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Free tax 1. Free tax   Travel Table of Contents Traveling Away From HomeTax Home Tax Home Different From Family Home Temporary Assignment or Job What Travel Expenses Are Deductible?Employee. Free tax Business associate. Free tax Bona fide business purpose. Free tax Meals Travel in the United States Travel Outside the United States Luxury Water Travel Conventions If you temporarily travel away from your tax home, you can use this chapter to determine if you have deductible travel expenses. Free tax This chapter discusses: Traveling away from home, Temporary assignment or job, and What travel expenses are deductible. Free tax It also discusses the standard meal allowance, rules for travel inside and outside the United States, luxury water travel, and deductible convention expenses. Free tax Travel expenses defined. Free tax   For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. Free tax   An ordinary expense is one that is common and accepted in your trade or business. Free tax A necessary expense is one that is helpful and appropriate for your business. Free tax An expense does not have to be required to be considered necessary. Free tax   You will find examples of deductible travel expenses in Table 1-1 , later. Free tax Traveling Away From Home You are traveling away from home if: Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work, and You need to sleep or rest to meet the demands of your work while away from home. Free tax This rest requirement is not satisfied by merely napping in your car. Free tax You do not have to be away from your tax home for a whole day or from dusk to dawn as long as your relief from duty is long enough to get necessary sleep or rest. Free tax Example 1. Free tax You are a railroad conductor. Free tax You leave your home terminal on a regularly scheduled round-trip run between two cities and return home 16 hours later. Free tax During the run, you have 6 hours off at your turnaround point where you eat two meals and rent a hotel room to get necessary sleep before starting the return trip. Free tax You are considered to be away from home. Free tax Example 2. Free tax You are a truck driver. Free tax You leave your terminal and return to it later the same day. Free tax You get an hour off at your turnaround point to eat. Free tax Because you are not off to get necessary sleep and the brief time off is not an adequate rest period, you are not traveling away from home. Free tax Members of the Armed Forces. Free tax   If you are a member of the U. Free tax S. Free tax Armed Forces on a permanent duty assignment overseas, you are not traveling away from home. Free tax You cannot deduct your expenses for meals and lodging. Free tax You cannot deduct these expenses even if you have to maintain a home in the United States for your family members who are not allowed to accompany you overseas. Free tax If you are transferred from one permanent duty station to another, you may have deductible moving expenses, which are explained in Publication 521, Moving Expenses. Free tax   A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a tax home (explained next) aboard the ship for travel expense purposes. Free tax Tax Home To determine whether you are traveling away from home, you must first determine the location of your tax home. Free tax Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. Free tax It includes the entire city or general area in which your business or work is located. Free tax If you have more than one regular place of business, your tax home is your main place of business. Free tax See Main place of business or work , later. Free tax If you do not have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live. Free tax See No main place of business or work , later. Free tax If you do not have a regular or main place of business or post of duty and there is no place where you regularly live, you are considered an itinerant (a transient) and your tax home is wherever you work. Free tax As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home. Free tax Main place of business or work. Free tax   If you have more than one place of work, consider the following when determining which one is your main place of business or work. Free tax The total time you ordinarily spend in each place. Free tax The level of your business activity in each place. Free tax Whether your income from each place is significant or insignificant. Free tax Example. Free tax You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. Free tax You work the other 4 months in Miami, also at a seasonal job, and earn $15,000. Free tax Cincinnati is your main place of work because you spend most of your time there and earn most of your income there. Free tax No main place of business or work. Free tax   You may have a tax home even if you do not have a regular or main place of work. Free tax Your tax home may be the home where you regularly live. Free tax Factors used to determine tax home. Free tax   If you do not have a regular or main place of business or work, use the following three factors to determine where your tax home is. Free tax You perform part of your business in the area of your main home and use that home for lodging while doing business in the area. Free tax You have living expenses at your main home that you duplicate because your business requires you to be away from that home. Free tax You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging. Free tax   If you satisfy all three factors, your tax home is the home where you regularly live. Free tax If you satisfy only two factors, you may have a tax home depending on all the facts and circumstances. Free tax If you satisfy only one factor, you are an itinerant; your tax home is wherever you work and you cannot deduct travel expenses. Free tax Example 1. Free tax You are single and live in Boston in an apartment you rent. Free tax You have worked for your employer in Boston for a number of years. Free tax Your employer enrolls you in a 12-month executive training program. Free tax You do not expect to return to work in Boston after you complete your training. Free tax During your training, you do not do any work in Boston. Free tax Instead, you receive classroom and on-the-job training throughout the United States. Free tax You keep your apartment in Boston and return to it frequently. Free tax You use your apartment to conduct your personal business. Free tax You also keep up your community contacts in Boston. Free tax When you complete your training, you are transferred to Los Angeles. Free tax You do not satisfy factor (1) because you did not work in Boston. Free tax You satisfy factor (2) because you had duplicate living expenses. Free tax You also satisfy factor (3) because you did not abandon your apartment in Boston as your main home, you kept your community contacts, and you frequently returned to live in your apartment. Free tax Therefore, you have a tax home in Boston. Free tax Example 2. Free tax You are an outside salesperson with a sales territory covering several states. Free tax Your employer's main office is in Newark, but you do not conduct any business there. Free tax Your work assignments are temporary, and you have no way of knowing where your future assignments will be located. Free tax You have a room in your married sister's house in Dayton. Free tax You stay there for one or two weekends a year, but you do no work in the area. Free tax You do not pay your sister for the use of the room. Free tax You do not satisfy any of the three factors listed earlier. Free tax You are an itinerant and have no tax home. Free tax Tax Home Different From Family Home If you (and your family) do not live at your tax home (defined earlier), you cannot deduct the cost of traveling between your tax home and your family home. Free tax You also cannot deduct the cost of meals and lodging while at your tax home. Free tax See Example 1 , later. Free tax If you are working temporarily in the same city where you and your family live, you may be considered as traveling away from home. Free tax See Example 2 , later. Free tax Example 1. Free tax You are a truck driver and you and your family live in Tucson. Free tax You are employed by a trucking firm that has its terminal in Phoenix. Free tax At the end of your long runs, you return to your home terminal in Phoenix and spend one night there before returning home. Free tax You cannot deduct any expenses you have for meals and lodging in Phoenix or the cost of traveling from Phoenix to Tucson. Free tax This is because Phoenix is your tax home. Free tax Example 2. Free tax Your family home is in Pittsburgh, where you work 12 weeks a year. Free tax The rest of the year you work for the same employer in Baltimore. Free tax In Baltimore, you eat in restaurants and sleep in a rooming house. Free tax Your salary is the same whether you are in Pittsburgh or Baltimore. Free tax Because you spend most of your working time and earn most of your salary in Baltimore, that city is your tax home. Free tax You cannot deduct any expenses you have for meals and lodging there. Free tax However, when you return to work in Pittsburgh, you are away from your tax home even though you stay at your family home. Free tax You can deduct the cost of your round trip between Baltimore and Pittsburgh. Free tax You can also deduct your part of your family's living expenses for meals and lodging while you are living and working in Pittsburgh. Free tax Temporary Assignment or Job You may regularly work at your tax home and also work at another location. Free tax It may not be practical to return to your tax home from this other location at the end of each work day. Free tax Temporary assignment vs. Free tax indefinite assignment. Free tax   If your assignment or job away from your main place of work is temporary, your tax home does not change. Free tax You are considered to be away from home for the whole period you are away from your main place of work. Free tax You can deduct your travel expenses if they otherwise qualify for deduction. Free tax Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. Free tax    However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. Free tax An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than 1 year. Free tax   If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them. Free tax You may be able to deduct the cost of relocating to your new tax home as a moving expense. Free tax See Publication 521 for more information. Free tax Exception for federal crime investigations or prosecutions. Free tax   If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the 1-year rule. Free tax This means you may be able to deduct travel expenses even if you are away from your tax home for more than 1 year provided you meet the other requirements for deductibility. Free tax   For you to qualify, the Attorney General (or his or her designee) must certify that you are traveling: For the federal government, In a temporary duty status, and To investigate, prosecute, or provide support services for the investigation or prosecution of a federal crime. Free tax Determining temporary or indefinite. Free tax   You must determine whether your assignment is temporary or indefinite when you start work. Free tax If you expect an assignment or job to last for 1 year or less, it is temporary unless there are facts and circumstances that indicate otherwise. Free tax An assignment or job that is initially temporary may become indefinite due to changed circumstances. Free tax A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment. Free tax   The following examples illustrate whether an assignment or job is temporary or indefinite. Free tax Example 1. Free tax You are a construction worker. Free tax You live and regularly work in Los Angeles. Free tax You are a member of a trade union in Los Angeles that helps you get work in the Los Angeles area. Free tax Your tax home is Los Angeles. Free tax Because of a shortage of work, you took a job on a construction project in Fresno. Free tax Your job was scheduled to end in 8 months. Free tax The job actually lasted 10 months. Free tax You realistically expected the job in Fresno to last 8 months. Free tax The job actually did last less than 1 year. Free tax The job is temporary and your tax home is still in Los Angeles. Free tax Example 2. Free tax The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 18 months. Free tax The job actually was completed in 10 months. Free tax Your job in Fresno is indefinite because you realistically expected the work to last longer than 1 year, even though it actually lasted less than 1 year. Free tax You cannot deduct any travel expenses you had in Fresno because Fresno became your tax home. Free tax Example 3. Free tax The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 9 months. Free tax After 8 months, however, you were asked to remain for 7 more months (for a total actual stay of 15 months). Free tax Initially, you realistically expected the job in Fresno to last for only 9 months. Free tax However, due to changed circumstances occurring after 8 months, it was no longer realistic for you to expect that the job in Fresno would last for 1 year or less. Free tax You can only deduct your travel expenses for the first 8 months. Free tax You cannot deduct any travel expenses you had after that time because Fresno became your tax home when the job became indefinite. Free tax Going home on days off. Free tax   If you go back to your tax home from a temporary assignment on your days off, you are not considered away from home while you are in your hometown. Free tax You cannot deduct the cost of your meals and lodging there. Free tax However, you can deduct your travel expenses, including meals and lodging, while traveling between your temporary place of work and your tax home. Free tax You can claim these expenses up to the amount it would have cost you to stay at your temporary place of work. Free tax   If you keep your hotel room during your visit home, you can deduct the cost of your hotel room. Free tax In addition, you can deduct your expenses of returning home up to the amount you would have spent for meals had you stayed at your temporary place of work. Free tax Probationary work period. Free tax   If you take a job that requires you to move, with the understanding that you will keep the job if your work is satisfactory during a probationary period, the job is indefinite. Free tax You cannot deduct any of your expenses for meals and lodging during the probationary period. Free tax What Travel Expenses Are Deductible? Once you have determined that you are traveling away from your tax home, you can determine what travel expenses are deductible. Free tax You can deduct ordinary and necessary expenses you have when you travel away from home on business. Free tax The type of expense you can deduct depends on the facts and your circumstances. Free tax Table 1-1 summarizes travel expenses you may be able to deduct. Free tax You may have other deductible travel expenses that are not covered there, depending on the facts and your circumstances. Free tax When you travel away from home on business, you should keep records of all the expenses you have and any advances you receive from your employer. Free tax You can use a log, diary, notebook, or any other written record to keep track of your expenses. Free tax The types of expenses you need to record, along with supporting documentation, are described in Table 5-1 (see chapter 5). Free tax Separating costs. Free tax   If you have one expense that includes the costs of meals, entertainment, and other services (such as lodging or transportation), you must allocate that expense between the cost of meals and entertainment and the cost of other services. Free tax You must have a reasonable basis for making this allocation. Free tax For example, you must allocate your expenses if a hotel includes one or more meals in its room charge. Free tax Travel expenses for another individual. Free tax    If a spouse, dependent, or other individual goes with you (or your employee) on a business trip or to a business convention, you generally cannot deduct his or her travel expenses. Free tax Employee. Free tax   You can deduct the travel expenses of someone who goes with you if that person: Is your employee, Has a bona fide business purpose for the travel, and Would otherwise be allowed to deduct the travel expenses. Free tax Business associate. Free tax   If a business associate travels with you and meets the conditions in (2) and (3), earlier, you can deduct the travel expenses you have for that person. Free tax A business associate is someone with whom you could reasonably expect to actively conduct business. Free tax A business associate can be a current or prospective (likely to become) customer, client, supplier, employee, agent, partner, or professional advisor. Free tax Bona fide business purpose. Free tax   A bona fide business purpose exists if you can prove a real business purpose for the individual's presence. Free tax Incidental services, such as typing notes or assisting in entertaining customers, are not enough to make the expenses deductible. Free tax Table 1-1. Free tax Travel Expenses You Can Deduct   This chart summarizes expenses you can deduct when you travel away from home for business purposes. Free tax IF you have expenses for. Free tax . Free tax . Free tax THEN you can deduct the cost of. Free tax . Free tax . Free tax transportation travel by airplane, train, bus, or car between your home and your business destination. Free tax If you were provided with a free ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. Free tax If you travel by ship, see Luxury Water Travel and Cruise Ships (under Conventions) for additional rules and limits. Free tax taxi, commuter bus, and airport limousine fares for these and other types of transportation that take you between: The airport or station and your hotel, and The hotel and the work location of your customers or clients, your business meeting place, or your temporary work location. Free tax baggage and shipping sending baggage and sample or display material between your regular and temporary work locations. Free tax car operating and maintaining your car when traveling away from home on business. Free tax You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. Free tax If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. Free tax lodging and meals your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Free tax Meals include amounts spent for food, beverages, taxes, and related tips. Free tax See Meals for additional rules and limits. Free tax cleaning dry cleaning and laundry. Free tax telephone business calls while on your business trip. Free tax This includes business communication by fax machine or other communication devices. Free tax tips tips you pay for any expenses in this chart. Free tax other other similar ordinary and necessary expenses related to your business travel. Free tax These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer. Free tax Example. Free tax Jerry drives to Chicago on business and takes his wife, Linda, with him. Free tax Linda is not Jerry's employee. Free tax Linda occasionally types notes, performs similar services, and accompanies Jerry to luncheons and dinners. Free tax The performance of these services does not establish that her presence on the trip is necessary to the conduct of Jerry's business. Free tax Her expenses are not deductible. Free tax Jerry pays $199 a day for a double room. Free tax A single room costs $149 a day. Free tax He can deduct the total cost of driving his car to and from Chicago, but only $149 a day for his hotel room. Free tax If he uses public transportation, he can deduct only his fare. Free tax Meals You can deduct the cost of meals in either of the following situations. Free tax It is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business. Free tax The meal is business-related entertainment. Free tax Business-related entertainment is discussed in chapter 2 . Free tax The following discussion deals only with meals that are not business-related entertainment. Free tax Lavish or extravagant. Free tax   You cannot deduct expenses for meals that are lavish or extravagant. Free tax An expense is not considered lavish or extravagant if it is reasonable based on the facts and circumstances. Free tax Expenses will not be disallowed merely because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Free tax 50% limit on meals. Free tax   You can figure your meals expense using either of the following methods. Free tax Actual cost. Free tax The standard meal allowance. Free tax Both of these methods are explained below. Free tax But, regardless of the method you use, you generally can deduct only 50% of the unreimbursed cost of your meals. Free tax   If you are reimbursed for the cost of your meals, how you apply the 50% limit depends on whether your employer's reimbursement plan was accountable or nonaccountable. Free tax If you are not reimbursed, the 50% limit applies whether the unreimbursed meal expense is for business travel or business entertainment. Free tax Chapter 2 discusses the 50% Limit in more detail, and chapter 6 discusses accountable and nonaccountable plans. Free tax Actual Cost You can use the actual cost of your meals to figure the amount of your expense before reimbursement and application of the 50% deduction limit. Free tax If you use this method, you must keep records of your actual cost. Free tax Standard Meal Allowance Generally, you can use the “standard meal allowance” method as an alternative to the actual cost method. Free tax It allows you to use a set amount for your daily meals and incidental expenses (M&IE), instead of keeping records of your actual costs. Free tax The set amount varies depending on where and when you travel. Free tax In this publication, “standard meal allowance” refers to the federal rate for M&IE, discussed later under Amount of standard meal allowance . Free tax If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of your travel. Free tax See the recordkeeping rules for travel in chapter 5 . Free tax Incidental expenses. Free tax   The term “incidental expenses” means fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Free tax   Incidental expenses do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, costs of telegrams or telephone calls, transportation between places of lodging or business and places where meals are taken, or the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings. Free tax Incidental-expenses-only method. Free tax   You can use an optional method (instead of actual cost) for deducting incidental expenses only. Free tax The amount of the deduction is $5 a day. Free tax You can use this method only if you did not pay or incur any meal expenses. Free tax You cannot use this method on any day that you use the standard meal allowance. Free tax This method is subject to the proration rules for partial days. Free tax See Travel for days you depart and return , later in this chapter. Free tax Note. Free tax The incidental-expenses-only method is not subject to the 50% limit discussed below. Free tax Federal employees should refer to the Federal Travel Regulations at www. Free tax gsa. Free tax gov. Free tax Find the “Most Requested Links” on the upper left and click on “Regulations: FAR, FMR, FTR” for Federal Travel Regulation (FTR) for changes affecting claims for reimbursement. Free tax 50% limit may apply. Free tax   If you use the standard meal allowance method for meal expenses and you are not reimbursed or you are reimbursed under a nonaccountable plan, you can generally deduct only 50% of the standard meal allowance. Free tax If you are reimbursed under an accountable plan and you are deducting amounts that are more than your reimbursements, you can deduct only 50% of the excess amount. Free tax The 50% limit is discussed in more detail in chapter 2, and accountable and nonaccountable plans are discussed in chapter 6. Free tax There is no optional standard lodging amount similar to the standard meal allowance. Free tax Your allowable lodging expense deduction is your actual cost. Free tax Who can use the standard meal allowance. Free tax   You can use the standard meal allowance whether you are an employee or self-employed, and whether or not you are reimbursed for your traveling expenses. Free tax Use of the standard meal allowance for other travel. Free tax   You can use the standard meal allowance to figure your meal expenses when you travel in connection with investment and other income-producing property. Free tax You can also use it to figure your meal expenses when you travel for qualifying educational purposes. Free tax You cannot use the standard meal allowance to figure the cost of your meals when you travel for medical or charitable purposes. Free tax Amount of standard meal allowance. Free tax   The standard meal allowance is the federal M&IE rate. Free tax For travel in 2013, the rate for most small localities in the United States is $46 a day. Free tax    Most major cities and many other localities in the United States are designated as high-cost areas, qualifying for higher standard meal allowances. Free tax    You can find this information (organized by state) on the Internet at www. Free tax gsa. Free tax gov/perdiem. Free tax Enter a zip code or select a city and state for the per diem rates for the current fiscal year. Free tax Per diem rates for prior fiscal years are available by using the drop down menu under “Search by State. Free tax ”   Per diem rates are listed by the Federal government's fiscal year which runs from October 1 to September 30. Free tax You can choose to use the rates from the 2013 fiscal year per diem tables or the rates from the 2014 fiscal year tables, but you must consistently use the same tables for all travel you are reporting on your income tax return for the year. Free tax   If you travel to more than one location in one day, use the rate in effect for the area where you stop for sleep or rest. Free tax If you work in the transportation industry, however, see Special rate for transportation workers , later. Free tax Standard meal allowance for areas outside the continental United States. Free tax   The standard meal allowance rates above do not apply to travel in Alaska, Hawaii, or any other location outside the continental United States. Free tax The Department of Defense establishes per diem rates for Alaska, Hawaii, Puerto Rico, American Samoa, Guam, Midway, the Northern Mariana Islands, the U. Free tax S. Free tax Virgin Islands, Wake Island, and other non-foreign areas outside the continental United States. Free tax The Department of State establishes per diem rates for all other foreign areas. Free tax    You can access per diem rates for non-foreign areas outside the continental United States at: www. Free tax defensetravel. Free tax dod. Free tax mil/site/perdiemCalc. Free tax cfm. Free tax You can access all other foreign per diem rates at: www. Free tax state. Free tax gov/travel/. Free tax Click on “Travel Per Diem Allowances for Foreign Areas,” under “Foreign Per Diem Rates” to obtain the latest foreign per diem rates. Free tax Special rate for transportation workers. Free tax   You can use a special standard meal allowance if you work in the transportation industry. Free tax You are in the transportation industry if your work: Directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and Regularly requires you to travel away from home and, during any single trip, usually involves travel to areas eligible for different standard meal allowance rates. Free tax If this applies to you, you can claim a standard meal allowance of $59 a day ($65 for travel outside the continental United States). Free tax   Using the special rate for transportation workers eliminates the need for you to determine the standard meal allowance for every area where you stop for sleep or rest. Free tax If you choose to use the special rate for any trip, you must use the special rate (and not use the regular standard meal allowance rates) for all trips you take that year. Free tax Travel for days you depart and return. Free tax   For both the day you depart for and the day you return from a business trip, you must prorate the standard meal allowance (figure a reduced amount for each day). Free tax You can do so by one of two methods. Free tax Method 1: You can claim 3/4 of the standard meal allowance. Free tax Method 2: You can prorate using any method that you consistently apply and that is in accordance with reasonable business practice. Free tax Example. Free tax Jen is employed in New Orleans as a convention planner. Free tax In March, her employer sent her on a 3-day trip to Washington, DC, to attend a planning seminar. Free tax She left her home in New Orleans at 10 a. Free tax m. Free tax on Wednesday and arrived in Washington, DC, at 5:30 p. Free tax m. Free tax After spending two nights there, she flew back to New Orleans on Friday and arrived back home at 8:00 p. Free tax m. Free tax Jen's employer gave her a flat amount to cover her expenses and included it with her wages. Free tax Under Method 1, Jen can claim 2½ days of the standard meal allowance for Washington, DC: 3/4 of the daily rate for Wednesday and Friday (the days she departed and returned), and the full daily rate for Thursday. Free tax Under Method 2, Jen could also use any method that she applies consistently and that is in accordance with reasonable business practice. Free tax For example, she could claim 3 days of the standard meal allowance even though a federal employee would have to use Method 1 and be limited to only 2½ days. Free tax Travel in the United States The following discussion applies to travel in the United States. Free tax For this purpose, the United States includes the 50 states and the District of Columbia. Free tax The treatment of your travel expenses depends on how much of your trip was business related and on how much of your trip occurred within the United States. Free tax See Part of Trip Outside the United States , later. Free tax Trip Primarily for Business You can deduct all of your travel expenses if your trip was entirely business related. Free tax If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses. Free tax These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination. Free tax Example. Free tax You work in Atlanta and take a business trip to New Orleans in May. Free tax Your business travel totals 850 miles round trip. Free tax On your way, you stop in Mobile to visit your parents. Free tax You spend $2,120 for the 9 days you are away from home for travel, meals, lodging, and other travel expenses. Free tax If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,820. Free tax You can deduct $1,820 for your trip, including the cost of round-trip transportation to and from New Orleans. Free tax The deduction for your meals is subject to the 50% limit on meals mentioned earlier. Free tax Trip Primarily for Personal Reasons If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. Free tax However, you can deduct any expenses you have while at your destination that are directly related to your business. Free tax A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. Free tax The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip. Free tax Part of Trip Outside the United States If part of your trip is outside the United States, use the rules described later in this chapter under Travel Outside the United States for that part of the trip. Free tax For the part of your trip that is inside the United States, use the rules for travel in the United States. Free tax Travel outside the United States does not include travel from one point in the United States to another point in the United States. Free tax The following discussion can help you determine whether your trip was entirely within the United States. Free tax Public transportation. Free tax   If you travel by public transportation, any place in the United States where that vehicle makes a scheduled stop is a point in the United States. Free tax Once the vehicle leaves the last scheduled stop in the United States on its way to a point outside the United States, you apply the rules under Travel Outside the United States . Free tax Example. Free tax You fly from New York to Puerto Rico with a scheduled stop in Miami. Free tax You return to New York nonstop. Free tax The flight from New York to Miami is in the United States, so only the flight from Miami to Puerto Rico is outside the United States. Free tax Because there are no scheduled stops between Puerto Rico and New York, all of the return trip is outside the United States. Free tax Private car. Free tax   Travel by private car in the United States is travel between points in the United States, even though you are on your way to a destination outside the United States. Free tax Example. Free tax You travel by car from Denver to Mexico City and return. Free tax Your travel from Denver to the border and from the border back to Denver is travel in the United States, and the rules in this section apply. Free tax The rules under Travel Outside the United States apply to your trip from the border to Mexico City and back to the border. Free tax Travel Outside the United States If any part of your business travel is outside the United States, some of your deductions for the cost of getting to and from your destination may be limited. Free tax For this purpose, the United States includes the 50 states and the District of Columbia. Free tax How much of your travel expenses you can deduct depends in part upon how much of your trip outside the United States was business related. Free tax Travel Entirely for Business or Considered Entirely for Business You can deduct all your travel expenses of getting to and from your business destination if your trip is entirely for business or considered entirely for business. Free tax Travel entirely for business. Free tax   If you travel outside the United States and you spend the entire time on business activities, you can deduct all of your travel expenses. Free tax Travel considered entirely for business. Free tax   Even if you did not spend your entire time on business activities, your trip is considered entirely for business if you meet at least one of the following four exceptions. Free tax Exception 1 - No substantial control. Free tax   Your trip is considered entirely for business if you did not have substantial control over arranging the trip. Free tax The fact that you control the timing of your trip does not, by itself, mean that you have substantial control over arranging your trip. Free tax   You do not have substantial control over your trip if you: Are an employee who was reimbursed or paid a travel expense allowance, and Are not related to your employer, or Are not a managing executive. Free tax    “Related to your employer” is defined later in chapter 6 under Per Diem and Car Allowances . Free tax   A “managing executive” is an employee who has the authority and responsibility, without being subject to the veto of another, to decide on the need for the business travel. Free tax   A self-employed person generally has substantial control over arranging business trips. Free tax Exception 2 - Outside United States no more than a week. Free tax   Your trip is considered entirely for business if you were outside the United States for a week or less, combining business and nonbusiness activities. Free tax One week means 7 consecutive days. Free tax In counting the days, do not count the day you leave the United States, but do count the day you return to the United States. Free tax Example. Free tax You traveled to Brussels primarily for business. Free tax You left Denver on Tuesday and flew to New York. Free tax On Wednesday, you flew from New York to Brussels, arriving the next morning. Free tax On Thursday and Friday, you had business discussions, and from Saturday until Tuesday, you were sightseeing. Free tax You flew back to New York, arriving Wednesday afternoon. Free tax On Thursday, you flew back to Denver. Free tax Although you were away from your home in Denver for more than a week, you were not outside the United States for more than a week. Free tax This is because the day you depart does not count as a day outside the United States. Free tax You can deduct your cost of the round-trip flight between Denver and Brussels. Free tax You can also deduct the cost of your stay in Brussels for Thursday and Friday while you conducted business. Free tax However, you cannot deduct the cost of your stay in Brussels from Saturday through Tuesday because those days were spent on nonbusiness activities. Free tax Exception 3 - Less than 25% of time on personal activities. Free tax   Your trip is considered entirely for business if: You were outside the United States for more than a week, and You spent less than 25% of the total time you were outside the United States on nonbusiness activities. Free tax For this purpose, count both the day your trip began and the day it ended. Free tax Example. Free tax You flew from Seattle to Tokyo, where you spent 14 days on business and 5 days on personal matters. Free tax You then flew back to Seattle. Free tax You spent 1 day flying in each direction. Free tax Because only 5/21 (less than 25%) of your total time abroad was for nonbusiness activities, you can deduct as travel expenses what it would have cost you to make the trip if you had not engaged in any nonbusiness activity. Free tax The amount you can deduct is the cost of the round-trip plane fare and 16 days of meals (subject to the 50% limit), lodging, and other related expenses. Free tax Exception 4 - Vacation not a major consideration. Free tax   Your trip is considered entirely for business if you can establish that a personal vacation was not a major consideration, even if you have substantial control over arranging the trip. Free tax Travel Primarily for Business If you travel outside the United States primarily for business but spend some of your time on other activities, you generally cannot deduct all of your travel expenses. Free tax You can only deduct the business portion of your cost of getting to and from your destination. Free tax You must allocate the costs between your business and other activities to determine your deductible amount. Free tax See Travel allocation rules , later. Free tax You do not have to allocate your travel expenses if you meet one of the four exceptions listed earlier under Travel considered entirely for business . Free tax In those cases, you can deduct the total cost of getting to and from your destination. Free tax Travel allocation rules. Free tax   If your trip outside the United States was primarily for business, you must allocate your travel time on a day-to-day basis between business days and nonbusiness days. Free tax The days you depart from and return to the United States are both counted as days outside the United States. Free tax   To figure the deductible amount of your round-trip travel expenses, use the following fraction. Free tax The numerator (top number) is the total number of business days outside the United States. Free tax The denominator (bottom number) is the total number of business and nonbusiness days of travel. Free tax Counting business days. Free tax   Your business days include transportation days, days your presence was required, days you spent on business, and certain weekends and holidays. Free tax Transportation day. Free tax   Count as a business day any day you spend traveling to or from a business destination. Free tax However, if because of a nonbusiness activity you do not travel by a direct route, your business days are the days it would take you to travel a reasonably direct route to your business destination. Free tax Extra days for side trips or nonbusiness activities cannot be counted as business days. Free tax Presence required. Free tax   Count as a business day any day your presence is required at a particular place for a specific business purpose. Free tax Count it as a business day even if you spend most of the day on nonbusiness activities. Free tax Day spent on business. Free tax   If your principal activity during working hours is the pursuit of your trade or business, count the day as a business day. Free tax Also, count as a business day any day you are prevented from working because of circumstances beyond your control. Free tax Certain weekends and holidays. Free tax   Count weekends, holidays, and other necessary standby days as business days if they fall between business days. Free tax But if they follow your business meetings or activity and you remain at your business destination for nonbusiness or personal reasons, do not count them as business days. Free tax Example 1. Free tax Your tax home is New York City. Free tax You travel to Quebec, where you have a business appointment on Friday. Free tax You have another appointment on the following Monday. Free tax Because your presence was required on both Friday and Monday, they are business days. Free tax Because the weekend is between business days, Saturday and Sunday are counted as business days. Free tax This is true even though you use the weekend for sightseeing, visiting friends, or other nonbusiness activity. Free tax Example 2. Free tax If, in Example 1, you had no business in Quebec after Friday, but stayed until Monday before starting home, Saturday and Sunday would be nonbusiness days. Free tax Nonbusiness activity on the way to or from your business destination. Free tax   If you stopped for a vacation or other nonbusiness activity either on the way from the United States to your business destination, or on the way back to the United States from your business destination, you must allocate part of your travel expenses to the nonbusiness activity. Free tax   The part you must allocate is the amount it would have cost you to travel between the point where travel outside the United States begins and your nonbusiness destination and a return to the point where travel outside the United States ends. Free tax   You determine the nonbusiness portion of that expense by multiplying it by a fraction. Free tax The numerator (top number) of the fraction is the number of nonbusiness days during your travel outside the United States and the denominator (bottom number) is the total number of days you spend outside the United States. Free tax Example. Free tax You live in New York. Free tax On May 4 you flew to Paris to attend a business conference that began on May 5. Free tax The conference ended at noon on May 14. Free tax That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. Free tax The primary purpose for the trip was to attend the conference. Free tax If you had not stopped in Dublin, you would have arrived home the evening of May 14. Free tax You do not meet any of the exceptions that would allow you to consider your travel entirely for business. Free tax May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are nonbusiness days. Free tax You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris. Free tax You cannot deduct your expenses while in Dublin. Free tax You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin. Free tax You paid $750 to fly from New York to Paris, $400 to fly from Paris to Dublin, and $700 to fly from Dublin back to New York. Free tax Round-trip airfare from New York to Dublin would have been $1,250. Free tax You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($1,250 × 7/18 = $486) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($750 + $400 + $700 = $1,850). Free tax Your deductible air travel expense is $1,364 ($1,850 − $486). Free tax Nonbusiness activity at, near, or beyond business destination. Free tax   If you had a vacation or other nonbusiness activity at, near, or beyond your business destination, you must allocate part of your travel expenses to the nonbusiness activity. Free tax   The part you must allocate is the amount it would have cost you to travel between the point where travel outside the United States begins and your business destination and a return to the point where travel outside the United States ends. Free tax   You determine the nonbusiness portion of that expense by multiplying it by a fraction. Free tax The numerator (top number) of the fraction is the number of nonbusiness days during your travel outside the United States and the denominator (bottom number) is the total number of days you spend outside the United States. Free tax   None of your travel expenses for nonbusiness activities at, near, or beyond your business destination are deductible. Free tax Example. Free tax Assume that the dates are the same as in the previous example but that instead of going to Dublin for your vacation, you fly to Venice, Italy, for a vacation. Free tax You cannot deduct any part of the cost of your trip from Paris to Venice and return to Paris. Free tax In addition, you cannot deduct 7/18 of the airfare and other expenses from New York to Paris and back to New York. Free tax You can deduct 11/18 of the round-trip plane fare and other travel expenses from New York to Paris, plus your meals (subject to the 50% limit), lodging, and any other business expenses you had in Paris. Free tax (Assume these expenses total $4,939. Free tax ) If the round-trip plane fare and other travel-related expenses (such as food during the trip) are $1,750, you can deduct travel costs of $1,069 (11/18 × $1,750), plus the full $4,939 for the expenses you had in Paris. Free tax Other methods. Free tax   You can use another method of counting business days if you establish that it more clearly reflects the time spent on other than business activities outside the United States. Free tax Travel Primarily for Personal Reasons If you travel outside the United States primarily for vacation or for investment purposes, the entire cost of the trip is a nondeductible personal expense. Free tax However, if you spend some time attending brief professional seminars or a continuing education program, you can deduct your registration fees and other expenses you have that are directly related to your business. Free tax Example. Free tax The university from which you graduated has a continuing education program for members of its alumni association. Free tax This program consists of trips to various foreign countries where academic exercises and conferences are set up to acquaint individuals in most occupations with selected facilities in several regions of the world. Free tax However, none of the conferences are directed toward specific occupations or professions. Free tax It is up to each participant to seek out specialists and organizational settings appropriate to his or her occupational interests. Free tax Three-hour sessions are held each day over a 5-day period at each of the selected overseas facilities where participants can meet with individual practitioners. Free tax These sessions are composed of a variety of activities including workshops, mini-lectures, role playing, skill development, and exercises. Free tax Professional conference directors schedule and conduct the sessions. Free tax Participants can choose those sessions they wish to attend. Free tax You can participate in this program since you are a member of the alumni association. Free tax You and your family take one of the trips. Free tax You spend about 2 hours at each of the planned sessions. Free tax The rest of the time you go touring and sightseeing with your family. Free tax The trip lasts less than 1 week. Free tax Your travel expenses for the trip are not deductible since the trip was primarily a vacation. Free tax However, registration fees and any other incidental expenses you have for the five planned sessions you attended that are directly related and beneficial to your business are deductible business expenses. Free tax These expenses should be specifically stated in your records to ensure proper allocation of your deductible business expenses. Free tax Luxury Water Travel If you travel by ocean liner, cruise ship, or other form of luxury water transportation for business purposes, there is a daily limit on the amount you can deduct. Free tax The limit is twice the highest federal per diem rate allowable at the time of your travel. Free tax (Generally, the federal per diem is the amount paid to federal government employees for daily living expenses when they travel away from home, but in the United States, for business purposes. Free tax ) Daily limit on luxury water travel. Free tax   The highest federal per diem rate allowed and the daily limit for luxury water travel in 2013 is shown in the following table. Free tax   2013 Dates Highest Federal Per Diem Daily Limit on Luxury Water Travel   Jan. Free tax 1 – Mar. Free tax 31 $367 $734   Apr. Free tax 1 – June 30 312 624   July 1 – Aug. Free tax 31 310 620   Sept. Free tax 1 – Sept. Free tax 30 366 732   Oct. Free tax 1 – Dec. Free tax 31 374 748 Example. Free tax Caroline, a travel agent, traveled by ocean liner from New York to London, England, on business in May. Free tax Her expense for the 6-day cruise was $5,200. Free tax Caroline's deduction for the cruise cannot exceed $3,744 (6 days × $624 daily limit). Free tax Meals and entertainment. Free tax   If your expenses for luxury water travel include separately stated amounts for meals or entertainment, those amounts are subject to the 50% limit on meals and entertainment before you apply the daily limit. Free tax For a discussion of the 50% Limit , see chapter 2. Free tax Example. Free tax In the previous example, Caroline's luxury water travel had a total cost of $5,200. Free tax Of that amount, $3,700 was separately stated as meals and entertainment. Free tax Caroline, who is self-employed, is not reimbursed for any of her travel expenses. Free tax Caroline figures her deductible travel expenses as follows. Free tax Meals and entertainment $3,700   50% limit × . Free tax 50   Allowable meals &     entertainment $1,850   Other travel expenses + 1,800   Allowable cost before the daily limit $3,650 Daily limit for May 2013 $624   Times number of days × 6   Maximum luxury water travel     deduction $3,744 Amount of allowable deduction $3,650 Caroline's deduction for her cruise is limited to $3,650, even though the limit on luxury water travel is slightly higher. Free tax Not separately stated. Free tax   If your meal or entertainment charges are not separately stated or are not clearly identifiable, you do not have to allocate any portion of the total charge to meals or entertainment. Free tax Exceptions The daily limit on luxury water travel (discussed earlier) does not apply to expenses you have to attend a convention, seminar, or meeting on board a cruise ship. Free tax See Cruise Ships under Conventions. Free tax Conventions You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. Free tax You cannot deduct the travel expenses for your family. Free tax If the convention is for investment, political, social, or other purposes unrelated to your trade or business, you cannot deduct the expenses. Free tax Your appointment or election as a delegate does not, in itself, determine whether you can deduct travel expenses. Free tax You can deduct your travel expenses only if your attendance is connected to your own trade or business. Free tax Convention agenda. Free tax   The convention agenda or program generally shows the purpose of the convention. Free tax You can show your attendance at the convention benefits your trade or business by comparing the agenda with the official duties and responsibilities of your position. Free tax The agenda does not have to deal specifically with your official duties and responsibilities; it will be enough if the agenda is so related to your position that it shows your attendance was for business purposes. Free tax Conventions Held Outside the North American Area You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless: The meeting is directly related to your trade or business, and It is reasonable to hold the meeting outside the North American area. Free tax See Reasonableness test , later. Free tax If the meeting meets these requirements, you also must satisfy the rules for deducting expenses for business trips in general, discussed earlier under Travel Outside the United States . Free tax North American area. Free tax   The North American area includes the following locations. Free tax American Samoa Johnston Island Antigua and Barbuda Kingman Reef Aruba Marshall Islands Bahamas Mexico Baker Island Micronesia Barbados Midway Islands Bermuda Netherlands Antilles Canada Northern Mariana Costa Rica Islands Dominica Palau Dominican Republic Palmyra Atoll Grenada Panama Guam Puerto Rico Guyana Trinidad and Tobago Honduras USA Howland Island U. Free tax S. Free tax Virgin Islands Jamaica Wake Island Jarvis Island   The North American area also includes U. Free tax S. Free tax islands, cays, and reefs that are possessions of the United States and not part of the fifty states or the District of Columbia. Free tax Reasonableness test. Free tax   The following factors are taken into account to determine if it was reasonable to hold the meeting outside the North American area. Free tax The purpose of the meeting and the activities taking place at the meeting. Free tax The purposes and activities of the sponsoring organizations or groups. Free tax The homes of the active members of the sponsoring organizations and the places at which other meetings of the sponsoring organizations or groups have been or will be held. Free tax Other relevant factors you may present. Free tax Cruise Ships You can deduct up to $2,000 per year of your expenses of attending conventions, seminars, or similar meetings held on cruise ships. Free tax All ships that sail are considered cruise ships. Free tax You can deduct these expenses only if all of the following requirements are met. Free tax The convention, seminar, or meeting is directly related to your trade or business. Free tax The cruise ship is a vessel registered in the United States. Free tax All of the cruise ship's ports of call are in the United States or in possessions of the United States. Free tax You attach to your return a written statement signed by you that includes information about: The total days of the trip (not including the days of transportation to and from the cruise ship port), The number of hours each day that you devoted to scheduled business activities, and A program of the scheduled business activities of the meeting. Free tax You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes: A schedule of the business activities of each day of the meeting, and The number of hours you attended the scheduled business activities. Free tax Prev  Up  Next   Home   More Online Publications
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The Free Tax

Free tax 14. Free tax   Sale of Property Table of Contents Reminder Introduction Useful Items - You may want to see: Sales and TradesWhat Is a Sale or Trade? How To Figure Gain or Loss Nontaxable Trades Transfers Between Spouses Related Party Transactions Capital Gains and LossesCapital or Ordinary Gain or Loss Capital Assets and Noncapital Assets Holding Period Nonbusiness Bad Debts Wash Sales Rollover of Gain From Publicly Traded Securities Reminder Foreign income. Free tax  If you are a U. Free tax S. Free tax citizen who sells property located outside the United States, you must report all gains and losses from the sale of that property on your tax return unless it is exempt by U. Free tax S. Free tax law. Free tax This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the payer. Free tax Introduction This chapter discusses the tax consequences of selling or trading investment property. Free tax It explains the following. Free tax What a sale or trade is. Free tax Figuring gain or loss. Free tax Nontaxable trades. Free tax Related party transactions. Free tax Capital gains or losses. Free tax Capital assets and noncapital assets. Free tax Holding period. Free tax Rollover of gain from publicly traded securities. Free tax Other property transactions. Free tax   Certain transfers of property are not discussed here. Free tax They are discussed in other IRS publications. Free tax These include the following. Free tax Sales of a main home, covered in chapter 15. Free tax Installment sales, covered in Publication 537, Installment Sales. Free tax Transactions involving business property, covered in Publication 544, Sales and Other Dispositions of Assets. Free tax Dispositions of an interest in a passive activity, covered in Publication 925, Passive Activity and At-Risk Rules. Free tax    Publication 550, Investment Income and Expenses (Including Capital Gains and Losses), provides a more detailed discussion about sales and trades of investment property. Free tax Publication 550 includes information about the rules covering nonbusiness bad debts, straddles, section 1256 contracts, puts and calls, commodity futures, short sales, and wash sales. Free tax It also discusses investment-related expenses. Free tax Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 8949 Sales and Other Dispositions of Capital Assets 8824 Like-Kind Exchanges Sales and Trades If you sold property such as stocks, bonds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. Free tax Generally, you should receive the statement by February 15 of the next year. Free tax It will show the gross proceeds from the sale. Free tax If you sold a covered security in 2013, your 1099-B (or substitute statement) will show your basis. Free tax Generally, a covered security is a security you acquired after 2010, with certain exceptions. Free tax See the Instructions for Form 8949. Free tax The IRS will also get a copy of Form 1099-B from the broker. Free tax Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. Free tax What Is a Sale or Trade? This section explains what is a sale or trade. Free tax It also explains certain transactions and events that are treated as sales or trades. Free tax A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. Free tax A trade is a transfer of property for other property or services and may be taxed in the same way as a sale. Free tax Sale and purchase. Free tax   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. Free tax The sale and purchase are two separate transactions. Free tax But see Like-kind exchanges under Nontaxable Trades, later. Free tax Redemption of stock. Free tax   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. Free tax Dividend versus sale or trade. Free tax   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Free tax Both direct and indirect ownership of stock will be considered. Free tax The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend (see chapter 8), There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. Free tax Redemption or retirement of bonds. Free tax   A redemption or retirement of bonds or notes at their maturity is generally treated as a sale or trade. Free tax   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. Free tax For details, see Regulations section 1. Free tax 1001-3. Free tax Surrender of stock. Free tax   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. Free tax The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Free tax Worthless securities. Free tax    Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. Free tax This affects whether your capital loss is long term or short term. Free tax See Holding Period , later. Free tax   Worthless securities also include securities that you abandon after March 12, 2008. Free tax To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Free tax All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. Free tax    If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. Free tax Do not deduct them in the year the stock became worthless. Free tax How to report loss. Free tax    Report worthless securities in Part I or Part II, whichever applies, of Form 8949. Free tax In column (a), enter “Worthless. Free tax ”    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. Free tax See Form 8949 and the Instructions for Form 8949. Free tax For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Free tax See also Schedule D (Form 1040), Form 8949, and their separate instructions. Free tax Filing a claim for refund. Free tax   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. Free tax You must use Form 1040X, Amended U. Free tax S. Free tax Individual Income Tax Return, to amend your return for the year the security became worthless. Free tax You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. Free tax For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. Free tax How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. Free tax Gain. Free tax   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. Free tax Loss. Free tax   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. Free tax Adjusted basis. Free tax   The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. Free tax See chapter 13 for more information about determining the adjusted basis of property. Free tax Amount realized. Free tax   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Free tax Amount realized includes the money you receive plus the fair market value of any property or services you receive. Free tax If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized. Free tax If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. Free tax For more information, see Publication 537. Free tax Fair market value. Free tax   Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Free tax Example. Free tax You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Free tax Your gain is $3,000 ($10,000 − $7,000). Free tax Debt paid off. Free tax    A debt against the property, or against you, that is paid off as a part of the transaction, or that is assumed by the buyer, must be included in the amount realized. Free tax This is true even if neither you nor the buyer is personally liable for the debt. Free tax For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. Free tax Example. Free tax You sell stock that you had pledged as security for a bank loan of $8,000. Free tax Your basis in the stock is $6,000. Free tax The buyer pays off your bank loan and pays you $20,000 in cash. Free tax The amount realized is $28,000 ($20,000 + $8,000). Free tax Your gain is $22,000 ($28,000 − $6,000). Free tax Payment of cash. Free tax   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Free tax Determine your gain or loss by subtracting the cash you pay plus the adjusted basis of the property you trade in from the amount you realize. Free tax If the result is a positive number, it is a gain. Free tax If the result is a negative number, it is a loss. Free tax No gain or loss. Free tax   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. Free tax In this case, you may have neither a gain nor a loss. Free tax See Basis Other Than Cost in chapter 13. Free tax Nontaxable Trades This section discusses trades that generally do not result in a taxable gain or deductible loss. Free tax For more information on nontaxable trades, see chapter 1 of Publication 544. Free tax Like-kind exchanges. Free tax   If you trade business or investment property for other business or investment property of a like kind, you do not pay tax on any gain or deduct any loss until you sell or dispose of the property you receive. Free tax To be nontaxable, a trade must meet all six of the following conditions. Free tax The property must be business or investment property. Free tax You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Free tax Neither property may be property used for personal purposes, such as your home or family car. Free tax The property must not be held primarily for sale. Free tax The property you trade and the property you receive must not be property you sell to customers, such as merchandise. Free tax The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. Free tax However, see Special rules for mutual ditch, reservoir, or irrigation company stock, in chapter 4 of Publication 550 for an exception. Free tax Also, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later. Free tax There must be a trade of like property. Free tax The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. Free tax The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. Free tax The trade of a piece of machinery for a store building is not a trade of like property. Free tax Real property located in the United States and real property located outside the United States are not like property. Free tax Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property. Free tax The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade. Free tax The property to be received must be received by the earlier of: The 180th day after the date on which you transfer the property given up in the trade, or The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs. Free tax    If you trade property with a related party in a like-kind exchange, a special rule may apply. Free tax See Related Party Transactions , later in this chapter. Free tax Also, see chapter 1 of Publication 544 for more information on exchanges of business property and special rules for exchanges using qualified intermediaries or involving multiple properties. Free tax Partly nontaxable exchange. Free tax   If you receive money or unlike property in addition to like property, and the above six conditions are met, you have a partly nontaxable trade. Free tax You are taxed on any gain you realize, but only up to the amount of the money and the fair market value of the unlike property you receive. Free tax You cannot deduct a loss. Free tax Like property and unlike property transferred. Free tax   If you give up unlike property in addition to the like property, you must recognize gain or loss on the unlike property you give up. Free tax The gain or loss is the difference between the adjusted basis of the unlike property and its fair market value. Free tax Like property and money transferred. Free tax   If all of the above conditions (1) – (6) are met, you have a nontaxable trade even if you pay money in addition to the like property. Free tax Basis of property received. Free tax   To figure the basis of the property received, see Nontaxable Exchanges in chapter 13. Free tax How to report. Free tax   You must report the trade of like property on Form 8824. Free tax If you figure a recognized gain or loss on Form 8824, report it on Schedule D (Form 1040), or on Form 4797, Sales of Business Property, whichever applies. Free tax See the instructions for Line 22 in the Instructions for Form 8824. Free tax   For information on using Form 4797, see chapter 4 of Publication 544. Free tax Corporate stocks. Free tax   The following trades of corporate stocks generally do not result in a taxable gain or a deductible loss. Free tax Corporate reorganizations. Free tax   In some instances, a company will give you common stock for preferred stock, preferred stock for common stock, or stock in one corporation for stock in another corporation. Free tax If this is a result of a merger, recapitalization, transfer to a controlled corporation, bankruptcy, corporate division, corporate acquisition, or other corporate reorganization, you do not recognize gain or loss. Free tax Stock for stock of the same corporation. Free tax   You can exchange common stock for common stock or preferred stock for preferred stock in the same corporation without having a recognized gain or loss. Free tax This is true for a trade between two stockholders as well as a trade between a stockholder and the corporation. Free tax Convertible stocks and bonds. Free tax   You generally will not have a recognized gain or loss if you convert bonds into stock or preferred stock into common stock of the same corporation according to a conversion privilege in the terms of the bond or the preferred stock certificate. Free tax Property for stock of a controlled corporation. Free tax   If you transfer property to a corporation solely in exchange for stock in that corporation, and immediately after the trade you are in control of the corporation, you ordinarily will not recognize a gain or loss. Free tax This rule applies both to individuals and to groups who transfer property to a corporation. Free tax It does not apply if the corporation is an investment company. Free tax   For this purpose, to be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock of the corporation. Free tax   If this provision applies to you, you may have to attach to your return a complete statement of all facts pertinent to the exchange. Free tax For details, see Regulations section 1. Free tax 351-3. Free tax Additional information. Free tax   For more information on trades of stock, see Nontaxable Trades in chapter 4 of Publication 550. Free tax Insurance policies and annuities. Free tax   You will not have a recognized gain or loss if the insured or annuitant is the same under both contracts and you trade: A life insurance contract for another life insurance contract or for an endowment or annuity contract or for a qualified long-term care insurance contract, An endowment contract for another endowment contract that provides for regular payments beginning at a date no later than the beginning date under the old contract or for an annuity contract or for a qualified long-term insurance contract, An annuity contract for annuity contract or for a qualified long-term care insurance contract, or A qualified long-term care insurance contract for a qualified long-term care insurance contract. Free tax   You also may not have to recognize gain or loss on an exchange of a portion of an annuity contract for another annuity contract. Free tax For transfers completed before October 24, 2011, see Revenue Ruling 2003-76 in Internal Revenue Bulletin 2003-33 and Revenue Procedure 2008-24 in Internal Revenue Bulletin 2008-13. Free tax Revenue Ruling 2003-76 is available at www. Free tax irs. Free tax gov/irb/2003-33_IRB/ar11. Free tax html. Free tax Revenue Procedure 2008-24 is available at www. Free tax irs. Free tax gov/irb/2008-13_IRB/ar13. Free tax html. Free tax For transfers completed on or after October 24, 2011, see Revenue Ruling 2003-76, above, and Revenue Procedure 2011-38, in Internal Revenue Bulletin 2011-30. Free tax Revenue Procedure 2011-38 is available at www. Free tax irs. Free tax gov/irb/2011-30_IRB/ar09. Free tax html. Free tax   For tax years beginning after December 31, 2010, amounts received as an annuity for a period of 10 years or more, or for the lives of one or more individuals, under any portion of an annuity, endowment, or life insurance contract, are treated as a separate contract and are considered partial annuities. Free tax A portion of an annuity, endowment, or life insurance contract may be annuitized, provided that the annuitization period is for 10 years or more or for the lives of one or more individuals. Free tax The investment in the contract is allocated between the part of the contract from which amounts are received as an annuity and the part of the contract from which amounts are not received as an annuity. Free tax   Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable. Free tax Demutualization of life insurance companies. Free tax   If you received stock in exchange for your equity interest as a policyholder or an annuitant, you generally will not have a recognized gain or loss. Free tax See Demutualization of Life Insurance Companies in Publication 550. Free tax U. Free tax S. Free tax Treasury notes or bonds. Free tax   You can trade certain issues of U. Free tax S. Free tax Treasury obligations for other issues designated by the Secretary of the Treasury, with no gain or loss recognized on the trade. Free tax See Savings bonds traded in chapter 1 of Publication 550 for more information. Free tax Transfers Between Spouses Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or if incident to a divorce, a former spouse. Free tax This nonrecognition rule does not apply in the following situations. Free tax The recipient spouse or former spouse is a nonresident alien. Free tax Property is transferred in trust and liability exceeds basis. Free tax Gain must be recognized to the extent the amount of the liabilities assumed by the trust, plus any liabilities on the property, exceed the adjusted basis of the property. Free tax For other situations, see Transfers Between Spouses in chapter 4 of Publication 550. Free tax Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is treated by the recipient as a gift and is not considered a sale or exchange. Free tax The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Free tax This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its fair market value at the time of transfer or any consideration paid by the recipient. Free tax This rule applies for purposes of determining loss as well as gain. Free tax Any gain recognized on a transfer in trust increases the basis. Free tax A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage. Free tax Related Party Transactions Special rules apply to the sale or trade of property between related parties. Free tax Gain on sale or trade of depreciable property. Free tax   Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. Free tax See chapter 3 of Publication 544 for more information. Free tax Like-kind exchanges. Free tax   Generally, if you trade business or investment property for other business or investment property of a like kind, no gain or loss is recognized. Free tax See Like-kind exchanges , earlier, under Nontaxable Trades. Free tax   This rule also applies to trades of property between related parties, defined next under Losses on sales or trades of property. Free tax However, if either you or the related party disposes of the like property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return filed for the year in which the later disposition occurs. Free tax See Related Party Transactions in chapter 4 of Publication 550 for exceptions. Free tax Losses on sales or trades of property. Free tax   You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties. Free tax Members of your family. Free tax This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. Free tax ), and lineal descendants (children, grandchildren, etc. Free tax ). Free tax A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. Free tax A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. Free tax (See Constructive ownership of stock , later. Free tax ) A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. Free tax   In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties. Free tax A grantor and fiduciary, or the fiduciary and beneficiary, of any trust. Free tax Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Free tax A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust. Free tax A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership. Free tax Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Free tax Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Free tax An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest). Free tax Two corporations that are members of the same controlled group. Free tax (Under certain conditions, however, these losses are not disallowed but must be deferred. Free tax ) Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profit interests in both partnerships. Free tax Multiple property sales or trades. Free tax   If you sell or trade to a related party a number of blocks of stock or pieces of property in a lump sum, you must figure the gain or loss separately for each block of stock or piece of property. Free tax The gain on each item may be taxable. Free tax However, you cannot deduct the loss on any item. Free tax Also, you cannot reduce gains from the sales of any of these items by losses on the sales of any of the other items. Free tax Indirect transactions. Free tax   You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. Free tax This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged. Free tax Constructive ownership of stock. Free tax   In determining whether a person directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Free tax Rule 1. Free tax   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Free tax Rule 2. Free tax   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Free tax Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Free tax Rule 3. Free tax   An individual owning, other than by applying rule 2, any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Free tax Rule 4. Free tax   When applying rule 1, 2, or 3, stock constructively owned by a person under rule 1 is treated as actually owned by that person. Free tax But stock constructively owned by an individual under rule 2 or rule 3 is not treated as owned by that individual for again applying either rule 2 or rule 3 to make another person the constructive owner of the stock. Free tax Property received from a related party. Free tax    If you sell or trade at a gain property you acquired from a related party, you recognize the gain only to the extent it is more than the loss previously disallowed to the related party. Free tax This rule applies only if you are the original transferee and you acquired the property by purchase or exchange. Free tax This rule does not apply if the related party's loss was disallowed because of the wash sale rules described in chapter 4 of Publication 550 under Wash Sales. Free tax   If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party. Free tax Example 1. Free tax Your brother sells you stock for $7,600. Free tax His cost basis is $10,000. Free tax Your brother cannot deduct the loss of $2,400. Free tax Later, you sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900. Free tax Your reportable gain is $500 (the $2,900 gain minus the $2,400 loss not allowed to your brother). Free tax Example 2. Free tax If, in Example 1, you sold the stock for $6,900 instead of $10,500, your recognized loss is only $700 (your $7,600 basis minus $6,900). Free tax You cannot deduct the loss that was not allowed to your brother. Free tax Capital Gains and Losses This section discusses the tax treatment of gains and losses from different types of investment transactions. Free tax Character of gain or loss. Free tax   You need to classify your gains and losses as either ordinary or capital gains or losses. Free tax You then need to classify your capital gains and losses as either short term or long term. Free tax If you have long-term gains and losses, you must identify your 28% rate gains and losses. Free tax If you have a net capital gain, you must also identify any unrecaptured section 1250 gain. Free tax   The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. Free tax Reporting capital gains and losses is explained in chapter 16. Free tax Capital or Ordinary Gain or Loss If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. Free tax Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. Free tax A sale or trade of a noncapital asset generally results in ordinary gain or loss. Free tax Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. Free tax In some situations, part of your gain or loss may be a capital gain or loss and part may be an ordinary gain or loss. Free tax Capital Assets and Noncapital Assets For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. Free tax Some examples are: Stocks or bonds held in your personal account, A house owned and used by you and your family, Household furnishings, A car used for pleasure or commuting, Coin or stamp collections, Gems and jewelry, and Gold, silver, or any other metal. Free tax Any property you own is a capital asset, except the following noncapital assets. Free tax Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. Free tax For an exception, see Capital Asset Treatment for Self-Created Musical Works , later. Free tax Depreciable property used in your trade or business, even if fully depreciated. Free tax Real property used in your trade or business. Free tax A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that is: Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. Free tax For an exception to this rule, see Capital Asset Treatment for Self-Created Musical Works , later. Free tax Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1). Free tax U. Free tax S. Free tax Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price. Free tax Certain commodities derivative financial instruments held by commodities derivatives dealers. Free tax Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. Free tax Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Free tax Investment Property Investment property is a capital asset. Free tax Any gain or loss from its sale or trade is generally a capital gain or loss. Free tax Gold, silver, stamps, coins, gems, etc. Free tax   These are capital assets except when they are held for sale by a dealer. Free tax Any gain or loss you have from their sale or trade generally is a capital gain or loss. Free tax Stocks, stock rights, and bonds. Free tax   All of these (including stock received as a dividend) are capital assets except when held for sale by a securities dealer. Free tax However, if you own small business stock, see Losses on Section 1244 (Small Business) Stock , later, and Losses on Small Business Investment Company Stock, in chapter 4 of Publication 550. Free tax Personal Use Property Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. Free tax However, you cannot deduct a loss from selling personal use property. Free tax Capital Asset Treatment for Self-Created Musical Works You can elect to treat musical compositions and copyrights in musical works as capital assets when you sell or exchange them if: Your personal efforts created the property, or You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. Free tax You must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. Free tax You must make the election on or before the due date (including extensions) of the income tax return for the tax year of the sale or exchange. Free tax You must make the election on Form 8949 by treating the sale or exchange as the sale or exchange of a capital asset, according to Form 8949, Schedule D (Form 1040), and their separate instructions. Free tax For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Free tax See also Schedule D (Form 1040), Form 8949, and their separate instructions. Free tax You can revoke the election if you have IRS approval. Free tax To get IRS approval, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. Free tax See, for example, Rev. Free tax Proc. Free tax 2013-1, corrected by Announcement 2013–9, and amplified and modified by Rev. Free tax Proc. Free tax 2013–32, available at www. Free tax irs. Free tax gov/irb/2013-01_IRB/ar06. Free tax html. Free tax Alternatively, you are granted an automatic 6-month extension from the due date of your income tax return (excluding extensions) to revoke the election, provided you timely file your income tax return, and within this 6-month extension period, you file Form 1040X that treats the sale or exchange as the sale or exchange of property that is not a capital asset. Free tax Discounted Debt Instruments Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions. Free tax Short-term government obligations. Free tax   Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. Free tax This treatment applies to obligations with a fixed maturity date not more than 1 year from the date of issue. Free tax Acquisition discount is the stated redemption price at maturity minus your basis in the obligation. Free tax   However, do not treat these gains as income to the extent you previously included the discount in income. Free tax See Discount on Short-Term Obligations in chapter 1 of Publication 550. Free tax Short-term nongovernment obligations. Free tax   Treat gains on short-term nongovernment obligations as ordinary income up to your ratable share of original issue discount (OID). Free tax This treatment applies to obligations with a fixed maturity date of not more than 1 year from the date of issue. Free tax   However, to the extent you previously included the discount in income, you do not have to include it in income again. Free tax See Discount on Short-Term Obligations in chapter 1 of Publication 550. Free tax Tax-exempt state and local government bonds. Free tax   If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of OID as tax-exempt interest. Free tax To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID. Free tax   If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. Free tax For more information on the basis of these bonds, see Discounted Debt Instruments in chapter 4 of Publication 550. Free tax   Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. Free tax If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. Free tax If you bought the bonds after April 30, 1993, the gain is ordinary income. Free tax   You figure the market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. Free tax For more information, see Market Discount Bonds in chapter 1 of Publication 550. Free tax    A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss. Free tax Redeemed before maturity. Free tax   If a state or local bond issued before June 9, 1980, is redeemed before it matures, the OID is not taxable to you. Free tax   If a state or local bond issued after June 8, 1980, is redeemed before it matures, the part of OID earned while you hold the bond is not taxable to you. Free tax However, you must report the unearned part of OID as a capital gain. Free tax Example. Free tax On July 2, 2002, the date of issue, you bought a 20-year, 6% municipal bond for $800. Free tax The face amount of the bond was $1,000. Free tax The $200 discount was OID. Free tax At the time the bond was issued, the issuer had no intention of redeeming it before it matured. Free tax The bond was callable at its face amount beginning 10 years after the issue date. Free tax The issuer redeemed the bond at the end of 11 years (July 2, 2013) for its face amount of $1,000 plus accrued annual interest of $60. Free tax The OID earned during the time you held the bond, $73, is not taxable. Free tax The $60 accrued annual interest also is not taxable. Free tax However, you must report the unearned part of OID ($127) as a capital gain. Free tax Long-term debt instruments issued after 1954 and before May 28, 1969 (or before July 2, 1982, if a government instrument). Free tax   If you sell, trade, or redeem for a gain one of these debt instruments, the part of your gain that is not more than your ratable share of the OID at the time of the sale or redemption is ordinary income. Free tax The rest of the gain is capital gain. Free tax If, however, there was an intention to call the debt instrument before maturity, all of your gain that is not more than the entire OID is treated as ordinary income at the time of the sale. Free tax This treatment of taxable gain also applies to corporate instruments issued after May 27, 1969, under a written commitment that was binding on May 27, 1969, and at all times thereafter. Free tax Long-term debt instruments issued after May 27, 1969 (or after July 1, 1982, if a government instrument). Free tax   If you hold one of these debt instruments, you must include a part of OID in your gross income each year you own the instrument. Free tax Your basis in that debt instrument is increased by the amount of OID that you have included in your gross income. Free tax See Original Issue Discount (OID) in chapter 7 for information about OID that you must report on your tax return. Free tax   If you sell or trade the debt instrument before maturity, your gain is a capital gain. Free tax However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. Free tax In this case, the rest of the gain is capital gain. Free tax Market discount bonds. Free tax   If the debt instrument has market discount and you chose to include the discount in income as it accrued, increase your basis in the debt instrument by the accrued discount to figure capital gain or loss on its disposition. Free tax If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. Free tax The rest of the gain is capital gain. Free tax See Market Discount Bonds in chapter 1 of Publication 550. Free tax   A different rule applies to market discount bonds issued before July 19, 1984, and purchased by you before May 1, 1993. Free tax See Market discount bonds under Discounted Debt Instruments in chapter 4 of Publication 550. Free tax Retirement of debt instrument. Free tax   Any amount you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument. Free tax Notes of individuals. Free tax   If you hold an obligation of an individual issued with OID after March 1, 1984, you generally must include the OID in your income currently, and your gain or loss on its sale or retirement is generally capital gain or loss. Free tax An exception to this treatment applies if the obligation is a loan between individuals and all the following requirements are met. Free tax The lender is not in the business of lending money. Free tax The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or less. Free tax Avoiding federal tax is not one of the principal purposes of the loan. Free tax   If the exception applies, or the obligation was issued before March 2, 1984, you do not include the OID in your income currently. Free tax When you sell or redeem the obligation, the part of your gain that is not more than your accrued share of OID at that time is ordinary income. Free tax The rest of the gain, if any, is capital gain. Free tax Any loss on the sale or redemption is capital loss. Free tax Deposit in Insolvent or Bankrupt Financial Institution If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways. Free tax Ordinary loss. Free tax Casualty loss. Free tax Nonbusiness bad debt (short-term capital loss). Free tax  For more information, see Deposit in Insolvent or Bankrupt Financial Institution, in chapter 4 of Publication 550. Free tax Sale of Annuity The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income. Free tax Losses on Section 1244 (Small Business) Stock You can deduct as an ordinary loss, rather than as a capital loss, your loss on the sale, trade, or worthlessness of section 1244 stock. Free tax Report the loss on Form 4797, line 10. Free tax Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. Free tax Report the gain on Form 8949. Free tax See Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Free tax For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Free tax See also Schedule D (Form 1040), Form 8949, and their separate instructions. Free tax Holding Period If you sold or traded investment property, you must determine your holding period for the property. Free tax Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss. Free tax Long-term or short-term. Free tax   If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. Free tax If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. Free tax   To determine how long you held the investment property, begin counting on the date after the day you acquired the property. Free tax The day you disposed of the property is part of your holding period. Free tax Example. Free tax If you bought investment property on February 6, 2012, and sold it on February 6, 2013, your holding period is not more than 1 year and you have a short-term capital gain or loss. Free tax If you sold it on February 7, 2013, your holding period is more than 1 year and you will have a long-term capital gain or loss. Free tax Securities traded on established market. Free tax   For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them. Free tax    Do not confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be made. Free tax Example. Free tax You are a cash method, calendar year taxpayer. Free tax You sold stock at a gain on December 30, 2013. Free tax According to the rules of the stock exchange, the sale was closed by delivery of the stock 4 trading days after the sale, on January 6, 2014. Free tax You received payment of the sales price on that same day. Free tax Report your gain on your 2013 return, even though you received the payment in 2014. Free tax The gain is long term or short term depending on whether you held the stock more than 1 year. Free tax Your holding period ended on December 30. Free tax If you had sold the stock at a loss, you would also report it on your 2013 return. Free tax U. Free tax S. Free tax Treasury notes and bonds. Free tax   The holding period of U. Free tax S. Free tax Treasury notes and bonds sold at auction on the basis of yield starts the day after the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. Free tax The holding period of U. Free tax S. Free tax Treasury notes and bonds sold through an offering on a subscription basis at a specified yield starts the day after the subscription is submitted. Free tax Automatic investment service. Free tax   In determining your holding period for shares bought by the bank or other agent, full shares are considered bought first and any fractional shares are considered bought last. Free tax Your holding period starts on the day after the bank's purchase date. Free tax If a share was bought over more than one purchase date, your holding period for that share is a split holding period. Free tax A part of the share is considered to have been bought on each date that stock was bought by the bank with the proceeds of available funds. Free tax Nontaxable trades. Free tax   If you acquire investment property in a trade for other investment property and your basis for the new property is determined, in whole or in part, by your basis in the old property, your holding period for the new property begins on the day following the date you acquired the old property. Free tax Property received as a gift. Free tax   If you receive a gift of property and your basis is determined by the donor's adjusted basis, your holding period is considered to have started on the same day the donor's holding period started. Free tax   If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift. Free tax Inherited property. Free tax   Generally, if you inherited investment property, your capital gain or loss on any later disposition of that property is long-term capital gain or loss. Free tax This is true regardless of how long you actually held the property. Free tax However, if you inherited property from someone who died in 2010, see the information below. Free tax Inherited property from someone who died in 2010. Free tax   If you inherit investment property from a decedent who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your holding period. Free tax Real property bought. Free tax   To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. Free tax However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. Free tax The holding period cannot start until there is an actual contract of sale. Free tax The holding period of the seller cannot end before that time. Free tax Real property repossessed. Free tax   If you sell real property but keep a security interest in it, and then later repossess the property under the terms of the sales contract, your holding period for a later sale includes the period you held the property before the original sale and the period after the repossession. Free tax Your holding period does not include the time between the original sale and the repossession. Free tax That is, it does not include the period during which the first buyer held the property. Free tax Stock dividends. Free tax   The holding period for stock you received as a taxable stock dividend begins on the date of distribution. Free tax   The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. Free tax This rule also applies to stock acquired in a “spin-off,” which is a distribution of stock or securities in a controlled corporation. Free tax Nontaxable stock rights. Free tax   Your holding period for nontaxable stock rights begins on the same day as the holding period of the underlying stock. Free tax The holding period for stock acquired through the exercise of stock rights begins on the date the right was exercised. Free tax Nonbusiness Bad Debts If someone owes you money that you cannot collect, you have a bad debt. Free tax You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless. Free tax Generally, nonbusiness bad debts are bad debts that did not come from operating your trade or business, and are deductible as short-term capital losses. Free tax To be deductible, nonbusiness bad debts must be totally worthless. Free tax You cannot deduct a partly worthless nonbusiness debt. Free tax Genuine debt required. Free tax   A debt must be genuine for you to deduct a loss. Free tax A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. Free tax Basis in bad debt required. Free tax    To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. Free tax For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. Free tax If you are a cash method taxpayer (as most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items. Free tax When deductible. Free tax   You can take a bad debt deduction only in the year the debt becomes worthless. Free tax You do not have to wait until a debt is due to determine whether it is worthless. Free tax A debt becomes worthless when there is no longer any chance that the amount owed will be paid. Free tax   It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Free tax You must only show that you have taken reasonable steps to collect the debt. Free tax Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Free tax How to report bad debts. Free tax    Deduct nonbusiness bad debts as short-term capital losses on Form 8949. Free tax    Make sure you report your bad debt(s) (and any other short-term transactions for which you did not receive a Form 1099-B) on Form 8949, Part I, with box C checked. Free tax    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Free tax See also Schedule D (Form 1040), Form 8949, and their separate instructions. Free tax   For each bad debt, attach a statement to your return that contains: A description of the debt, including the amount, and the date it became due, The name of the debtor, and any business or family relationship between you and the debtor, The efforts you made to collect the debt, and Why you decided the debt was worthless. Free tax For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt. Free tax Filing a claim for refund. Free tax    If you do not deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. Free tax To do this, use Form 1040X to amend your return for the year the debt became worthless. Free tax You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. Free tax For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. Free tax Additional information. Free tax   For more information, see Nonbusiness Bad Debts in Publication 550. Free tax For information on business bad debts, see chapter 10 of Publication 535, Business Expenses. Free tax Wash Sales You cannot deduct losses from sales or trades of stock or securities in a wash sale. Free tax A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. Free tax If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). Free tax The result is your basis in the new stock or securities. Free tax This adjustment postpones the loss deduction until the disposition of the new stock or securities. Free tax Your holding period for the new stock or securities includes the holding period of the stock or securities sold. Free tax For more information, see Wash Sales, in chapter 4 of Publication 550. Free tax Rollover of Gain From Publicly Traded Securities You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. Free tax This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain. Free tax You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement property , later. Free tax This postpones your gain until the year you dispose of the replacement property. Free tax You qualify to make this choice if you meet all the following tests. Free tax You sell publicly traded securities at a gain. Free tax Publicly traded securities are securities traded on an established securities market. Free tax Your gain from the sale is a capital gain. Free tax During the 60-day period beginning on the date of the sale, you buy replacement property. Free tax This replacement property must be either common stock of, or a partnership interest in a specialized small business investment company (SSBIC). Free tax This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993. Free tax Amount of gain recognized. Free tax   If you make the choice described in this section, you must recognize gain only up to the following amount. Free tax The amount realized on the sale, minus The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of publicly traded securities). Free tax  If this amount is less than the amount of your gain, you can postpone the rest of your gain, subject to the limit described next. Free tax If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain. Free tax Limit on gain postponed. Free tax   The amount of gain you can postpone each year is limited to the smaller of: $50,000 ($25,000 if you are married and file a separate return), or $500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier years. Free tax Basis of replacement property. Free tax   You must subtract the amount of postponed gain from the basis of your replacement property. Free tax How to report and postpone gain. Free tax    See How to report and postpone gain under Rollover of Gain From Publicly Traded Securities in chapter 4 of Publication 550 for details. Free tax Prev  Up  Next   Home   More Online Publications