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Amend 2. Amend   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. Amend 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. Amend Deduction may depend on your type of business. Amend Exception for events that benefit charitable organizations. Amend Food and beverages in skybox seats. Amend What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. Amend You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Amend The rules and definitions are summarized in Table 2-1 . Amend You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. Amend Directly-related test. Amend Associated test. Amend Both of these tests are explained later. Amend An ordinary expense is one that is common and accepted in your trade or business. Amend A necessary expense is one that is helpful and appropriate for your business. Amend An expense does not have to be required to be considered necessary. Amend The amount you can deduct for entertainment expenses may be limited. Amend Generally, you can deduct only 50% of your unreimbursed entertainment expenses. Amend This limit is discussed later under 50% Limit. Amend Directly-Related Test To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. Amend Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Amend Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. Amend See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. Amend You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. Amend It is not necessary to devote more time to business than to entertainment. Amend However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. Amend Table 2-1. Amend When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Amend Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Amend An ordinary expense is one that is common and accepted in your trade or business. Amend A necessary expense is one that is helpful and appropriate. Amend Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Amend   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. Amend Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Amend You cannot deduct expenses that are lavish or extravagant under the circumstances. Amend You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). Amend You do not have to show that business income or other business benefit actually resulted from each entertainment expense. Amend Clear business setting. Amend   If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. Amend The following situations are examples of entertainment in a clear business setting. Amend Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. Amend Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer). Amend Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. Amend An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained. Amend Expenses not considered directly related. Amend   Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. Amend The following are examples of situations where there are substantial distractions. Amend A meeting or discussion at a nightclub, theater, or sporting event. Amend A meeting or discussion during what is essentially a social gathering, such as a cocktail party. Amend A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. Amend Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. Amend To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). Amend Associated with trade or business. Amend   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. Amend The purpose may be to get new business or to encourage the continuation of an existing business relationship. Amend Substantial business discussion. Amend   Whether a business discussion is substantial depends on the facts of each case. Amend A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. Amend   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. Amend It is not necessary that you devote more time to business than to entertainment. Amend You do not have to discuss business during the meal or entertainment. Amend Meetings at conventions. Amend   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. Amend However, your reason for attending the convention or meeting must be to further your trade or business. Amend The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. Amend Directly before or after business discussion. Amend   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. Amend   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. Amend Among the facts to consider are the place, date, and duration of the business discussion. Amend If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. Amend Example. Amend A group of business associates comes from out of town to your place of business to hold a substantial business discussion. Amend If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. Amend The expense meets the associated test. Amend 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. Amend (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. Amend See Individuals subject to “hours of service” limits , later. Amend ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. Amend Figure A summarizes the general rules explained in this section. Amend The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. Amend Included expenses. Amend   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. Amend However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. Amend Figure A. Amend Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. Amend See Exceptions to the 50% Limit . Amend Please click here for the text description of the image. Amend Figure A. Amend Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. Amend   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. Amend   The 50% limit also applies to certain meal and entertainment expenses that are not business related. Amend It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. Amend It also applies to the cost of meals included in deductible educational expenses. Amend When to apply the 50% limit. Amend   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. Amend You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. Amend Example 1. Amend You spend $200 for a business-related meal. Amend If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. Amend Your deduction cannot be more than $45 (50% × $90). Amend Example 2. Amend You purchase two tickets to a concert and give them to a client. Amend You purchased the tickets through a ticket agent. Amend You paid $200 for the two tickets, which had a face value of $80 each ($160 total). Amend Your deduction cannot be more than $80 (50% × $160). Amend Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. Amend Figure A can help you determine if the 50% limit applies to you. Amend Expenses not subject to 50% limit. Amend   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. Amend 1 - Employee's reimbursed expenses. Amend   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. Amend Accountable plans are discussed in chapter 6. Amend 2 - Self-employed. Amend   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. Amend You have these expenses as an independent contractor. Amend Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. Amend You provide adequate records of these expenses to your customer or client. Amend (See chapter 5 . Amend )   In this case, your client or customer is subject to the 50% limit on the expenses. Amend Example. Amend You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. Amend You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. Amend If the client can deduct the expenses, the client is subject to the 50% limit. Amend If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. Amend 3 - Advertising expenses. Amend   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Amend For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. Amend 4 - Sale of meals or entertainment. Amend   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. Amend For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. Amend 5 - Charitable sports event. Amend   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. Amend For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. Amend Individuals subject to “hours of service” limits. Amend   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. Amend The percentage is 80%. Amend   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. Amend Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. Amend Interstate truck operators and bus drivers who are under Department of Transportation regulations. Amend Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. Amend Certain merchant mariners who are under Coast Guard regulations. Amend What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. Amend Entertainment. Amend   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Amend Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. Amend   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. Amend A meal as a form of entertainment. Amend   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. Amend A meal expense includes the cost of food, beverages, taxes, and tips for the meal. Amend To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. Amend    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. Amend    Meals sold in the normal course of your business are not considered entertainment. Amend Deduction may depend on your type of business. Amend   Your kind of business may determine if a particular activity is considered entertainment. Amend For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. Amend This is because fashion shows are typical in your business. Amend But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. Amend Separating costs. Amend   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. Amend You must have a reasonable basis for making this allocation. Amend For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. Amend Taking turns paying for meals or entertainment. Amend   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. Amend Lavish or extravagant expenses. Amend   You cannot deduct expenses for entertainment that are lavish or extravagant. Amend An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Amend Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Amend Allocating between business and nonbusiness. Amend   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. Amend You can deduct only the business part. Amend If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. Amend Example. Amend You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. Amend Only 4/11 of the expense qualifies as a business entertainment expense. Amend You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. Amend Trade association meetings. Amend   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. Amend These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. Amend Entertainment tickets. Amend   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Amend For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. Amend Exception for events that benefit charitable organizations. Amend   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. Amend You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. Amend The event's main purpose is to benefit a qualified charitable organization. Amend The entire net proceeds go to the charity. Amend The event uses volunteers to perform substantially all the event's work. Amend    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. Amend Example 1. Amend You purchase tickets to a golf tournament organized by the local volunteer fire company. Amend All net proceeds will be used to buy new fire equipment. Amend The volunteers will run the tournament. Amend You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. Amend Example 2. Amend You purchase tickets to a college football game through a ticket broker. Amend After having a business discussion, you take a client to the game. Amend Net proceeds from the game go to colleges that qualify as charitable organizations. Amend However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. Amend Skyboxes and other private luxury boxes. Amend   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. Amend   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. Amend For example, renting a skybox for a series of playoff games is considered renting it for more than one event. Amend All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. Amend   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. Amend Example. Amend You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. Amend The cost of regular nonluxury box seats at each event is $30 a seat. Amend You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). Amend Food and beverages in skybox seats. Amend   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. Amend The amounts separately stated for food and beverages must be reasonable. Amend You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. Amend What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. Amend Club dues and membership fees. Amend   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. Amend This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. Amend   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. Amend You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Amend Entertainment facilities. Amend   Generally, you cannot deduct any expense for the use of an entertainment facility. Amend This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. Amend   An entertainment facility is any property you own, rent, or use for entertainment. Amend Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. Amend Out-of-pocket expenses. Amend   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. Amend These are not expenses for the use of an entertainment facility. Amend However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. Amend Expenses for spouses. Amend   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. Amend However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. Amend Example. Amend You entertain a customer. Amend The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. Amend The customer's spouse joins you because it is impractical to entertain the customer without the spouse. Amend You can deduct the cost of entertaining the customer's spouse. Amend If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. Amend Gift or entertainment. Amend   Any item that might be considered either a gift or entertainment generally will be considered entertainment. Amend However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. Amend   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. Amend You can treat the tickets as either a gift or entertainment, whichever is to your advantage. Amend   You can change your treatment of the tickets at a later date by filing an amended return. Amend Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. Amend   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. Amend You cannot choose, in this case, to treat the tickets as a gift. Amend Prev  Up  Next   Home   More Online Publications
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Amend 14. Amend   Sale of Property Table of Contents Reminder Introduction Useful Items - You may want to see: Sales and TradesWhat Is a Sale or Trade? How To Figure Gain or Loss Nontaxable Trades Transfers Between Spouses Related Party Transactions Capital Gains and LossesCapital or Ordinary Gain or Loss Capital Assets and Noncapital Assets Holding Period Nonbusiness Bad Debts Wash Sales Rollover of Gain From Publicly Traded Securities Reminder Foreign income. Amend  If you are a U. Amend S. Amend citizen who sells property located outside the United States, you must report all gains and losses from the sale of that property on your tax return unless it is exempt by U. Amend S. Amend law. Amend This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the payer. Amend Introduction This chapter discusses the tax consequences of selling or trading investment property. Amend It explains the following. Amend What a sale or trade is. Amend Figuring gain or loss. Amend Nontaxable trades. Amend Related party transactions. Amend Capital gains or losses. Amend Capital assets and noncapital assets. Amend Holding period. Amend Rollover of gain from publicly traded securities. Amend Other property transactions. Amend   Certain transfers of property are not discussed here. Amend They are discussed in other IRS publications. Amend These include the following. Amend Sales of a main home, covered in chapter 15. Amend Installment sales, covered in Publication 537, Installment Sales. Amend Transactions involving business property, covered in Publication 544, Sales and Other Dispositions of Assets. Amend Dispositions of an interest in a passive activity, covered in Publication 925, Passive Activity and At-Risk Rules. Amend    Publication 550, Investment Income and Expenses (Including Capital Gains and Losses), provides a more detailed discussion about sales and trades of investment property. Amend Publication 550 includes information about the rules covering nonbusiness bad debts, straddles, section 1256 contracts, puts and calls, commodity futures, short sales, and wash sales. Amend It also discusses investment-related expenses. Amend Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 8949 Sales and Other Dispositions of Capital Assets 8824 Like-Kind Exchanges Sales and Trades If you sold property such as stocks, bonds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. Amend Generally, you should receive the statement by February 15 of the next year. Amend It will show the gross proceeds from the sale. Amend If you sold a covered security in 2013, your 1099-B (or substitute statement) will show your basis. Amend Generally, a covered security is a security you acquired after 2010, with certain exceptions. Amend See the Instructions for Form 8949. Amend The IRS will also get a copy of Form 1099-B from the broker. Amend Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. Amend What Is a Sale or Trade? This section explains what is a sale or trade. Amend It also explains certain transactions and events that are treated as sales or trades. Amend A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. Amend A trade is a transfer of property for other property or services and may be taxed in the same way as a sale. Amend Sale and purchase. Amend   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. Amend The sale and purchase are two separate transactions. Amend But see Like-kind exchanges under Nontaxable Trades, later. Amend Redemption of stock. Amend   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. Amend Dividend versus sale or trade. Amend   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Amend Both direct and indirect ownership of stock will be considered. Amend The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend (see chapter 8), There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. Amend Redemption or retirement of bonds. Amend   A redemption or retirement of bonds or notes at their maturity is generally treated as a sale or trade. Amend   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. Amend For details, see Regulations section 1. Amend 1001-3. Amend Surrender of stock. Amend   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. Amend The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Amend Worthless securities. Amend    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. Amend This affects whether your capital loss is long term or short term. Amend See Holding Period , later. Amend   Worthless securities also include securities that you abandon after March 12, 2008. Amend To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Amend 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. Amend    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. Amend Do not deduct them in the year the stock became worthless. Amend How to report loss. Amend    Report worthless securities in Part I or Part II, whichever applies, of Form 8949. Amend In column (a), enter “Worthless. Amend ”    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. Amend See Form 8949 and the Instructions for Form 8949. Amend For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Amend See also Schedule D (Form 1040), Form 8949, and their separate instructions. Amend Filing a claim for refund. Amend   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. Amend You must use Form 1040X, Amended U. Amend S. Amend Individual Income Tax Return, to amend your return for the year the security became worthless. Amend 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. Amend For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. Amend 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. Amend Gain. Amend   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. Amend Loss. Amend   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. Amend Adjusted basis. Amend   The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. Amend See chapter 13 for more information about determining the adjusted basis of property. Amend Amount realized. Amend   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). Amend Amount realized includes the money you receive plus the fair market value of any property or services you receive. Amend If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized. Amend 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. Amend For more information, see Publication 537. Amend Fair market value. Amend   Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Amend Example. Amend 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. Amend Your gain is $3,000 ($10,000 − $7,000). Amend Debt paid off. Amend    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. Amend This is true even if neither you nor the buyer is personally liable for the debt. Amend 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. Amend Example. Amend You sell stock that you had pledged as security for a bank loan of $8,000. Amend Your basis in the stock is $6,000. Amend The buyer pays off your bank loan and pays you $20,000 in cash. Amend The amount realized is $28,000 ($20,000 + $8,000). Amend Your gain is $22,000 ($28,000 − $6,000). Amend Payment of cash. Amend   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Amend Determine your gain or loss by subtracting the cash you pay plus the adjusted basis of the property you trade in from the amount you realize. Amend If the result is a positive number, it is a gain. Amend If the result is a negative number, it is a loss. Amend No gain or loss. Amend   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. Amend In this case, you may have neither a gain nor a loss. Amend See Basis Other Than Cost in chapter 13. Amend Nontaxable Trades This section discusses trades that generally do not result in a taxable gain or deductible loss. Amend For more information on nontaxable trades, see chapter 1 of Publication 544. Amend Like-kind exchanges. Amend   If you trade business or investment property for other business or investment property of a like kind, you do not pay tax on any gain or deduct any loss until you sell or dispose of the property you receive. Amend To be nontaxable, a trade must meet all six of the following conditions. Amend The property must be business or investment property. Amend You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Amend Neither property may be property used for personal purposes, such as your home or family car. Amend The property must not be held primarily for sale. Amend The property you trade and the property you receive must not be property you sell to customers, such as merchandise. Amend The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. Amend However, see Special rules for mutual ditch, reservoir, or irrigation company stock, in chapter 4 of Publication 550 for an exception. Amend Also, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later. Amend There must be a trade of like property. Amend The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. Amend The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. Amend The trade of a piece of machinery for a store building is not a trade of like property. Amend Real property located in the United States and real property located outside the United States are not like property. Amend Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property. Amend The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade. Amend The property to be received must be received by the earlier of: The 180th day after the date on which you transfer the property given up in the trade, or The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs. Amend    If you trade property with a related party in a like-kind exchange, a special rule may apply. Amend See Related Party Transactions , later in this chapter. Amend Also, see chapter 1 of Publication 544 for more information on exchanges of business property and special rules for exchanges using qualified intermediaries or involving multiple properties. Amend Partly nontaxable exchange. Amend   If you receive money or unlike property in addition to like property, and the above six conditions are met, you have a partly nontaxable trade. Amend You are taxed on any gain you realize, but only up to the amount of the money and the fair market value of the unlike property you receive. Amend You cannot deduct a loss. Amend Like property and unlike property transferred. Amend   If you give up unlike property in addition to the like property, you must recognize gain or loss on the unlike property you give up. Amend The gain or loss is the difference between the adjusted basis of the unlike property and its fair market value. Amend Like property and money transferred. Amend   If all of the above conditions (1) – (6) are met, you have a nontaxable trade even if you pay money in addition to the like property. Amend Basis of property received. Amend   To figure the basis of the property received, see Nontaxable Exchanges in chapter 13. Amend How to report. Amend   You must report the trade of like property on Form 8824. Amend If you figure a recognized gain or loss on Form 8824, report it on Schedule D (Form 1040), or on Form 4797, Sales of Business Property, whichever applies. Amend See the instructions for Line 22 in the Instructions for Form 8824. Amend   For information on using Form 4797, see chapter 4 of Publication 544. Amend Corporate stocks. Amend   The following trades of corporate stocks generally do not result in a taxable gain or a deductible loss. Amend Corporate reorganizations. Amend   In some instances, a company will give you common stock for preferred stock, preferred stock for common stock, or stock in one corporation for stock in another corporation. Amend If this is a result of a merger, recapitalization, transfer to a controlled corporation, bankruptcy, corporate division, corporate acquisition, or other corporate reorganization, you do not recognize gain or loss. Amend Stock for stock of the same corporation. Amend   You can exchange common stock for common stock or preferred stock for preferred stock in the same corporation without having a recognized gain or loss. Amend This is true for a trade between two stockholders as well as a trade between a stockholder and the corporation. Amend Convertible stocks and bonds. Amend   You generally will not have a recognized gain or loss if you convert bonds into stock or preferred stock into common stock of the same corporation according to a conversion privilege in the terms of the bond or the preferred stock certificate. Amend Property for stock of a controlled corporation. Amend   If you transfer property to a corporation solely in exchange for stock in that corporation, and immediately after the trade you are in control of the corporation, you ordinarily will not recognize a gain or loss. Amend This rule applies both to individuals and to groups who transfer property to a corporation. Amend It does not apply if the corporation is an investment company. Amend   For this purpose, to be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock of the corporation. Amend   If this provision applies to you, you may have to attach to your return a complete statement of all facts pertinent to the exchange. Amend For details, see Regulations section 1. Amend 351-3. Amend Additional information. Amend   For more information on trades of stock, see Nontaxable Trades in chapter 4 of Publication 550. Amend Insurance policies and annuities. Amend   You will not have a recognized gain or loss if the insured or annuitant is the same under both contracts and you trade: A life insurance contract for another life insurance contract or for an endowment or annuity contract or for a qualified long-term care insurance contract, An endowment contract for another endowment contract that provides for regular payments beginning at a date no later than the beginning date under the old contract or for an annuity contract or for a qualified long-term insurance contract, An annuity contract for annuity contract or for a qualified long-term care insurance contract, or A qualified long-term care insurance contract for a qualified long-term care insurance contract. Amend   You also may not have to recognize gain or loss on an exchange of a portion of an annuity contract for another annuity contract. Amend For transfers completed before October 24, 2011, see Revenue Ruling 2003-76 in Internal Revenue Bulletin 2003-33 and Revenue Procedure 2008-24 in Internal Revenue Bulletin 2008-13. Amend Revenue Ruling 2003-76 is available at www. Amend irs. Amend gov/irb/2003-33_IRB/ar11. Amend html. Amend Revenue Procedure 2008-24 is available at www. Amend irs. Amend gov/irb/2008-13_IRB/ar13. Amend html. Amend For transfers completed on or after October 24, 2011, see Revenue Ruling 2003-76, above, and Revenue Procedure 2011-38, in Internal Revenue Bulletin 2011-30. Amend Revenue Procedure 2011-38 is available at www. Amend irs. Amend gov/irb/2011-30_IRB/ar09. Amend html. Amend   For tax years beginning after December 31, 2010, amounts received as an annuity for a period of 10 years or more, or for the lives of one or more individuals, under any portion of an annuity, endowment, or life insurance contract, are treated as a separate contract and are considered partial annuities. Amend A portion of an annuity, endowment, or life insurance contract may be annuitized, provided that the annuitization period is for 10 years or more or for the lives of one or more individuals. Amend The investment in the contract is allocated between the part of the contract from which amounts are received as an annuity and the part of the contract from which amounts are not received as an annuity. Amend   Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable. Amend Demutualization of life insurance companies. Amend   If you received stock in exchange for your equity interest as a policyholder or an annuitant, you generally will not have a recognized gain or loss. Amend See Demutualization of Life Insurance Companies in Publication 550. Amend U. Amend S. Amend Treasury notes or bonds. Amend   You can trade certain issues of U. Amend S. Amend Treasury obligations for other issues designated by the Secretary of the Treasury, with no gain or loss recognized on the trade. Amend See Savings bonds traded in chapter 1 of Publication 550 for more information. Amend Transfers Between Spouses Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or if incident to a divorce, a former spouse. Amend This nonrecognition rule does not apply in the following situations. Amend The recipient spouse or former spouse is a nonresident alien. Amend Property is transferred in trust and liability exceeds basis. Amend Gain must be recognized to the extent the amount of the liabilities assumed by the trust, plus any liabilities on the property, exceed the adjusted basis of the property. Amend For other situations, see Transfers Between Spouses in chapter 4 of Publication 550. Amend Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is treated by the recipient as a gift and is not considered a sale or exchange. Amend The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Amend This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its fair market value at the time of transfer or any consideration paid by the recipient. Amend This rule applies for purposes of determining loss as well as gain. Amend Any gain recognized on a transfer in trust increases the basis. Amend A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage. Amend Related Party Transactions Special rules apply to the sale or trade of property between related parties. Amend Gain on sale or trade of depreciable property. Amend   Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. Amend See chapter 3 of Publication 544 for more information. Amend Like-kind exchanges. Amend   Generally, if you trade business or investment property for other business or investment property of a like kind, no gain or loss is recognized. Amend See Like-kind exchanges , earlier, under Nontaxable Trades. Amend   This rule also applies to trades of property between related parties, defined next under Losses on sales or trades of property. Amend However, if either you or the related party disposes of the like property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return filed for the year in which the later disposition occurs. Amend See Related Party Transactions in chapter 4 of Publication 550 for exceptions. Amend Losses on sales or trades of property. Amend   You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties. Amend Members of your family. Amend This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. Amend ), and lineal descendants (children, grandchildren, etc. Amend ). Amend A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. Amend A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. Amend (See Constructive ownership of stock , later. Amend ) A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. Amend   In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties. Amend A grantor and fiduciary, or the fiduciary and beneficiary, of any trust. Amend Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Amend A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust. Amend A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership. Amend Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Amend Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Amend An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest). Amend Two corporations that are members of the same controlled group. Amend (Under certain conditions, however, these losses are not disallowed but must be deferred. Amend ) Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profit interests in both partnerships. Amend Multiple property sales or trades. Amend   If you sell or trade to a related party a number of blocks of stock or pieces of property in a lump sum, you must figure the gain or loss separately for each block of stock or piece of property. Amend The gain on each item may be taxable. Amend However, you cannot deduct the loss on any item. Amend Also, you cannot reduce gains from the sales of any of these items by losses on the sales of any of the other items. Amend Indirect transactions. Amend   You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. Amend This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged. Amend Constructive ownership of stock. Amend   In determining whether a person directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Amend Rule 1. Amend   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Amend Rule 2. Amend   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Amend Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Amend Rule 3. Amend   An individual owning, other than by applying rule 2, any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Amend Rule 4. Amend   When applying rule 1, 2, or 3, stock constructively owned by a person under rule 1 is treated as actually owned by that person. Amend But stock constructively owned by an individual under rule 2 or rule 3 is not treated as owned by that individual for again applying either rule 2 or rule 3 to make another person the constructive owner of the stock. Amend Property received from a related party. Amend    If you sell or trade at a gain property you acquired from a related party, you recognize the gain only to the extent it is more than the loss previously disallowed to the related party. Amend This rule applies only if you are the original transferee and you acquired the property by purchase or exchange. Amend This rule does not apply if the related party's loss was disallowed because of the wash sale rules described in chapter 4 of Publication 550 under Wash Sales. Amend   If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party. Amend Example 1. Amend Your brother sells you stock for $7,600. Amend His cost basis is $10,000. Amend Your brother cannot deduct the loss of $2,400. Amend Later, you sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900. Amend Your reportable gain is $500 (the $2,900 gain minus the $2,400 loss not allowed to your brother). Amend Example 2. Amend If, in Example 1, you sold the stock for $6,900 instead of $10,500, your recognized loss is only $700 (your $7,600 basis minus $6,900). Amend You cannot deduct the loss that was not allowed to your brother. Amend Capital Gains and Losses This section discusses the tax treatment of gains and losses from different types of investment transactions. Amend Character of gain or loss. Amend   You need to classify your gains and losses as either ordinary or capital gains or losses. Amend You then need to classify your capital gains and losses as either short term or long term. Amend If you have long-term gains and losses, you must identify your 28% rate gains and losses. Amend If you have a net capital gain, you must also identify any unrecaptured section 1250 gain. Amend   The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. Amend Reporting capital gains and losses is explained in chapter 16. Amend Capital or Ordinary Gain or Loss If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. Amend Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. Amend A sale or trade of a noncapital asset generally results in ordinary gain or loss. Amend Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. Amend In some situations, part of your gain or loss may be a capital gain or loss and part may be an ordinary gain or loss. Amend Capital Assets and Noncapital Assets For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. Amend Some examples are: Stocks or bonds held in your personal account, A house owned and used by you and your family, Household furnishings, A car used for pleasure or commuting, Coin or stamp collections, Gems and jewelry, and Gold, silver, or any other metal. Amend Any property you own is a capital asset, except the following noncapital assets. Amend Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. Amend For an exception, see Capital Asset Treatment for Self-Created Musical Works , later. Amend Depreciable property used in your trade or business, even if fully depreciated. Amend Real property used in your trade or business. Amend A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that is: Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. Amend For an exception to this rule, see Capital Asset Treatment for Self-Created Musical Works , later. Amend Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1). Amend U. Amend S. Amend Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price. Amend Certain commodities derivative financial instruments held by commodities derivatives dealers. Amend Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. Amend Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Amend Investment Property Investment property is a capital asset. Amend Any gain or loss from its sale or trade is generally a capital gain or loss. Amend Gold, silver, stamps, coins, gems, etc. Amend   These are capital assets except when they are held for sale by a dealer. Amend Any gain or loss you have from their sale or trade generally is a capital gain or loss. Amend Stocks, stock rights, and bonds. Amend   All of these (including stock received as a dividend) are capital assets except when held for sale by a securities dealer. Amend However, if you own small business stock, see Losses on Section 1244 (Small Business) Stock , later, and Losses on Small Business Investment Company Stock, in chapter 4 of Publication 550. Amend Personal Use Property Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. Amend However, you cannot deduct a loss from selling personal use property. Amend Capital Asset Treatment for Self-Created Musical Works You can elect to treat musical compositions and copyrights in musical works as capital assets when you sell or exchange them if: Your personal efforts created the property, or You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. Amend You must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. Amend You must make the election on or before the due date (including extensions) of the income tax return for the tax year of the sale or exchange. Amend You must make the election on Form 8949 by treating the sale or exchange as the sale or exchange of a capital asset, according to Form 8949, Schedule D (Form 1040), and their separate instructions. Amend For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Amend See also Schedule D (Form 1040), Form 8949, and their separate instructions. Amend You can revoke the election if you have IRS approval. Amend To get IRS approval, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. Amend See, for example, Rev. Amend Proc. Amend 2013-1, corrected by Announcement 2013–9, and amplified and modified by Rev. Amend Proc. Amend 2013–32, available at www. Amend irs. Amend gov/irb/2013-01_IRB/ar06. Amend html. Amend Alternatively, you are granted an automatic 6-month extension from the due date of your income tax return (excluding extensions) to revoke the election, provided you timely file your income tax return, and within this 6-month extension period, you file Form 1040X that treats the sale or exchange as the sale or exchange of property that is not a capital asset. Amend Discounted Debt Instruments Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions. Amend Short-term government obligations. Amend   Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. Amend This treatment applies to obligations with a fixed maturity date not more than 1 year from the date of issue. Amend Acquisition discount is the stated redemption price at maturity minus your basis in the obligation. Amend   However, do not treat these gains as income to the extent you previously included the discount in income. Amend See Discount on Short-Term Obligations in chapter 1 of Publication 550. Amend Short-term nongovernment obligations. Amend   Treat gains on short-term nongovernment obligations as ordinary income up to your ratable share of original issue discount (OID). Amend This treatment applies to obligations with a fixed maturity date of not more than 1 year from the date of issue. Amend   However, to the extent you previously included the discount in income, you do not have to include it in income again. Amend See Discount on Short-Term Obligations in chapter 1 of Publication 550. Amend Tax-exempt state and local government bonds. Amend   If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of OID as tax-exempt interest. Amend To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID. Amend   If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. Amend For more information on the basis of these bonds, see Discounted Debt Instruments in chapter 4 of Publication 550. Amend   Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. Amend If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. Amend If you bought the bonds after April 30, 1993, the gain is ordinary income. Amend   You figure the market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. Amend For more information, see Market Discount Bonds in chapter 1 of Publication 550. Amend    A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss. Amend Redeemed before maturity. Amend   If a state or local bond issued before June 9, 1980, is redeemed before it matures, the OID is not taxable to you. Amend   If a state or local bond issued after June 8, 1980, is redeemed before it matures, the part of OID earned while you hold the bond is not taxable to you. Amend However, you must report the unearned part of OID as a capital gain. Amend Example. Amend On July 2, 2002, the date of issue, you bought a 20-year, 6% municipal bond for $800. Amend The face amount of the bond was $1,000. Amend The $200 discount was OID. Amend At the time the bond was issued, the issuer had no intention of redeeming it before it matured. Amend The bond was callable at its face amount beginning 10 years after the issue date. Amend The issuer redeemed the bond at the end of 11 years (July 2, 2013) for its face amount of $1,000 plus accrued annual interest of $60. Amend The OID earned during the time you held the bond, $73, is not taxable. Amend The $60 accrued annual interest also is not taxable. Amend However, you must report the unearned part of OID ($127) as a capital gain. Amend Long-term debt instruments issued after 1954 and before May 28, 1969 (or before July 2, 1982, if a government instrument). Amend   If you sell, trade, or redeem for a gain one of these debt instruments, the part of your gain that is not more than your ratable share of the OID at the time of the sale or redemption is ordinary income. Amend The rest of the gain is capital gain. Amend If, however, there was an intention to call the debt instrument before maturity, all of your gain that is not more than the entire OID is treated as ordinary income at the time of the sale. Amend This treatment of taxable gain also applies to corporate instruments issued after May 27, 1969, under a written commitment that was binding on May 27, 1969, and at all times thereafter. Amend Long-term debt instruments issued after May 27, 1969 (or after July 1, 1982, if a government instrument). Amend   If you hold one of these debt instruments, you must include a part of OID in your gross income each year you own the instrument. Amend Your basis in that debt instrument is increased by the amount of OID that you have included in your gross income. Amend See Original Issue Discount (OID) in chapter 7 for information about OID that you must report on your tax return. Amend   If you sell or trade the debt instrument before maturity, your gain is a capital gain. Amend However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. Amend In this case, the rest of the gain is capital gain. Amend Market discount bonds. Amend   If the debt instrument has market discount and you chose to include the discount in income as it accrued, increase your basis in the debt instrument by the accrued discount to figure capital gain or loss on its disposition. Amend If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. Amend The rest of the gain is capital gain. Amend See Market Discount Bonds in chapter 1 of Publication 550. Amend   A different rule applies to market discount bonds issued before July 19, 1984, and purchased by you before May 1, 1993. Amend See Market discount bonds under Discounted Debt Instruments in chapter 4 of Publication 550. Amend Retirement of debt instrument. Amend   Any amount you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument. Amend Notes of individuals. Amend   If you hold an obligation of an individual issued with OID after March 1, 1984, you generally must include the OID in your income currently, and your gain or loss on its sale or retirement is generally capital gain or loss. Amend An exception to this treatment applies if the obligation is a loan between individuals and all the following requirements are met. Amend The lender is not in the business of lending money. Amend The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or less. Amend Avoiding federal tax is not one of the principal purposes of the loan. Amend   If the exception applies, or the obligation was issued before March 2, 1984, you do not include the OID in your income currently. Amend When you sell or redeem the obligation, the part of your gain that is not more than your accrued share of OID at that time is ordinary income. Amend The rest of the gain, if any, is capital gain. Amend Any loss on the sale or redemption is capital loss. Amend Deposit in Insolvent or Bankrupt Financial Institution If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways. Amend Ordinary loss. Amend Casualty loss. Amend Nonbusiness bad debt (short-term capital loss). Amend  For more information, see Deposit in Insolvent or Bankrupt Financial Institution, in chapter 4 of Publication 550. Amend Sale of Annuity The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income. Amend Losses on Section 1244 (Small Business) Stock You can deduct as an ordinary loss, rather than as a capital loss, your loss on the sale, trade, or worthlessness of section 1244 stock. Amend Report the loss on Form 4797, line 10. Amend Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. Amend Report the gain on Form 8949. Amend See Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Amend For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Amend See also Schedule D (Form 1040), Form 8949, and their separate instructions. Amend Holding Period If you sold or traded investment property, you must determine your holding period for the property. Amend Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss. Amend Long-term or short-term. Amend   If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. Amend If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. Amend   To determine how long you held the investment property, begin counting on the date after the day you acquired the property. Amend The day you disposed of the property is part of your holding period. Amend Example. Amend If you bought investment property on February 6, 2012, and sold it on February 6, 2013, your holding period is not more than 1 year and you have a short-term capital gain or loss. Amend If you sold it on February 7, 2013, your holding period is more than 1 year and you will have a long-term capital gain or loss. Amend Securities traded on established market. Amend   For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them. Amend    Do not confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be made. Amend Example. Amend You are a cash method, calendar year taxpayer. Amend You sold stock at a gain on December 30, 2013. Amend According to the rules of the stock exchange, the sale was closed by delivery of the stock 4 trading days after the sale, on January 6, 2014. Amend You received payment of the sales price on that same day. Amend Report your gain on your 2013 return, even though you received the payment in 2014. Amend The gain is long term or short term depending on whether you held the stock more than 1 year. Amend Your holding period ended on December 30. Amend If you had sold the stock at a loss, you would also report it on your 2013 return. Amend U. Amend S. Amend Treasury notes and bonds. Amend   The holding period of U. Amend S. Amend Treasury notes and bonds sold at auction on the basis of yield starts the day after the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. Amend The holding period of U. Amend S. Amend Treasury notes and bonds sold through an offering on a subscription basis at a specified yield starts the day after the subscription is submitted. Amend Automatic investment service. Amend   In determining your holding period for shares bought by the bank or other agent, full shares are considered bought first and any fractional shares are considered bought last. Amend Your holding period starts on the day after the bank's purchase date. Amend If a share was bought over more than one purchase date, your holding period for that share is a split holding period. Amend A part of the share is considered to have been bought on each date that stock was bought by the bank with the proceeds of available funds. Amend Nontaxable trades. Amend   If you acquire investment property in a trade for other investment property and your basis for the new property is determined, in whole or in part, by your basis in the old property, your holding period for the new property begins on the day following the date you acquired the old property. Amend Property received as a gift. Amend   If you receive a gift of property and your basis is determined by the donor's adjusted basis, your holding period is considered to have started on the same day the donor's holding period started. Amend   If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift. Amend Inherited property. Amend   Generally, if you inherited investment property, your capital gain or loss on any later disposition of that property is long-term capital gain or loss. Amend This is true regardless of how long you actually held the property. Amend However, if you inherited property from someone who died in 2010, see the information below. Amend Inherited property from someone who died in 2010. Amend   If you inherit investment property from a decedent who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your holding period. Amend Real property bought. Amend   To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. Amend However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. Amend The holding period cannot start until there is an actual contract of sale. Amend The holding period of the seller cannot end before that time. Amend Real property repossessed. Amend   If you sell real property but keep a security interest in it, and then later repossess the property under the terms of the sales contract, your holding period for a later sale includes the period you held the property before the original sale and the period after the repossession. Amend Your holding period does not include the time between the original sale and the repossession. Amend That is, it does not include the period during which the first buyer held the property. Amend Stock dividends. Amend   The holding period for stock you received as a taxable stock dividend begins on the date of distribution. Amend   The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. Amend This rule also applies to stock acquired in a “spin-off,” which is a distribution of stock or securities in a controlled corporation. Amend Nontaxable stock rights. Amend   Your holding period for nontaxable stock rights begins on the same day as the holding period of the underlying stock. Amend The holding period for stock acquired through the exercise of stock rights begins on the date the right was exercised. Amend Nonbusiness Bad Debts If someone owes you money that you cannot collect, you have a bad debt. Amend You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless. Amend Generally, nonbusiness bad debts are bad debts that did not come from operating your trade or business, and are deductible as short-term capital losses. Amend To be deductible, nonbusiness bad debts must be totally worthless. Amend You cannot deduct a partly worthless nonbusiness debt. Amend Genuine debt required. Amend   A debt must be genuine for you to deduct a loss. Amend A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. Amend Basis in bad debt required. Amend    To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. Amend For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. Amend If you are a cash method taxpayer (as most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items. Amend When deductible. Amend   You can take a bad debt deduction only in the year the debt becomes worthless. Amend You do not have to wait until a debt is due to determine whether it is worthless. Amend A debt becomes worthless when there is no longer any chance that the amount owed will be paid. Amend   It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Amend You must only show that you have taken reasonable steps to collect the debt. Amend Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Amend How to report bad debts. Amend    Deduct nonbusiness bad debts as short-term capital losses on Form 8949. Amend    Make sure you report your bad debt(s) (and any other short-term transactions for which you did not receive a Form 1099-B) on Form 8949, Part I, with box C checked. Amend    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Amend See also Schedule D (Form 1040), Form 8949, and their separate instructions. Amend   For each bad debt, attach a statement to your return that contains: A description of the debt, including the amount, and the date it became due, The name of the debtor, and any business or family relationship between you and the debtor, The efforts you made to collect the debt, and Why you decided the debt was worthless. Amend For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt. Amend Filing a claim for refund. Amend    If you do not deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. Amend To do this, use Form 1040X to amend your return for the year the debt became worthless. Amend 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. Amend For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. Amend Additional information. Amend   For more information, see Nonbusiness Bad Debts in Publication 550. Amend For information on business bad debts, see chapter 10 of Publication 535, Business Expenses. Amend Wash Sales You cannot deduct losses from sales or trades of stock or securities in a wash sale. Amend A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. Amend If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). Amend The result is your basis in the new stock or securities. Amend This adjustment postpones the loss deduction until the disposition of the new stock or securities. Amend Your holding period for the new stock or securities includes the holding period of the stock or securities sold. Amend For more information, see Wash Sales, in chapter 4 of Publication 550. Amend Rollover of Gain From Publicly Traded Securities You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. Amend This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain. Amend You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement property , later. Amend This postpones your gain until the year you dispose of the replacement property. Amend You qualify to make this choice if you meet all the following tests. Amend You sell publicly traded securities at a gain. Amend Publicly traded securities are securities traded on an established securities market. Amend Your gain from the sale is a capital gain. Amend During the 60-day period beginning on the date of the sale, you buy replacement property. Amend This replacement property must be either common stock of, or a partnership interest in a specialized small business investment company (SSBIC). Amend This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993. Amend Amount of gain recognized. Amend   If you make the choice described in this section, you must recognize gain only up to the following amount. Amend The amount realized on the sale, minus The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of publicly traded securities). Amend  If this amount is less than the amount of your gain, you can postpone the rest of your gain, subject to the limit described next. Amend If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain. Amend Limit on gain postponed. Amend   The amount of gain you can postpone each year is limited to the smaller of: $50,000 ($25,000 if you are married and file a separate return), or $500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier years. Amend Basis of replacement property. Amend   You must subtract the amount of postponed gain from the basis of your replacement property. Amend How to report and postpone gain. Amend    See How to report and postpone gain under Rollover of Gain From Publicly Traded Securities in chapter 4 of Publication 550 for details. Amend Prev  Up  Next   Home   More Online Publications