lost or
tect your identity when using any social net- tended. stolen or you suspect you’re a victim of
tax-related identity theft, you can learn
working site. Access your online account (individual tax- what steps you should take.
The following IRS YouTube channels pro- payers only). Go to IRS.gov/Account to se- • Get an Identity Protection PIN (IP PIN). IP
vide short, informative videos on various tax-re- PINs are six-digit numbers assigned to tax-
lated topics in English, Spanish, and ASL. payers to help prevent the misuse of their
• Youtube.com/irsvideos.

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SSNs on fraudulent federal income tax re- • Use the Offer in Compromise Pre-Qualifier know and understand your rights under the
turns. When you have an IP PIN, it pre- to see if you can settle your tax debt for Taxpayer Bill of Rights.
vents someone else from filing a tax return less than the full amount you owe. For
with your SSN. To learn more, go to more information on the Offer in Compro- How can you learn about your taxpayer
IRS.gov/IPPIN. mise program, go to IRS.gov/OIC. rights? The Taxpayer Bill of Rights describes
10 basic rights that all taxpayers have when
Ways to check on the status of your refund. Filing an amended return. Go to IRS.gov/ dealing with the IRS. Go to
• Go to IRS.gov/Refunds. Form1040X for information and updates. TaxpayerAdvocate.IRS.gov to help you under-
• Download the official IRS2Go app to your stand what these rights mean to you and how
mobile device to check your refund status. Checking the status of your amended re- they apply. These are your rights. Know them.
• Call the automated refund hotline at turn. Go to IRS.gov/WMAR to track the status Use them.
800-829-1954. of Form 1040-X amended returns.
What can TAS do for you? TAS can help you
Note. The IRS can’t issue refunds before Note. It can take up to 3 weeks from the resolve problems that you can’t resolve with the
mid-February for returns that claimed the EIC or date you filed your amended return for it to IRS. And their service is free. If you qualify for
the additional child tax credit (ACTC). This ap- show up in our system, and processing it can their assistance, you will be assigned to one ad-
plies to the entire refund, not just the portion as- take up to 16 weeks. vocate who will work with you throughout the
sociated with these credits. process and will do everything possible to re-
Understanding an IRS notice or letter solve your issue. TAS can help you if:
Making a tax payment. Go to IRS.gov/ you’ve received. Go to IRS.gov/Notices to • Your problem is causing financial difficulty
Payments for information on how to make a find additional information about responding to for you, your family, or your business;
payment using any of the following options. an IRS notice or letter. • You face (or your business is facing) an
• IRS Direct Pay: Pay your individual tax bill immediate threat of adverse action; or
or estimated tax payment directly from Note. You can use Schedule LEP (Form • You’ve tried repeatedly to contact the IRS
your checking or savings account at no 1040), Request for Change in Language Prefer- but no one has responded, or the IRS
cost to you. ence, to state a preference to receive notices, hasn’t responded by the date promised.
• Debit or Credit Card: Choose an approved letters, or other written communications from
payment processor to pay online or by the IRS in an alternative language. You may not How can you reach TAS? TAS has offices in
phone. immediately receive written communications in every state, the District of Columbia, and Puerto
• Electronic Funds Withdrawal: Schedule a the requested language. The IRS’s commitment Rico. Your local advocate’s number is in your
payment when filing your federal taxes us- to LEP taxpayers is part of a multi-year timeline local directory and at
ing tax return preparation software or that is scheduled to begin providing translations TaxpayerAdvocate.IRS.gov/Contact-Us. You
through a tax professional. in 2023. You will continue to receive communi- can also call them at 877-777-4778.
• Electronic Federal Tax Payment System: cations, including notices and letters in English
Best option for businesses. Enrollment is until they are translated to your preferred lan- How else does TAS help taxpayers? TAS
required. guage. works to resolve large-scale problems that af-
• Check or Money Order: Mail your payment fect many taxpayers. If you know of one of
to the address listed on the notice or in- Contacting your local IRS office. Keep in these broad issues, report it to them at IRS.gov/
structions. mind, many questions can be answered on SAMS.
• Cash: You may be able to pay your taxes IRS.gov without visiting an IRS TAC. Go to
with cash at a participating retail store. IRS.gov/LetUsHelp for the topics people ask TAS for tax professionals. TAS can provide
• Same-Day Wire: You may be able to do about most. If you still need help, IRS TACs a variety of information for tax professionals, in-
same-day wire from your financial institu- provide tax help when a tax issue can’t be han- cluding tax law updates and guidance, TAS
tion. Contact your financial institution for dled online or by phone. All TACs now provide programs, and ways to let TAS know about sys-
availability, cost, and time frames. service by appointment, so you’ll know in ad- temic problems you’ve seen in your practice.
vance that you can get the service you need
Note. The IRS uses the latest encryption without long wait times. Before you visit, go to
technology to ensure that the electronic pay- IRS.gov/TACLocator to find the nearest TAC Low Income Taxpayer
ments you make online, by phone, or from a and to check hours, available services, and ap-
mobile device using the IRS2Go app are safe pointment options. Or, on the IRS2Go app, un- Clinics (LITCs)
and secure. Paying electronically is quick, easy, der the Stay Connected tab, choose the Con-
and faster than mailing in a check or money or- tact Us option and click on “Local Offices.” LITCs are independent from the IRS. LITCs
der. represent individuals whose income is below a
certain level and need to resolve tax problems
What if I can’t pay now? Go to IRS.gov/ The Taxpayer Advocate with the IRS, such as audits, appeals, and tax
Payments for more information about your op- collection disputes. In addition, LITCs can pro-
tions. Service (TAS) Is Here To vide information about taxpayer rights and re-
• Apply for an online payment agreement sponsibilities in different languages for individu-
(IRS.gov/OPA) to meet your tax obligation Help You als who speak English as a second language.
in monthly installments if you can’t pay Services are offered for free or a small fee for
your taxes in full today. Once you complete What is TAS? TAS is an independent organi- eligible taxpayers. To find an LITC near you, go
the online process, you will receive imme- zation within the IRS that helps taxpayers and to TaxpayerAdvocate.IRS.gov/about-us/Low-
diate notification of whether your agree- protects taxpayer rights. Their job is to ensure Income-Taxpayer-Clinics-LITC or see IRS Pub.
ment has been approved. that every taxpayer is treated fairly and that you 4134, Low Income Taxpayer Clinic List.

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Glossary

Accrual method: An accounting is due to the time value of your Interest: Compensation for the use as debt options, commodity futures
method under which you report your net investment. or forbearance of money. options, currency options, and
broad-based stock index options.
income when you earn it, whether or 2. The transaction is one of the Investment interest: The interest
ally deduct your expenses when you
not you have received it. You gener- following: you paid or accrued on money you Options dealer: Any person regis-
incur a liability for them, rather than a. A straddle, including any borrowed that is allocable to prop- tered with an appropriate national
when you pay them. set of offsetting positions erty held for investment. securities exchange as a market
on stock. maker or specialist in listed options.
At-risk rules: Rules that limit the b. Any transaction in which Limited partner: A partner whose
amount of loss you may deduct to you acquire property participation in partnership activities Original issue discount (OID):
the amount you risk losing in the ac- (whether or not actively is restricted, and whose personal li- The amount by which the stated re-
tivity. traded) at substantially the ability for partnership debts is limited demption price at maturity of a debt
same time that you con- to the amount of money or other instrument is more than its issue
Basis: Basis is the amount of your tract to sell the same prop- property that he or she contributed price.
investment in property for tax purpo- erty or substantially identi- or may have to contribute.
Passive activity: An activity involv-
ses. The basis of property you buy is cal property at a price set Listed option: Any option (other ing the conduct of a trade or busi-
usually the cost. Basis is used to fig- in the contract. than a right to acquire stock from the ness in which you do not materially
ure gain or loss on the sale or dispo-
sition of investment property. c. Any other transaction that issuer) that is traded on (or subject participate and any rental activity.
is marketed or sold as pro- to the rules of) a qualified board or However, the rental of real estate is
Below-market loan: A demand ducing capital gains from a exchange. not a passive activity if both of the
loan (defined later) on which interest transaction described in following are true:
is payable at a rate below the appli- (1). Marked-to-market rule: The treat- • More than one-half of the per-
cable federal rate, or a term loan ment of each section 1256 contract sonal services you perform dur-
where the amount loaned is more Demand loan: A loan payable in (defined later) held by a taxpayer at ing the year in all trades or
than the present value of all pay- full at any time upon demand by the the close of the year as if it were businesses are performed in
ments due under the loan. lender. sold for its fair market value on the real property trades or busi-
last business day of the year. nesses in which you materially
Call: An option that entitles the pur- Dividend: A distribution of money participate.
chaser to buy, at any time before a or other property made by a corpo- Market discount: The stated re- • You perform more than 750
specified future date, property such ration to its shareholders out of its demption price of a bond at maturity hours of services during the
as a stated number of shares of earnings and profits. minus your basis in the bond imme- year in real property trades or
stock at a specified price. diately after you acquire it. Market businesses in which you mate-
Equity option: Any option: discount arises when the value of a rially participate.
Cash method: An accounting • To buy or sell stock, or debt obligation decreases after its
method under which you report your • That is valued directly or indi- issue date. Portfolio income: Gross income
income in the year in which you ac- rectly by reference to any stock from interest, dividends, annuities,
tually or constructively receive it. or narrow-based security index. Market discount bond: Any bond or royalties that is not derived in the
You generally deduct your expenses having market discount except: ordinary course of a trade or busi-
in the year you pay them. Fair market value: The price at • Short-term obligations with ness. It includes gains from the sale
which property would change hands fixed maturity dates of up to 1 or trade of property (other than an
Commodities trader: A person between a willing buyer and a willing year from the date of issue, interest in a passive activity) produc-
who is actively engaged in trading seller, both having reasonable • Tax-exempt obligations that ing portfolio income or held for in-
section 1256 contracts and is regis- knowledge of the relevant facts. you bought before May 1, vestment.
tered with a domestic board of trade 1993,
designated as a contract market by Forgone interest: The amount of • U.S. savings bonds, and Premium: The amount by which
the Commodities Futures Trading interest that would be payable for • Certain installment obligations. your cost or other basis in a bond
Commission. any period if interest accrued at the right after you get it is more than the
applicable federal rate and was pay- Mutual fund: A mutual fund is a total of all amounts payable on the
Commodity future: A contract able annually on December 31, mi- regulated investment company gen- bond after you get it (other than pay-
made on a commodity exchange, nus any interest payable on the loan erally created by “pooling” funds of ments of qualified stated interest).
calling for the sale or purchase of a for that period. investors to allow them to take ad-
fixed amount of a commodity at a fu- vantage of diversity of investments Private activity bond: A bond that
ture date for a fixed price. Forward contract: A contract to and professional management. is part of a state or local government
deliver a substantially fixed amount bond issue of which:
Covered security: Covered securi- of property (including cash) for a Nominee: A person who receives,
ties are certain securities subject to substantially fixed price. in his or her name, income that ac- 1. More than 10% of the pro-
added reporting by your broker on tually belongs to someone else. ceeds are to be used for a pri-
vate business use, and
any Form 1099-B you may receive. Futures contract: An ex-
See the Instructions for Form change-traded contract to buy or Noncovered security: Noncov- 2. More than 10% of the payment
1099-B for more details. sell a specified commodity or finan- ered securities are securities that of the principal or interest is:
cial instrument at a specified price at are not subject to added reporting
Conversion transaction: Any a specified future date. See also by your broker on any Form 1099-B a. Secured by an interest in
transaction that you entered into af- Commodity future. you may receive. See the Instruc- property to be used for a
ter April 30, 1993, that meets both of tions for Form 1099-B for more de- private business use (or
these tests: Gift loan: Any below-market loan tails. payments for the prop-
erty), or
where the forgone interest is in the
1. Substantially all of your expec- nature of a gift. Nonequity option: Any listed op- b. Derived from payments for
ted return from the transaction tion that is not an equity option, such property (or borrowed
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money) used for a private • Is traded on, or subject to the Exceptions under Section 1256 1. There has been a separation in
business use. rules of, a qualified board of ex- Contracts Marked to Market in chap- ownership between the stock
change, such as a domestic ter 4. and any dividend on the stock
Put: An option that entitles the pur- board of trade designated as a that has not become payable.
chaser to sell, at any time before a contract market by the Com- Securities futures contract: A
specified future date, property such modity Futures Trading Com- contract of sale for future delivery of 2. The stock:
as a stated number of shares of mission or any board of trade or a single security or of a nar- a. Is limited and preferred as
stock at a specified price. exchange approved by the row-based security index. to dividends,
Secretary of the Treasury.
Real estate mortgage investment Short sale: The sale of property b. Does not participate in
corporate growth to any
conduit (REMIC): An entity that is Restricted stock: Stock you get for that you generally do not own. You significant extent, and
formed for the purpose of holding a services you perform that is non- borrow the property to deliver to a
fixed pool of mortgages secured by transferable and is subject to a sub- buyer and, at a later date, you buy c. Has a fixed redemption
interests in real property, with multi- stantial risk of forfeiture. substantially identical property and price.
ple classes of interests held by in- deliver it to the lender.
vestors. These interests may be ei- Section 1256 contract: Any: Term loan: Any loan that is not a
ther regular or residual. • Regulated futures contract, Straddle: Generally, a set of offset- demand loan.
• Foreign currency contract as ting positions on personal property.
Regulated futures contract: A defined in chapter 4 under For- A straddle may consist of a pur- Wash sale: A sale of stock or se-
section 1256 contract that: eign currency contract, chased option to buy and a pur- curities at a loss within 30 days be-
• Provides that amounts that • Nonequity option, chased option to sell on the same fore or after you buy or acquire in a
must be deposited to, or may • Dealer equity option, or number of shares of the security, fully taxable trade, or acquire a con-
be withdrawn from, your margin • Dealer securities futures con- with the same exercise price and tract or option to buy, substantially
account depend on daily mar- tract. period. identical stock or securities.
ket conditions (a system of A section 1256 contract does not Stripped preferred stock: Stock
marking to market); and include certain swaps as listed in that meets the following tests:

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                       To help us develop a more useful index, please let us know if you have ideas for index entries.
Index                  See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
 
                                          Private activity 12 71,              Constructive receipt    16            Restricted stock  22
A                                         Redemption or retirement of      36  Constructive sales   36               Sale or trade vs. 35
Abusive tax shelters (See Tax             Sold between interest dates      11  Contractors, insolvency of     54     Scrip  22
  shelters)                               State and local government     49    Conversion transactions    50 71,     Sold stock 19
Accrual method    7 16 24 31 71, , , ,    Stripped 11 14 43, ,                 Convertible stocks and                Stock  41 53, 
Accuracy-related penalty       4          Tax credit bonds   12                  bonds   46                          Underreported   3
Acquisition discount   15 42,             Tax-exempt   49                      Cooperatives, sales of stock          Veterans' insurance   5 22, 
Adjusted basis    20 39 40 42, , ,        Traded flat 5                          to 62                              Divorce 39 47, 
Alaska Permanent Fund                     U.S. savings (See U.S. savings       Corporate distributions    18
  dividends   22 32,                      bonds)                                 Capital gain 23 32 53, ,           E
Amortization of bond                      U.S. Treasury (See U.S.                Constructive 21
  premium     32 33,                      Treasury bills, notes, and             Dividends (See Dividends)          Education Savings Bond 
Annuities:                                bonds)                                 Fractional shares  21               Program  9 10, 
  Borrowing on    34                    Brokerage fees  65                       Liquidating 21 23,                  Interest excluded under    18
  Interest on 5                                                                  Nondividend  20 23,                 Recordkeeping requirements      10
  Life insurance proceeds used to       C                                        Return of capital 20               Employee stock options      2
  buy     11                            Calls and puts 57 71,                    Stock rights 21                    Employee stock ownership plans 
                                                                                                                     (ESOPs), sales of stock to      62
  Sale of 50                              Table 4-3  58                          Undistributed capital gains  20    Employer identification numbers 
  Single-premium    33                  Capital assets 48                      Corporate reorganizations      46     (EINs) 25
  Trade for 36 46,                      Capital gain distributions    20 23, , Cost basis 39 43,                    Empowerment zone      64
Applicable federal rate   6               32 53,                               Coupon bonds    16                   Endowment contracts       33
Appreciated financial                   Capital gains and losses   48 54-      Covered security, defined      71    Enterprise zone facility 
  positions   36                          Constructive ownership                                                     bonds  12
Arbitrage bonds   12                      transactions     51                  D                                    Equity option 37 71, 
Assistance (See Tax help)                 Definition 48                        Day traders 67                       Estate income received by 
At-risk rules 30 64 71, ,                 Empowerment zone assets        64    Dealer equity options   37            beneficiary   3
Automatic investment                      Investment property  49              Dealer securities futures            Exchanges of mutual fund 
  service  41 53,                         Long-term   55 65,                     contracts  37                       shares 46
Average basis    43                       Long-term debt instruments     49    Debt instruments, retirement         Exclusion of gain:
  Double-category method       44         Losses, limit on 66                    of 50                               DC zone assets    64
  Illustrated 44                          Passive activities 65                Decedents   40 66,                   Exempt-interest dividends on 
                                          Qualified covered call                 U.S. savings bond interest,         mutual fund stock     54
B                                         options     60                            reporting of 8
Backup withholding     3                  Qualified small business             Demand loans   71                    F
                                          stock    63                          Demutualization   47                 Face-amount certificates    14
Bad debts  50 54,                         Reporting requirements   60 63,      Deposits, loss on  50                Fair market value 39 43 71, , 
Bankrupt financial institutions:          Short-term  55 65,                   Discount on debt instruments      12 Federal guarantee on bonds       11
  Deposit in  50                          Tax rates  66 68,                      Certificates of deposit 13         Financial asset securitization 
Bargain purchases    39                   Table 4-4     68                       Election to report all interest as  investment trusts (FASITs)      25
Basis 38 47 71- ,                       Capital loss carryover    60 66,            OID  16                         First-in first-out (FIFO) 43
  Adjusted  20 39 40 42, , ,              Worksheet 4-1    66                    Face-amount certificates     14    Foreign currency 
  Average   43                          Cash method   7 16 31 71, , ,            Gain or loss treatment   49         transactions   37
  Cost 39 43,                             Reporting options for savings          Inflation-indexed  14              Foreign income  1
  Inherited property   40                 bond interest      7                   Market discount bonds              Forgone interest  71
  Investment property   38              Cash-settled options   37                   (See Market discount bonds)     Form 1040 or 1040-SR, 
  Like-kind exchanges     45            Casualty losses    50                    Original issue discount             Schedule B    16
  Other than cost 39                    CDOs (Collateralized debt                   (See Original issue discount    Form 1040 or Form 1040-SR        22
  REITs  40                               obligations)  25                          (OID))                          Form 1040-X 36
  REMIC, residual interest     24       Certificates of deposit (CDs)      13    Short-term obligations   15 49,    Form 1040, Schedule D     63
  Replacement stock    63               Children:                                Stripped bonds and coupons      14 Form 1041 26
  Shares acquired by                      Alaska Permanent Fund                Discounted debt instruments       12 Form 1065 26
  reinvestment       41                   dividends     32                     Discounted tax-exempt                 Schedule K-1   26
  Stocks and bonds     20 21 33 40, , ,   Capital gain distributions  32         obligations  43                    Form 1066, Schedule Q     24 34, 
Bearer obligations   14 50,               Custodian account for   3            Dividends 18 71,                     Form 1096 18 23 65, , 
Below-market loans     6 71,              Gifts to 4                           (See also Form 1099-DIV)
Bonds:                                    Investment income of    3 32,          Alaska Permanent Fund    22 32,    Form 1099-B 35 65, 
  Accrued interest on  18                 Qualified dividends  32                Exempt-interest   5 22 54, ,        Covered security, defined     71
  Amortization of premium      32         Savings account with parent as         Extraordinary 56                    Noncovered security, 
                                                                                                                       defined  71
  Arbitrage 12                            trustee    4                           Holding period  19                 Form 1099-CAP   65
  Basis 33 40,                            U.S. savings bond owner     7          Insurance policies 22              Form 1099-DIV  2 18 22 23, , , 
  Capital asset   49                    Co-owners of U.S. savings                Money market funds    20           Form 1099-INT  2 4 9 16 18 24,  ,  , , , , 
  Convertible 46                          bonds    7                             Nominees   18 23,                   25
  Coupon   16                           Collateralized debt obligations          Ordinary  19                       Form 1099-MISC    19 55, 
  Enterprise zone facility   12           (CDOs)   25                            Patronage  22                      Form 1099-OID  4 13 17 24 25, , , , 
  Federally guaranteed    11            Collectibles 67                          Payments in lieu of 55             Form 1099-S 65
  Identification  40                    Commissions    40                        Qualified 19 23 32, ,              Form 1120 26
  Market discount    12 31 42 50, , , , Commodities traders    71                Qualified foreign corporation   19 Form 2439 20
  65 71,                                Commodity futures      51 53 71, ,       Received in January   19           Form 3115 7 33 67, , 
  New York Liberty bonds      12        Community property:                      Reinvestment of   53               Form 4684 50
  Par value   42                          U.S. savings bonds   7                 Reinvestment plans    20 41,       Form 4797 45 52, 
  Premiums on     33 42 71, ,           Constructive ownership                   Reporting requirements   18 22, ,  Form 4952 32
                                          transactions  48 51,                      23
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Form 6198   64                            Shares acquired by                        Limits on deductions       30         Mechanics' and suppliers' 
Form 6781   38 51 60 65, , ,              reinvestment     53                       Nondeductible   33                     liens  54
Form 8275   29                            Straddles 61                              nonpublicly offered mutual fund       Missing children, photographs 
Form 8275-R   29                                                                      or REMIC    34                       of  2
Form 8582   25                          I                                         Investment income     2                 Mixed straddles  55 61, 
Form 8615   3                           Income from sources outside                 Children 3 32,                        Money market funds       20
Form 8815   9 10 18, ,                    U.S. 1                                    General Information        2           Interest income   5
Form 8824   45                          Income tax treaties                         Net income  32                        Mortgages:
Form 8832   26                            (Table 1-3)   19                          Records to keep   2                    Revenue bonds     12
Form 8886   27 29,                      Indian tribal government    11              Reporting of (Table 1-1)     4         Secondary liability on home       54
Form 8949:                              Individual retirement                     Investment interest expenses:            Seller-financed  18
  Bad debts   55                          arrangements (IRAs):                      Reporting requirements       34       Municipal bonds   11 16 49, , 
  Basis adjustment      20                Interest income  5                      Investment property    30               (See also State or local 
  Capital Gains  64                     Inflation-indexed debt                      Basis 38                               government obligations)
  Capital Losses      64                  instruments   14                          Definition 35                         Mutual fund, defined     71
  Cooperative, sale to certain   62     Inherited property:                         Gain or loss treatment       49       Mutual funds 20 30 32 34 40, , , ,  , 
                                                                                                                           43 53, 
  Copyrights in musical works      49     Basis 40                                  Gift, received as 39                   Individual retirement 
  Employee stock ownership plan,          Holding period  53                        Holding period  52                         arrangements (IRAs)    2
      sale to 62                          Transfer by inheritance   36              Liquidation, received in     42        publicly offered 34
  Empowerment Zone Assets          64   Insolvency of contractors   54              Nontaxable trades, received 
  Exempt-interest dividends      54     Installment sales  64                         in 39                               N
  Form 1099-B    35 65,                 Insurance:                                  Sales and trades   35
  Form 1099-CAP         65                Borrowing on  34                          Services, received for     39         Net Investment Income Tax          3
  Form 1099-S    65                       Dividends, interest on 5 22,              Spouse, received from        39       New York Liberty bonds      12
  Fractional shares     21                Interest option on  11                    Taxable trades, received in     39    NIIT 3
  Gain, qualified small business          Life insurance companies,                                                       Nominee distributions:
      stock 64                            demutualization       47                J                                        Dividends 18 23, 
  How to fill in, generally  64           Life, paid to beneficiary 11                                                     Interest income   4 7 9 18,  ,  , 
  Long-term gains and losses       65     Prepaid premiums     5                  Joint accounts  4                        Original issue discount    13
  Marked-to-market election      67       Single-premium life   33                Joint and separate returns        30,   Nominee, defined   71
                                                                                    66
  Market discount bonds      50 65,       Trades   46                                                                     Nonbusiness bad debts       50 54, 
  Musical compositions       49           Veterans' dividends, interest                                                   Noncapital assets  48
  Nominees    65                          on    5 22,                             L                                       Noncovered security, defined        71
  Nonbusiness bad debt       50         Interest expenses:                        Life insurance companies:               Nondeductible investment 
  Nondividend distributions     23        Allocation of 31                          demutualization   47                   expenses    33
  Option  57                              Investment interest   30 71,            Like-kind exchanges    45 47,           Nondividend distributions     20
  Property bought at various              Limit on    31 32,                        Basis of property received      45    Nonequity options   37 71, 
      times 65                            When to deduct        31                  Reporting requirements       45       Nonqualified preferred stock        46
  Rollover, qualified small               Margin accounts   31                    Limited partners  71                    Nonresident aliens:
      business stock      63              Paid in advance  31                     Liquidating distributions      21 42,    Backup withholding      3
  Sale expenses       65                  Straddles 34                            Listed options 37 71,                   Nontaxable return of capital       20
  Short-term gains and losses      65   Interest income 4                         Load charges  40                        Nontaxable stock rights     53
  Software   40                           Annuity contracts   5                   Loans                                   Nontaxable trades   45 53, 
  Worthless securities      36            Bonds traded flat   5                     Below-market   6 71,                  Notes:
Form SS-4   25                            Certificates of deposits  5               Gift and demand    6 71,               Individuals, bought at 
Form W-8BEN     3                         Condemnation awards       5               Guarantees  54                             discount 50
Form W-9  3                               Deferred interest accounts   5            Term  6 72,                            U.S. Treasury (See U.S. 
Forward contracts       71                Dividends on deposit or share           Local government obligations                 Treasury bills, notes, and 
Fractional shares     21 53,              accounts      5                           (See State or local government             bonds)
Frozen deposits   5 18,                   Frozen deposits  5 18,                    obligations)
Futures contracts:                        Gift for opening account  5             Long-term capital gains and             O
  Definition  71                          Individual retirement                     losses  55 65,                        Options 57
  Regulated   37 72,                      arrangements (IRAs)       5             Long-term debt instruments        49     Calls and puts  57 71, 
  Securities  53 56 57, ,                 Installment sale payments    5          Losses on sales or trades        48      Cash settlement   37 57, 
Futures, commodity        51 53 71, ,     Insurance dividends   5                 (See also Capital gains and losses)
  Wash sales   56                         Money market funds     5                  Amount calculation   43                Dealer equity   37
                                          Nominee distributions   4 7 9 18,  ,  ,   Carryback election  38                 Deep-in-the-money       59
G                                         Prepaid insurance premiums      5         Mutual fund or REIT stock held 6       Employee stock    2
                                          Reporting 16 18-                            months or less    53                 Equity   37 71, 
Gains on qualified small                  Seller-financed mortgage     18           Passive activities 25 26 30 32, , ,    Gain or loss 57 59, 
  business stock        63                Tax refunds   5                           Related parties 47                     Holding period  53
Gains on sales or trades       43 47, ,   Tax-exempt    11 16,                      Section 1244 (small business)          Listed 37 71, 
  48                                                                                  stock  52                            Nonequity 37 71, 
(See also Capital gains and losses)       Taxable  5 10 11, ,                       Small business investment              Qualified covered call    59
Gifts 4 39 53 71, , ,                     U.S. savings bonds, person                  company stock     52                 Reporting requirements     57
Gifts of shares 45                        responsible for tax                       Wash sales  60                         Section 1256 contracts     37 57, 
                                          (Table 1-2)     8
Glossary  71                              Underreported   3                                                                Wash sales   56
Government obligations       15           Unstated  39                            M                                       Options dealer   71
                                          Usurious interest   5                   Mark-to-market election        67       Ordinary gains and losses          48 50, 
H                                         VA insurance dividends    5             Marked-to-market rules         37 67, , Original issue discount:
Hedging transactions        37 38 51, , Investment clubs   25 26,                   71                                     Nominee distributions     13
Holding period:                         Investment expenses     30                Market discount bonds        12 14, ,   Original issue discount 
  Investment property       52            Allocated 24                              15 31 42 50 65 71, , , , ,             (OID)  11 14 43 71- , , 
  Replacement stock       63              At-risk rules 30                          Accrued market discount        15      Adjustment to   18
                                          Interest 67                             Maximum rate of capital gains            Reporting requirements     13
                                                                                    (Table 4-4) 68                         Rules  13
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                                          Interest on U.S. savings            Small business stock     42 52 53, , , Tax credit bonds  12
P                                          bonds      7 8,                     63                                    Tax help 68
                                          Investment interest expenses     34 Social security number (SSN):          Tax rates:
Pass-through entities:                    Like-kind exchanges    45            Custodial accounts    3                Capital gain and losses    66
  Rollover of gain 63                     Options  57                          Joint accounts   3                    Tax refunds:
Passive activities   71                   Original issue discount   13         Requirement to give     3              Interest on 5
  Gains and losses   25 26 30 32, , , ,   S corporation income,               Specialized small business             Tax shelters 26 30-
  65                                       deductions, and credits     25      investment company                     Penalties  28
Patronage dividends     22                Section 1256 contracts    38         stock  64                              Reporting requirements     27
Penalties:                                State or local government           Spouses:                                Rules to curb abuse      27
  Accuracy-related   4 28,                 obligations     11                  Transfers between     39 47,          Tax-exempt bonds     49
  Backup withholding    4                 Straddles   65                       (See also Related party 
  Civil fraud 29                          Substitute payments   55                  transactions)                    Tax-exempt income:
  Early withdrawal   5 18,                Tax-exempt interest income     16   State or local government               Expenses of  34
  Failure to pay tax 30                   Trades   67                          obligations    11 12,                  Interest 11 16, 
  Failure to supply SSN    3            Repossession of real                   Market discount bonds                 Tax-exempt obligations    11 14, , 
  Substantial understatement    29        property    53                           (See Market discount bonds)        43
  Section 199A deduction        29      Restricted property   39               Private activity bonds  12 71,        Taxable income, expenses of     34
  Valuation misstatement    29          Restricted stock   22 72,              Registration requirement   11         Taxes:
Political parties:                      Retirement of debt                     Tax-exempt interest     11             State income   34
  Debts owed by    54                     instrument  50                       Taxable interest  11                  Term loans  6 72, 
Portfolio income   71                   Return of capital                     Stock:                                 Trade or business  30
Preferred stock:                          (See Nondividend distributions)      Basis  20 21 40 63, , ,               Traders in securities  67
  Nonqualified   46                     Rollover of gain from sale:            Capital asset  49                     Trades:
  Redeemable at a premium       21        Securities  63                       Constructive ownership     48          Insurance   46
  Stripped 23 72,                                                              Convertible 46                         Investment property      35
Premiums on bonds      33 42 71, ,      S                                      Corporate  46                          Like-kind  45 47, 
                                                                               Dividends (See Dividends)              Nontaxable  39 45 53, , 
Private activity bonds  12 71,          S corporations   25 42,                Fractional shares   21 53,             Reporting requirements     67
Public utility stock                    Sales and trades of investment         Identification 40                      Stock   46
  reinvestment     41                     property    35                                                              Taxable  39
Publications (See Tax help)               Definition  35                       Installment sales   64
Puts and calls 57 72,                   Savings bonds (See U.S. savings        Nonqualified preferred stock   46      U.S. Treasury notes or 
  Table 4-3   58                          bonds)                               Options for employees     2              bonds    47
                                        SBIC stock (See Small business         Public utility, reinvestment 41       Treasury bills, notes, and bonds 
Q                                         investment company stock)            Redemption of    35                    (See U.S. Treasury bills, notes, 
                                                                                                                      and bonds)
                                        Scrip dividends    22                  Replacement stock       63            Treasury inflation-indexed 
Qualified dividends   23                Section 1202 gain    64 67,            Restricted stock  22 72,               securities  14
Qualified small business                Section 1244 stock    52               Rights  21 42 53, ,                   Treasury inflation-protected 
  Gains on  63                          Section 1250 gain    67
  stock  42 53 63, ,                                                           S corporations   42                    securities (TIPS)   11 14, 
                                        Section 1256 contracts    37 53, ,     Sales to ESOPs or                     Treaties, income tax 
                                          57 65 72, ,                              cooperatives  62                   (Table 1-3) 19
R                                         Net gain on 38                       Small business   42 53,               Trust income received by 
Real estate investment trusts             Net loss on 38                       Splits 42                              beneficiary  3
  (REITs)  20 40 53, ,                    Reporting requirements    38         Straddles (See Straddles)
Real estate mortgage investment  Securities:                                   Stripped preferred stock   23 72,     U
  conduits (REMICs)     24 34 72, ,       Holding period   52                  Surrender of   36                     U.S. savings bonds   5 6, 
  Regular interest   24                   Installment sales  64                Trades   46                            Reporting interest on    5 6, 
  Residual interest  24 57,               Rollover of gain from sale 63        Trust instruments treated as   36      Retirement or profit-sharing plan, 
Recordkeeping requirements:               Traders in  67                      Straddles 58 62-                          distributed from   9
  Education Savings Bond                  Worthless   36 55,                   Defined  72                              Worksheet      17
  Program      10                       Securities futures contracts   37,     Holding period   61                    Tax, responsible person 
  Investment income    2                  53 57 72, ,                          Interest expense and carrying            (Table 1-2)    8
  Small business stock   52             Self-employment income      38             charges 34                        U.S. Treasury bills, notes, and 
Redemption of stock     35              Self-employment tax     67             Loss deferral rules   59               bonds    5 10 47 53, , , 
Redemption or retirement of             Seller-financed mortgages    18        Mixed  55 61,                         Undistributed capital gains    23
  bonds  36                             Short sales   55 56,                   Reporting requirements     65         Usurious interest  5
Regulated futures contract    37,         Adjusted basis   42                 Stripped bonds and coupons      11, 
Reinvestment rights    40                 Defined  72
  72                                                                           14 43,                                V
REITs (See Real estate investment         Expenses of  34                     Stripped preferred stock    23 72, 
  trusts (REITs))                         Extraordinary dividends   56        Substitute payments      55            Veterans' insurance:
                                                                                                                      Dividends on   22
Related party transactions    35,         Puts 57
  47 48,                                  Small business investment           T
                                                                                                                     W
Related persons    59                      company stock      52              Tables:
REMICs (See Real estate mortgage        Short-term capital gains and           Capital gains maximum rate            Warrants  56
  investment conduits (REMICs))           losses   55 65,                          (Table 4-4)  68                   Wash sales  56 57 72, , 
Reorganizations, corporate      46      Short-term obligations    15 16, ,     Income tax treaties                    Holding period   53
Reporting requirements:                   42 49,                                   (Table 1-3)  19                    Loss deferral rules, straddles  60
  Bad debts   55                          Interest deduction, limit on 31      Investment income, reporting of       Withholding, backup     3
  Bond premium amortization     33      Sixty/forty (60/40) rule  37               (Table 1-1)  4                    Worksheets:
  Capital gains and losses   60 63, ,   Small business investment              Puts and calls (Table 4-3)   58        Capital loss carryover   66
  64                                      company stock      52 64,            U.S. savings bonds, person            Worthless securities   36 55, 
  Dividend income    22                   Reporting requirements    52             responsible for tax 
                                                                                   (Table 1-2)  8

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