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H&r Block File Taxes

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H&r Block File Taxes

H&r block file taxes Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. H&r block file taxes Proc. H&r block file taxes 2013-16 Table of Contents SECTION 1. H&r block file taxes PURPOSE SECTION 2. H&r block file taxes BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. H&r block file taxes BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. H&r block file taxes FEDERAL INCOME TAX TREATMENT SECTION 5. H&r block file taxes INFORMATION-REPORTING OBLIGATIONS SECTION 6. H&r block file taxes HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. H&r block file taxes PENALTY RELIEF FOR 2012 SECTION 8. H&r block file taxes SCOPE AND EFFECTIVE DATE SECTION 9. H&r block file taxes DRAFTING INFORMATION SECTION 1. H&r block file taxes PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). H&r block file taxes Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). H&r block file taxes In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. H&r block file taxes Current plans call for HAMP to continue accepting new borrowers through the end of 2013. H&r block file taxes The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. H&r block file taxes SECTION 2. H&r block file taxes BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . H&r block file taxes 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). H&r block file taxes A description of the program can be found at www. H&r block file taxes makinghomeaffordable. H&r block file taxes gov. H&r block file taxes . H&r block file taxes 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. H&r block file taxes These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. H&r block file taxes . H&r block file taxes 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. H&r block file taxes The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. H&r block file taxes However, as noted in section 2. H&r block file taxes 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. H&r block file taxes (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. H&r block file taxes ”) . H&r block file taxes 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. H&r block file taxes . H&r block file taxes 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. H&r block file taxes The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. H&r block file taxes (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. H&r block file taxes ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). H&r block file taxes Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. H&r block file taxes Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. H&r block file taxes . H&r block file taxes 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. H&r block file taxes (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. H&r block file taxes ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. H&r block file taxes . H&r block file taxes 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). H&r block file taxes If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. H&r block file taxes These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. H&r block file taxes The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. H&r block file taxes The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. H&r block file taxes For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. H&r block file taxes ” . H&r block file taxes 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). H&r block file taxes . H&r block file taxes 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. H&r block file taxes 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. H&r block file taxes . H&r block file taxes 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. H&r block file taxes SECTION 3. H&r block file taxes BACKGROUND—APPLICABLE PROVISIONS OF LAW . H&r block file taxes 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. H&r block file taxes See § 61(a)(12). H&r block file taxes . H&r block file taxes 02 Under § 1. H&r block file taxes 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. H&r block file taxes In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. H&r block file taxes However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. H&r block file taxes See § 1. H&r block file taxes 1001-3(c)(6). H&r block file taxes . H&r block file taxes 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. H&r block file taxes 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. H&r block file taxes If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. H&r block file taxes See also § 1. H&r block file taxes 61-12(c). H&r block file taxes . H&r block file taxes 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. H&r block file taxes If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. H&r block file taxes See, e. H&r block file taxes g. H&r block file taxes , §§ 1. H&r block file taxes 1272-1(c)(5) and 1. H&r block file taxes 1274-2(d). H&r block file taxes . H&r block file taxes 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. H&r block file taxes Section 108(a)(1)(E) and 108(a)(1)(B). H&r block file taxes (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. H&r block file taxes ) . H&r block file taxes 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. H&r block file taxes . H&r block file taxes 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. H&r block file taxes See §§ 108(h) and 163(h)(3)(B)(i). H&r block file taxes . H&r block file taxes 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). H&r block file taxes Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. H&r block file taxes . H&r block file taxes 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. H&r block file taxes . H&r block file taxes 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. H&r block file taxes Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. H&r block file taxes . H&r block file taxes 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. H&r block file taxes See § 108(h)(1). H&r block file taxes If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). H&r block file taxes See § 108(b). H&r block file taxes For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). H&r block file taxes . H&r block file taxes 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). H&r block file taxes See Form 982 instructions and Publication 4681. H&r block file taxes This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. H&r block file taxes . H&r block file taxes 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. H&r block file taxes See Notice 2003-18, 2003-1 C. H&r block file taxes B. H&r block file taxes 699, and Rev. H&r block file taxes Rul. H&r block file taxes 79-356, 1979-2 C. H&r block file taxes B. H&r block file taxes 28. H&r block file taxes However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). H&r block file taxes See Rev. H&r block file taxes Rul. H&r block file taxes 2005-46, 2005-2 C. H&r block file taxes B. H&r block file taxes 120, and Rev. H&r block file taxes Rul. H&r block file taxes 75-246, 1975-1 C. H&r block file taxes B. H&r block file taxes 24. H&r block file taxes . H&r block file taxes 14 Under § 451 and § 1. H&r block file taxes 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. H&r block file taxes . H&r block file taxes 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. H&r block file taxes See § 6041(a) and (d) and § 1. H&r block file taxes 6041-1(a)(1) and (b). H&r block file taxes . H&r block file taxes 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. H&r block file taxes See § 6050P(a)-(c) and §§ 1. H&r block file taxes 6050P-1(a) and 1. H&r block file taxes 6050P-2(a) and (d). H&r block file taxes . H&r block file taxes 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. H&r block file taxes These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. H&r block file taxes Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. H&r block file taxes ” . H&r block file taxes 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. H&r block file taxes These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. H&r block file taxes Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. H&r block file taxes SECTION 4. H&r block file taxes FEDERAL INCOME TAX TREATMENT . H&r block file taxes 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. H&r block file taxes See § 1. H&r block file taxes 1001-3. H&r block file taxes At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. H&r block file taxes See also § 61(a)(12) and § 1. H&r block file taxes 61-12(c). H&r block file taxes . H&r block file taxes 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. H&r block file taxes Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. H&r block file taxes Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. H&r block file taxes . H&r block file taxes 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. H&r block file taxes Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. H&r block file taxes . H&r block file taxes 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. H&r block file taxes Therefore, for purposes of § 1. H&r block file taxes 1001-3, the date of the modification is the date of the permanent modification. H&r block file taxes . H&r block file taxes 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. H&r block file taxes 01 of this revenue procedure for the taxable year in which the permanent modification occurs. H&r block file taxes Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. H&r block file taxes The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. H&r block file taxes . H&r block file taxes 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. H&r block file taxes . H&r block file taxes 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. H&r block file taxes This is consistent with Rev. H&r block file taxes Rul. H&r block file taxes 2009-19, 2009-28 I. H&r block file taxes R. H&r block file taxes B. H&r block file taxes 111, which addressed the treatment of Pay-for-Performance Success Payments. H&r block file taxes . H&r block file taxes 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. H&r block file taxes If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. H&r block file taxes . H&r block file taxes 09 As described in section 2. H&r block file taxes 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. H&r block file taxes To the extent that the HAMP-PRA borrower is described in section 4. H&r block file taxes 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. H&r block file taxes To the extent that the HAMP-PRA borrower is described in section 4. H&r block file taxes 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. H&r block file taxes SECTION 5. H&r block file taxes INFORMATION-REPORTING OBLIGATIONS . H&r block file taxes 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. H&r block file taxes A copy of this form is required to be furnished to the borrower. H&r block file taxes . H&r block file taxes 02 As stated in sections 4. H&r block file taxes 01 and 4. H&r block file taxes 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. H&r block file taxes . H&r block file taxes 03 An investor is an applicable entity that is required under § 1. H&r block file taxes 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. H&r block file taxes Under § 1. H&r block file taxes 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. H&r block file taxes Identifiable events determine when Forms 1099-C have to be issued. H&r block file taxes Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. H&r block file taxes This rule under § 1. H&r block file taxes 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. H&r block file taxes . H&r block file taxes 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. H&r block file taxes That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). H&r block file taxes . H&r block file taxes 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. H&r block file taxes 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. H&r block file taxes Under § 6041, these payments are not subject to information reporting. H&r block file taxes See Notice 2011-14, 2011-11 I. H&r block file taxes R. H&r block file taxes B. H&r block file taxes 544, 546. H&r block file taxes . H&r block file taxes 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. H&r block file taxes 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. H&r block file taxes The payment is subject to the information reporting requirements of § 6041, as described in section 3. H&r block file taxes 15 of this revenue procedure. H&r block file taxes Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. H&r block file taxes SECTION 6. H&r block file taxes HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . H&r block file taxes 01 In general. H&r block file taxes The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). H&r block file taxes As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. H&r block file taxes Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. H&r block file taxes A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. H&r block file taxes 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. H&r block file taxes Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. H&r block file taxes 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. H&r block file taxes . H&r block file taxes 02 HAMP-PRA borrower options. H&r block file taxes A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. H&r block file taxes 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. H&r block file taxes If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. H&r block file taxes 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. H&r block file taxes . H&r block file taxes 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. H&r block file taxes (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. H&r block file taxes (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. H&r block file taxes 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. H&r block file taxes 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. H&r block file taxes This section 6. H&r block file taxes 03(2) applies only if the change to reporting the discharge using the method described in section 6. H&r block file taxes 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. H&r block file taxes To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. H&r block file taxes (3) Example. H&r block file taxes The following example illustrates the application of section 6. H&r block file taxes 03(2) of this revenue procedure. H&r block file taxes In 2010, B’s basis in B’s principal residence was $330,000. H&r block file taxes In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. H&r block file taxes B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). H&r block file taxes The trial period plan effective date also fell in 2010. H&r block file taxes B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. H&r block file taxes 02(2) of this revenue procedure. H&r block file taxes That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. H&r block file taxes The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. H&r block file taxes For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. H&r block file taxes 02(1) of this revenue procedure. H&r block file taxes Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. H&r block file taxes 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). H&r block file taxes (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. H&r block file taxes 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. H&r block file taxes 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. H&r block file taxes Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. H&r block file taxes 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. H&r block file taxes Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. H&r block file taxes (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. H&r block file taxes 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. H&r block file taxes The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. H&r block file taxes (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. H&r block file taxes The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). H&r block file taxes The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. H&r block file taxes . H&r block file taxes 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. H&r block file taxes (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. H&r block file taxes Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. H&r block file taxes Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. H&r block file taxes If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. H&r block file taxes (2) A HAMP-PRA borrower who has been using the method described in section 6. H&r block file taxes 02(1) of this revenue procedure may change to the method described in section 6. H&r block file taxes 02(2) but must comply with the consistency and open-year requirements described in section 6. H&r block file taxes 01 of this revenue procedure. H&r block file taxes SECTION 7. H&r block file taxes PENALTY RELIEF FOR 2012 . H&r block file taxes 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. H&r block file taxes 03 through 5. H&r block file taxes 04 and section 8. H&r block file taxes 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. H&r block file taxes 01 through 4. H&r block file taxes 04 of this revenue procedure) that is required to be reported for 2012. H&r block file taxes (2) Not later than March 28, 2013, a statement is sent to the Service. H&r block file taxes It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. H&r block file taxes 01(1) of this revenue procedure. H&r block file taxes The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . H&r block file taxes 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. H&r block file taxes 06 and 8. H&r block file taxes 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. H&r block file taxes . H&r block file taxes 03 Section 8. H&r block file taxes 03 and 8. H&r block file taxes 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. H&r block file taxes SECTION 8. H&r block file taxes SCOPE AND EFFECTIVE DATE . H&r block file taxes 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. H&r block file taxes . H&r block file taxes 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. H&r block file taxes . H&r block file taxes 03 Because of the effective date in section 8. H&r block file taxes 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. H&r block file taxes 03 through 5. H&r block file taxes 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. H&r block file taxes 03 through 5. H&r block file taxes 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. H&r block file taxes . H&r block file taxes 04 Because of the effective date in section 8. H&r block file taxes 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. H&r block file taxes 06 of this revenue procedure. H&r block file taxes SECTION 9. H&r block file taxes DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. H&r block file taxes Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. H&r block file taxes Pflanz and Sheldon A. H&r block file taxes Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. H&r block file taxes Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). H&r block file taxes For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). H&r block file taxes Prev  Up  Next   Home   More Internal Revenue Bulletins
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Fact Sheets 2014

IRS Offers Advice on How to Choose a Tax Preparer
FS-2014-5, February 2014 — Many people hire a professional when it’s time to file their tax return. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. Even if you don’t prepare your own return, you’re still legally responsible for what is on it.

Earned Income Tax Credit; Do I Qualify?
FS-2014-4, January 2014 — The Earned Income Tax Credit (EITC) is a financial boost for people working hard to make ends meet. Millions of workers may qualify for the first time this year due to changes in their marital, parental or financial status.

IRS Criminal Investigation Combats Identity Theft Refund Fraud
FS-2014-3, January 2014 — The IRS has seen a significant increase in refund fraud that involves identity thieves who file false claims for refunds by stealing and using someone's Social Security number. The investigative work done by Criminal Investigation is a major component of the IRS’s efforts to combat tax-related identity theft. 

Tips for Taxpayers, Victims about Identity Theft and Tax Returns
FS-2014-2, January 2014 — Identity theft is one of the fastest growing crimes nationwide, and refund fraud caused by identity theft is one of the biggest challenges facing the IRS. In 2014, the IRS continues to take new steps and strong actions to protect taxpayers and help victims of identity theft and refund fraud.

IRS Combats Identity Theft and Refund Fraud on Many Fronts
FS-2014-1, January 2014 — Stopping identity theft and refund fraud is a top priority for the IRS. The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.

News Release and Fact Sheet Archive
News releases and fact sheets from November 2002 forward and an archive of news releases and fact sheets in PDF format back to 1997.

Page Last Reviewed or Updated: 05-Mar-2014

The H&r Block File Taxes

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