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Online tax filing 14. Online tax filing   Sale of Property Table of Contents Reminder Introduction Useful Items - You may want to see: Sales and TradesWhat Is a Sale or Trade? How To Figure Gain or Loss Nontaxable Trades Transfers Between Spouses Related Party Transactions Capital Gains and LossesCapital or Ordinary Gain or Loss Capital Assets and Noncapital Assets Holding Period Nonbusiness Bad Debts Wash Sales Rollover of Gain From Publicly Traded Securities Reminder Foreign income. Online tax filing  If you are a U. Online tax filing S. Online tax filing citizen who sells property located outside the United States, you must report all gains and losses from the sale of that property on your tax return unless it is exempt by U. Online tax filing S. Online tax filing law. Online tax filing This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the payer. Online tax filing Introduction This chapter discusses the tax consequences of selling or trading investment property. Online tax filing It explains the following. Online tax filing What a sale or trade is. Online tax filing Figuring gain or loss. Online tax filing Nontaxable trades. Online tax filing Related party transactions. Online tax filing Capital gains or losses. Online tax filing Capital assets and noncapital assets. Online tax filing Holding period. Online tax filing Rollover of gain from publicly traded securities. Online tax filing Other property transactions. Online tax filing   Certain transfers of property are not discussed here. Online tax filing They are discussed in other IRS publications. Online tax filing These include the following. Online tax filing Sales of a main home, covered in chapter 15. Online tax filing Installment sales, covered in Publication 537, Installment Sales. Online tax filing Transactions involving business property, covered in Publication 544, Sales and Other Dispositions of Assets. Online tax filing Dispositions of an interest in a passive activity, covered in Publication 925, Passive Activity and At-Risk Rules. Online tax filing    Publication 550, Investment Income and Expenses (Including Capital Gains and Losses), provides a more detailed discussion about sales and trades of investment property. Online tax filing Publication 550 includes information about the rules covering nonbusiness bad debts, straddles, section 1256 contracts, puts and calls, commodity futures, short sales, and wash sales. Online tax filing It also discusses investment-related expenses. Online tax filing Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 8949 Sales and Other Dispositions of Capital Assets 8824 Like-Kind Exchanges Sales and Trades If you sold property such as stocks, bonds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. Online tax filing Generally, you should receive the statement by February 15 of the next year. Online tax filing It will show the gross proceeds from the sale. Online tax filing If you sold a covered security in 2013, your 1099-B (or substitute statement) will show your basis. Online tax filing Generally, a covered security is a security you acquired after 2010, with certain exceptions. Online tax filing See the Instructions for Form 8949. Online tax filing The IRS will also get a copy of Form 1099-B from the broker. Online tax filing Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. Online tax filing What Is a Sale or Trade? This section explains what is a sale or trade. Online tax filing It also explains certain transactions and events that are treated as sales or trades. Online tax filing A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. Online tax filing A trade is a transfer of property for other property or services and may be taxed in the same way as a sale. Online tax filing Sale and purchase. Online tax filing   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. Online tax filing The sale and purchase are two separate transactions. Online tax filing But see Like-kind exchanges under Nontaxable Trades, later. Online tax filing Redemption of stock. Online tax filing   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. Online tax filing Dividend versus sale or trade. Online tax filing   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Online tax filing Both direct and indirect ownership of stock will be considered. Online tax filing The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend (see chapter 8), There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. Online tax filing Redemption or retirement of bonds. Online tax filing   A redemption or retirement of bonds or notes at their maturity is generally treated as a sale or trade. Online tax filing   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. Online tax filing For details, see Regulations section 1. Online tax filing 1001-3. Online tax filing Surrender of stock. Online tax filing   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. Online tax filing The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Online tax filing Worthless securities. Online tax filing    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. Online tax filing This affects whether your capital loss is long term or short term. Online tax filing See Holding Period , later. Online tax filing   Worthless securities also include securities that you abandon after March 12, 2008. Online tax filing To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Online tax filing 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. Online tax filing    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. Online tax filing Do not deduct them in the year the stock became worthless. Online tax filing How to report loss. Online tax filing    Report worthless securities in Part I or Part II, whichever applies, of Form 8949. Online tax filing In column (a), enter “Worthless. Online tax filing ”    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. Online tax filing See Form 8949 and the Instructions for Form 8949. Online tax filing For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Online tax filing See also Schedule D (Form 1040), Form 8949, and their separate instructions. Online tax filing Filing a claim for refund. Online tax filing   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. Online tax filing You must use Form 1040X, Amended U. Online tax filing S. Online tax filing Individual Income Tax Return, to amend your return for the year the security became worthless. Online tax filing 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. Online tax filing For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. Online tax filing 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. Online tax filing Gain. Online tax filing   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. Online tax filing Loss. Online tax filing   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. Online tax filing Adjusted basis. Online tax filing   The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. Online tax filing See chapter 13 for more information about determining the adjusted basis of property. Online tax filing Amount realized. Online tax filing   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). Online tax filing Amount realized includes the money you receive plus the fair market value of any property or services you receive. Online tax filing If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized. Online tax filing 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. Online tax filing For more information, see Publication 537. Online tax filing Fair market value. Online tax filing   Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Online tax filing Example. Online tax filing 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. Online tax filing Your gain is $3,000 ($10,000 − $7,000). Online tax filing Debt paid off. Online tax filing    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. Online tax filing This is true even if neither you nor the buyer is personally liable for the debt. Online tax filing 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. Online tax filing Example. Online tax filing You sell stock that you had pledged as security for a bank loan of $8,000. Online tax filing Your basis in the stock is $6,000. Online tax filing The buyer pays off your bank loan and pays you $20,000 in cash. Online tax filing The amount realized is $28,000 ($20,000 + $8,000). Online tax filing Your gain is $22,000 ($28,000 − $6,000). Online tax filing Payment of cash. Online tax filing   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Online tax filing Determine your gain or loss by subtracting the cash you pay plus the adjusted basis of the property you trade in from the amount you realize. Online tax filing If the result is a positive number, it is a gain. Online tax filing If the result is a negative number, it is a loss. Online tax filing No gain or loss. Online tax filing   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. Online tax filing In this case, you may have neither a gain nor a loss. Online tax filing See Basis Other Than Cost in chapter 13. Online tax filing Nontaxable Trades This section discusses trades that generally do not result in a taxable gain or deductible loss. Online tax filing For more information on nontaxable trades, see chapter 1 of Publication 544. Online tax filing Like-kind exchanges. Online tax filing   If you trade business or investment property for other business or investment property of a like kind, you do not pay tax on any gain or deduct any loss until you sell or dispose of the property you receive. Online tax filing To be nontaxable, a trade must meet all six of the following conditions. Online tax filing The property must be business or investment property. Online tax filing You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Online tax filing Neither property may be property used for personal purposes, such as your home or family car. Online tax filing The property must not be held primarily for sale. Online tax filing The property you trade and the property you receive must not be property you sell to customers, such as merchandise. Online tax filing The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. Online tax filing However, see Special rules for mutual ditch, reservoir, or irrigation company stock, in chapter 4 of Publication 550 for an exception. Online tax filing Also, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later. Online tax filing There must be a trade of like property. Online tax filing The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. Online tax filing The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. Online tax filing The trade of a piece of machinery for a store building is not a trade of like property. Online tax filing Real property located in the United States and real property located outside the United States are not like property. Online tax filing Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property. Online tax filing The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade. Online tax filing The property to be received must be received by the earlier of: The 180th day after the date on which you transfer the property given up in the trade, or The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs. Online tax filing    If you trade property with a related party in a like-kind exchange, a special rule may apply. Online tax filing See Related Party Transactions , later in this chapter. Online tax filing Also, see chapter 1 of Publication 544 for more information on exchanges of business property and special rules for exchanges using qualified intermediaries or involving multiple properties. Online tax filing Partly nontaxable exchange. Online tax filing   If you receive money or unlike property in addition to like property, and the above six conditions are met, you have a partly nontaxable trade. Online tax filing You are taxed on any gain you realize, but only up to the amount of the money and the fair market value of the unlike property you receive. Online tax filing You cannot deduct a loss. Online tax filing Like property and unlike property transferred. Online tax filing   If you give up unlike property in addition to the like property, you must recognize gain or loss on the unlike property you give up. Online tax filing The gain or loss is the difference between the adjusted basis of the unlike property and its fair market value. Online tax filing Like property and money transferred. Online tax filing   If all of the above conditions (1) – (6) are met, you have a nontaxable trade even if you pay money in addition to the like property. Online tax filing Basis of property received. Online tax filing   To figure the basis of the property received, see Nontaxable Exchanges in chapter 13. Online tax filing How to report. Online tax filing   You must report the trade of like property on Form 8824. Online tax filing If you figure a recognized gain or loss on Form 8824, report it on Schedule D (Form 1040), or on Form 4797, Sales of Business Property, whichever applies. Online tax filing See the instructions for Line 22 in the Instructions for Form 8824. Online tax filing   For information on using Form 4797, see chapter 4 of Publication 544. Online tax filing Corporate stocks. Online tax filing   The following trades of corporate stocks generally do not result in a taxable gain or a deductible loss. Online tax filing Corporate reorganizations. Online tax filing   In some instances, a company will give you common stock for preferred stock, preferred stock for common stock, or stock in one corporation for stock in another corporation. Online tax filing If this is a result of a merger, recapitalization, transfer to a controlled corporation, bankruptcy, corporate division, corporate acquisition, or other corporate reorganization, you do not recognize gain or loss. Online tax filing Stock for stock of the same corporation. Online tax filing   You can exchange common stock for common stock or preferred stock for preferred stock in the same corporation without having a recognized gain or loss. Online tax filing This is true for a trade between two stockholders as well as a trade between a stockholder and the corporation. Online tax filing Convertible stocks and bonds. Online tax filing   You generally will not have a recognized gain or loss if you convert bonds into stock or preferred stock into common stock of the same corporation according to a conversion privilege in the terms of the bond or the preferred stock certificate. Online tax filing Property for stock of a controlled corporation. Online tax filing   If you transfer property to a corporation solely in exchange for stock in that corporation, and immediately after the trade you are in control of the corporation, you ordinarily will not recognize a gain or loss. Online tax filing This rule applies both to individuals and to groups who transfer property to a corporation. Online tax filing It does not apply if the corporation is an investment company. Online tax filing   For this purpose, to be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock of the corporation. Online tax filing   If this provision applies to you, you may have to attach to your return a complete statement of all facts pertinent to the exchange. Online tax filing For details, see Regulations section 1. Online tax filing 351-3. Online tax filing Additional information. Online tax filing   For more information on trades of stock, see Nontaxable Trades in chapter 4 of Publication 550. Online tax filing Insurance policies and annuities. Online tax filing   You will not have a recognized gain or loss if the insured or annuitant is the same under both contracts and you trade: A life insurance contract for another life insurance contract or for an endowment or annuity contract or for a qualified long-term care insurance contract, An endowment contract for another endowment contract that provides for regular payments beginning at a date no later than the beginning date under the old contract or for an annuity contract or for a qualified long-term insurance contract, An annuity contract for annuity contract or for a qualified long-term care insurance contract, or A qualified long-term care insurance contract for a qualified long-term care insurance contract. Online tax filing   You also may not have to recognize gain or loss on an exchange of a portion of an annuity contract for another annuity contract. Online tax filing For transfers completed before October 24, 2011, see Revenue Ruling 2003-76 in Internal Revenue Bulletin 2003-33 and Revenue Procedure 2008-24 in Internal Revenue Bulletin 2008-13. Online tax filing Revenue Ruling 2003-76 is available at www. Online tax filing irs. Online tax filing gov/irb/2003-33_IRB/ar11. Online tax filing html. Online tax filing Revenue Procedure 2008-24 is available at www. Online tax filing irs. Online tax filing gov/irb/2008-13_IRB/ar13. Online tax filing html. Online tax filing For transfers completed on or after October 24, 2011, see Revenue Ruling 2003-76, above, and Revenue Procedure 2011-38, in Internal Revenue Bulletin 2011-30. Online tax filing Revenue Procedure 2011-38 is available at www. Online tax filing irs. Online tax filing gov/irb/2011-30_IRB/ar09. Online tax filing html. Online tax filing   For tax years beginning after December 31, 2010, amounts received as an annuity for a period of 10 years or more, or for the lives of one or more individuals, under any portion of an annuity, endowment, or life insurance contract, are treated as a separate contract and are considered partial annuities. Online tax filing A portion of an annuity, endowment, or life insurance contract may be annuitized, provided that the annuitization period is for 10 years or more or for the lives of one or more individuals. Online tax filing The investment in the contract is allocated between the part of the contract from which amounts are received as an annuity and the part of the contract from which amounts are not received as an annuity. Online tax filing   Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable. Online tax filing Demutualization of life insurance companies. Online tax filing   If you received stock in exchange for your equity interest as a policyholder or an annuitant, you generally will not have a recognized gain or loss. Online tax filing See Demutualization of Life Insurance Companies in Publication 550. Online tax filing U. Online tax filing S. Online tax filing Treasury notes or bonds. Online tax filing   You can trade certain issues of U. Online tax filing S. Online tax filing Treasury obligations for other issues designated by the Secretary of the Treasury, with no gain or loss recognized on the trade. Online tax filing See Savings bonds traded in chapter 1 of Publication 550 for more information. Online tax filing Transfers Between Spouses Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or if incident to a divorce, a former spouse. Online tax filing This nonrecognition rule does not apply in the following situations. Online tax filing The recipient spouse or former spouse is a nonresident alien. Online tax filing Property is transferred in trust and liability exceeds basis. Online tax filing Gain must be recognized to the extent the amount of the liabilities assumed by the trust, plus any liabilities on the property, exceed the adjusted basis of the property. Online tax filing For other situations, see Transfers Between Spouses in chapter 4 of Publication 550. Online tax filing Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is treated by the recipient as a gift and is not considered a sale or exchange. Online tax filing The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Online tax filing This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its fair market value at the time of transfer or any consideration paid by the recipient. Online tax filing This rule applies for purposes of determining loss as well as gain. Online tax filing Any gain recognized on a transfer in trust increases the basis. Online tax filing A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage. Online tax filing Related Party Transactions Special rules apply to the sale or trade of property between related parties. Online tax filing Gain on sale or trade of depreciable property. Online tax filing   Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. Online tax filing See chapter 3 of Publication 544 for more information. Online tax filing Like-kind exchanges. Online tax filing   Generally, if you trade business or investment property for other business or investment property of a like kind, no gain or loss is recognized. Online tax filing See Like-kind exchanges , earlier, under Nontaxable Trades. Online tax filing   This rule also applies to trades of property between related parties, defined next under Losses on sales or trades of property. Online tax filing However, if either you or the related party disposes of the like property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return filed for the year in which the later disposition occurs. Online tax filing See Related Party Transactions in chapter 4 of Publication 550 for exceptions. Online tax filing Losses on sales or trades of property. Online tax filing   You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties. Online tax filing Members of your family. Online tax filing This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. Online tax filing ), and lineal descendants (children, grandchildren, etc. Online tax filing ). Online tax filing A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. Online tax filing A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. Online tax filing (See Constructive ownership of stock , later. Online tax filing ) A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. Online tax filing   In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties. Online tax filing A grantor and fiduciary, or the fiduciary and beneficiary, of any trust. Online tax filing Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Online tax filing A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust. Online tax filing A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership. Online tax filing Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Online tax filing Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Online tax filing An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest). Online tax filing Two corporations that are members of the same controlled group. Online tax filing (Under certain conditions, however, these losses are not disallowed but must be deferred. Online tax filing ) Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profit interests in both partnerships. Online tax filing Multiple property sales or trades. Online tax filing   If you sell or trade to a related party a number of blocks of stock or pieces of property in a lump sum, you must figure the gain or loss separately for each block of stock or piece of property. Online tax filing The gain on each item may be taxable. Online tax filing However, you cannot deduct the loss on any item. Online tax filing Also, you cannot reduce gains from the sales of any of these items by losses on the sales of any of the other items. Online tax filing Indirect transactions. Online tax filing   You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. Online tax filing This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged. Online tax filing Constructive ownership of stock. Online tax filing   In determining whether a person directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Online tax filing Rule 1. Online tax filing   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Online tax filing Rule 2. Online tax filing   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Online tax filing Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Online tax filing Rule 3. Online tax filing   An individual owning, other than by applying rule 2, any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Online tax filing Rule 4. Online tax filing   When applying rule 1, 2, or 3, stock constructively owned by a person under rule 1 is treated as actually owned by that person. Online tax filing But stock constructively owned by an individual under rule 2 or rule 3 is not treated as owned by that individual for again applying either rule 2 or rule 3 to make another person the constructive owner of the stock. Online tax filing Property received from a related party. Online tax filing    If you sell or trade at a gain property you acquired from a related party, you recognize the gain only to the extent it is more than the loss previously disallowed to the related party. Online tax filing This rule applies only if you are the original transferee and you acquired the property by purchase or exchange. Online tax filing This rule does not apply if the related party's loss was disallowed because of the wash sale rules described in chapter 4 of Publication 550 under Wash Sales. Online tax filing   If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party. Online tax filing Example 1. Online tax filing Your brother sells you stock for $7,600. Online tax filing His cost basis is $10,000. Online tax filing Your brother cannot deduct the loss of $2,400. Online tax filing Later, you sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900. Online tax filing Your reportable gain is $500 (the $2,900 gain minus the $2,400 loss not allowed to your brother). Online tax filing Example 2. Online tax filing If, in Example 1, you sold the stock for $6,900 instead of $10,500, your recognized loss is only $700 (your $7,600 basis minus $6,900). Online tax filing You cannot deduct the loss that was not allowed to your brother. Online tax filing Capital Gains and Losses This section discusses the tax treatment of gains and losses from different types of investment transactions. Online tax filing Character of gain or loss. Online tax filing   You need to classify your gains and losses as either ordinary or capital gains or losses. Online tax filing You then need to classify your capital gains and losses as either short term or long term. Online tax filing If you have long-term gains and losses, you must identify your 28% rate gains and losses. Online tax filing If you have a net capital gain, you must also identify any unrecaptured section 1250 gain. Online tax filing   The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. Online tax filing Reporting capital gains and losses is explained in chapter 16. Online tax filing Capital or Ordinary Gain or Loss If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. Online tax filing Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. Online tax filing A sale or trade of a noncapital asset generally results in ordinary gain or loss. Online tax filing Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. Online tax filing In some situations, part of your gain or loss may be a capital gain or loss and part may be an ordinary gain or loss. Online tax filing Capital Assets and Noncapital Assets For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. Online tax filing Some examples are: Stocks or bonds held in your personal account, A house owned and used by you and your family, Household furnishings, A car used for pleasure or commuting, Coin or stamp collections, Gems and jewelry, and Gold, silver, or any other metal. Online tax filing Any property you own is a capital asset, except the following noncapital assets. Online tax filing Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. Online tax filing For an exception, see Capital Asset Treatment for Self-Created Musical Works , later. Online tax filing Depreciable property used in your trade or business, even if fully depreciated. Online tax filing Real property used in your trade or business. Online tax filing A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that is: Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. Online tax filing For an exception to this rule, see Capital Asset Treatment for Self-Created Musical Works , later. Online tax filing Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1). Online tax filing U. Online tax filing S. Online tax filing Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price. Online tax filing Certain commodities derivative financial instruments held by commodities derivatives dealers. Online tax filing Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. Online tax filing Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Online tax filing Investment Property Investment property is a capital asset. Online tax filing Any gain or loss from its sale or trade is generally a capital gain or loss. Online tax filing Gold, silver, stamps, coins, gems, etc. Online tax filing   These are capital assets except when they are held for sale by a dealer. Online tax filing Any gain or loss you have from their sale or trade generally is a capital gain or loss. Online tax filing Stocks, stock rights, and bonds. Online tax filing   All of these (including stock received as a dividend) are capital assets except when held for sale by a securities dealer. Online tax filing However, if you own small business stock, see Losses on Section 1244 (Small Business) Stock , later, and Losses on Small Business Investment Company Stock, in chapter 4 of Publication 550. Online tax filing Personal Use Property Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. Online tax filing However, you cannot deduct a loss from selling personal use property. Online tax filing Capital Asset Treatment for Self-Created Musical Works You can elect to treat musical compositions and copyrights in musical works as capital assets when you sell or exchange them if: Your personal efforts created the property, or You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. Online tax filing You must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. Online tax filing You must make the election on or before the due date (including extensions) of the income tax return for the tax year of the sale or exchange. Online tax filing You must make the election on Form 8949 by treating the sale or exchange as the sale or exchange of a capital asset, according to Form 8949, Schedule D (Form 1040), and their separate instructions. Online tax filing For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Online tax filing See also Schedule D (Form 1040), Form 8949, and their separate instructions. Online tax filing You can revoke the election if you have IRS approval. Online tax filing To get IRS approval, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. Online tax filing See, for example, Rev. Online tax filing Proc. Online tax filing 2013-1, corrected by Announcement 2013–9, and amplified and modified by Rev. Online tax filing Proc. Online tax filing 2013–32, available at www. Online tax filing irs. Online tax filing gov/irb/2013-01_IRB/ar06. Online tax filing html. Online tax filing Alternatively, you are granted an automatic 6-month extension from the due date of your income tax return (excluding extensions) to revoke the election, provided you timely file your income tax return, and within this 6-month extension period, you file Form 1040X that treats the sale or exchange as the sale or exchange of property that is not a capital asset. Online tax filing Discounted Debt Instruments Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions. Online tax filing Short-term government obligations. Online tax filing   Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. Online tax filing This treatment applies to obligations with a fixed maturity date not more than 1 year from the date of issue. Online tax filing Acquisition discount is the stated redemption price at maturity minus your basis in the obligation. Online tax filing   However, do not treat these gains as income to the extent you previously included the discount in income. Online tax filing See Discount on Short-Term Obligations in chapter 1 of Publication 550. Online tax filing Short-term nongovernment obligations. Online tax filing   Treat gains on short-term nongovernment obligations as ordinary income up to your ratable share of original issue discount (OID). Online tax filing This treatment applies to obligations with a fixed maturity date of not more than 1 year from the date of issue. Online tax filing   However, to the extent you previously included the discount in income, you do not have to include it in income again. Online tax filing See Discount on Short-Term Obligations in chapter 1 of Publication 550. Online tax filing Tax-exempt state and local government bonds. Online tax filing   If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of OID as tax-exempt interest. Online tax filing To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID. Online tax filing   If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. Online tax filing For more information on the basis of these bonds, see Discounted Debt Instruments in chapter 4 of Publication 550. Online tax filing   Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. Online tax filing If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. Online tax filing If you bought the bonds after April 30, 1993, the gain is ordinary income. Online tax filing   You figure the market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. Online tax filing For more information, see Market Discount Bonds in chapter 1 of Publication 550. Online tax filing    A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss. Online tax filing Redeemed before maturity. Online tax filing   If a state or local bond issued before June 9, 1980, is redeemed before it matures, the OID is not taxable to you. Online tax filing   If a state or local bond issued after June 8, 1980, is redeemed before it matures, the part of OID earned while you hold the bond is not taxable to you. Online tax filing However, you must report the unearned part of OID as a capital gain. Online tax filing Example. Online tax filing On July 2, 2002, the date of issue, you bought a 20-year, 6% municipal bond for $800. Online tax filing The face amount of the bond was $1,000. Online tax filing The $200 discount was OID. Online tax filing At the time the bond was issued, the issuer had no intention of redeeming it before it matured. Online tax filing The bond was callable at its face amount beginning 10 years after the issue date. Online tax filing The issuer redeemed the bond at the end of 11 years (July 2, 2013) for its face amount of $1,000 plus accrued annual interest of $60. Online tax filing The OID earned during the time you held the bond, $73, is not taxable. Online tax filing The $60 accrued annual interest also is not taxable. Online tax filing However, you must report the unearned part of OID ($127) as a capital gain. Online tax filing Long-term debt instruments issued after 1954 and before May 28, 1969 (or before July 2, 1982, if a government instrument). Online tax filing   If you sell, trade, or redeem for a gain one of these debt instruments, the part of your gain that is not more than your ratable share of the OID at the time of the sale or redemption is ordinary income. Online tax filing The rest of the gain is capital gain. Online tax filing If, however, there was an intention to call the debt instrument before maturity, all of your gain that is not more than the entire OID is treated as ordinary income at the time of the sale. Online tax filing This treatment of taxable gain also applies to corporate instruments issued after May 27, 1969, under a written commitment that was binding on May 27, 1969, and at all times thereafter. Online tax filing Long-term debt instruments issued after May 27, 1969 (or after July 1, 1982, if a government instrument). Online tax filing   If you hold one of these debt instruments, you must include a part of OID in your gross income each year you own the instrument. Online tax filing Your basis in that debt instrument is increased by the amount of OID that you have included in your gross income. Online tax filing See Original Issue Discount (OID) in chapter 7 for information about OID that you must report on your tax return. Online tax filing   If you sell or trade the debt instrument before maturity, your gain is a capital gain. Online tax filing However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. Online tax filing In this case, the rest of the gain is capital gain. Online tax filing Market discount bonds. Online tax filing   If the debt instrument has market discount and you chose to include the discount in income as it accrued, increase your basis in the debt instrument by the accrued discount to figure capital gain or loss on its disposition. Online tax filing If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. Online tax filing The rest of the gain is capital gain. Online tax filing See Market Discount Bonds in chapter 1 of Publication 550. Online tax filing   A different rule applies to market discount bonds issued before July 19, 1984, and purchased by you before May 1, 1993. Online tax filing See Market discount bonds under Discounted Debt Instruments in chapter 4 of Publication 550. Online tax filing Retirement of debt instrument. Online tax filing   Any amount you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument. Online tax filing Notes of individuals. Online tax filing   If you hold an obligation of an individual issued with OID after March 1, 1984, you generally must include the OID in your income currently, and your gain or loss on its sale or retirement is generally capital gain or loss. Online tax filing An exception to this treatment applies if the obligation is a loan between individuals and all the following requirements are met. Online tax filing The lender is not in the business of lending money. Online tax filing The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or less. Online tax filing Avoiding federal tax is not one of the principal purposes of the loan. Online tax filing   If the exception applies, or the obligation was issued before March 2, 1984, you do not include the OID in your income currently. Online tax filing When you sell or redeem the obligation, the part of your gain that is not more than your accrued share of OID at that time is ordinary income. Online tax filing The rest of the gain, if any, is capital gain. Online tax filing Any loss on the sale or redemption is capital loss. Online tax filing Deposit in Insolvent or Bankrupt Financial Institution If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways. Online tax filing Ordinary loss. Online tax filing Casualty loss. Online tax filing Nonbusiness bad debt (short-term capital loss). Online tax filing  For more information, see Deposit in Insolvent or Bankrupt Financial Institution, in chapter 4 of Publication 550. Online tax filing Sale of Annuity The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income. Online tax filing Losses on Section 1244 (Small Business) Stock You can deduct as an ordinary loss, rather than as a capital loss, your loss on the sale, trade, or worthlessness of section 1244 stock. Online tax filing Report the loss on Form 4797, line 10. Online tax filing Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. Online tax filing Report the gain on Form 8949. Online tax filing See Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Online tax filing For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Online tax filing See also Schedule D (Form 1040), Form 8949, and their separate instructions. Online tax filing Holding Period If you sold or traded investment property, you must determine your holding period for the property. Online tax filing Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss. Online tax filing Long-term or short-term. Online tax filing   If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. Online tax filing If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. Online tax filing   To determine how long you held the investment property, begin counting on the date after the day you acquired the property. Online tax filing The day you disposed of the property is part of your holding period. Online tax filing Example. Online tax filing If you bought investment property on February 6, 2012, and sold it on February 6, 2013, your holding period is not more than 1 year and you have a short-term capital gain or loss. Online tax filing If you sold it on February 7, 2013, your holding period is more than 1 year and you will have a long-term capital gain or loss. Online tax filing Securities traded on established market. Online tax filing   For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them. Online tax filing    Do not confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be made. Online tax filing Example. Online tax filing You are a cash method, calendar year taxpayer. Online tax filing You sold stock at a gain on December 30, 2013. Online tax filing According to the rules of the stock exchange, the sale was closed by delivery of the stock 4 trading days after the sale, on January 6, 2014. Online tax filing You received payment of the sales price on that same day. Online tax filing Report your gain on your 2013 return, even though you received the payment in 2014. Online tax filing The gain is long term or short term depending on whether you held the stock more than 1 year. Online tax filing Your holding period ended on December 30. Online tax filing If you had sold the stock at a loss, you would also report it on your 2013 return. Online tax filing U. Online tax filing S. Online tax filing Treasury notes and bonds. Online tax filing   The holding period of U. Online tax filing S. Online tax filing Treasury notes and bonds sold at auction on the basis of yield starts the day after the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. Online tax filing The holding period of U. Online tax filing S. Online tax filing Treasury notes and bonds sold through an offering on a subscription basis at a specified yield starts the day after the subscription is submitted. Online tax filing Automatic investment service. Online tax filing   In determining your holding period for shares bought by the bank or other agent, full shares are considered bought first and any fractional shares are considered bought last. Online tax filing Your holding period starts on the day after the bank's purchase date. Online tax filing If a share was bought over more than one purchase date, your holding period for that share is a split holding period. Online tax filing A part of the share is considered to have been bought on each date that stock was bought by the bank with the proceeds of available funds. Online tax filing Nontaxable trades. Online tax filing   If you acquire investment property in a trade for other investment property and your basis for the new property is determined, in whole or in part, by your basis in the old property, your holding period for the new property begins on the day following the date you acquired the old property. Online tax filing Property received as a gift. Online tax filing   If you receive a gift of property and your basis is determined by the donor's adjusted basis, your holding period is considered to have started on the same day the donor's holding period started. Online tax filing   If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift. Online tax filing Inherited property. Online tax filing   Generally, if you inherited investment property, your capital gain or loss on any later disposition of that property is long-term capital gain or loss. Online tax filing This is true regardless of how long you actually held the property. Online tax filing However, if you inherited property from someone who died in 2010, see the information below. Online tax filing Inherited property from someone who died in 2010. Online tax filing   If you inherit investment property from a decedent who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your holding period. Online tax filing Real property bought. Online tax filing   To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. Online tax filing However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. Online tax filing The holding period cannot start until there is an actual contract of sale. Online tax filing The holding period of the seller cannot end before that time. Online tax filing Real property repossessed. Online tax filing   If you sell real property but keep a security interest in it, and then later repossess the property under the terms of the sales contract, your holding period for a later sale includes the period you held the property before the original sale and the period after the repossession. Online tax filing Your holding period does not include the time between the original sale and the repossession. Online tax filing That is, it does not include the period during which the first buyer held the property. Online tax filing Stock dividends. Online tax filing   The holding period for stock you received as a taxable stock dividend begins on the date of distribution. Online tax filing   The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. Online tax filing This rule also applies to stock acquired in a “spin-off,” which is a distribution of stock or securities in a controlled corporation. Online tax filing Nontaxable stock rights. Online tax filing   Your holding period for nontaxable stock rights begins on the same day as the holding period of the underlying stock. Online tax filing The holding period for stock acquired through the exercise of stock rights begins on the date the right was exercised. Online tax filing Nonbusiness Bad Debts If someone owes you money that you cannot collect, you have a bad debt. Online tax filing You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless. Online tax filing Generally, nonbusiness bad debts are bad debts that did not come from operating your trade or business, and are deductible as short-term capital losses. Online tax filing To be deductible, nonbusiness bad debts must be totally worthless. Online tax filing You cannot deduct a partly worthless nonbusiness debt. Online tax filing Genuine debt required. Online tax filing   A debt must be genuine for you to deduct a loss. Online tax filing A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. Online tax filing Basis in bad debt required. Online tax filing    To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. Online tax filing For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. Online tax filing If you are a cash method taxpayer (as most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items. Online tax filing When deductible. Online tax filing   You can take a bad debt deduction only in the year the debt becomes worthless. Online tax filing You do not have to wait until a debt is due to determine whether it is worthless. Online tax filing A debt becomes worthless when there is no longer any chance that the amount owed will be paid. Online tax filing   It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Online tax filing You must only show that you have taken reasonable steps to collect the debt. Online tax filing Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Online tax filing How to report bad debts. Online tax filing    Deduct nonbusiness bad debts as short-term capital losses on Form 8949. Online tax filing    Make sure you report your bad debt(s) (and any other short-term transactions for which you did not receive a Form 1099-B) on Form 8949, Part I, with box C checked. Online tax filing    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. Online tax filing See also Schedule D (Form 1040), Form 8949, and their separate instructions. Online tax filing   For each bad debt, attach a statement to your return that contains: A description of the debt, including the amount, and the date it became due, The name of the debtor, and any business or family relationship between you and the debtor, The efforts you made to collect the debt, and Why you decided the debt was worthless. Online tax filing For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt. Online tax filing Filing a claim for refund. Online tax filing    If you do not deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. Online tax filing To do this, use Form 1040X to amend your return for the year the debt became worthless. Online tax filing 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. Online tax filing For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. Online tax filing Additional information. Online tax filing   For more information, see Nonbusiness Bad Debts in Publication 550. Online tax filing For information on business bad debts, see chapter 10 of Publication 535, Business Expenses. Online tax filing Wash Sales You cannot deduct losses from sales or trades of stock or securities in a wash sale. Online tax filing A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. Online tax filing If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). Online tax filing The result is your basis in the new stock or securities. Online tax filing This adjustment postpones the loss deduction until the disposition of the new stock or securities. Online tax filing Your holding period for the new stock or securities includes the holding period of the stock or securities sold. Online tax filing For more information, see Wash Sales, in chapter 4 of Publication 550. Online tax filing Rollover of Gain From Publicly Traded Securities You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. Online tax filing This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain. Online tax filing You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement property , later. Online tax filing This postpones your gain until the year you dispose of the replacement property. Online tax filing You qualify to make this choice if you meet all the following tests. Online tax filing You sell publicly traded securities at a gain. Online tax filing Publicly traded securities are securities traded on an established securities market. Online tax filing Your gain from the sale is a capital gain. Online tax filing During the 60-day period beginning on the date of the sale, you buy replacement property. Online tax filing This replacement property must be either common stock of, or a partnership interest in a specialized small business investment company (SSBIC). Online tax filing This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993. Online tax filing Amount of gain recognized. Online tax filing   If you make the choice described in this section, you must recognize gain only up to the following amount. Online tax filing The amount realized on the sale, minus The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of publicly traded securities). Online tax filing  If this amount is less than the amount of your gain, you can postpone the rest of your gain, subject to the limit described next. Online tax filing If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain. Online tax filing Limit on gain postponed. Online tax filing   The amount of gain you can postpone each year is limited to the smaller of: $50,000 ($25,000 if you are married and file a separate return), or $500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier years. Online tax filing Basis of replacement property. Online tax filing   You must subtract the amount of postponed gain from the basis of your replacement property. Online tax filing How to report and postpone gain. Online tax filing    See How to report and postpone gain under Rollover of Gain From Publicly Traded Securities in chapter 4 of Publication 550 for details. 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Online tax filing 5. Online tax filing   Recordkeeping Table of Contents How To Prove ExpensesWhat Are Adequate Records? What If I Have Incomplete Records? Separating and Combining Expenses How Long To Keep Records and Receipts Examples of Records If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove (substantiate) certain elements of expense. Online tax filing This chapter discusses the records you need to keep to prove these expenses. Online tax filing If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined. Online tax filing You will also have proof of expenses that your employer may require if you are reimbursed under an accountable plan. Online tax filing These plans are discussed in chapter 6 under Reimbursements . Online tax filing How To Prove Expenses Table 5-1 is a summary of records you need to prove each expense discussed in this publication. Online tax filing You must be able to prove the elements listed across the top portion of the chart. Online tax filing You prove them by having the information and receipts (where needed) for the expenses listed in the first column. Online tax filing You cannot deduct amounts that you approximate or estimate. Online tax filing You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. Online tax filing You must generally prepare a written record for it to be considered adequate. Online tax filing This is because written evidence is more reliable than oral evidence alone. Online tax filing However, if you prepare a record on a computer, it is considered an adequate record. Online tax filing What Are Adequate Records? You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. Online tax filing You should also keep documentary evidence that, together with your record, will support each element of an expense. Online tax filing Documentary evidence. Online tax filing   You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Online tax filing Exception. Online tax filing   Documentary evidence is not needed if any of the following conditions apply. Online tax filing You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging. Online tax filing ( Accountable plans and per diem allowances are discussed in chapter 6. Online tax filing ) Your expense, other than lodging, is less than $75. Online tax filing You have a transportation expense for which a receipt is not readily available. Online tax filing Adequate evidence. Online tax filing   Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. Online tax filing   For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information. Online tax filing The name and location of the hotel. Online tax filing The dates you stayed there. Online tax filing Separate amounts for charges such as lodging, meals, and telephone calls. Online tax filing   A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information. Online tax filing The name and location of the restaurant. Online tax filing The number of people served. Online tax filing The date and amount of the expense. Online tax filing If a charge is made for items other than food and beverages, the receipt must show that this is the case. Online tax filing Canceled check. Online tax filing   A canceled check, together with a bill from the payee, ordinarily establishes the cost. Online tax filing However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose. Online tax filing Duplicate information. Online tax filing   You do not have to record information in your account book or other record that duplicates information shown on a receipt as long as your records and receipts complement each other in an orderly manner. Online tax filing   You do not have to record amounts your employer pays directly for any ticket or other travel item. Online tax filing However, if you charge these items to your employer, through a credit card or otherwise, you must keep a record of the amounts you spend. Online tax filing Timely-kept records. Online tax filing   You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. Online tax filing A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. Online tax filing   You do not need to write down the elements of every expense on the day of the expense. Online tax filing If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record. Online tax filing   If you give your employer, client, or customer an expense account statement, it can also be considered a timely-kept record. Online tax filing This is true if you copy it from your account book, diary, log, statement of expense, trip sheets, or similar record. Online tax filing Proving business purpose. Online tax filing   You must generally provide a written statement of the business purpose of an expense. Online tax filing However, the degree of proof varies according to the circumstances in each case. Online tax filing If the business purpose of an expense is clear from the surrounding circumstances, then you do not need to give a written explanation. Online tax filing Example. Online tax filing If you are a sales representative who calls on customers on an established sales route, you do not have to give a written explanation of the business purpose for traveling that route. Online tax filing You can satisfy the requirements by recording the length of the delivery route once, the date of each trip at or near the time of the trips, and the total miles you drove the car during the tax year. Online tax filing You could also establish the date of each trip with a receipt, record of delivery, or other documentary evidence. Online tax filing Confidential information. Online tax filing   You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. Online tax filing However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense. Online tax filing What If I Have Incomplete Records? If you do not have complete records to prove an element of an expense, then you must prove the element with: Your own written or oral statement containing specific information about the element, and Other supporting evidence that is sufficient to establish the element. Online tax filing If the element is the description of a gift, or the cost, time, place, or date of an expense, the supporting evidence must be either direct evidence or documentary evidence. Online tax filing Direct evidence can be written statements or the oral testimony of your guests or other witnesses setting forth detailed information about the element. Online tax filing Documentary evidence can be receipts, paid bills, or similar evidence. Online tax filing If the element is either the business relationship of your guests or the business purpose of the amount spent, the supporting evidence can be circumstantial rather than direct. Online tax filing For example, the nature of your work, such as making deliveries, provides circumstantial evidence of the use of your car for business purposes. Online tax filing Invoices of deliveries establish when you used the car for business. Online tax filing Table 5-1. Online tax filing How To Prove Certain Business Expenses IF you have expenses for . Online tax filing . Online tax filing THEN you must keep records that show details of the following elements . Online tax filing . Online tax filing . Online tax filing   Amount Time Place or  Description Business Purpose Business Relationship Travel Cost of each separate expense for travel, lodging, and meals. Online tax filing Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. Online tax filing Dates you left and returned for each trip and number of days spent on business. Online tax filing Destination or area of your travel (name of city, town, or other designation). Online tax filing Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Online tax filing    Relationship: N/A Entertainment Cost of each separate expense. Online tax filing Incidental expenses such as taxis, telephones, etc. Online tax filing , may be totaled on a daily basis. Online tax filing Date of entertainment. Online tax filing (Also see Business Purpose. Online tax filing ) Name and address or location of place of entertainment. Online tax filing Type of entertainment if not otherwise apparent. Online tax filing (Also see Business Purpose. Online tax filing ) Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Online tax filing  For entertainment, the nature of the business discussion or activity. Online tax filing If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity. Online tax filing    Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. Online tax filing  For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. Online tax filing Gifts Cost of the gift. Online tax filing Date of the gift. Online tax filing Description of the gift. Online tax filing   Transportation Cost of each separate expense. Online tax filing For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. Online tax filing Date of the expense. Online tax filing For car expenses, the date of the use of the car. Online tax filing Your business destination. Online tax filing Purpose: Business purpose for the expense. Online tax filing    Relationship: N/A Sampling. Online tax filing   You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. Online tax filing You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year. Online tax filing Example. Online tax filing You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. Online tax filing There is no other business use of the car, but you and your family use the car for personal purposes. Online tax filing You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Online tax filing Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Online tax filing Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year. Online tax filing Exceptional circumstances. Online tax filing   You can satisfy the substantiation requirements with other evidence if, because of the nature of the situation in which an expense is made, you cannot get a receipt. Online tax filing This applies if all the following are true. Online tax filing You were unable to obtain evidence for an element of the expense or use that completely satisfies the requirements explained earlier under What Are Adequate Records . Online tax filing You are unable to obtain evidence for an element that completely satisfies the two rules listed earlier under What If I Have Incomplete Records . Online tax filing You have presented other evidence for the element that is the best proof possible under the circumstances. Online tax filing Destroyed records. Online tax filing   If you cannot produce a receipt because of reasons beyond your control, you can prove a deduction by reconstructing your records or expenses. Online tax filing Reasons beyond your control include fire, flood, and other casualties. Online tax filing    Table 5-2. Online tax filing Daily Business Mileage and Expense Log Name:       Odometer Readings Expenses Date Destination  (City, Town, or Area) Business Purpose Start Stop Miles  this trip Type  (Gas, oil, tolls, etc. Online tax filing ) Amount                                                                                                                   Weekly  Total             Total Year-to-Date             Separating and Combining Expenses This section explains when expenses must be kept separate and when expenses can be combined. Online tax filing Separating expenses. Online tax filing   Each separate payment is generally considered a separate expense. Online tax filing For example, if you entertain a customer or client at dinner and then go to the theater, the dinner expense and the cost of the theater tickets are two separate expenses. Online tax filing You must record them separately in your records. Online tax filing Season or series tickets. Online tax filing   If you buy season or series tickets for business use, you must treat each ticket in the series as a separate item. Online tax filing To determine the cost of individual tickets, divide the total cost (but not more than face value) by the number of games or performances in the series. Online tax filing You must keep records to show whether you use each ticket as a gift or entertainment. Online tax filing Also, you must be able to prove the cost of nonluxury box seat tickets if you rent a skybox or other private luxury box for more than one event. Online tax filing See Entertainment tickets in chapter 2. Online tax filing Combining items. Online tax filing   You can make one daily entry in your record for reasonable categories of expenses. Online tax filing Examples are taxi fares, telephone calls, or other incidental travel costs. Online tax filing Meals should be in a separate category. Online tax filing You can include tips for meal-related services with the costs of the meals. Online tax filing   Expenses of a similar nature occurring during the course of a single event are considered a single expense. Online tax filing For example, if during entertainment at a cocktail lounge, you pay separately for each serving of refreshments, the total expense for the refreshments is treated as a single expense. Online tax filing Car expenses. Online tax filing   You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record. Online tax filing Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use. Online tax filing Example. Online tax filing You make deliveries at several different locations on a route that begins and ends at your employer's business premises and that includes a stop at the business premises between two deliveries. Online tax filing You can account for these using a single record of miles driven. Online tax filing Gift expenses. Online tax filing   You do not always have to record the name of each recipient of a gift. Online tax filing A general listing will be enough if it is evident that you are not trying to avoid the $25 annual limit on the amount you can deduct for gifts to any one person. Online tax filing For example, if you buy a large number of tickets to local high school basketball games and give one or two tickets to each of many customers, it is usually enough to record a general description of the recipients. Online tax filing Allocating total cost. Online tax filing   If you can prove the total cost of travel or entertainment but you cannot prove how much it cost for each person who participated in the event, you may have to allocate the total cost among you and your guests on a pro rata basis. Online tax filing To do so, you must establish the number of persons who participated in the event. Online tax filing   An allocation would be needed, for example, if you did not have a business relationship with all of your guests. Online tax filing See Allocating between business and nonbusiness in chapter 2. Online tax filing If your return is examined. Online tax filing    If your return is examined, you may have to provide additional information to the IRS. Online tax filing This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed. Online tax filing    THIS IS NOT AN OFFICIAL INTERNAL REVENUE FORM Table 5-3. Online tax filing Weekly Traveling Expense and Entertainment Record From: To: Name: Expenses Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total 1. Online tax filing Travel Expenses: Airlines                                 Excess Baggage                                 Bus – Train                                 Cab and Limousine                                 Tips                                 Porter                                 2. Online tax filing Meals and Lodging:  Breakfast                                 Lunch                                 Dinner                                 Hotel and Motel  (Detail in Schedule B)                                 3. Online tax filing Entertainment  (Detail in Schedule C)                                 4. Online tax filing Other Expenses:  Postage                                 Telephone & Telegraph                                 Stationery & Printing                                 Stenographer                                 Sample Room                                 Advertising                                 Assistant(s)                                 Trade Shows                                 5. Online tax filing Car Expenses: (List all car expenses - the division between business and personal expenses may be made at the end of the year. Online tax filing ) (Detail mileage in Schedule A. Online tax filing ) Gas, oil, lube, wash                                 Repairs, parts                                 Tires, supplies                                 Parking fees, tolls                                 6. Online tax filing Other (Identify)                                 Total                                 Note: Attach receipted bills for (1) ALL lodging and (2) any other expenses of $75. Online tax filing 00 or more. Online tax filing Schedule A – Car Mileage: End                 Start                 Total                 Business Mileage                 Schedule B – Lodging Hotel or Motel Name                 City                 Schedule C – Entertainment Date Item Place Amount Business Purpose Business Relationship                                             WEEKLY REIMBURSEMENTS:     Travel and transportation expenses     Other reimbursements     TOTAL   How Long To Keep Records and Receipts You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Online tax filing Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file the income tax return on which the deduction is claimed. Online tax filing A return filed early is considered filed on the due date. Online tax filing For a more complete explanation of how long to keep records, see Publication 583, Starting a Business and Keeping Records. Online tax filing You must keep records of the business use of your car for each year of the recovery period. Online tax filing See More-than-50%-use test in chapter 4 under Depreciation Deduction. Online tax filing Reimbursed for expenses. Online tax filing   Employees who give their records and documentation to their employers and are reimbursed for their expenses generally do not have to keep copies of this information. Online tax filing However, you may have to prove your expenses if any of the following conditions apply. Online tax filing You claim deductions for expenses that are more than reimbursements. Online tax filing Your expenses are reimbursed under a nonaccountable plan. Online tax filing Your employer does not use adequate accounting procedures to verify expense accounts. Online tax filing You are related to your employer as defined under Per Diem and Car Allowances , in chapter 6. Online tax filing Reimbursements , adequate accounting , and nonaccountable plans are discussed in chapter 6. Online tax filing Examples of Records Table 5-2 and Table 5-3 are examples of worksheets which can be used for tracking business expenses. Online tax filing Prev  Up  Next   Home   More Online Publications