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H&r Block Income Tax

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H&r Block Income Tax

H&r block income tax Publication 4681 - Introductory Material Table of Contents Reminder IntroductionOrdering forms and publications. H&r block income tax Tax questions. H&r block income tax Useful Items - You may want to see: Common Situations Covered In This Publication Reminder Future Developments. H&r block income tax  Information about any future developments affecting Publication 4681 (such as legislation enacted after we release it) will be posted at www. H&r block income tax irs. H&r block income tax gov/pub4681. H&r block income tax Photographs of missing children. H&r block income tax   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. H&r block income tax Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. H&r block income tax You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. H&r block income tax Introduction This publication explains the federal tax treatment of canceled debts, foreclosures, repossessions, and abandonments. H&r block income tax Generally, if you owe a debt to someone else and they cancel or forgive that debt for less than its full amount, you are treated for income tax purposes as having income and may have to pay tax on this income. H&r block income tax Note. H&r block income tax This publication generally refers to debt that is canceled, forgiven, or discharged for less than the full amount of the debt as “canceled debt. H&r block income tax ” Sometimes a debt, or part of a debt, that you do not have to pay is not considered canceled debt. H&r block income tax These exceptions are discussed later under Exceptions . H&r block income tax Sometimes a canceled debt may be excluded from your income. H&r block income tax But if you do exclude canceled debt from income, you may be required to reduce your “tax attributes. H&r block income tax ” These exclusions and the reduction of tax attributes associated with them are discussed later under Exclusions . H&r block income tax Foreclosure and repossession are remedies that your lender may exercise if you fail to make payments on your loan and you have previously granted that lender a mortgage or other security interest in some of your property. H&r block income tax These remedies allow the lender to seize or sell the property securing the loan. H&r block income tax When your property is foreclosed upon or repossessed and sold, you are treated as having sold the property and you may recognize taxable gain. H&r block income tax Whether you also recognize income from canceled debt depends in part on whether you are personally liable for the debt and in part on whether the outstanding loan balance is more than the fair market value (FMV) of the property. H&r block income tax Figuring your gain or loss and income from canceled debt arising from a foreclosure or repossession is discussed later under Foreclosures and Repossessions . H&r block income tax Generally, you abandon property when you voluntarily and permanently give up possession and use of property you own with the intention of ending your ownership but without passing it on to anyone else. H&r block income tax Figuring your gain or loss and income from canceled debt arising from an abandonment is discussed later under Abandonments . H&r block income tax This publication also includes detailed examples with filled-in forms. H&r block income tax Comments and suggestions. H&r block income tax    We welcome your comments about this publication and your suggestions for future editions. H&r block income tax   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. H&r block income tax NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. H&r block income tax Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. H&r block income tax   You can send your comments from www. H&r block income tax irs. H&r block income tax gov/formspubs. H&r block income tax Click on “More Information” and then on “Comment on Tax Forms and Publications”. H&r block income tax   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. H&r block income tax Ordering forms and publications. H&r block income tax    Visit www. H&r block income tax irs. H&r block income tax gov/formspubs to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. H&r block income tax Internal Revenue Service 1201 N. H&r block income tax Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. H&r block income tax    If you have a tax question, check the information available on IRS. H&r block income tax gov or call 1-800-829-1040. H&r block income tax We cannot answer tax questions sent to either of the above addresses. H&r block income tax Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 334 Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) 523 Selling Your Home 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 542 Corporations 544 Sales and Other Dispositions of Assets 551 Basis of Assets 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) 1099-C Cancellation of Debt 1099-DIV Dividends and Distributions 3800 General Business Credit Common Situations Covered In This Publication The sections of this publication that apply to you depend on the type of debt canceled, the tax attributes you have, and whether or not you continue to own the property that was subject to the debt. H&r block income tax Some examples of common circumstances are provided in the following paragraphs to help guide you through this publication. H&r block income tax These examples do not cover every situation but are intended to provide general guidance for the most common situations. H&r block income tax Nonbusiness credit card debt cancellation. H&r block income tax    If you had a nonbusiness credit card debt canceled, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case or you were insolvent immediately before the cancellation. H&r block income tax You should read Bankruptcy or Insolvency under Exclusions in chapter 1 to see if you can exclude the canceled debt from income under one of those provisions. H&r block income tax If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy and Insolvency under Reduction of Tax Attributes in chapter 1. H&r block income tax Personal vehicle repossession. H&r block income tax    If you had a personal vehicle repossessed and disposed of by the lender during the year, you will need to determine your gain or nondeductible loss on the disposition. H&r block income tax This is explained in chapter 2 . H&r block income tax If the lender also canceled all or part of the remaining amount of the loan, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case or you were insolvent immediately before the cancellation. H&r block income tax You should read Bankruptcy or Insolvency under Exclusions in chapter 1 to see if you can exclude the canceled debt from income under one of those provisions. H&r block income tax If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy and Insolvency under Reduction of Tax Attributes in chapter 1. H&r block income tax Main home foreclosure or abandonment. H&r block income tax    If a lender foreclosed on your main home during the year, you will need to determine your gain or loss on the foreclosure. H&r block income tax Foreclosures are explained in chapter 2 and abandonments are explained in chapter 3. H&r block income tax If the lender also canceled all or part of the remaining amount on the mortgage loan and you were personally liable for the debt, you should also read Qualified Principal Residence Indebtedness under Exclusions in chapter 1 to see if you can exclude part or all of the canceled debt from income. H&r block income tax Detailed Example 2 and Example 3 in chapter 4 use filled-in forms to help explain these provisions. H&r block income tax Main home loan modification (workout agreement). H&r block income tax    If a lender agrees to a mortgage loan modification (a “workout”) that includes a reduction in the principal balance of the loan, you should read Qualified Principal Residence Indebtedness under Exclusions in chapter 1 to see if you can exclude part or all of the canceled debt from income. H&r block income tax If you can exclude part or all of the canceled debt from income, you should also read Qualified Principal Residence Indebtedness under Reduction of Tax Attributes in chapter 1. H&r block income tax Detailed Example 1 in chapter 4 uses filled-in forms to help explain the tax implications of a mortgage workout scenario. H&r block income tax Prev  Up  Next   Home   More Online Publications
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The H&r Block Income Tax

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