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Freetaxusa2010

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Freetaxusa2010 6. Freetaxusa2010   Dual-Status Tax Year Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Tax Year Income Subject to Tax Restrictions for Dual-Status Taxpayers Exemptions How To Figure TaxIncome Tax Credits and Payments Forms To File When and Where To File Introduction You have a dual-status tax year when you have been both a resident alien and a nonresident alien in the same year. Freetaxusa2010 Dual status does not refer to your citizenship; it refers only to your resident status in the United States. Freetaxusa2010 In determining your U. Freetaxusa2010 S. Freetaxusa2010 income tax liability for a dual-status tax year, different rules apply for the part of the year you are a resident of the United States and the part of the year you are a nonresident. Freetaxusa2010 The most common dual-status tax years are the years of arrival and departure. Freetaxusa2010 See Dual-Status Aliens in chapter 1. Freetaxusa2010 If you are married and choose to be treated as a U. Freetaxusa2010 S. Freetaxusa2010 resident for the entire year, as explained in chapter 1, the rules of this chapter do not apply to you for that year. Freetaxusa2010 Topics - This chapter discusses: Income subject to tax, Restrictions for dual-status taxpayers, Exemptions, How to figure the tax, Forms to file, When and where to file, and How to fill out a dual-status return. Freetaxusa2010 Useful Items - You may want to see: Publication 503 Child and Dependent Care Expenses 514 Foreign Tax Credit for Individuals 575 Pension and Annuity Income Form (and Instructions) 1040 U. Freetaxusa2010 S. Freetaxusa2010 Individual Income Tax Return 1040-C U. Freetaxusa2010 S. Freetaxusa2010 Departing Alien Income Tax Return 1040-ES Estimated Tax for Individuals 1040-ES (NR) U. Freetaxusa2010 S. Freetaxusa2010 Estimated Tax for Nonresident Alien Individuals 1040NR U. Freetaxusa2010 S. Freetaxusa2010 Nonresident Alien Income Tax Return 1116 Foreign Tax Credit See chapter 12 for information about getting these publications and forms. Freetaxusa2010 Tax Year You must file your tax return on the basis of an annual accounting period called a tax year. Freetaxusa2010 If you have not previously established a fiscal tax year, your tax year is the calendar year. Freetaxusa2010 A calendar year is 12 consecutive months ending on December 31. Freetaxusa2010 If you have previously established a regular fiscal year (12 consecutive months ending on the last day of a month other than December, or a 52–53 week year) and are considered to be a U. Freetaxusa2010 S. Freetaxusa2010 resident for any calendar year, you will be treated as a U. Freetaxusa2010 S. Freetaxusa2010 resident for any part of your fiscal year that falls within that calendar year. Freetaxusa2010 Income Subject to Tax For the part of the year you are a resident alien, you are taxed on income from all sources. Freetaxusa2010 Income from sources outside the United States is taxable if you receive it while you are a resident alien. Freetaxusa2010 The income is taxable even if you earned it while you were a nonresident alien or if you became a nonresident alien after receiving it and before the end of the year. Freetaxusa2010 For the part of the year you are a nonresident alien, you are taxed on income from U. Freetaxusa2010 S. Freetaxusa2010 sources and on certain foreign source income treated as effectively connected with a U. Freetaxusa2010 S. Freetaxusa2010 trade or business. Freetaxusa2010 (The rules for treating foreign source income as effectively connected are discussed in chapter 4 under Foreign Income. Freetaxusa2010 ) Income from sources outside the United States that is not effectively connected with a trade or business in the United States is not taxable if you receive it while you are a nonresident alien. Freetaxusa2010 The income is not taxable even if you earned it while you were a resident alien or if you became a resident alien or a U. Freetaxusa2010 S. Freetaxusa2010 citizen after receiving it and before the end of the year. Freetaxusa2010 Income from U. Freetaxusa2010 S. Freetaxusa2010 sources is taxable whether you receive it while a nonresident alien or a resident alien unless specifically exempt under the Internal Revenue Code or a tax treaty provision. Freetaxusa2010 Generally, tax treaty provisions apply only to the part of the year you were a nonresident. Freetaxusa2010 In certain cases, however, treaty provisions may apply while you were a resident alien. Freetaxusa2010 See chapter 9 for more information. Freetaxusa2010 When determining what income is taxed in the United States, you must consider exemptions under U. Freetaxusa2010 S. Freetaxusa2010 tax law as well as the reduced tax rates and exemptions provided by tax treaties between the United States and certain foreign countries. Freetaxusa2010 For a further discussion of tax treaties, see chapter 9. Freetaxusa2010 Restrictions for Dual-Status Taxpayers The following restrictions apply if you are filing a tax return for a dual-status tax year. Freetaxusa2010 1) Standard deduction. Freetaxusa2010   You cannot use the standard deduction allowed on Form 1040. Freetaxusa2010 However, you can itemize any allowable deductions. Freetaxusa2010 2) Exemptions. Freetaxusa2010   Your total deduction for the exemptions for your spouse and allowable dependents cannot be more than your taxable income (figured without deducting personal exemptions) for the period you are a resident alien. Freetaxusa2010 3) Head of household. Freetaxusa2010   You cannot use the head of household Tax Table column or Tax Computation Worksheet. Freetaxusa2010 4) Joint return. Freetaxusa2010   You cannot file a joint return. Freetaxusa2010 However, see Choosing Resident Alien Status under Dual-Status Aliens in chapter 1. Freetaxusa2010 5) Tax rates. Freetaxusa2010   If you are married and a nonresident of the United States for all or part of the tax year and you do not choose to file jointly as discussed in chapter 1, you must use the Tax Table column or Tax Computation Worksheet for married filing separately to figure your tax on income effectively connected with a U. Freetaxusa2010 S. Freetaxusa2010 trade or business. Freetaxusa2010 You cannot use the Tax Table column or Tax Computation Worksheet for married filing jointly or single. Freetaxusa2010 However, you may be able to file as single if you lived apart from your spouse during the last 6 months of the year and you are a: Married resident of Canada, Mexico, or South Korea, or Married U. Freetaxusa2010 S. Freetaxusa2010 national. Freetaxusa2010  See the instructions for Form 1040NR to see if you qualify. Freetaxusa2010    A U. Freetaxusa2010 S. Freetaxusa2010 national is an individual who, although not a U. Freetaxusa2010 S. Freetaxusa2010 citizen, owes his or her allegiance to the United States. Freetaxusa2010 U. Freetaxusa2010 S. Freetaxusa2010 nationals include American Samoans and Northern Mariana Islanders who chose to become U. Freetaxusa2010 S. Freetaxusa2010 nationals instead of U. Freetaxusa2010 S. Freetaxusa2010 citizens. Freetaxusa2010 6) Tax credits. Freetaxusa2010   You cannot claim the education credits, the earned income credit, or the credit for the elderly or the disabled unless: You are married, and You choose to be treated as a resident for all of 2013 by filing a joint return with your spouse who is a U. Freetaxusa2010 S. Freetaxusa2010 citizen or resident, as discussed in chapter 1. Freetaxusa2010 Exemptions As a dual-status taxpayer, you usually will be able to claim your own personal exemption. Freetaxusa2010 Subject to the general rules for qualification, you can claim exemptions for your spouse and dependents when you figure taxable income for the part of the year you are a resident alien. Freetaxusa2010 The amount you can claim for these exemptions is limited to your taxable income (figured before subtracting exemptions) for the part of the year you are a resident alien. Freetaxusa2010 You cannot use exemptions (other than your own) to reduce taxable income to less than zero for that period. Freetaxusa2010 Special rules apply to exemptions for the part of the tax year you are a nonresident alien if you are a: Resident of Canada, Mexico, or South Korea, U. Freetaxusa2010 S. Freetaxusa2010 national, or Student or business apprentice from India. Freetaxusa2010 For more information, see Exemptions in chapter 5. Freetaxusa2010 How To Figure Tax When you figure your U. Freetaxusa2010 S. Freetaxusa2010 tax for a dual-status year, you are subject to different rules for the part of the year you are a resident and the part of the year you are a nonresident. Freetaxusa2010 Income All income for your period of residence and all income that is effectively connected with a trade or business in the United States for your period of nonresidence, after allowable deductions, is added and taxed at the rates that apply to U. Freetaxusa2010 S. Freetaxusa2010 citizens and residents. Freetaxusa2010 Income that is not connected with a trade or business in the United States for your period of nonresidence is subject to the flat 30% rate or lower treaty rate. Freetaxusa2010 You cannot take any deductions against this income. Freetaxusa2010 Social security and railroad retirement benefits. Freetaxusa2010   During the part of the year you are a nonresident alien, 85% of any U. Freetaxusa2010 S. Freetaxusa2010 social security benefits (and the equivalent portion of tier 1 railroad retirement benefits) you receive is subject to the flat 30% tax, unless exempt, or subject to a lower treaty rate. Freetaxusa2010 (See The 30% Tax in chapter 4. Freetaxusa2010 )   During the part of the year you are a resident alien, part of the social security and the equivalent portion of tier 1 railroad retirement benefits will be taxed at graduated rates if your modified adjusted gross income plus half of these benefits is more than a certain base amount. Freetaxusa2010 Use the Social Security Benefits Worksheet in the Form 1040 instructions to help you figure the taxable part of your social security and equivalent tier 1 railroad retirement benefits for the part of the year you were a resident alien. Freetaxusa2010 If you received U. Freetaxusa2010 S. Freetaxusa2010 social security benefits while you were a nonresident alien, the Social Security Administration will send you Form SSA-1042S showing your combined benefits for the entire year and the amount of tax withheld. Freetaxusa2010 You will not receive separate statements for the benefits received during your periods of U. Freetaxusa2010 S. Freetaxusa2010 residence and nonresidence. Freetaxusa2010 Therefore, it is important for you to keep careful records of these amounts. Freetaxusa2010 You will need this information to properly complete your return and determine your tax liability. Freetaxusa2010 If you received railroad retirement benefits while you were a nonresident alien, the U. Freetaxusa2010 S. Freetaxusa2010 Railroad Retirement Board (RRB) will send you Form RRB-1042S, Statement for Nonresident Alien Recipients of Payments by the Railroad Retirement Board, and/or Form RRB-1099-R, Annuities or Pensions by the Railroad Retirement Board. Freetaxusa2010 If your country of legal residence changed or your rate of tax changed during the tax year, you may receive more than one form. Freetaxusa2010 Tax Credits and Payments This discussion covers tax credits and payments for dual-status aliens. Freetaxusa2010 Credits As a dual-status alien, you generally can claim tax credits using the same rules that apply to resident aliens. Freetaxusa2010 There are certain restrictions that may apply. Freetaxusa2010 These restrictions are discussed here, along with a brief explanation of credits often claimed by individuals. Freetaxusa2010 Foreign tax credit. Freetaxusa2010   If you have paid or are liable for the payment of income tax to a foreign country on income from foreign sources, you may be able to claim a credit for the foreign taxes. Freetaxusa2010   If you claim the foreign tax credit, you generally must file Form 1116 with your income tax return. Freetaxusa2010 For more information, see the Instructions for Form 1116 and Publication 514. Freetaxusa2010 Child and dependent care credit. Freetaxusa2010   You may qualify for this credit if you pay someone to care for your qualifying child who is under age 13, or your disabled dependent or disabled spouse so that you can work or look for work. Freetaxusa2010 Generally, you must be able to claim an exemption for your dependent. Freetaxusa2010   Married dual-status aliens can claim the credit only if they choose to file a joint return as discussed in chapter 1, or if they qualify as certain married individuals living apart. Freetaxusa2010   The amount of your child and dependent care expense that qualifies for the credit in any tax year cannot be more than your earned income for that tax year. Freetaxusa2010   For more information, get Publication 503 and Form 2441. Freetaxusa2010 Retirement savings contributions credit. Freetaxusa2010   You may qualify for this credit (also known as the saver's credit) if you made eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA) in 2013. Freetaxusa2010 You cannot claim this credit if: You were born after January 1, 1996, You were a full-time student, Your exemption is claimed by someone else on his or her 2013 tax return, or Your adjusted gross income is more than $29,500. Freetaxusa2010 Use Form 8880 to figure the credit. Freetaxusa2010 For more information, see Publication 590. Freetaxusa2010 Child tax credit. Freetaxusa2010   You may be able to take this credit if you have a qualifying child. Freetaxusa2010   A qualifying child for purposes of the child tax credit is a child who: Was under age 17 at the end of 2013. Freetaxusa2010 Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew). Freetaxusa2010 Is a U. Freetaxusa2010 S. Freetaxusa2010 citizen, a U. Freetaxusa2010 S. Freetaxusa2010 national, or a resident alien. Freetaxusa2010 Did not provide over half of his or her own support for 2013. Freetaxusa2010 Lived with you more than half of 2013. Freetaxusa2010 Temporary absences, such as for school, vacation, or medical care, count as time lived in the home. Freetaxusa2010 Is claimed as a dependent on your return. Freetaxusa2010 An adopted child is always treated as your own child. Freetaxusa2010 An adopted child includes a child lawfully placed with you for legal adoption. Freetaxusa2010   See your form instructions for additional details. Freetaxusa2010 Adoption credit. Freetaxusa2010   You may qualify to take a tax credit of up to $12,970 for qualifying expenses paid to adopt an eligible child. Freetaxusa2010 This amount may be allowed for the adoption of a child with special needs regardless of whether you have qualifying expenses. Freetaxusa2010 To claim the adoption credit, file Form 8839 with the U. Freetaxusa2010 S. Freetaxusa2010 income tax return that you file. Freetaxusa2010   Married dual-status aliens can claim the credit only if they choose to file a joint return with a U. Freetaxusa2010 S. Freetaxusa2010 citizen or resident spouse as discussed in chapter 1, or if they qualify as certain married individuals living apart (see Married Persons Not Filing Jointly in the Form 8839 instructions). Freetaxusa2010 Payments You can report as payments against your U. Freetaxusa2010 S. Freetaxusa2010 income tax liability certain taxes you paid, are considered to have paid, or that were withheld from your income. Freetaxusa2010 These include: Tax withheld from wages earned in the United States, Taxes withheld at the source from various items of income from U. Freetaxusa2010 S. Freetaxusa2010 sources other than wages, Estimated tax paid with Form 1040-ES or Form 1040-ES (NR), and Tax paid with Form 1040-C, at the time of departure from the United States. Freetaxusa2010 Forms To File The U. Freetaxusa2010 S. Freetaxusa2010 income tax return you must file as a dual-status alien depends on whether you are a resident alien or a nonresident alien at the end of the tax year. Freetaxusa2010 Resident at end of year. Freetaxusa2010   You must file Form 1040 if you are a dual-status taxpayer who becomes a resident during the year and who is a U. Freetaxusa2010 S. Freetaxusa2010 resident on the last day of the tax year. Freetaxusa2010 Write “Dual-Status Return” across the top of the return. Freetaxusa2010 Attach a statement to your return to show the income for the part of the year you are a nonresident. Freetaxusa2010 You can use Form 1040NR or Form 1040NR-EZ as the statement, but be sure to mark “Dual-Status Statement” across the top. Freetaxusa2010 Nonresident at end of year. Freetaxusa2010   You must file Form 1040NR or Form 1040NR-EZ if you are a dual-status taxpayer who gives up residence in the United States during the year and who is not a U. Freetaxusa2010 S. Freetaxusa2010 resident on the last day of the tax year. Freetaxusa2010 Write “Dual-Status Return” across the top of the return. Freetaxusa2010 Attach a statement to your return to show the income for the part of the year you are a resident. Freetaxusa2010 You can use Form 1040 as the statement, but be sure to mark “Dual-Status Statement” across the top. Freetaxusa2010   If you expatriated or terminated your residency in 2013, you may be required to file an expatriation statement (Form 8854) with your tax return. Freetaxusa2010 For more information, see Expatriation Tax in chapter 4. Freetaxusa2010 Statement. Freetaxusa2010   Any statement must have your name, address, and taxpayer identification number on it. Freetaxusa2010 You do not need to sign a separate statement or schedule accompanying your return, because your signature on the return also applies to the supporting statements and schedules. Freetaxusa2010 When and Where To File If you are a resident alien on the last day of your tax year and report your income on a calendar year basis, you must file no later than April 15 of the year following the close of your tax year. Freetaxusa2010 If you report your income on other than a calendar year basis, file your return no later than the 15th day of the 4th month following the close of your tax year. Freetaxusa2010 In either case, file your return with the address for dual-status aliens shown on the back page of the Form 1040 instructions. Freetaxusa2010 If you are a nonresident alien on the last day of your tax year and you report your income on a calendar year basis, you must file no later than April 15 of the year following the close of your tax year if you receive wages subject to withholding. Freetaxusa2010 If you report your income on other than a calendar year basis, file your return no later than the 15th day of the 4th month following the close of your tax year. Freetaxusa2010 If you did not receive wages subject to withholding and you report your income on a calendar year basis, you must file no later than June 15 of the year following the close of your tax year. Freetaxusa2010 If you report your income on other than a calendar year basis, file your return no later than the 15th day of the 6th month following the close of your tax year. Freetaxusa2010 In any case, mail your return to:  Department of the Treasury Internal Revenue Service  Austin, TX 73301-0215 If enclosing a payment, mail your return to:  Internal Revenue Service  P. Freetaxusa2010 O. Freetaxusa2010 Box 1303 Charlotte, NC 28201-1303 If the regular due date for filing falls on a Saturday, Sunday, or legal holiday, the due date is the next day that is not a Saturday, Sunday, or legal holiday. Freetaxusa2010 Prev  Up  Next   Home   More Online Publications
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Freetaxusa2010 4. Freetaxusa2010   Sales and Trades of Investment Property Table of Contents IntroductionNominees. Freetaxusa2010 Topics - This chapter discusses: Useful Items - You may want to see: What Is a Sale or Trade?Dividend versus sale or trade. Freetaxusa2010 Worthless Securities Constructive Sales of Appreciated Financial Positions Section 1256 Contracts Marked to Market Basis of Investment PropertyCost Basis Basis Other Than Cost Adjusted Basis Stocks and Bonds How To Figure Gain or LossFair market value. Freetaxusa2010 Debt paid off. Freetaxusa2010 Payment of cash. Freetaxusa2010 Special Rules for Mutual Funds Nontaxable TradesLike-Kind Exchanges Corporate Stocks Exchange of Shares In One Mutual Fund For Shares In Another Mutual Fund Insurance Policies and Annuities U. Freetaxusa2010 S. Freetaxusa2010 Treasury Notes or Bonds Transfers Between Spouses Related Party TransactionsGain on Sale or Trade of Depreciable Property Capital Gains and LossesCapital or Ordinary Gain or Loss Holding Period Nonbusiness Bad Debts Short Sales Wash Sales Options Straddles Sales of Stock to ESOPs or Certain Cooperatives Rollover of Gain From Publicly Traded Securities Gains on Qualified Small Business Stock Exclusion of Gain From DC Zone Assets Reporting Capital Gains and LossesException 1. Freetaxusa2010 Exception 2. Freetaxusa2010 Section 1256 contracts and straddles. Freetaxusa2010 Market discount bonds. Freetaxusa2010 File Form 1099-B or Form 1099-S with the IRS. Freetaxusa2010 Capital Losses Capital Gain Tax Rates Special Rules for Traders in SecuritiesHow To Report Introduction This chapter explains the tax treatment of sales and trades of investment property. Freetaxusa2010 Investment property. Freetaxusa2010   This is property that produces investment income. Freetaxusa2010 Examples include stocks, bonds, and Treasury bills and notes. Freetaxusa2010 Property used in a trade or business is not investment property. Freetaxusa2010 Form 1099-B. Freetaxusa2010   If you sold property such as stocks, bonds, mutual funds, 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. Freetaxusa2010 You should receive the statement by February 15 of the next year. Freetaxusa2010 It will show the gross proceeds from the sale. Freetaxusa2010 The IRS will also get a copy of Form 1099-B from the broker. Freetaxusa2010   Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. Freetaxusa2010 If you sold a covered security in 2013, your broker will send you a Form 1099-B (or substitute statement) that shows your basis. Freetaxusa2010 This will help you complete Form 8949. Freetaxusa2010 Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. Freetaxusa2010    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in this chapter. Freetaxusa2010 Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Freetaxusa2010 Nominees. Freetaxusa2010   If someone receives gross proceeds as a nominee for you, that person will give you a Form 1099-B, which will show gross proceeds received on your behalf. Freetaxusa2010   If you receive a Form 1099-B that includes gross proceeds belonging to another person, see Nominees , later under Reporting Capital Gains and Losses for more information. Freetaxusa2010 Other property transactions. Freetaxusa2010   Certain transfers of property are discussed in other IRS publications. Freetaxusa2010 These include: Sale of your main home, discussed in Publication 523, Selling Your Home; Installment sales, covered in Publication 537; Various types of transactions involving business property, discussed in Publication 544, Sales and Other Dispositions of Assets; Transfers of property at death, covered in Publication 559; and Disposition of an interest in a passive activity, discussed in Publication 925. Freetaxusa2010 Topics - This chapter discusses: What Is a Sale or Trade? , Basis of Investment Property , Adjusted Basis , How To Figure Gain or Loss , Nontaxable trades , Transfers Between Spouses , Related Party Transactions , Capital Gains and Losses , Reporting Capital Gains and Losses , and Special Rules for Traders in Securities . Freetaxusa2010 Useful Items - You may want to see: Publication 551 Basis of Assets Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 6781 Gains and Losses From Section 1256 Contracts and Straddles 8582 Passive Activity Loss Limitations 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Freetaxusa2010 What Is a Sale or Trade? This section explains what is a sale or trade. Freetaxusa2010 It also explains certain transactions and events that are treated as sales or trades. Freetaxusa2010 A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. Freetaxusa2010 A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. Freetaxusa2010 Sale and purchase. Freetaxusa2010   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. Freetaxusa2010 The sale and purchase are two separate transactions. Freetaxusa2010 But see Like-Kind Exchanges under Nontaxable Trades, later. Freetaxusa2010 Redemption of stock. Freetaxusa2010   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. Freetaxusa2010 Dividend versus sale or trade. Freetaxusa2010   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Freetaxusa2010 Both direct and indirect ownership of stock will be considered. Freetaxusa2010 The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend — see Dividends and Other Distributions in chapter 1, 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. Freetaxusa2010 Redemption or retirement of bonds. Freetaxusa2010   A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. Freetaxusa2010 See Stocks, stock rights, and bonds and Discounted Debt Instruments under Capital or Ordinary Gain or Loss, later. Freetaxusa2010   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. Freetaxusa2010 For details, see Regulations section 1. Freetaxusa2010 1001-3. Freetaxusa2010 Surrender of stock. Freetaxusa2010   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. Freetaxusa2010 The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Freetaxusa2010 Trade of investment property for an annuity. Freetaxusa2010   The transfer of investment property to a corporation, trust, fund, foundation, or other organization, in exchange for a fixed annuity contract that will make guaranteed annual payments to you for life, is a taxable trade. Freetaxusa2010 If the present value of the annuity is more than your basis in the property traded, you have a taxable gain in the year of the trade. Freetaxusa2010 Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. Freetaxusa2010 Transfer by inheritance. Freetaxusa2010   The transfer of property of a decedent to the executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or other disposition. Freetaxusa2010 No taxable gain or deductible loss results from the transfer. Freetaxusa2010 Termination of certain rights and obligations. Freetaxusa2010   The cancellation, lapse, expiration, or other termination of a right or obligation (other than a securities futures contract) with respect to property that is a capital asset (or that would be a capital asset if you acquired it) is treated as a sale. Freetaxusa2010 Any gain or loss is treated as a capital gain or loss. Freetaxusa2010   This rule does not apply to the retirement of a debt instrument. Freetaxusa2010 See Redemption or retirement of bonds , earlier. Freetaxusa2010 Worthless Securities 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. Freetaxusa2010 This affects whether your capital loss is long term or short term. Freetaxusa2010 See Holding Period , later. Freetaxusa2010 Worthless securities also include securities that you abandon after March 12, 2008. Freetaxusa2010 To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 Do not deduct them in the year the stock became worthless. Freetaxusa2010 How to report loss. Freetaxusa2010   Report worthless securities in Form 8949, Part I or Part II, whichever applies. Freetaxusa2010    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. Freetaxusa2010 See Form 8949 and the Instructions for Form 8949. Freetaxusa2010 Filing a claim for refund. Freetaxusa2010   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. Freetaxusa2010 You must use Form 1040X, Amended U. Freetaxusa2010 S. Freetaxusa2010 Individual Income Tax Return, to amend your return for the year the security became worthless. Freetaxusa2010 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. Freetaxusa2010 (Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later. Freetaxusa2010 ) For more information about filing a claim, see Publication 556. Freetaxusa2010 Constructive Sales of Appreciated Financial Positions You are treated as having made a constructive sale when you enter into certain transactions involving an appreciated financial position (defined later) in stock, a partnership interest, or certain debt instruments. Freetaxusa2010 You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. Freetaxusa2010 This gives you a new holding period for the position that begins on the date of the constructive sale. Freetaxusa2010 Then, when you close the transaction, you reduce your gain (or increase your loss) by the gain recognized on the constructive sale. Freetaxusa2010 Constructive sale. Freetaxusa2010   You are treated as having made a constructive sale of an appreciated financial position if you: Enter into a short sale of the same or substantially identical property, Enter into an offsetting notional principal contract relating to the same or substantially identical property, Enter into a futures or forward contract to deliver the same or substantially identical property (including a forward contract that provides for cash settlement), or Acquire the same or substantially identical property (if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract). Freetaxusa2010   You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. Freetaxusa2010 For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter. Freetaxusa2010 Exception for nonmarketable securities. Freetaxusa2010   You are not treated as having made a constructive sale solely because you entered into a contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security if it settles within 1 year of the date you enter into it. Freetaxusa2010 Exception for certain closed transactions. Freetaxusa2010   Do not treat a transaction as a constructive sale if all of the following are true. Freetaxusa2010 You closed the transaction on or before the 30th day after the end of your tax year. Freetaxusa2010 You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction. Freetaxusa2010 Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions. Freetaxusa2010   If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true. Freetaxusa2010   This exception also applies to successive short sales of an entire appreciated financial position. Freetaxusa2010 For more information, see Revenue Ruling 2003-1 in Internal Revenue Bulletin 2003-3. Freetaxusa2010 This bulletin is available at www. Freetaxusa2010 irs. Freetaxusa2010 gov/pub/irs-irbs/irb03-03. Freetaxusa2010 pdf. Freetaxusa2010 Appreciated financial position. Freetaxusa2010   This is any interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain. Freetaxusa2010 Exceptions. Freetaxusa2010   An appreciated financial position does not include the following. Freetaxusa2010 Any position from which all of the appreciation is accounted for under marked-to-market rules, including section 1256 contracts (described later under Section 1256 Contracts Marked to Market ). Freetaxusa2010 Any position in a debt instrument if: The position unconditionally entitles the holder to receive a specified principal amount, The interest payments (or other similar amounts) with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. Freetaxusa2010 860G-1(a)(3), and The position is not convertible, either directly or indirectly, into stock of the issuer (or any related person). Freetaxusa2010 Any hedge with respect to a position described in (2). Freetaxusa2010 Certain trust instruments treated as stock. Freetaxusa2010   For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the exception to the definition of an appreciated financial position (explained in (2) above). Freetaxusa2010 Sale of appreciated financial position. Freetaxusa2010   A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. Freetaxusa2010 However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position. Freetaxusa2010 Section 1256 Contracts Marked to Market If you hold a section 1256 contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year. Freetaxusa2010 Section 1256 Contract A section 1256 contract is any: Regulated futures contract, Foreign currency contract, Nonequity option, Dealer equity option, or Dealer securities futures contract. Freetaxusa2010 Exceptions. Freetaxusa2010   A section 1256 contract does not include: Interest rate swaps, Currency swaps, Basis swaps, Interest rate caps, Interest rate floors, Commodity swaps, Equity swaps, Equity index swaps, Credit default swaps, or Similar agreements. Freetaxusa2010 For more details, including definitions of these terms, see section 1256. Freetaxusa2010 Regulated futures contract. Freetaxusa2010   This is a contract that: Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions (a system of marking to market), and Is traded on, or subject to the rules of, a qualified board of exchange. Freetaxusa2010 A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission. Freetaxusa2010 Foreign currency contract. Freetaxusa2010   This is a contract that: Requires delivery of a foreign currency that has positions traded through regulated futures contracts (or settlement of which depends on the value of that type of foreign currency), Is traded in the interbank market, and Is entered into at arm's length at a price determined by reference to the price in the interbank market. Freetaxusa2010   Bank forward contracts with maturity dates longer than the maturities ordinarily available for regulated futures contracts are considered to meet the definition of a foreign currency contract if the above three conditions are satisfied. Freetaxusa2010   Special rules apply to certain foreign currency transactions. Freetaxusa2010 These transactions may result in ordinary gain or loss treatment. Freetaxusa2010 For details, see Internal Revenue Code section 988 and Regulations sections 1. Freetaxusa2010 988-1(a)(7) and 1. Freetaxusa2010 988-3. Freetaxusa2010 Nonequity option. Freetaxusa2010   This is any listed option (defined later) that is not an equity option. Freetaxusa2010 Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. Freetaxusa2010 A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). Freetaxusa2010 Warrants based on a stock index that are economically, substantially identical in all material respects to options based on a stock index are treated as options based on a stock index. Freetaxusa2010 Cash-settled options. Freetaxusa2010   Cash-settled options based on a stock index and either traded on or subject to the rules of a qualified board of exchange are nonequity options if the Securities and Exchange Commission (SEC) determines that the stock index is broad based. Freetaxusa2010   This rule does not apply to options established before the SEC determines that the stock index is broad based. Freetaxusa2010 Listed option. Freetaxusa2010   This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). Freetaxusa2010 A listed option, however, does not include an option that is a right to acquire stock from the issuer. Freetaxusa2010 Dealer equity option. Freetaxusa2010   This is any listed option that, for an options dealer: Is an equity option, Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and Is listed on the qualified board of exchange where that dealer is registered. Freetaxusa2010   An “options dealer” is any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. Freetaxusa2010 Equity option. Freetaxusa2010   This is any option: To buy or sell stock, or That is valued directly or indirectly by reference to any stock or narrow-based security index. Freetaxusa2010  Equity options include options on a group of stocks only if the group is a narrow-based stock index. Freetaxusa2010 Dealer securities futures contract. Freetaxusa2010   For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract (or option on such a contract) that: Is entered into by the dealer (or, in the case of an option, is purchased or granted by the dealer) in the normal course of the dealer's activity of dealing in this type of contract (or option), and Is traded on a qualified board or exchange (as defined under Regulated futures contract , earlier). Freetaxusa2010 A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts . Freetaxusa2010 Marked-to-Market Rules A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. Freetaxusa2010 That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the example under 60/40 rule, below. Freetaxusa2010 Hedging exception. Freetaxusa2010   The marked-to-market rules do not apply to hedging transactions. Freetaxusa2010 See Hedging Transactions , later. Freetaxusa2010 60/40 rule. Freetaxusa2010   Under the marked-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. Freetaxusa2010 This is true regardless of how long you actually held the property. Freetaxusa2010 Example. Freetaxusa2010 On June 22, 2012, you bought a regulated futures contract for $50,000. Freetaxusa2010 On December 31, 2012 (the last business day of your tax year), the fair market value of the contract was $57,000. Freetaxusa2010 You recognized a $7,000 gain on your 2012 tax return, treated as 60% long-term and 40% short-term capital gain. Freetaxusa2010 On February 1, 2013, you sold the contract for $56,000. Freetaxusa2010 Because you recognized a $7,000 gain on your 2012 return, you recognize a $1,000 loss ($57,000 − $56,000) on your 2013 tax return, treated as 60% long-term and 40% short-term capital loss. Freetaxusa2010 Limited partners or entrepreneurs. Freetaxusa2010   The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions ). Freetaxusa2010 Instead, these gains or losses are treated as short term. Freetaxusa2010 Terminations and transfers. Freetaxusa2010   The marked-to-market rules also apply if your obligation or rights under section 1256 contracts are terminated or transferred during the tax year. Freetaxusa2010 In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. Freetaxusa2010 Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. Freetaxusa2010 Loss carryback election. Freetaxusa2010   An individual having a net section 1256 contracts loss (defined later), generally can elect to carry this loss back 3 years instead of carrying it over to the next year. Freetaxusa2010 See How To Report , later, for information about reporting this election on your return. Freetaxusa2010   The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. Freetaxusa2010 In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. Freetaxusa2010   The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. Freetaxusa2010 In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts. Freetaxusa2010   If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. Freetaxusa2010 (See Capital Losses under Reporting Capital Gains and Losses, later. Freetaxusa2010 ) Figure your capital loss carryover as if, for the loss year, you had an additional short-term capital gain of 40% of the amount of net section 1256 contracts loss absorbed in the carryback years and an additional long-term capital gain of 60% of the absorbed loss. Freetaxusa2010 In the carryover year, treat any capital loss carryover from losses on section 1256 contracts as if it were a loss from section 1256 contracts for that year. Freetaxusa2010 Net section 1256 contracts loss. Freetaxusa2010   This loss is the lesser of: The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or The capital loss carryover to the next tax year determined without this election. Freetaxusa2010 Net section 1256 contracts gain. Freetaxusa2010   This gain is the lesser of: The capital gain net income for the carryback year determined by taking into account only gains and losses from section 1256 contracts, or The capital gain net income for that year. Freetaxusa2010  Figure your net section 1256 contracts gain for any carryback year without regard to the net section 1256 contracts loss for the loss year or any later tax year. Freetaxusa2010 Traders in section 1256 contracts. Freetaxusa2010   Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. Freetaxusa2010 However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. Freetaxusa2010 Treatment of underlying property. Freetaxusa2010   The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section 1256 contracts related to that property. Freetaxusa2010 How To Report If you disposed of regulated futures or foreign currency contracts in 2013 (or had unrealized profit or loss on these contracts that were open at the end of 2012 or 2013), you should receive Form 1099-B, or substitute statement, from your broker. Freetaxusa2010 Form 6781. Freetaxusa2010   Use Part I of Form 6781 to report your gains and losses from all section 1256 contracts that are open at the end of the year or that were closed out during the year. Freetaxusa2010 This includes the amount shown in box 10 of Form 1099-B. Freetaxusa2010 Then enter the net amount of these gains and losses on Schedule D (Form 1040), line 4 or line 11, as appropriate. Freetaxusa2010 Include a copy of Form 6781 with your income tax return. Freetaxusa2010   If the Form 1099-B you receive includes a straddle or hedging transaction, defined later, it may be necessary to show certain adjustments on Form 6781. Freetaxusa2010 Follow the Form 6781 instructions for completing Part I. Freetaxusa2010 Loss carryback election. Freetaxusa2010   To carry back your loss under the election procedures described earlier, file Form 1040X or Form 1045, Application for Tentative Refund, for the year to which you are carrying the loss with an amended Form 6781 and an amended Schedule D (Form 1040) attached. Freetaxusa2010 Follow the instructions for completing Form 6781 for the loss year to make this election. Freetaxusa2010 Hedging Transactions The marked-to-market rules, described earlier, do not apply to hedging transactions. Freetaxusa2010 A transaction is a hedging transaction if both of the following conditions are met. Freetaxusa2010 You entered into the transaction in the normal course of your trade or business primarily to manage the risk of: Price changes or currency fluctuations on ordinary property you hold (or will hold), or Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. Freetaxusa2010 You clearly identified the transaction as being a hedging transaction before the close of the day on which you entered into it. Freetaxusa2010 This hedging transaction exception does not apply to transactions entered into by or for any syndicate. Freetaxusa2010 A syndicate is a partnership, S corporation, or other entity (other than a regular corporation) that allocates more than 35% of its losses to limited partners or limited entrepreneurs. Freetaxusa2010 A limited entrepreneur is a person who has an interest in an enterprise (but not as a limited partner) and who does not actively participate in its management. Freetaxusa2010 However, an interest is not considered held by a limited partner or entrepreneur if the interest holder actively participates (or did so for at least 5 full years) in the management of the entity, or is the spouse, child (including a legally adopted child), grandchild, or parent of an individual who actively participates in the management of the entity. Freetaxusa2010 Hedging loss limit. Freetaxusa2010   If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. Freetaxusa2010 A “hedging loss” is the amount by which the allowable deductions in a tax year that resulted from a hedging transaction (determined without regard to the limit) are more than the income received or accrued during the tax year from this transaction. Freetaxusa2010   Any hedging loss allocated to you for the tax year is limited to your taxable income for that year from the trade or business in which the hedging transaction occurred. Freetaxusa2010 Ignore any hedging transaction items in determining this taxable income. Freetaxusa2010 If you have a hedging loss that is disallowed because of this limit, you can carry it over to the next tax year as a deduction resulting from a hedging transaction. Freetaxusa2010   If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. Freetaxusa2010   The limit on hedging losses does not apply to any hedging loss to the extent that it is more than all your unrecognized gains from hedging transactions at the end of the tax year that are from the trade or business in which the hedging transaction occurred. Freetaxusa2010 The term “unrecognized gain” has the same meaning as defined under Loss Deferral Rules in Straddles, later. Freetaxusa2010 Sale of property used in a hedge. Freetaxusa2010   Once you identify personal property as being part of a hedging transaction, you must treat gain from its sale or exchange as ordinary income, not capital gain. Freetaxusa2010 Self-Employment Income Gains and losses derived in the ordinary course of a commodity or option dealer's trading in section 1256 contracts and property related to these contracts are included in net earnings from self-employment. Freetaxusa2010 See the Instructions for Schedule SE (Form 1040). Freetaxusa2010 In addition, the rules relating to contributions to self-employment retirement plans apply. Freetaxusa2010 For information on retirement plan contributions, see Publication 560 and Publication 590. Freetaxusa2010 Basis of Investment Property Basis is a way of measuring your investment in property for tax purposes. Freetaxusa2010 You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. Freetaxusa2010 Investment property you buy normally has an original basis equal to its cost. Freetaxusa2010 If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. Freetaxusa2010 Cost Basis The basis of property you buy is usually its cost. Freetaxusa2010 The cost is the amount you pay in cash, debt obligations, or other property or services. Freetaxusa2010 Unstated interest. Freetaxusa2010   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. Freetaxusa2010 You generally have unstated interest if your interest rate is less than the applicable federal rate. Freetaxusa2010 For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Freetaxusa2010 Basis Other Than Cost There are times when you must use a basis other than cost. Freetaxusa2010 In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. Freetaxusa2010 Fair market value. Freetaxusa2010   This 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. Freetaxusa2010 Sales of similar property, around the same date, may be helpful in figuring fair market value. Freetaxusa2010 Property Received for Services If you receive investment property for services, you must include the property's fair market value in income. Freetaxusa2010 The amount you include in income then becomes your basis in the property. Freetaxusa2010 If the services were performed for a price that was agreed to beforehand, this price will be accepted as the fair market value of the property if there is no evidence to the contrary. Freetaxusa2010 Restricted property. Freetaxusa2010   If you receive, as payment for services, property that is subject to certain restrictions, your basis in the property generally is its fair market value when it becomes substantially vested. Freetaxusa2010 Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. Freetaxusa2010 See Restricted Property in Publication 525 for more information. Freetaxusa2010 Bargain purchases. Freetaxusa2010   If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. Freetaxusa2010 Your basis in the property is the price you pay plus the amount you include in income. Freetaxusa2010 Property Received in Taxable Trades If you received investment property in trade for other property, the basis of the new property is its fair market value at the time of the trade unless you received the property in a nontaxable trade. Freetaxusa2010 Example. Freetaxusa2010 You trade A Company stock for B Company stock having a fair market value of $1,200. Freetaxusa2010 If the adjusted basis of the A Company stock is less than $1,200, you have a taxable gain on the trade. Freetaxusa2010 If the adjusted basis of the A Company stock is more than $1,200, you have a deductible loss on the trade. Freetaxusa2010 The basis of your B Company stock is $1,200. Freetaxusa2010 If you later sell the B Company stock for $1,300, you will have a gain of $100. Freetaxusa2010 Property Received in Nontaxable Trades If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the property you received in the trade. Freetaxusa2010 See Nontaxable Trades , later. Freetaxusa2010 The basis of property you received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property you gave up. Freetaxusa2010 Increase this amount by any cash you paid, additional costs you had, and any gain recognized. Freetaxusa2010 Reduce this amount by any cash or unlike property you received, any loss recognized, and any liability of yours that was assumed or treated as assumed. Freetaxusa2010 Property Received From Your Spouse If property is transferred to you from your spouse (or former spouse, if the transfer is incident to your divorce), your basis is the same as your spouse's or former spouse's adjusted basis just before the transfer. Freetaxusa2010 See Transfers Between Spouses , later. Freetaxusa2010 Recordkeeping. Freetaxusa2010 The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. Freetaxusa2010 Property Received as a Gift To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you. Freetaxusa2010 Fair market value less than donor's adjusted basis. Freetaxusa2010   If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Freetaxusa2010 Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property. Freetaxusa2010 No gain or loss. Freetaxusa2010   If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss. Freetaxusa2010 Example. Freetaxusa2010 You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. Freetaxusa2010 The fair market value at the time of the gift is $9,000. Freetaxusa2010 You later sell the property for $9,500. Freetaxusa2010 You have neither gain nor loss. Freetaxusa2010 Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. Freetaxusa2010 Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain. Freetaxusa2010 Fair market value equal to or more than donor's adjusted basis. Freetaxusa2010   If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Freetaxusa2010 Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. Freetaxusa2010 Gift received before 1977. Freetaxusa2010   If you received property as a gift before 1977, your basis in the property is the donor's adjusted basis increased by the total gift tax paid on the gift. Freetaxusa2010 However, your basis cannot be more than the fair market value of the gift at the time it was given to you. Freetaxusa2010 Example 1. Freetaxusa2010 You were given XYZ Company stock in 1976. Freetaxusa2010 At the time of the gift, the stock had a fair market value of $21,000. Freetaxusa2010 The donor's adjusted basis was $20,000. Freetaxusa2010 The donor paid a gift tax of $500 on the gift. Freetaxusa2010 Your basis for gain or loss is $20,500, the donor's adjusted basis plus the amount of gift tax paid. Freetaxusa2010 Example 2. Freetaxusa2010 The facts are the same as in Example 1 except that the gift tax paid was $1,500. Freetaxusa2010 Your basis is $21,000, the donor's adjusted basis plus the gift tax paid, but limited to the fair market value of the stock at the time of the gift. Freetaxusa2010 Gift received after 1976. Freetaxusa2010   If you received property as a gift after 1976, your basis is the donor's adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. Freetaxusa2010 You figure this part by multiplying the gift tax paid on the gift by a fraction. Freetaxusa2010 The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. Freetaxusa2010   The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. Freetaxusa2010 The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Freetaxusa2010 Example. Freetaxusa2010 In 2013, you received a gift of property from your mother. Freetaxusa2010 At the time of the gift, the property had a fair market value of $101,000 and an adjusted basis to her of $40,000. Freetaxusa2010 The amount of the gift for gift tax purposes was $87,000 ($101,000 minus the $14,000 annual exclusion), and your mother paid a gift tax of $21,000. Freetaxusa2010 You figure your basis in the following way: Fair market value $101,000 Minus: Adjusted basis 40,000 Net increase in value of gift $61,000 Gift tax paid $21,000 Multiplied by . Freetaxusa2010 701 ($61,000 ÷ $87,000) . Freetaxusa2010 701 Gift tax due to net increase in value $14,721 Plus: Adjusted basis of property to  your mother 40,000 Your basis in the property $54,721 Part sale, part gift. Freetaxusa2010   If you get property in a transfer that is partly a sale and partly a gift, your basis is the larger of the amount you paid for the property or the transferor's adjusted basis in the property at the time of the transfer. Freetaxusa2010 Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. Freetaxusa2010 For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. Freetaxusa2010 Gift tax information. Freetaxusa2010   For information on gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Freetaxusa2010 For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551. Freetaxusa2010 Property Received as Inheritance Before or after 2010. Freetaxusa2010   If you inherited property from a decedent who died before or after 2010, or who died in 2010 and the executor of the decedent's estate elected not to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value (its appraised value on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) on: The date of the decedent's death, or The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. Freetaxusa2010 If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. Freetaxusa2010 For stocks and bonds, if no Form 706 was filed and there are no state inheritance or transmission taxes, see the Form 706 instructions for figuring the fair market value of the stocks and bonds on the date of the decedent's death. Freetaxusa2010 Appreciated property you gave the decedent. Freetaxusa2010   Your basis in certain appreciated property that you inherited is the decedent's adjusted basis in the property immediately before death rather than its fair market value. Freetaxusa2010 This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. Freetaxusa2010 Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. Freetaxusa2010 More information. Freetaxusa2010   See Publication 551 for more information on the basis of inherited property, including community property, property held by a surviving tenant in a joint tenancy or tenancy by the entirety, a qualified joint interest, and a farm or closely held business. Freetaxusa2010 Inherited in 2010 and executor elected to file Form 8939. Freetaxusa2010   If you inherited property from a decedent who died in 2010 and the executor made the election to file Form 8939, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to figure your basis. Freetaxusa2010 Adjusted Basis Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or amortization, you usually must make certain adjustments (increases and decreases) to the basis of the property. Freetaxusa2010 The result of these adjustments to the basis is the adjusted basis. Freetaxusa2010 Adjustments to the basis of stocks and bonds are explained in the following discussion. Freetaxusa2010 For information about other adjustments to basis, see Publication 551. Freetaxusa2010 Stocks and Bonds The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. Freetaxusa2010 If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted basis as discussed earlier under Basis Other Than Cost . Freetaxusa2010 The basis of stock must be adjusted for certain events that occur after purchase. Freetaxusa2010 For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. Freetaxusa2010 You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). Freetaxusa2010 These distributions, up to the amount of your basis, are a nontaxable return of capital. Freetaxusa2010 The IRS partners with companies that offer Form 8949 and Schedule D (Form 1040) software that can import trades from many brokerage firms and accounting software to help you keep track of your adjusted basis in securities. Freetaxusa2010 To find out more, go to www. Freetaxusa2010 irs. Freetaxusa2010 gov/Filing/Filing-Options. Freetaxusa2010 Identifying stock or bonds sold. Freetaxusa2010   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. Freetaxusa2010 Adequate identification. Freetaxusa2010   You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. Freetaxusa2010 Broker holds stock. Freetaxusa2010   If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and Receive a written confirmation of this from your broker or other agent within a reasonable time. Freetaxusa2010  Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other agent. Freetaxusa2010 Single stock certificate. Freetaxusa2010   If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and Receive a written confirmation of this from your broker or other agent within a reasonable time. Freetaxusa2010   If you sell part of the stock represented by a single certificate directly to the buyer instead of through a broker, you will make an adequate identification if you keep a written record of the particular stock that you intend to sell. Freetaxusa2010 Bonds. Freetaxusa2010   These methods of identification also apply to bonds sold or transferred. Freetaxusa2010 Identification not possible. Freetaxusa2010   If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Freetaxusa2010 Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares. Freetaxusa2010 Example. Freetaxusa2010 You bought 100 shares of stock of XYZ Corporation in 1998 for $10 a share. Freetaxusa2010 In January 1999 you bought another 200 shares for $11 a share. Freetaxusa2010 In July 1999 you gave your son 50 shares. Freetaxusa2010 In December 2001 you bought 100 shares for $9 a share. Freetaxusa2010 In April 2013 you sold 130 shares. Freetaxusa2010 You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. Freetaxusa2010 The shares of stock you gave your son had a basis of $500 (50 × $10). Freetaxusa2010 You figure the basis of the 130 shares of stock you sold in 2013 as follows: 50 shares (50 × $10) balance of stock bought in 1998 $ 500 80 shares (80 × $11) stock bought in January 1999 880 Total basis of stock sold in 2013 $1,380 Shares in a mutual fund or REIT. Freetaxusa2010    The basis of shares in a mutual fund (or other regulated investment company) or a real estate investment trust (REIT) is generally figured in the same way as the basis of other stock and usually includes any commissions or load charges paid for the purchase. Freetaxusa2010 Example. Freetaxusa2010 You bought 100 shares of Fund A for $10 a share. Freetaxusa2010 You paid a $50 commission to the broker for the purchase. Freetaxusa2010 Your cost basis for each share is $10. Freetaxusa2010 50 ($1,050 ÷ 100). Freetaxusa2010 Commissions and load charges. Freetaxusa2010   The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. Freetaxusa2010 You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. Freetaxusa2010 A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). Freetaxusa2010   You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply. Freetaxusa2010 You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. Freetaxusa2010 You dispose of the shares within 90 days of the purchase date. Freetaxusa2010 You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the original shares. Freetaxusa2010   The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. Freetaxusa2010 The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of the new shares). Freetaxusa2010 Choosing average basis for mutual fund shares. Freetaxusa2010   You can choose to use the average basis of mutual fund shares if you acquired the identical shares at various times and prices, or you acquired the shares after 2010 in connection with a dividend reinvestment plan, and left them on deposit in an account kept by a custodian or agent. Freetaxusa2010 The methods you can use to figure average basis are explained later. Freetaxusa2010 Undistributed capital gains. Freetaxusa2010   If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference between the amount you included and the amount of tax paid for you by the fund or REIT. Freetaxusa2010 See Undistributed capital gains of mutual funds and REITs under Capital Gain Distributions in chapter 1. Freetaxusa2010 Reinvestment right. Freetaxusa2010   This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge. Freetaxusa2010      The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. Freetaxusa2010 This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. Freetaxusa2010 Table 4-1. Freetaxusa2010 This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. Freetaxusa2010 Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. Freetaxusa2010 This worksheet will help you figure the adjusted basis when you sell or redeem shares. Freetaxusa2010 Table 4-1. Freetaxusa2010 Mutual Fund Record Mutual Fund Acquired1 Adjustment to Basis Per Share Adjusted2 Basis Per Share Sold or redeemed Date Number of Shares Cost Per Share Date Number of Shares                                                                                                                                                                                                                                                                         1 Include share received from reinvestment of distributions. Freetaxusa2010 2 Cost plus or minus adjustments. Freetaxusa2010 Automatic investment service. Freetaxusa2010   If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker's commission. Freetaxusa2010 Dividend reinvestment plans. Freetaxusa2010   If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value of the stock on the dividend payment date. Freetaxusa2010 You must include the amount of the discount in your income. Freetaxusa2010 Public utilities. Freetaxusa2010   If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. Freetaxusa2010 Stock dividends. Freetaxusa2010   Stock dividends are distributions made by a corporation of its own stock. Freetaxusa2010 Generally, stock dividends are not taxable to you. Freetaxusa2010 However, see Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1 for some exceptions. Freetaxusa2010 If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. Freetaxusa2010 New and old stock identical. Freetaxusa2010   If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis of the old stock by the number of shares of old and new stock. Freetaxusa2010 The result is your basis for each share of stock. Freetaxusa2010 Example 1. Freetaxusa2010 You owned one share of common stock that you bought for $45. Freetaxusa2010 The corporation distributed two new shares of common stock for each share held. Freetaxusa2010 You then had three shares of common stock. Freetaxusa2010 Your basis in each share is $15 ($45 ÷ 3). Freetaxusa2010 Example 2. Freetaxusa2010 You owned two shares of common stock. Freetaxusa2010 You bought one for $30 and the other for $45. Freetaxusa2010 The corporation distributed two new shares of common stock for each share held. Freetaxusa2010 You had six shares after the distribution—three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15 each ($45 ÷ 3). Freetaxusa2010 New and old stock not identical. Freetaxusa2010   If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is calculated differently. Freetaxusa2010 Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock. Freetaxusa2010 Example. Freetaxusa2010 You bought a share of common stock for $100. Freetaxusa2010 Later, the corporation distributed a share of preferred stock for each share of common stock held. Freetaxusa2010 At the date of distribution, your common stock had a fair market value of $150 and the preferred stock had a fair market value of $50. Freetaxusa2010 You figure the basis of the old and new stock by dividing your $100 basis between them. Freetaxusa2010 The basis of your common stock is $75 (($150 ÷ $200) × $100), and the basis of the new preferred stock is $25 (($50 ÷ $200) × $100). Freetaxusa2010 Stock bought at various times. Freetaxusa2010   Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it. Freetaxusa2010 Taxable stock dividends. Freetaxusa2010   If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. Freetaxusa2010 The basis of your old stock does not change. Freetaxusa2010 Stock splits. Freetaxusa2010   Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. Freetaxusa2010 Stock rights. Freetaxusa2010   A stock right is a right to acquire a corporation's stock. Freetaxusa2010 It may be exercised, it may be sold if it has a market value, or it may expire. Freetaxusa2010 Stock rights are rarely taxable when you receive them. Freetaxusa2010 See Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1. Freetaxusa2010 Taxable stock rights. Freetaxusa2010   If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. Freetaxusa2010 The basis of the old stock does not change. Freetaxusa2010 Nontaxable stock rights. Freetaxusa2010   If you receive nontaxable stock rights and allow them to expire, they have no basis. Freetaxusa2010   If you exercise or sell the nontaxable stock rights and if, at the time of distribution, the stock rights had a fair market value of 15% or more of the fair market value of the old stock, you must divide the adjusted basis of the old stock between the old stock and the stock rights. Freetaxusa2010 Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. Freetaxusa2010   If the fair market value of the stock rights was less than 15%, their basis is zero. Freetaxusa2010 However, you can choose to divide the basis of the old stock between the old stock and the stock rights. Freetaxusa2010 To make the choice, attach a statement to your return for the year in which you received the rights, stating that you choose to divide the basis of the stock. Freetaxusa2010 Basis of new stock. Freetaxusa2010   If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. Freetaxusa2010 Example. Freetaxusa2010 You own 100 shares of ABC Company stock, which cost you $22 per share. Freetaxusa2010 The ABC Company gave you 10 nontaxable stock rights that would allow you to buy 10 more shares at $26 per share. Freetaxusa2010 At the time the stock rights were distributed, the stock had a market value of $30, not including the stock rights. Freetaxusa2010 Each stock right had a market value of $3. Freetaxusa2010 The market value of the stock rights was less than 15% of the market value of the stock, but you chose to divide the basis of your stock between the stock and the rights. Freetaxusa2010 You figure the basis of the rights and the basis of the old stock as follows: 100 shares × $22 = $2,200, basis of old stock   100 shares × $30 = $3,000, market value of old stock   10 rights × $3 = $30, market value of rights   ($3,000 ÷ $3,030) × $2,200 = $2,178. Freetaxusa2010 22, new basis of old stock   ($30 ÷ $3,030) × $2,200 = $21. Freetaxusa2010 78, basis of rights   If you sell the rights, the basis for figuring gain or loss is $2. Freetaxusa2010 18 ($21. Freetaxusa2010 78 ÷ 10) per right. Freetaxusa2010 If you exercise the rights, the basis of the stock you acquire is the price you pay ($26) plus the basis of the right exercised ($2. Freetaxusa2010 18), or $28. Freetaxusa2010 18 per share. Freetaxusa2010 The remaining basis of the old stock is $21. Freetaxusa2010 78 per share. Freetaxusa2010 Investment property received in liquidation. Freetaxusa2010   In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution. Freetaxusa2010 S corporation stock. Freetaxusa2010   You must increase your basis in stock of an S corporation by your pro rata share of the following items. Freetaxusa2010 All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. Freetaxusa2010 The nonseparately stated income of the S corporation. Freetaxusa2010 The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted. Freetaxusa2010   You must decrease your basis in stock of an S corporation by your pro rata share of the following items. Freetaxusa2010 Distributions by the S corporation that were not included in your income. Freetaxusa2010 All loss and deduction items of the S corporation that are separately stated and passed through to you. Freetaxusa2010 Any nonseparately stated loss of the S corporation. Freetaxusa2010 Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. Freetaxusa2010 The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted basis of the wells. Freetaxusa2010 However, your basis in the stock cannot be reduced below zero. Freetaxusa2010 Specialized small business investment company stock or partnership interest. Freetaxusa2010   If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock or interest by the amount of any postponed gain on that sale. Freetaxusa2010 See Rollover of Gain From Publicly Traded Securities , later. Freetaxusa2010 Qualified small business stock. Freetaxusa2010   If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this replacement stock by the amount of any postponed gain on the earlier sale. Freetaxusa2010 See Gains on Qualified Small Business Stock , later. Freetaxusa2010 Short sales. Freetaxusa2010   If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale. Freetaxusa2010   See Payments in lieu of dividends , later, for information about deducting payments in lieu of dividends. Freetaxusa2010 Premiums on bonds. Freetaxusa2010   If you buy a bond at a premium, the premium is treated as part of your basis in the bond. Freetaxusa2010 If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond. Freetaxusa2010   Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. Freetaxusa2010 You must reduce the basis of the bond by the premium you amortized for the period you held the bond. Freetaxusa2010   See Bond Premium Amortization in chapter 3 for more information. Freetaxusa2010 Market discount on bonds. Freetaxusa2010   If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your income. Freetaxusa2010 See Market Discount Bonds in chapter 1 for more information. Freetaxusa2010 Bonds purchased at par value. Freetaxusa2010   A bond purchased at par value (face amount) has no premium or discount. Freetaxusa2010 When you sell or otherwise dispose of the bond, you figure the gain or loss by comparing the bond proceeds to the purchase price of the bond. Freetaxusa2010 Example. Freetaxusa2010 You purchased a bond several years ago for its par value of $10,000. Freetaxusa2010 You sold the bond this year for $10,100. Freetaxusa2010 You have a gain of $100. Freetaxusa2010 However, if you had sold the bond for $9,900, you would have a loss of $100. Freetaxusa2010 Acquisition discount on short-term obligations. Freetaxusa2010   If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of acquisition discount you include in your income. Freetaxusa2010 See Discount on Short-Term Obligations in chapter 1 for more information. Freetaxusa2010 Original issue discount (OID) on debt instruments. Freetaxusa2010   Increase the basis of a debt instrument by the OID you include in your income. Freetaxusa2010 See Original Issue Discount (OID) in chapter 1. Freetaxusa2010 Discounted tax-exempt obligations. Freetaxusa2010   OID on tax-exempt obligations is generally not taxable. Freetaxusa2010 However, when you dispose of a tax-exempt obligation issued after September 3, 1982, that you acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Freetaxusa2010 The accrued OID is added to the basis of the obligation to determine your gain or loss. Freetaxusa2010   For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1, 1982, and Before 1985 or Debt Instruments Issued After 1984, whichever applies, in Publication 1212 under Figuring OID on Long-Term Debt Instruments. Freetaxusa2010   If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term obligations. Freetaxusa2010 See Discount on Short-Term Obligations in chapter 1. Freetaxusa2010 Stripped tax-exempt obligation. Freetaxusa2010   If you acquired a stripped tax-exempt bond or coupon after October 22, 1986, you must accrue OID on it to determine its adjusted basis when you dispose of it. Freetaxusa2010 For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. Freetaxusa2010 You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons . Freetaxusa2010   Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. Freetaxusa2010 Also increase your basis by the interest that accrued (but was not paid and was not previously reflected in your basis) before the date you sold the bond or coupon. Freetaxusa2010 In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. Freetaxusa2010 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. Freetaxusa2010 Gain. Freetaxusa2010   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. Freetaxusa2010 Loss. Freetaxusa2010   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. Freetaxusa2010 Amount realized. Freetaxusa2010   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). Freetaxusa2010 Amount realized includes the money you receive plus the fair market value of any property or services you receive. Freetaxusa2010   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. Freetaxusa2010 For more information, see Publication 537. Freetaxusa2010   If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. Freetaxusa2010 See Regulations section 1. Freetaxusa2010 1001-1(g). Freetaxusa2010 However, if the debt instrument was previously issued by a third party (one not part of the sale transaction), the fair market value of the debt instrument is used to determine the amount realized. Freetaxusa2010 Fair market value. Freetaxusa2010   Fair market value is the price at which 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. Freetaxusa2010 Example. Freetaxusa2010 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. Freetaxusa2010 Your gain is $3,000 ($10,000 – $7,000). Freetaxusa2010 If you also receive a note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000 + $6,000 – $7,000). Freetaxusa2010 Debt paid off. Freetaxusa2010   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. Freetaxusa2010 This is true even if neither you nor the buyer is personally liable for the debt. Freetaxusa2010 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. Freetaxusa2010 Example. Freetaxusa2010 You sell stock that you had pledged as security for a bank loan of $8,000. Freetaxusa2010 Your basis in the stock is $6,000. Freetaxusa2010 The buyer pays off your bank loan and pays you $20,000 in cash. Freetaxusa2010 The amount realized is $28,000 ($20,000 + $8,000). Freetaxusa2010 Your gain is $22,000 ($28,000 – $6,000). Freetaxusa2010 Payment of cash. Freetaxusa2010   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Freetaxusa2010 Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. Freetaxusa2010 If the result is a positive number, it is a gain. Freetaxusa2010 If the result is a negative number, it is a loss. Freetaxusa2010 No gain or loss. Freetaxusa2010   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. Freetaxusa2010 In this case, you may have neither a gain nor a loss. Freetaxusa2010 See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. Freetaxusa2010 Special Rules for Mutual Funds To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. Freetaxusa2010 If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficu