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Hrblockfree Index A Accelerated cost recovery system (ACRS):, ACRS Defined Alternate method, Alternate ACRS Method (Modified Straight Line Method) Classes of recovery property, Classes of Recovery Property Deduction, short tax year, ACRS Deduction in Short Tax Year Defined, ACRS Defined Dispositions, Early dispositions of ACRS property other than 15-, 18-, or 19-year real property. Hrblockfree Recovery periods, Recovery Periods Unadjusted basis, Unadjusted Basis B Basis: Adjusted, Adjusted basis. Hrblockfree Unadjusted, ACRS, Unadjusted Basis C Changing methods, How To Change Methods D Declining balance method, Declining Balance Method Deduction: ACRS, How To Figure the Deduction How to figure, How To Figure the Deduction Dispositions, Dispositions, Dispositions I Income forecast method, Income Forecast Method L Listed property:, Listed Property Defined 5% owner, 5% owner. Hrblockfree Computers, related equipment, Computers and Related Peripheral Equipment Defined, Listed Property Defined Entertainment use, Entertainment Use Leased, Leased Property Other transportation property, Other Property Used for Transportation Predominant use test, Predominant Use Test Qualified business use, Qualified Business Use Recordkeeping, What Records Must Be Kept, Adequate Records Related person, Related person. Hrblockfree Reporting on Form 4562, Reporting Information on Form 4562 Use by employee, Employees M Methods of figuring depreciation:, Income Forecast Method ACRS, How To Figure the Deduction Declining Balance, Declining Balance Method Income forecast, Income Forecast Method Straight line, Straight Line Method P Passenger automobile: Defined, Passenger Automobile Defined Predominant use test, applying, Applying the Predominant Use Test Property: ACRS, What Can and Cannot Be Depreciated Under ACRS Intangible, Intangible property. Hrblockfree R Recapture: Depreciation, Depreciation Recapture Excess depreciation, listed property, Recapture of excess depreciation. Hrblockfree Recordkeeping: For listed property, What Records Must Be Kept S Salvage value, Salvage Value Straight line method, Straight Line Method U Useful life, Useful Life V Videocassettes, Videocassettes. Hrblockfree Prev Up Home More Online Publications
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Hrblockfree 4. Hrblockfree Sales and Trades of Investment Property Table of Contents IntroductionNominees. Hrblockfree Topics - This chapter discusses: Useful Items - You may want to see: What Is a Sale or Trade?Dividend versus sale or trade. Hrblockfree 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. Hrblockfree Debt paid off. Hrblockfree Payment of cash. Hrblockfree 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. Hrblockfree S. Hrblockfree 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. Hrblockfree Exception 2. Hrblockfree Section 1256 contracts and straddles. Hrblockfree Market discount bonds. Hrblockfree File Form 1099-B or Form 1099-S with the IRS. Hrblockfree 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. Hrblockfree Investment property. Hrblockfree This is property that produces investment income. Hrblockfree Examples include stocks, bonds, and Treasury bills and notes. Hrblockfree Property used in a trade or business is not investment property. Hrblockfree Form 1099-B. Hrblockfree 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. Hrblockfree You should receive the statement by February 15 of the next year. Hrblockfree It will show the gross proceeds from the sale. Hrblockfree The IRS will also get a copy of Form 1099-B from the broker. Hrblockfree Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. Hrblockfree If you sold a covered security in 2013, your broker will send you a Form 1099-B (or substitute statement) that shows your basis. Hrblockfree This will help you complete Form 8949. Hrblockfree Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. Hrblockfree For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in this chapter. Hrblockfree Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Hrblockfree Nominees. Hrblockfree 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. Hrblockfree 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. Hrblockfree Other property transactions. Hrblockfree Certain transfers of property are discussed in other IRS publications. Hrblockfree 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. Hrblockfree 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 . Hrblockfree 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. Hrblockfree What Is a Sale or Trade? This section explains what is a sale or trade. Hrblockfree It also explains certain transactions and events that are treated as sales or trades. Hrblockfree A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. Hrblockfree A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. Hrblockfree Sale and purchase. Hrblockfree Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. Hrblockfree The sale and purchase are two separate transactions. Hrblockfree But see Like-Kind Exchanges under Nontaxable Trades, later. Hrblockfree Redemption of stock. Hrblockfree 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. Hrblockfree Dividend versus sale or trade. Hrblockfree Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Hrblockfree Both direct and indirect ownership of stock will be considered. Hrblockfree 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. Hrblockfree Redemption or retirement of bonds. Hrblockfree A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. Hrblockfree See Stocks, stock rights, and bonds and Discounted Debt Instruments under Capital or Ordinary Gain or Loss, later. Hrblockfree In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. Hrblockfree For details, see Regulations section 1. Hrblockfree 1001-3. Hrblockfree Surrender of stock. Hrblockfree 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. Hrblockfree The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Hrblockfree Trade of investment property for an annuity. Hrblockfree 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. Hrblockfree 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. Hrblockfree Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. Hrblockfree Transfer by inheritance. Hrblockfree 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. Hrblockfree No taxable gain or deductible loss results from the transfer. Hrblockfree Termination of certain rights and obligations. Hrblockfree 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. Hrblockfree Any gain or loss is treated as a capital gain or loss. Hrblockfree This rule does not apply to the retirement of a debt instrument. Hrblockfree See Redemption or retirement of bonds , earlier. Hrblockfree 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. Hrblockfree This affects whether your capital loss is long term or short term. Hrblockfree See Holding Period , later. Hrblockfree Worthless securities also include securities that you abandon after March 12, 2008. Hrblockfree To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Hrblockfree 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. Hrblockfree 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. Hrblockfree Do not deduct them in the year the stock became worthless. Hrblockfree How to report loss. Hrblockfree Report worthless securities in Form 8949, Part I or Part II, whichever applies. Hrblockfree Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. Hrblockfree See Form 8949 and the Instructions for Form 8949. Hrblockfree Filing a claim for refund. Hrblockfree 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. Hrblockfree You must use Form 1040X, Amended U. Hrblockfree S. Hrblockfree Individual Income Tax Return, to amend your return for the year the security became worthless. Hrblockfree 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. Hrblockfree (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. Hrblockfree ) For more information about filing a claim, see Publication 556. Hrblockfree 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. Hrblockfree You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. Hrblockfree This gives you a new holding period for the position that begins on the date of the constructive sale. Hrblockfree Then, when you close the transaction, you reduce your gain (or increase your loss) by the gain recognized on the constructive sale. Hrblockfree Constructive sale. Hrblockfree 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). Hrblockfree 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. Hrblockfree For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter. Hrblockfree Exception for nonmarketable securities. Hrblockfree 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. Hrblockfree Exception for certain closed transactions. Hrblockfree Do not treat a transaction as a constructive sale if all of the following are true. Hrblockfree You closed the transaction on or before the 30th day after the end of your tax year. Hrblockfree You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction. Hrblockfree Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions. Hrblockfree 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. Hrblockfree This exception also applies to successive short sales of an entire appreciated financial position. Hrblockfree For more information, see Revenue Ruling 2003-1 in Internal Revenue Bulletin 2003-3. Hrblockfree This bulletin is available at www. Hrblockfree irs. Hrblockfree gov/pub/irs-irbs/irb03-03. Hrblockfree pdf. Hrblockfree Appreciated financial position. Hrblockfree 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. Hrblockfree Exceptions. Hrblockfree An appreciated financial position does not include the following. Hrblockfree 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 ). Hrblockfree 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. Hrblockfree 860G-1(a)(3), and The position is not convertible, either directly or indirectly, into stock of the issuer (or any related person). Hrblockfree Any hedge with respect to a position described in (2). Hrblockfree Certain trust instruments treated as stock. Hrblockfree 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). Hrblockfree Sale of appreciated financial position. Hrblockfree 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. Hrblockfree 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. Hrblockfree 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. Hrblockfree 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. Hrblockfree Exceptions. Hrblockfree 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. Hrblockfree For more details, including definitions of these terms, see section 1256. Hrblockfree Regulated futures contract. Hrblockfree 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. Hrblockfree 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. Hrblockfree Foreign currency contract. Hrblockfree 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. Hrblockfree 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. Hrblockfree Special rules apply to certain foreign currency transactions. Hrblockfree These transactions may result in ordinary gain or loss treatment. Hrblockfree For details, see Internal Revenue Code section 988 and Regulations sections 1. Hrblockfree 988-1(a)(7) and 1. Hrblockfree 988-3. Hrblockfree Nonequity option. Hrblockfree This is any listed option (defined later) that is not an equity option. Hrblockfree Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. Hrblockfree 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). Hrblockfree 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. Hrblockfree Cash-settled options. Hrblockfree 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. Hrblockfree This rule does not apply to options established before the SEC determines that the stock index is broad based. Hrblockfree Listed option. Hrblockfree This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). Hrblockfree A listed option, however, does not include an option that is a right to acquire stock from the issuer. Hrblockfree Dealer equity option. Hrblockfree 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. Hrblockfree An “options dealer” is any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. Hrblockfree Equity option. Hrblockfree 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. Hrblockfree Equity options include options on a group of stocks only if the group is a narrow-based stock index. Hrblockfree Dealer securities futures contract. Hrblockfree 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). Hrblockfree A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts . Hrblockfree 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. Hrblockfree 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. Hrblockfree Hedging exception. Hrblockfree The marked-to-market rules do not apply to hedging transactions. Hrblockfree See Hedging Transactions , later. Hrblockfree 60/40 rule. Hrblockfree 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. Hrblockfree This is true regardless of how long you actually held the property. Hrblockfree Example. Hrblockfree On June 22, 2012, you bought a regulated futures contract for $50,000. Hrblockfree On December 31, 2012 (the last business day of your tax year), the fair market value of the contract was $57,000. Hrblockfree You recognized a $7,000 gain on your 2012 tax return, treated as 60% long-term and 40% short-term capital gain. Hrblockfree On February 1, 2013, you sold the contract for $56,000. Hrblockfree 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. Hrblockfree Limited partners or entrepreneurs. Hrblockfree 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 ). Hrblockfree Instead, these gains or losses are treated as short term. Hrblockfree Terminations and transfers. Hrblockfree The marked-to-market rules also apply if your obligation or rights under section 1256 contracts are terminated or transferred during the tax year. Hrblockfree 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. Hrblockfree Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. Hrblockfree Loss carryback election. Hrblockfree 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. Hrblockfree See How To Report , later, for information about reporting this election on your return. Hrblockfree The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. Hrblockfree In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. Hrblockfree 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. Hrblockfree 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. Hrblockfree 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. Hrblockfree (See Capital Losses under Reporting Capital Gains and Losses, later. Hrblockfree ) 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. Hrblockfree 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. Hrblockfree Net section 1256 contracts loss. Hrblockfree 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. Hrblockfree Net section 1256 contracts gain. Hrblockfree 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. Hrblockfree 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. Hrblockfree Traders in section 1256 contracts. Hrblockfree Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. Hrblockfree However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. Hrblockfree Treatment of underlying property. Hrblockfree 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. Hrblockfree 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. Hrblockfree Form 6781. Hrblockfree 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. Hrblockfree This includes the amount shown in box 10 of Form 1099-B. Hrblockfree Then enter the net amount of these gains and losses on Schedule D (Form 1040), line 4 or line 11, as appropriate. Hrblockfree Include a copy of Form 6781 with your income tax return. Hrblockfree 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. Hrblockfree Follow the Form 6781 instructions for completing Part I. Hrblockfree Loss carryback election. Hrblockfree 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. Hrblockfree Follow the instructions for completing Form 6781 for the loss year to make this election. Hrblockfree Hedging Transactions The marked-to-market rules, described earlier, do not apply to hedging transactions. Hrblockfree A transaction is a hedging transaction if both of the following conditions are met. Hrblockfree 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. Hrblockfree You clearly identified the transaction as being a hedging transaction before the close of the day on which you entered into it. Hrblockfree This hedging transaction exception does not apply to transactions entered into by or for any syndicate. Hrblockfree 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. Hrblockfree 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. Hrblockfree 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. Hrblockfree Hedging loss limit. Hrblockfree If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. Hrblockfree 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. Hrblockfree 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. Hrblockfree Ignore any hedging transaction items in determining this taxable income. Hrblockfree 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. Hrblockfree 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. Hrblockfree 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. Hrblockfree The term “unrecognized gain” has the same meaning as defined under Loss Deferral Rules in Straddles, later. Hrblockfree Sale of property used in a hedge. Hrblockfree 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. Hrblockfree 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. Hrblockfree See the Instructions for Schedule SE (Form 1040). Hrblockfree In addition, the rules relating to contributions to self-employment retirement plans apply. Hrblockfree For information on retirement plan contributions, see Publication 560 and Publication 590. Hrblockfree Basis of Investment Property Basis is a way of measuring your investment in property for tax purposes. Hrblockfree You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. Hrblockfree Investment property you buy normally has an original basis equal to its cost. Hrblockfree 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. Hrblockfree Cost Basis The basis of property you buy is usually its cost. Hrblockfree The cost is the amount you pay in cash, debt obligations, or other property or services. Hrblockfree Unstated interest. Hrblockfree 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. Hrblockfree You generally have unstated interest if your interest rate is less than the applicable federal rate. Hrblockfree For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Hrblockfree Basis Other Than Cost There are times when you must use a basis other than cost. Hrblockfree In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. Hrblockfree Fair market value. Hrblockfree 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. Hrblockfree Sales of similar property, around the same date, may be helpful in figuring fair market value. Hrblockfree Property Received for Services If you receive investment property for services, you must include the property's fair market value in income. Hrblockfree The amount you include in income then becomes your basis in the property. Hrblockfree 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. Hrblockfree Restricted property. Hrblockfree 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. Hrblockfree Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. Hrblockfree See Restricted Property in Publication 525 for more information. Hrblockfree Bargain purchases. Hrblockfree If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. Hrblockfree Your basis in the property is the price you pay plus the amount you include in income. Hrblockfree 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. Hrblockfree Example. Hrblockfree You trade A Company stock for B Company stock having a fair market value of $1,200. Hrblockfree If the adjusted basis of the A Company stock is less than $1,200, you have a taxable gain on the trade. Hrblockfree If the adjusted basis of the A Company stock is more than $1,200, you have a deductible loss on the trade. Hrblockfree The basis of your B Company stock is $1,200. Hrblockfree If you later sell the B Company stock for $1,300, you will have a gain of $100. Hrblockfree 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. Hrblockfree See Nontaxable Trades , later. Hrblockfree 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. Hrblockfree Increase this amount by any cash you paid, additional costs you had, and any gain recognized. Hrblockfree 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. Hrblockfree 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. Hrblockfree See Transfers Between Spouses , later. Hrblockfree Recordkeeping. Hrblockfree 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. Hrblockfree 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. Hrblockfree Fair market value less than donor's adjusted basis. Hrblockfree 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. Hrblockfree 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. Hrblockfree No gain or loss. Hrblockfree 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. Hrblockfree Example. Hrblockfree You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. Hrblockfree The fair market value at the time of the gift is $9,000. Hrblockfree You later sell the property for $9,500. Hrblockfree You have neither gain nor loss. Hrblockfree Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. Hrblockfree Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain. Hrblockfree Fair market value equal to or more than donor's adjusted basis. Hrblockfree 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. Hrblockfree 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. Hrblockfree Gift received before 1977. Hrblockfree 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. Hrblockfree However, your basis cannot be more than the fair market value of the gift at the time it was given to you. Hrblockfree Example 1. Hrblockfree You were given XYZ Company stock in 1976. Hrblockfree At the time of the gift, the stock had a fair market value of $21,000. Hrblockfree The donor's adjusted basis was $20,000. Hrblockfree The donor paid a gift tax of $500 on the gift. Hrblockfree Your basis for gain or loss is $20,500, the donor's adjusted basis plus the amount of gift tax paid. Hrblockfree Example 2. Hrblockfree The facts are the same as in Example 1 except that the gift tax paid was $1,500. Hrblockfree 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. Hrblockfree Gift received after 1976. Hrblockfree 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. Hrblockfree You figure this part by multiplying the gift tax paid on the gift by a fraction. Hrblockfree The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. Hrblockfree The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. Hrblockfree 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. Hrblockfree Example. Hrblockfree In 2013, you received a gift of property from your mother. Hrblockfree 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. Hrblockfree 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. Hrblockfree 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 . Hrblockfree 701 ($61,000 ÷ $87,000) . Hrblockfree 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. Hrblockfree 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. Hrblockfree Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. Hrblockfree For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. Hrblockfree Gift tax information. Hrblockfree For information on gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Hrblockfree For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551. Hrblockfree Property Received as Inheritance Before or after 2010. Hrblockfree 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. Hrblockfree If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. Hrblockfree 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. Hrblockfree Appreciated property you gave the decedent. Hrblockfree 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. Hrblockfree 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. Hrblockfree Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. Hrblockfree More information. Hrblockfree 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. Hrblockfree Inherited in 2010 and executor elected to file Form 8939. Hrblockfree 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. Hrblockfree 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. Hrblockfree The result of these adjustments to the basis is the adjusted basis. Hrblockfree Adjustments to the basis of stocks and bonds are explained in the following discussion. Hrblockfree For information about other adjustments to basis, see Publication 551. Hrblockfree 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. Hrblockfree 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 . Hrblockfree The basis of stock must be adjusted for certain events that occur after purchase. Hrblockfree For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. Hrblockfree You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). Hrblockfree These distributions, up to the amount of your basis, are a nontaxable return of capital. Hrblockfree 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. Hrblockfree To find out more, go to www. Hrblockfree irs. Hrblockfree gov/Filing/Filing-Options. Hrblockfree Identifying stock or bonds sold. Hrblockfree 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. Hrblockfree Adequate identification. Hrblockfree 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. Hrblockfree Broker holds stock. Hrblockfree 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. Hrblockfree 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. Hrblockfree Single stock certificate. Hrblockfree 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. Hrblockfree 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. Hrblockfree Bonds. Hrblockfree These methods of identification also apply to bonds sold or transferred. Hrblockfree Identification not possible. Hrblockfree 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. Hrblockfree 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. Hrblockfree Example. Hrblockfree You bought 100 shares of stock of XYZ Corporation in 1998 for $10 a share. Hrblockfree In January 1999 you bought another 200 shares for $11 a share. Hrblockfree In July 1999 you gave your son 50 shares. Hrblockfree In December 2001 you bought 100 shares for $9 a share. Hrblockfree In April 2013 you sold 130 shares. Hrblockfree You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. Hrblockfree The shares of stock you gave your son had a basis of $500 (50 × $10). Hrblockfree 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. Hrblockfree 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. Hrblockfree Example. Hrblockfree You bought 100 shares of Fund A for $10 a share. Hrblockfree You paid a $50 commission to the broker for the purchase. Hrblockfree Your cost basis for each share is $10. Hrblockfree 50 ($1,050 ÷ 100). Hrblockfree Commissions and load charges. Hrblockfree The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. Hrblockfree You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. Hrblockfree A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). Hrblockfree 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. Hrblockfree You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. Hrblockfree You dispose of the shares within 90 days of the purchase date. Hrblockfree 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. Hrblockfree The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. Hrblockfree 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). Hrblockfree Choosing average basis for mutual fund shares. Hrblockfree 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. Hrblockfree The methods you can use to figure average basis are explained later. Hrblockfree Undistributed capital gains. Hrblockfree 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. Hrblockfree See Undistributed capital gains of mutual funds and REITs under Capital Gain Distributions in chapter 1. Hrblockfree Reinvestment right. Hrblockfree 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. Hrblockfree 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. Hrblockfree This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. Hrblockfree Table 4-1. Hrblockfree This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. Hrblockfree Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. Hrblockfree This worksheet will help you figure the adjusted basis when you sell or redeem shares. Hrblockfree Table 4-1. Hrblockfree 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. Hrblockfree 2 Cost plus or minus adjustments. Hrblockfree Automatic investment service. Hrblockfree 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. Hrblockfree Dividend reinvestment plans. Hrblockfree 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. Hrblockfree You must include the amount of the discount in your income. Hrblockfree Public utilities. Hrblockfree 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. Hrblockfree Stock dividends. Hrblockfree Stock dividends are distributions made by a corporation of its own stock. Hrblockfree Generally, stock dividends are not taxable to you. Hrblockfree However, see Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1 for some exceptions. Hrblockfree If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. Hrblockfree New and old stock identical. Hrblockfree 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. Hrblockfree The result is your basis for each share of stock. Hrblockfree Example 1. Hrblockfree You owned one share of common stock that you bought for $45. Hrblockfree The corporation distributed two new shares of common stock for each share held. Hrblockfree You then had three shares of common stock. Hrblockfree Your basis in each share is $15 ($45 ÷ 3). Hrblockfree Example 2. Hrblockfree You owned two shares of common stock. Hrblockfree You bought one for $30 and the other for $45. Hrblockfree The corporation distributed two new shares of common stock for each share held. Hrblockfree 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). Hrblockfree New and old stock not identical. Hrblockfree 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. Hrblockfree 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. Hrblockfree Example. Hrblockfree You bought a share of common stock for $100. Hrblockfree Later, the corporation distributed a share of preferred stock for each share of common stock held. Hrblockfree 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. Hrblockfree You figure the basis of the old and new stock by dividing your $100 basis between them. Hrblockfree The basis of your common stock is $75 (($150 ÷ $200) × $100), and the basis of the new preferred stock is $25 (($50 ÷ $200) × $100). Hrblockfree Stock bought at various times. Hrblockfree 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. Hrblockfree Taxable stock dividends. Hrblockfree 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. Hrblockfree The basis of your old stock does not change. Hrblockfree Stock splits. Hrblockfree Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. Hrblockfree Stock rights. Hrblockfree A stock right is a right to acquire a corporation's stock. Hrblockfree It may be exercised, it may be sold if it has a market value, or it may expire. Hrblockfree Stock rights are rarely taxable when you receive them. Hrblockfree See Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1. Hrblockfree Taxable stock rights. Hrblockfree If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. Hrblockfree The basis of the old stock does not change. Hrblockfree Nontaxable stock rights. Hrblockfree If you receive nontaxable stock rights and allow them to expire, they have no basis. Hrblockfree 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. Hrblockfree Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. Hrblockfree If the fair market value of the stock rights was less than 15%, their basis is zero. Hrblockfree However, you can choose to divide the basis of the old stock between the old stock and the stock rights. Hrblockfree 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. Hrblockfree Basis of new stock. Hrblockfree If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. Hrblockfree Example. Hrblockfree You own 100 shares of ABC Company stock, which cost you $22 per share. Hrblockfree The ABC Company gave you 10 nontaxable stock rights that would allow you to buy 10 more shares at $26 per share. Hrblockfree At the time the stock rights were distributed, the stock had a market value of $30, not including the stock rights. Hrblockfree Each stock right had a market value of $3. Hrblockfree 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. Hrblockfree 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. Hrblockfree 22, new basis of old stock ($30 ÷ $3,030) × $2,200 = $21. Hrblockfree 78, basis of rights If you sell the rights, the basis for figuring gain or loss is $2. Hrblockfree 18 ($21. Hrblockfree 78 ÷ 10) per right. Hrblockfree 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. Hrblockfree 18), or $28. Hrblockfree 18 per share. Hrblockfree The remaining basis of the old stock is $21. Hrblockfree 78 per share. Hrblockfree Investment property received in liquidation. Hrblockfree 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. Hrblockfree S corporation stock. Hrblockfree You must increase your basis in stock of an S corporation by your pro rata share of the following items. Hrblockfree All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. Hrblockfree The nonseparately stated income of the S corporation. Hrblockfree The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted. Hrblockfree You must decrease your basis in stock of an S corporation by your pro rata share of the following items. Hrblockfree Distributions by the S corporation that were not included in your income. Hrblockfree All loss and deduction items of the S corporation that are separately stated and passed through to you. Hrblockfree Any nonseparately stated loss of the S corporation. Hrblockfree Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. Hrblockfree 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. Hrblockfree However, your basis in the stock cannot be reduced below zero. Hrblockfree Specialized small business investment company stock or partnership interest. Hrblockfree 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. Hrblockfree See Rollover of Gain From Publicly Traded Securities , later. Hrblockfree Qualified small business stock. Hrblockfree 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. Hrblockfree See Gains on Qualified Small Business Stock , later. Hrblockfree Short sales. Hrblockfree 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. Hrblockfree See Payments in lieu of dividends , later, for information about deducting payments in lieu of dividends. Hrblockfree Premiums on bonds. Hrblockfree If you buy a bond at a premium, the premium is treated as part of your basis in the bond. Hrblockfree 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. Hrblockfree Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. Hrblockfree You must reduce the basis of the bond by the premium you amortized for the period you held the bond. Hrblockfree See Bond Premium Amortization in chapter 3 for more information. Hrblockfree Market discount on bonds. Hrblockfree 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. Hrblockfree See Market Discount Bonds in chapter 1 for more information. Hrblockfree Bonds purchased at par value. Hrblockfree A bond purchased at par value (face amount) has no premium or discount. Hrblockfree 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. Hrblockfree Example. Hrblockfree You purchased a bond several years ago for its par value of $10,000. Hrblockfree You sold the bond this year for $10,100. Hrblockfree You have a gain of $100. Hrblockfree However, if you had sold the bond for $9,900, you would have a loss of $100. Hrblockfree Acquisition discount on short-term obligations. Hrblockfree 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. Hrblockfree See Discount on Short-Term Obligations in chapter 1 for more information. Hrblockfree Original issue discount (OID) on debt instruments. Hrblockfree Increase the basis of a debt instrument by the OID you include in your income. Hrblockfree See Original Issue Discount (OID) in chapter 1. Hrblockfree Discounted tax-exempt obligations. Hrblockfree OID on tax-exempt obligations is generally not taxable. Hrblockfree 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. Hrblockfree The accrued OID is added to the basis of the obligation to determine your gain or loss. Hrblockfree 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. Hrblockfree 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. Hrblockfree See Discount on Short-Term Obligations in chapter 1. Hrblockfree Stripped tax-exempt obligation. Hrblockfree 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. Hrblockfree For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. Hrblockfree You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons . Hrblockfree Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. Hrblockfree 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. Hrblockfree In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. Hrblockfree 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. Hrblockfree Gain. Hrblockfree 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. Hrblockfree Loss. Hrblockfree If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. Hrblockfree Amount realized. Hrblockfree 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). Hrblockfree Amount realized includes the money you receive plus the fair market value of any property or services you receive. Hrblockfree 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. Hrblockfree For more information, see Publication 537. Hrblockfree 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. Hrblockfree See Regulations section 1. Hrblockfree 1001-1(g). Hrblockfree 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. Hrblockfree Fair market value. Hrblockfree 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. Hrblockfree Example. Hrblockfree 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. Hrblockfree Your gain is $3,000 ($10,000 – $7,000). Hrblockfree 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). Hrblockfree Debt paid off. Hrblockfree 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. Hrblockfree This is true even if neither you nor the buyer is personally liable for the debt. Hrblockfree 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. Hrblockfree Example. Hrblockfree You sell stock that you had pledged as security for a bank loan of $8,000. Hrblockfree Your basis in the stock is $6,000. Hrblockfree The buyer pays off your bank loan and pays you $20,000 in cash. Hrblockfree The amount realized is $28,000 ($20,000 + $8,000). Hrblockfree Your gain is $22,000 ($28,000 – $6,000). Hrblockfree Payment of cash. Hrblockfree If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Hrblockfree 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. Hrblockfree If the result is a positive number, it is a gain. Hrblockfree If the result is a negative number, it is a loss. Hrblockfree No gain or loss. Hrblockfree You may have to use a basis for figuring gain that is different from the basis used for figuring loss. Hrblockfree In this case, you may have neither a gain nor a loss. Hrblockfree See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. Hrblockfree 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. Hrblockfree 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