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Income Tax Preparation

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Income Tax Preparation

Income tax preparation 3. Income tax preparation   Self-Employment Tax Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Must Pay Self-Employment Tax?Employed by a U. Income tax preparation S. Income tax preparation Church Effect of Exclusion Members of the Clergy Income From U. Income tax preparation S. Income tax preparation Possessions Exemption From Social Security and Medicare Taxes Topics - This chapter discusses: Who must pay self-employment tax, and Who is exempt from self-employment tax. Income tax preparation Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 517 Social Security and Other Information for Members of the Clergy and Religious Workers Form (and Instructions) Form 1040-PR Planilla para la Declaración de la Contribución Federal sobre el Trabajo por Cuenta Propia Form 1040-SS U. Income tax preparation S. Income tax preparation Self-Employment Tax Return Form 4361 Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners Schedule SE (Form 1040) Self-Employment Tax See chapter 7 for information about getting these publications and forms. Income tax preparation Who Must Pay Self-Employment Tax? If you are a self-employed U. Income tax preparation S. Income tax preparation citizen or resident, the rules for paying self-employment tax are generally the same whether you are living in the United States or abroad. Income tax preparation The self-employment tax is a social security and Medicare tax on net earnings from self- employment. Income tax preparation You must pay self-employment tax if your net earnings from self-employment are at least $400. Income tax preparation For 2013, the maximum amount of net earnings from self-employment that is subject to the social security portion of the tax is $113,700. Income tax preparation All net earnings are subject to the Medicare portion of the tax. Income tax preparation Employed by a U. Income tax preparation S. Income tax preparation Church If you were employed by a U. Income tax preparation S. Income tax preparation church or a qualified church-controlled organization that chose exemption from social security and Medicare taxes and you received wages of $108. Income tax preparation 28 or more from the organization, the amounts paid to you are subject to self-employment tax. Income tax preparation However, you can choose to be exempt from social security and Medicare taxes if you are a member of a recognized religious sect. Income tax preparation See Publication 517 for more information about church employees and self-employment tax. Income tax preparation Effect of Exclusion You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the foreign earned income exclusion. Income tax preparation Example. Income tax preparation You are in business abroad as a consultant and qualify for the foreign earned income exclusion. Income tax preparation Your foreign earned income is $95,000, your business deductions total $27,000, and your net profit is $68,000. Income tax preparation You must pay self-employment tax on all of your net profit, including the amount you can exclude from income. Income tax preparation Members of the Clergy If you are a member of the clergy, you are treated as self-employed for self-employment tax purposes. Income tax preparation Your U. Income tax preparation S. Income tax preparation self-employment tax is based upon net earnings from self-employment figured without regard to the foreign earned income exclusion or the foreign housing exclusion. Income tax preparation You can receive exemption from coverage for your ministerial duties if you conscientiously oppose public insurance due to religious reasons or if you oppose it due to the religious principles of your denomination. Income tax preparation You must file Form 4361 to apply for this exemption. Income tax preparation This subject is discussed in further detail in Publication 517. Income tax preparation Income From U. Income tax preparation S. Income tax preparation Possessions If you are a U. Income tax preparation S. Income tax preparation citizen or resident alien and you own and operate a business in Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, or the U. Income tax preparation S. Income tax preparation Virgin Islands, you must pay tax on your net earnings from self-employment (if they are $400 or more) from those sources. Income tax preparation You must pay the self-employment tax whether or not the income is exempt from U. Income tax preparation S. Income tax preparation income taxes (or whether or not you otherwise must file a U. Income tax preparation S. Income tax preparation income tax return). Income tax preparation Unless your situation is described below, attach Schedule SE (Form 1040) to your U. Income tax preparation S. Income tax preparation income tax return. Income tax preparation If you do not have to file Form 1040 with the United States and you are a resident of any of the U. Income tax preparation S. Income tax preparation possessions listed in the preceding paragraph, figure your self-employment tax on Form 1040-SS. Income tax preparation Residents of Puerto Rico may file the Spanish-language Formulario 1040-PR. Income tax preparation If you are not enclosing a check or money order, file your return with the: Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215 If you are enclosing a check or money order, file your return with the: Department of the Treasury P. Income tax preparation O. Income tax preparation Box 1303 Charlotte, NC 28201-1303 Exemption From Social Security and Medicare Taxes The United States may reach agreements with foreign countries to eliminate dual coverage and dual contributions (taxes) to social security systems for the same work. Income tax preparation See Bilateral Social Security (Totalization) Agreements in chapter 2 under Social Security and Medicare Taxes. Income tax preparation As a general rule, self-employed persons who are subject to dual taxation will only be covered by the social security system of the country where they reside. Income tax preparation For more information on how any specific agreement affects self-employed persons, contact the United States Social Security Administration, as discussed under Bilateral Social Security (Totalization) Agreements in chapter 2. Income tax preparation If your self-employment earnings should be exempt from foreign social security tax and subject only to U. Income tax preparation S. Income tax preparation self-employment tax, you should request a certificate of coverage from the U. Income tax preparation S. Income tax preparation Social Security Administration, Office of International Programs. Income tax preparation The certificate will establish your exemption from the foreign social security tax. Income tax preparation Send the request to the: Social Security Administration Office of International Programs P. Income tax preparation O. Income tax preparation Box 17741 Baltimore, MD 21235-7741 Prev  Up  Next   Home   More Online Publications
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Utilities

In many states, consumers can choose their telephone and energy service provider. Contact your state utility commission to find out whether you have a choice. Some commissions will provide a list of service providers and advice on making a choice, and most state utility commissions will take any complaints you have concerning utility sales and service.

Starting Utility Service

When you move into a new home or apartment, you may also be required to have the utilities (electricity, gas, water, waste removal, and cable) turned on in your name. Your city or county government may handle some services, such as water, sewer, and garbage collection. If you live in an apartment or are leasing a house from a homeowner, the landlord may handle this for you, but that is not required. If you request service, provide as much advance notice to the utility company as you can, at least one week in advance of the date you need service to start. Also, if you are relocating, don’t forget to have service turned off at your old address. Each company may require you to pay a fee to start service. You may also be required to pay a deposit or allow the company to check your credit to establish service at your home. If any of these companies fails to meet its service requirements, file a complaint with the company; you may be able to get a refund of your installation fee. If that doesn’t work, contact your state’s utility commission.

Billing

Once you have established service, you should start receiving your bills at regular intervals, normally monthly or quarterly. Utility bills are based on the amount of energy or water you actually use. However, if you live in an apartment complex, the amount you pay for some utilities may be prorated or split, based on a mathematical formula, among all of the residents in your community, no matter how energy conscious you are. If the amount of energy varies by season, you may decide to sign up for a budget billing program. These programs allow you to smooth out your monthly payments by paying more in lighter-use months, so your bills are still manageable in months with heavier use. Contact your utility companies to sign up for these programs. To learn ways to save on your energy bill, check with Environmental Protection Agency.
In addition to your actual service, you may have other fees on your bill, such as administrative fees, public surcharges, or local taxes. Contact the service provider if you see charges you don’t understand or didn’t authorize, or if you have difficulty making timely payments.
If you have difficulty paying your bills, especially for electricity or gas, help is available. Contact the company to find out if it has a program in place to help consumers. Also, your state’s utility commission may sponsor a program to either reduce your bill or make your payments based on a set amount of your income each month. Programs like these from utility companies and local government are usually based on your income.

The Income Tax Preparation

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