The following article provides some general instructions for Schedule D of Form 1040, which is the fourth basic constituent of an individual’s income tax return. Some inputs regarding the filling up of this form have also been included.
Every US citizen files his Form 1040, every year as the common income tax return. Filing it is essential, as it is not just mandatory by income tax laws, exercised by the Internal Revenue Service on the whole, but by doing so, you also tend to declare all your incomes to the government. This form is divided into four prominent parts: Schedule A, Schedule B, Schedule C, and Schedule D.
In general, these four parts are required to be filled and filed by every US citizen. The remaining schedule are generally not used for income tax returns of individuals; entities such as LLCs (limited liability companies), businesses, and corporations use them. All individuals who have earned income from the sale of any kind of property are supposed to file schedule D.
The purpose of the Form 1040 schedule D is to report income derived from sale of assets. The assets can include all short and long-term assets, and also, tangible and intangible assets. Everything, right from real estate to small-stock transactions that generate income, can be recorded on it. However, the rule of thumb is that anything that is not a part of your regular business or profession; and sold to generate income, is to be recorded on it. In case of doubt, please refer to the IRS website, as non-reporting of the income can cause legal implications.
Schedule D is titled as Capital Gains and Losses, and in case, if you are including some other items on the schedule, then you will also need to file the following forms with it:
- Form 4797: If you have included sale of Section 126 property, normal property that is subject to depreciation, and trade-based property
- Form 4684: Theft or related losses
- Form 6781: Gains or losses from contracts
- Form 8824: In kind or barter like exchanges
In general, a capital asset is any property owned by you for personal purposes or investment; for example, car, house, furniture, bonds, stocks, etc.
Form 1040 Schedule D is made up of three parts: the first part deals with short-term capital gains and losses; the second part deals with long-term; and the third part summarizes all the details. Here’s how one can go about filling the form. At the start of the course, you will have to mention your name and your social security number.
Part I: It consists of gains and losses from sale of capital assets held for one year or less. These assets are deemed to be short term. Line 1 consists of a table, where descriptions of the property, acquisition date, sale date, value of sale, cost, and finally, gain or loss have to be sequentially reported. Lines 2 and 3 consist of the total of these gains or losses.
Line 4 consists of totals of other additional forms that have been mentioned above. Line 5 is used to report gains and losses from business organizations such as trusts, S-corporations, and partnerships. Line 6 consists of the loss carryover, which exceeds USD 3,000 for singles, and USD 1,500 for joint-filing status. Line 7 is of course the net total of Part I.
Part II: It is for the long-term profits and gains, i.e. the ones that are obtained from assets, that have been held for more than a year. Line 8 consists of a similar table that is present in Line 1. Lines 9 and 10 consist of totals from this table. Just like Part I, line 11 consists of totals from gains and losses that have been included in the aforementioned forms. Line 12 reports the net long-term gains from businesses, partnerships, etc. Line 13 consists of capital gains distributions, while line 14 consists of loss distributions and carryovers. Line 15 consists of net long-term profit or loss.
Part III: Line 16 combines the profits and losses from the totals of the two tables. Line 17 verifies, whether both the tables totaled up to a loss or not. Lines 18 through 22 consist of verification regarding whether any of the tables, or the aforementioned accompanying forms consist of profit, or loss.
It is necessary that the Schedule D is consistent with the aforementioned forms, as the elements of these forms need to be included with it. You can refer to the IRS website to have a look at the items that are to be included in it, when needed.