2023 Publication 550

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Department of the Treasury

Internal Revenue Service

Publication 550

Cat. No. 15093R

Investment

Income and

Expenses

(Including Capital

Gains and Losses)

For use in preparing

2023 Returns

Get forms and other information faster and easier at:

• IRS.gov (English)

• IRS.gov/Spanish (Español)

•

IRS.gov/Chinese (中文)

•

IRS.gov/Korean (한국어)

• IRS.gov/Russian (Pусский)

• IRS.gov/Vietnamese (Tiếng Việt)

Contents

Future Developments ....................... 1

Reminders ............................... 2

Introduction .............................. 2

Chapter 1. Investment Income ............... 2

General Information ...................... 3

Interest Income .......................... 6

Discount on Debt Instruments .............. 18

When To Report Interest Income ............ 23

How To Report Interest Income ............. 24

Dividends and Other Distributions ........... 27

How To Report Dividend Income ............ 33

Stripped Preferred Stock .................. 35

REMICs, FASITs, and Other CDOs ........... 36

S Corporations ......................... 38

Investment Clubs ....................... 38

Chapter 2. Tax Shelters and Other Reportable

Transactions .......................... 39

Abusive Tax Shelters ..................... 40

Chapter 3. Investment Expenses ............ 44

Limits on Deductions .................... 45

Interest Expenses ....................... 45

Bond Premium Amortization ............... 49

Nondeductible Interest Expenses ............ 50

How To Report Investment Interest Expenses ... 51

When To Report Investment Expenses ........ 52

Chapter 4. Sales and Trades of

Investment Property .................... 52

What Is a Sale or Trade? .................. 53

Basis of Investment Property ............... 58

How To Figure Gain or Loss ................ 65

Nontaxable Trades ...................... 67

Transfers Between Spouses ............... 71

Related Party Transactions ................ 71

Capital Gains and Losses ................. 73

Reporting Capital Gains and Losses ......... 97

Special Rules for Traders in Securities or

Commodities ....................... 102

Chapter 5. How To Get Tax Help ............ 103

Index ................................. 111

Future Developments

For the latest information about developments related to

Pub. 550, such as legislation enacted after it was

published, go to IRS.gov/Pub550.

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Reminders

Foreign source income. If you are a U.S. citizen with in-

vestment income from sources outside the United States

(foreign income), you must report that income on your tax

return unless it is exempt by U.S. law. This is true whether

you reside inside or outside the United States and

whether or not you receive a Form 1099 from the foreign

payer.

Employee stock options. If you received an option to

buy or sell stock or other property as payment for your

services, see Pub. 525, Taxable and Nontaxable Income,

for the special tax rules that apply.

Disaster relief. Relief is available for those affected by

some disasters. See IRS.gov/DisasterTaxRelief.

Photographs of missing children. The Internal Reve-

nue Service is a proud partner with the National Center for

Missing & Exploited Children® (NCMEC). Photographs of

missing children selected by the Center may appear in

this publication on pages that would otherwise be blank.

You can help bring these children home by looking at the

photographs and calling 800-THE-LOST (800-843-5678)

if you recognize a child.

Introduction

This publication provides information on the tax treatment

of investment income and expenses. It includes informa-

tion on the tax treatment of investment income and expen-

ses for individual shareholders of mutual funds or other

regulated investment companies, such as money market

funds. It explains what investment income is taxable and

what investment expenses are deductible. It explains

when and how to show these items on your tax return. It

also explains how to determine and report gains and los-

ses on the disposition of investment property and provides

information on property trades and tax shelters.

The glossary at the end of this publication defines

many of the terms used.

Investment income. This generally includes interest,

dividends, capital gains, and other types of distributions

including mutual fund distributions.

Investment expenses. These include interest paid or in-

curred to acquire investment property and expenses to

manage or collect income from investment property.

Qualified retirement plans and IRAs. The rules in this

publication do not apply to investments held in individual

retirement arrangements (IRAs), section 401(k) plans, and

other qualified retirement plans. The tax rules that apply to

retirement plan distributions are explained in the following

publications.

•

Pub. 560, Retirement Plans for Small Business.

•

Pub. 571, Tax-Sheltered Annuity Plans.

TIP

•

Pub. 575, Pension and Annuity Income.

•

Pub. 590-A, Contributions to Individual Retirement Ar-

rangements (IRAs).

•

Pub. 590-B, Distributions from Individual Retirement

Arrangements (IRAs).

•

Pub. 721, Tax Guide to U.S. Civil Service Retirement

Benefits.

Comments and suggestions. We welcome your com-

ments about this publication and suggestions for future

editions.

You can send us comments through IRS.gov/

FormComments. Or, you can write to the Internal Revenue

Service, Tax Forms and Publications, 1111 Constitution

Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each com-

ment received, we do appreciate your feedback and will

consider your comments and suggestions as we revise

our tax forms, instructions, and publications. Don’t send

tax questions, tax returns, or payments to the above ad-

dress.

Getting answers to your tax questions. If you have

a tax question not answered by this publication or the How

To Get Tax Help section at the end of this publication, go

to the IRS Interactive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the search

feature or viewing the categories listed.

Getting tax forms, instructions, and publications.

Go to IRS.gov/Forms to download current and prior-year

forms, instructions, and publications.

Ordering tax forms, instructions, and publications.

Go to IRS.gov/OrderForms to order current forms, instruc-

tions, and publications; call 800-829-3676 to order

prior-year forms and instructions. The IRS will process

your order for forms and publications as soon as possible.

Don’t resubmit requests you’ve already sent us. You can

get forms and publications faster online.

Investment Income

Topics

This chapter discusses:

•

Interest Income,

•

Discount on Debt Instruments,

•

When To Report Interest Income,

•

How To Report Interest Income,

•

Dividends and Other Distributions,

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•

How To Report Dividend Income,

•

Stripped Preferred Stock,

•

Real estate mortgage investment conduits (REMICs),

financial asset securitization investment trusts

(FASITs), and other collateralized debt obligations

(CDOs),

•

S Corporations, and

•

Investment Clubs.

Useful Items

You may want to see:

Publication

525 Taxable and Nontaxable Income

537 Installment Sales

590-B Distributions from Individual Retirement

Arrangements (IRAs)

925 Passive Activity and At-Risk Rules

1212 Guide to Original Issue Discount (OID)

Instruments

Form (and Instructions)

Schedule B (Form 1040) Interest and Ordinary

Dividends

Schedule D (Form 1040) Capital Gains and Losses

1040 U.S. Individual Income Tax Return

1040-SR U.S. Income Tax Return for Seniors

1099 General Instructions for Certain Information

Returns

2439 Notice to Shareholder of Undistributed

Long-Term Capital Gains

3115 Application for Change in Accounting Method

6251 Alternative Minimum Tax — Individuals

8582 Passive Activity Loss Limitations

8615 Tax for Certain Children Who Have Unearned

Income

8814 Parents' Election To Report Child's Interest and

Dividends

8815 Exclusion of Interest From Series EE and I U.S.

Savings Bonds Issued After 1989

8818 Optional Form To Record Redemption of

Series EE and I U.S. Savings Bonds Issued

After 1989

8824 Like-Kind Exchanges

8949 Sales and Other Dispositions of Capital Assets

8960 Net Investment Income Tax—Individuals,

Estates, and Trusts

See chapter 5, How To Get Tax Help, for information about

getting these publications and forms.

525

537

590-B

925

1212

Schedule B (Form 1040)

Schedule D (Form 1040)

1040

1040-SR

1099

2439

3115

6251

8582

8615

8814

8815

8818

8824

8949

8960

General Information

A few items of general interest are covered here.

Recordkeeping. You should keep a list of the

sources and investment income amounts you re-

ceive during the year. Also, keep the forms you re-

ceive showing your investment income (Forms 1099-INT,

Interest Income, and 1099-DIV, Dividends and Distribu-

tions, for example) as an important part of your records.

Net investment income tax (NIIT). You may be subject

to the NIIT. The NIIT is a 3.8% tax on the lesser of your net

investment income or the amount of your modified adjus-

ted gross income (MAGI) that is over a threshold amount

based on your filing status.

Filing Status Threshold Amount

Married filing jointly $250,000

Married filing separately $125,000

Single $200,000

Head of household (with qualifying

person)

$200,000

Qualifying surviving spouse with

dependent child

$250,000

For more information, see Form 8960, Net Investment

Income Tax—Individuals, Estates, and Trusts, and the In-

structions for Form 8960.

Tax on unearned income of certain children. Gener-

ally, a child must file Form 8615 if the child:

1. has more than $2,500 of unearned income;

2. is required to file a tax return;

3. meets certain age/earned-income/self-support

threshold;

4. has at least one parent alive at the end of the year;

and

5. doesn’t file a joint return for the year.

See Form 8615 and its instructions for details.

However, the parent can choose to include the child's

interest and dividends on the parent's return if certain re-

quirements are met. Use Form 8814, Parents’ Election To

Report Child’s Interest and Dividends, for this purpose.

For more information about the tax on unearned in-

come of children and the parents' election, see Pub. 929,

Tax Rules for Children and Dependents.

Beneficiary of an estate or trust. Interest, dividends,

and other investment income you receive as a beneficiary

of an estate or trust generally is taxable income. You

should receive a Schedule K-1 (Form 1041), Beneficiary's

Share of Income, Deductions, Credits, etc., from the fidu-

ciary. Your copy of Schedule K-1 (Form 1041) and its in-

structions will tell you where to report the income on your

Form 1040 or 1040-SR.

RECORDS

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Taxpayer Identification Number (TIN). You must give

your name and TIN (either a social security number

(SSN), an employer identification number (EIN), or an in-

dividual tax identification number (ITIN)) to any person re-

quired by federal tax law to make a return, statement, or

other document that relates to you. This includes payers

of interest and dividends. If you do not give your TIN to the

payer, you may have to pay a penalty. In addition, if you do

not provide a certified TIN on Form W-9, Request for Tax-

payer Identification Number and Certification, the payer

must backup withhold on your interest payments at a rate

of 24%. Use Form W-9 to provide the necessary informa-

tion. See Form W-9 and its instructions.

TIN for joint account. Generally, if the funds in a joint

account belong to one person, list that person's name first

on the account and give that person's TIN to the payer.

(For information on who owns the funds in a joint account,

see Joint accounts, later.) If the joint account contains

combined funds, give the TIN of the person whose name

is listed first on the account. This is because only one

name and TIN can be shown on Form 1099.

These rules apply both to joint ownership by a married

couple and to joint ownership by other individuals. For ex-

ample, if you open a joint savings account with your child

using funds belonging to the child, list the child's name

first on the account and give the child's TIN.

Form W-9 and its instructions provide: If this Form W-9

is for a joint account (other than an account maintained by

a foreign financial institution (FFI)), list first, and then cir-

cle, the name of the person or entity whose number you

entered in Part I of Form W-9. If you are providing Form

W-9 to an FFI to document a joint account, each holder of

the account that is a U.S. person must provide a Form

W-9. See Form W-9 and its instructions.

Custodian account for your child. If your child is the

actual owner of an account that is recorded in your name

as custodian for the child, give the child's TIN to the payer.

For example, you must give your child's SSN to the payer

of dividends on stock owned by your child, even though

the dividends are paid to you as custodian.

Penalty for failure to supply TIN. You may be sub-

ject to a penalty if, when required, you fail to:

•

Include your TIN on any return, statement, or other

document;

•

Give your TIN to another person who must include it

on any return, statement, or other document; or

•

Include the TIN of another person on any return, state-

ment, or other document.

The penalty is $50 for each failure up to a maximum pen-

alty of $100,000 for any calendar year.

This penalty may be abated if you can show that your

failure to provide the TIN was due to reasonable cause

and not to willful neglect.

If you fail to supply a TIN in the manner required, you

also may be subject to backup withholding.

Backup withholding. Your investment income generally

is not subject to regular withholding. However, it may be

subject to backup withholding to ensure that income tax is

collected on the income. The bank, broker, or other payer

of interest, original issue discount (OID), dividends, cash

patronage dividends, or royalties must withhold income

tax on these reportable payments at a rate of 24% under

backup withholding.

Backup withholding applies if:

1. You do not give the payer your TIN in the required

manner;

2. The IRS notifies the payer that you gave an incorrect

TIN;

3. The IRS notifies the payer that you are subject to

backup withholding on interest or dividends because

you underreported interest or dividends on your in-

come tax return; or

4. You are required, but fail, to certify that you are not

subject to backup withholding for the reason descri-

bed in (3).

Certification. For new accounts paying interest or div-

idends, you must certify under penalties of perjury that

your TIN is correct and that you are not subject to backup

withholding. Your payer will give you a Form W-9, Request

for Taxpayer Identification Number and Certification, or

similar form, to make this certification. If you fail to make

this certification, backup withholding may begin immedi-

ately on your new account or investment.

Underreported interest and dividends. You will be

considered to have underreported your interest and divi-

dends if the IRS has determined for a tax year that:

•

You failed to include any part of a reportable interest or

dividend payment required to be shown on your re-

turn, or

•

You were required to file a return and to include a re-

portable interest or dividend payment on that return,

but you failed to file the return.

How to stop backup withholding due to underre-

porting. If you have been notified that you underreported

interest or dividends, you can request a determination

from the IRS to prevent backup withholding from starting

or to stop backup withholding once it has begun. You must

show that at least one of the following situations applies.

•

No underreporting occurred.

•

You have a bona fide dispute with the IRS about

whether underreporting occurred.

•

Backup withholding will cause or is causing an undue

hardship, and it is unlikely that you will underreport in-

terest and dividends in the future.

•

You have corrected the underreporting by filing a re-

turn if you did not previously file one and by paying all

taxes, penalties, and interest due for any underrepor-

ted interest or dividend payments.

If the IRS determines that backup withholding should

stop, it will provide you with a certification and will notify

the payers who were sent notices earlier.

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How to stop backup withholding due to an incor-

rect TIN. If the IRS notifies a payer that your TIN is incor-

rect, the payer must contact you and ask you to provide

your correct TIN. Follow the instructions provided by the

payer to prevent or stop backup withholding.

Reporting backup withholding. If backup withhold-

ing is deducted from your interest or dividend income or

other reportable payment, the bank or other business

must give you an information return for the year (for exam-

ple, a Form 1099-INT) indicating the amount withheld. The

information return will show any backup withholding as

“Federal income tax withheld.”

Nonresident aliens. Generally, payments made to

nonresident aliens are not subject to backup withholding.

You can use Form W-8BEN, Certificate of Foreign Status

of Beneficial Owner for United States Tax Withholding and

Reporting (Individuals), to certify exempt status. However,

this does not exempt you from the 30% (or lower treaty)

withholding rate that may apply to your investment in-

come. For information on the 30% rate, see Pub. 519, U.S.

Tax Guide for Aliens.

Penalties. There are civil and criminal penalties for

giving false information to avoid backup withholding. The

civil penalty is $500. The criminal penalty, upon convic-

tion, is a fine of up to $1,000, or imprisonment of up to 1

year, or both.

Where to report investment income. Table 1-1 gives

an overview of the forms and schedules to use to report

some common types of investment income. But see the

rest of this publication for detailed information about re-

porting investment income.

Joint accounts. If two or more persons hold property

(such as a savings account, bond, or stock) as joint ten-

ants, tenants by the entirety, or tenants in common, each

person's share of any interest or dividends from the prop-

erty is determined by local law.

Community property states. If you are married and re-

ceive a distribution that is community income, half of the

distribution generally is considered to be received by each

spouse. If you file separate returns, you must each report

one-half of any taxable distribution. See Pub. 555, Com-

munity Property, for more information on community in-

come.

If the distribution is not considered community property

and you and your spouse file separate returns, each of

you must report your separate taxable distributions.

Example. You and your spouse have a joint money

market account. Under state law, half the income from the

account belongs to you, and half belongs to your spouse.

If you file separate returns, you each report half the in-

come.

Income from property given to a child. Property you

give as a parent to your child under the Model Gifts of Se-

curities to Minors Act, the Uniform Gifts to Minors Act, or

any similar law becomes the child's property.

Income from the property is taxable to the child, except

that any part used to satisfy a legal obligation to support

the child is taxable to the parent or guardian having that

legal obligation.

Savings account with parent as trustee. Interest in-

come from a savings account opened for a minor child,

but placed in the name and subject to the order of the pa-

rents as trustees, is taxable to the child if, under the law of

the state in which the child resides, both of the following

are true.

•

The savings account legally belongs to the child.

•

The parents are not legally permitted to use any of the

funds to support the child.

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Where To Report Common Types of Investment Income

(For detailed information about reporting investment income, see the rest of this publication, especially How

To Report Interest Income and How To Report Dividend Income in chapter 1.)

Table 1-1.

Type of Income If you file Form 1040 or 1040-SR, report on ...

Tax-exempt interest Line 2a (See the instructions there.)

Taxable interest Line 2b (See the instructions there.)

Savings bond interest you will exclude because of higher

education expenses

Schedule B; also use Form 8815

Qualified dividends Line 3a (See the instructions there.)

Ordinary dividends Line 3b (See the instructions there.)

Capital gain distributions Line 7, or, if required, Schedule D, line 13. (See the instructions

of Form 1040 or 1040-SR.)

Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b,

2c, or 2d)

Form 8949 and Schedule D

Nondividend distributions (Form 1099-DIV, box 3) Generally not reported

Undistributed capital gains (Form 2439, boxes 1a–1d) Schedule D

Gain or loss from sales of stocks or bonds Line 7; also use Form 8949, Schedule D, and the Qualified

Dividends and Capital Gain Tax Worksheet or the Schedule D

Tax Worksheet

Gain or loss from exchanges of like-kind investment property Line 7; also use Schedule D, Form 8824, and the Qualified

Dividends and Capital Gain Tax Worksheet or the Schedule D

Tax Worksheet

Accuracy-related penalty. An accuracy-related penalty

of 20% can be charged for underpayments of tax due to

negligence or disregard of rules or regulations or substan-

tial understatement of tax. For information on the penalty

and any interest that applies, see Penalties in chapter 2.

Interest Income

Terms you may need to know

(see Glossary):

Accrual method

Below-market loan

Cash method

Demand loan

Forgone interest

Gift loan

Interest

Mutual fund

Nominee

Original issue discount

Private activity bond

Term loan

This section discusses the tax treatment of different types

of interest income.

In general, any interest that you receive or that is credi-

ted to your account and can be withdrawn is taxable in-

come. Exceptions to this rule are discussed later.

Form 1099-INT. Interest income generally is reported to

you on Form 1099-INT, or a similar statement, by banks,

savings and loan associations, and other payers of inter-

est. This form shows you the interest you received during

the year. Keep this form for your records. You do not have

to attach it to your tax return.

Report on your tax return the total interest income you

receive for the tax year. See the Instructions for Recipient

of Form 1099-INT to see whether you need to adjust any

of the amounts reported to you.

Interest not reported on Form 1099-INT. Even if you

do not receive a Form 1099-INT, you must still report all of

your interest income. For example, you may receive dis-

tributive shares of interest from partnerships or S corpora-

tions. This interest is reported to you on Schedule K-1

(Form 1065), Partner's Share of Income, Deductions,

Credits, etc., and Schedule K-1 (Form 1120S), Sharehold-

er's Share of Income, Deductions, Credits, etc.

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Nominees. Generally, if someone receives interest as

a nominee for you, that person must give you a Form

1099-INT showing the interest received on your behalf.

If you receive a Form 1099-INT and interest as a nomi-

nee for another person, see the discussion on Nominee

distributions, later.

Incorrect amount. If you receive a Form 1099-INT

that shows an incorrect amount (or other incorrect infor-

mation), you should ask the issuer for a corrected form.

The new Form 1099-INT you receive should be denoted

“Corrected.”

Form 1099-OID. Reportable interest income also may be

shown on Form 1099-OID, Original Issue Discount. For

more information about amounts shown on this form, see

Original Issue Discount (OID), later in this chapter.

Exempt-interest dividends. Form 1099-DIV, box 12,

shows exempt-interest dividends from a mutual fund or

other regulated investment company paid to you during

the calendar year. See the Instructions for Form 1040 or

1040-SR for where to report.

Form 1099-DIV, box 13, shows exempt-interest divi-

dends subject to the alternative minimum tax (AMT). This

amount is included in box 12. See the Instructions for

Form 6251.

Interest on VA dividends. Interest on insurance divi-

dends left on deposit with the Department of Veterans Af-

fairs (VA) is not taxable. This includes interest paid on divi-

dends on converted United States Government Life

Insurance policies and on National Service Life Insurance

policies.

Individual retirement arrangements (IRAs). Interest

on a Roth IRA generally is not taxable. Interest on a tradi-

tional IRA is tax deferred. You generally do not include it in

your income until you make withdrawals from the IRA. See

Pub. 590-B for more information.

Taxable Interest—General

Taxable interest includes interest you receive from bank

accounts, loans you make to others, and other sources.

The following are some sources of taxable interest.

Dividends that are actually interest. Certain distribu-

tions commonly called dividends are actually interest. You

must report as interest so-called “dividends” on deposits

or on share accounts in:

•

Cooperative banks,

•

Credit unions,

•

Domestic building and loan associations,

•

Domestic savings and loan associations,

•

Federal savings and loan associations, and

•

Mutual savings banks.

The “dividends” will be shown as interest income on Form

1099-INT.

Money market funds. Money market funds are offered

by nonbank financial institutions such as mutual funds and

stock brokerage houses, and pay dividends. Generally,

amounts you receive from money market funds should be

reported as dividends, not as interest.

Certificates of deposit and other deferred interest ac-

counts. If you buy a certificate of deposit or open a defer-

red interest account, interest may be paid at fixed intervals

of 1 year or less during the term of the account. You gen-

erally must include this interest in your income when you

actually receive it or are entitled to receive it without pay-

ing a substantial penalty. The same is true for accounts

that mature in 1 year or less and pay interest in a single

payment at maturity. If interest is deferred for more than 1

year, see Original Issue Discount (OID), later.

Interest subject to penalty for early withdrawal. If

you withdraw funds from a deferred interest account be-

fore maturity, you may have to pay a penalty. You must re-

port the total amount of interest paid or credited to your

account during the year without subtracting the penalty.

See Penalty on early withdrawal of savings, later, for more

information on how to report the interest and deduct the

penalty.

Money borrowed to invest in certificate of deposit.

The interest you pay on money borrowed from a bank or

savings institution to meet the minimum deposit required

for a certificate of deposit from the institution and the inter-

est you earn on the certificate are two separate items. You

must report the total interest you earn on the certificate in

your income. If you itemize deductions, you can deduct

the interest you pay as investment interest, up to the

amount of your net investment income. See Interest Ex-

penses in chapter 3.

Example. You purchase a $10,000 certificate of de-

posit by borrowing $5,000 from the bank and adding an

additional $5,000 of your funds. The certificate earned

$575 at maturity in 2023, but you received only $265,

which represented the $575 you earned minus $310 inter-

est charged on your $5,000 loan. The bank gives you a

Form 1099-INT for 2023 showing the $575 interest you

earned. The bank also gives you a statement showing that

you paid $310 interest for 2023. You must include the

$575 in your income. If you itemize your deductions on

Schedule A (Form 1040), Itemized Deductions, you can

deduct $310, subject to the net investment income limit.

Gift for opening account. If you receive noncash gifts or

services for making deposits or for opening an account in

a savings institution, the value may be reported to you as

interest income on Form 1099-INT and you may have to

report it on your tax return.

For deposits of less than $5,000, gifts or services val-

ued at more than $10 must be reported as interest. For

deposits of $5,000 or more, gifts or services valued at

more than $20 must be reported as interest. The value is

determined by the cost to the financial institution.

Example. You open a savings account at your local

bank and deposit $800. The account earns $20 interest.

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You also receive a $15 calculator. If no other interest is

credited to your account during the year, the Form

1099-INT you receive will show $35 interest for the year.

You must report $35 interest income on your tax return.

Interest on insurance dividends. Interest on insurance

dividends left on deposit with an insurance company that

can be withdrawn annually is taxable to you in the year it is

credited to your account. However, if you can withdraw it

only on the anniversary date of the policy (or other speci-

fied date), the interest is taxable in the year that date oc-

curs.

Prepaid insurance premiums. Any increase in the value

of prepaid insurance premiums, advance premiums, or

premium deposit funds is interest if it is applied to the pay-

ment of premiums due on insurance policies or made

available for you to withdraw.

U.S. obligations. Interest on U.S. obligations, such as

U.S. Treasury bills, notes, and bonds, and obligations is-

sued by any agency or instrumentality of the United States

is taxable for federal income tax purposes.

Interest on tax refunds. Interest you receive on tax re-

funds is taxable income.

Interest on condemnation award. If the condemning

authority pays you interest to compensate you for a delay

in payment of an award, the interest is taxable.

Installment sale payments. If a contract for the sale or

exchange of property provides for deferred payments, it

also usually provides for interest payable with the deferred

payments. Generally, that interest is taxable when you re-

ceive it. If little or no interest is provided for in a deferred

payment contract, part of each payment may be treated as

interest. See Unstated Interest and Original Issue Dis-

count (OID) in Pub. 537.

Interest on annuity contract. Accumulated interest on

an annuity contract you sell before its maturity date is tax-

able.

Usurious interest. Usurious interest is interest charged

at an illegal rate. This is taxable as interest unless state

law automatically changes it to a payment on the principal.

Interest income on frozen deposits. Exclude from your

gross income interest on frozen deposits. A deposit is fro-

zen if, at the end of the year, you cannot withdraw any part

of the deposit because:

•

The financial institution is bankrupt or insolvent, or

•

The state in which the institution is located has placed

limits on withdrawals because other financial institu-

tions in the state are, or may become, bankrupt or in-

solvent.

The amount of interest you must exclude is the interest

that was credited on the frozen deposits minus the sum of:

•

The net amount you withdrew from these deposits

during the year, and

•

The amount you could have withdrawn as of the end

of the year (not reduced by any penalty for premature

withdrawals of a time deposit).

If you receive a Form 1099-INT for interest income on de-

posits that were frozen at the end of 2023, see Frozen de-

posits, later, for information about reporting this interest in-

come exclusion on your tax return.

The interest you exclude is treated as credited to your

account in the following year. You must include it in in-

come in the year you can withdraw it.

Example. $100 of interest was credited on your frozen

deposit during the year. You withdrew $80 but could not

withdraw any more as of the end of the year. You must in-

clude $80 in your income and exclude $20 from your in-

come for the year. You must include the $20 in your in-

come for the year you can withdraw it.

Bonds traded flat. If you buy a bond at a discount when

interest has been defaulted or when the interest has ac-

crued but has not been paid, the transaction is described

as trading a bond flat. The defaulted or unpaid interest is

not income and is not taxable as interest if paid later.

When you receive a payment of that interest, it is a return

of capital that reduces the remaining cost basis of your

bond. Interest that accrues after the date of purchase,

however, is taxable interest income for the year received

or accrued. See Bonds Sold Between Interest Dates, later

in this chapter.

Below-Market Loans

Generally, a “below-market loan” means any loan if (a) in

the case of a demand loan, interest is payable on the loan

at a rate less than the applicable federal rate, or (b) in the

case of a term loan, the amount loaned exceeds the

present value (using a discount rate equal to the applica-

ble federal rate) of all payments due under the loan. (See

Code section 7872 for details.) Section 7872 may con-

sider the borrower to pay the lender any forgone interest

and the lender to pay that foregone interest to the bor-

rower. (See Code section 7872.) Thus, the lender may be

compelled to recognize that foregone interest as income

and the borrower may be able to deduct that foregone in-

terest as an expense if the loan proceeds are used for

business or investment. The nature of the forgone interest

that section 7872 considers the lender to return to the bor-

rower depends on the relationship between lender and

borrower. It may be considered a gift, an investment, com-

pensation, etc. (See Code section 7872 for details.)

Loans subject to the rules. The rules for below-market

loans apply to:

•

Gift loans,

•

Compensation-related loans,

•

Corporation-shareholder loans,

•

Tax avoidance loans, and

•

Certain loans made to qualified continuing care facili-

ties under a continuing care contract.

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A compensation-related loan is any below-market loan

between an employer and an employee or between an in-

dependent contractor and a person for whom the contrac-

tor provides services.

A tax avoidance loan is any below-market loan where

the avoidance of federal tax is one of the main purposes of

the interest arrangement.

Forgone interest. For any period, forgone interest is:

•

The amount of interest that would be payable for that

period if interest accrued on the loan at the applicable

federal rate and was payable annually on December

31, minus

•

Any interest actually payable on the loan for the pe-

riod.

Applicable federal rate. Applicable federal rates are

published by the IRS each month in the Internal Revenue

Bulletin. The Internal Revenue Bulletin is available through

IRS.gov/IRB. You also can find applicable federal rates in

the Index of Applicable Federal Rates (AFR) Rulings at

https://irs.gov/applicable-federal-rates.

See chapter 5, How To Get Tax Help, for other ways to

get this information.

Rules for below-market loans. The rules that apply to a

below-market loan depend on whether the loan is a gift

loan, demand loan, or term loan.

Gift and demand loans. A gift loan is any below-mar-

ket loan where the forgone interest is in the nature of a gift.

A demand loan is a loan payable in full at any time upon

demand by the lender. A demand loan is a below-market

loan if no interest is charged or if interest is charged at a

rate below the applicable federal rate.

A demand loan or gift loan that is a below-market loan

generally is treated as an arm's-length transaction in

which the lender is treated as having made:

•

A loan to the borrower in exchange for a note that re-

quires the payment of interest at the applicable federal

rate, and

•

An additional payment to the borrower in an amount

equal to the forgone interest.

The borrower generally is treated as transferring the addi-

tional payment back to the lender as interest. The lender

must report that amount as interest income.

The lender's additional payment to the borrower is trea-

ted as a gift, dividend, contribution to capital, pay for serv-

ices, or other payment, depending on the substance of the

transaction. The borrower may have to report this payment

as taxable income, depending on its classification.

These transfers are considered to occur annually, gen-

erally on December 31.

Term loans. A term loan is any loan that is not a de-

mand loan. A term loan is a below-market loan if the

amount of the loan is more than the present value of all

payments due under the loan.

A lender who makes a below-market term loan other

than a gift loan is treated as transferring an additional

lump-sum cash payment to the borrower (as a dividend,

contribution to capital, etc.) on the date the loan is made.

The amount of this payment is the amount of the loan mi-

nus the present value, at the applicable federal rate, of all

payments due under the loan. An equal amount is treated

as original issue discount (OID). The lender must report

the annual part of the OID as interest income. The bor-

rower may be able to deduct the OID as interest expense.

See Original Issue Discount (OID), later.

Exceptions to the below-market loan rules. Excep-

tions to the below-market loan rules are discussed here.

Exception for loans of $10,000 or less. The rules for

below-market loans do not apply to any day on which the

total outstanding amount of loans between the borrower

and lender is $10,000 or less. This exception applies only

to:

1. Gift loans between individuals if the gift loan is not di-

rectly used to buy or carry income-producing assets,

and

2. Compensation-related loans or corporation-share-

holder loans if the avoidance of federal tax is not a

principal purpose of the interest arrangement.

This exception does not apply to term loans. The gen-

eral below-market loan rules will continue to apply even if

the outstanding balance is reduced to $10,000 or less.

Exception for loans to continuing care facilities.

Loans to qualified continuing care facilities under continu-

ing care contracts are not subject to the rules for be-

low-market loans for the calendar year if the lender or the

lender's spouse is age 65 or older at the end of the year.

For the definitions of qualified continuing care facility and

continuing care contract, see Internal Revenue Code

7872(g)(4) and (h).

Exception for loans without significant tax effect.

Loans are excluded from the below-market loan rules if

their interest arrangements do not have a significant effect

on the federal tax liability of the borrower or the lender.

These loans include:

1. Loans made available by the lender to the general

public on the same terms and conditions that are con-

sistent with the lender's customary business practice;

2. Loans subsidized by a federal, state, or municipal

government that are made available under a program

of general application to the public;

3. Certain employee-relocation loans;

4. Certain loans to or from a foreign person;

5. Gift loans to a charitable organization, contributions to

which are deductible, if the total outstanding amount

of loans between the organization and lender is

$250,000 or less at all times during the tax year; and

6. Other loans on which the interest arrangement can be

shown to have no significant effect on the federal tax

liability of the lender or the borrower.

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For a loan described in (6) above, all the facts and cir-

cumstances are used to determine if the interest arrange-

ment has a significant effect on the federal tax liability of

the lender or borrower. Some factors to be considered

are:

•

Whether items of income and deduction generated by

the loan offset each other;

•

The amount of these items;

•

The cost to you of complying with the below-market

loan rules, if they were to apply; and

•

Any reasons other than taxes for structuring the trans-

action as a below-market loan.

If you structure a transaction to meet this exception and

one of the principal purposes of that structure is the avoid-

ance of federal tax, the loan will be considered a

tax-avoidance loan, and this exception will not apply.

Limit on forgone interest for gift loans of $100,000

or less. For gift loans between individuals, if the out-

standing loans between the lender and borrower total

$100,000 or less, the forgone interest to be included in in-

come by the lender and deducted by the borrower is limi-

ted to the amount of the borrower's net investment income

for the year. If the borrower's net investment income is

$1,000 or less, it is treated as zero. This limit does not ap-

ply to a loan if the avoidance of federal tax is one of the

main purposes of the interest arrangement.

U.S. Savings Bonds

This section provides tax information on U.S. savings

bonds. It explains how to report the interest income on

these bonds and how to treat transfers of these bonds.

U.S. savings bonds currently offered to individuals in-

clude Series EE bonds and Series I bonds.

For information about U.S. savings bonds, go to

www.treasurydirect.gov/savings-bonds/. Also, go

to www.treasurydirect.gov/contact-us/ and click

on a topic to find answers to your questions by email.

If you prefer, write to:

Treasury Retail Securities Services

P.O. Box 9150

Minneapolis, MN 55480-9150

Accrual method taxpayers. If you use an accrual

method of accounting, you must report interest on U.S.

savings bonds each year as it accrues. You cannot post-

pone reporting interest until you receive it or until the

bonds mature.

Cash method taxpayers. If you use the cash method of

accounting, as most individual taxpayers do, you generally

report the interest on U.S. savings bonds when you re-

ceive it. But see Reporting options for cash method tax-

payers, later.

Series H and HH bonds. These bonds were issued at

face value in exchange for other savings bonds.

Series HH bonds were issued between 1980 and 2004.

They mature 20 years after issue. Series HH bonds that

have not matured pay interest twice a year, usually by di-

rect deposit to your bank account. If you are a cash

method taxpayer, you must report this interest as income

in the year you receive it.

Series H bonds were issued before 1980. All Series H

bonds have matured and are no longer earning interest.

In addition to the twice-a-year interest payments, most

H/HH bonds also have a deferred interest component.

Series EE and Series I bonds. Interest on these bonds

is payable when you redeem the bonds. The difference

between the purchase price and the redemption value is

taxable interest.

Series E and EE bonds. Series E bonds were issued

before 1980. All Series E bonds have matured and are no

longer earning interest. Series EE bonds were first offered

in January 1980 and have a maturity period of 30 years;

they were offered in paper (definitive) form until 2012. Pa-

per Series EE and Series E bonds were issued at a dis-

count and increase in value as they earn interest. Elec-

tronic (book-entry) Series EE bonds were first offered in

2003; they are issued at face value and increase in value

as they earn interest. For all Series E and Series EE

bonds, the purchase price plus all accrued interest is pay-

able to you at redemption.

Series I bonds. Series I bonds were first offered in

1998. These are inflation-indexed bonds issued at face

value with a maturity period of 30 years. Series I bonds in-

crease in value as they earn interest. The face value plus

all accrued interest is payable to you at redemption.

Reporting options for cash method taxpayers. If

you use the cash method of reporting income, you can re-

port the interest on Series EE, Series E, and Series I

bonds in either of the following ways.

1. Method 1. Postpone reporting the interest until the

earlier of the year you cash or dispose of the bonds or

the year in which they mature. (However, see Savings

bonds traded, later.)

Note. Series EE bonds issued in 1993 matured in

2023. If you have used method 1, you generally must

report the interest on these bonds on your 2023 re-

turn.

2. Method 2. Choose to report the increase in redemp-

tion value as interest each year.

You must use the same method for all Series EE and Ser-

ies I bonds you own. If you do not choose method 2 by re-

porting the increase in redemption value as interest each

year, you must use method 1.

If you plan to cash your bonds in the same year

you will pay for higher education expenses, you

may want to use method 1 because you may be

able to exclude the interest from your income. To learn

how, see Education Savings Bond Program, later.

TIP

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Change from method 1. If you want to change your

method of reporting the interest from method 1 to method

2, you can do so without permission from the IRS. In the

year of change, you must report all interest accrued to

date and not previously reported for all your bonds.

Once you choose to report the interest each year, you

must continue to do so for all Series EE, Series E, and

Series I bonds you own and for any you get later, unless

you request permission to change, as explained next.

Change from method 2. To change from method 2 to

method 1, you must request permission from the IRS. Per-

mission for the change is automatically granted if you

send the IRS a statement that meets all the following re-

quirements.

1. You have typed or printed the following number at the

top: “131.”

2. It includes your name and social security number un-

der “131.”

3. It includes the year of change (both the beginning and

ending dates).

4. It identifies the savings bonds for which you are re-

questing this change.

5. It includes your agreement to:

a. Report all interest on any bonds acquired during

or after the year of change when the interest is re-

alized upon disposition, redemption, or final ma-

turity, whichever is earliest; and

b. Report all interest on the bonds acquired before

the year of change when the interest is realized

upon disposition, redemption, or final maturity,

whichever is earliest, with the exception of the in-

terest reported in prior tax years.

You must attach this statement to your tax return for the

year of change, which you must file by the due date (in-

cluding extensions).

You can have an automatic extension of 6 months from

the due date of your return for the year of change (exclud-

ing extensions) to file the statement with an amended re-

turn. On the statement, type or print “Filed pursuant to

section 301.9100-2.” To get this extension, you must have

filed your original return for the year of the change by the

due date (including extensions). See also Revenue Proce-

dure 2015-13, Section 6.03(4).

Instead of filing this statement, you can request permis-

sion to change from method 2 to method 1 by filing Form

3115. In that case, follow the form instructions for an auto-

matic change. No user fee is required.

Co-owners. If a U.S. savings bond is issued in the names

of co-owners, such as you and your child or you and your

spouse, interest on the bond generally is taxable to the

co-owner who bought the bond.

One co-owner's funds used. If you used your funds

to buy the bond, you must pay the tax on the interest. This

is true even if you let the other co-owner redeem the bond

and keep all the proceeds. Under these circumstances,

the co-owner who redeemed the bond will receive a Form

1099-INT at the time of redemption and must provide you

with another Form 1099-INT showing the amount of inter-

est from the bond taxable to you. The co-owner who re-

deemed the bond is a “nominee.” See Nominee distribu-

tions, later, for more information about how a person who

is a nominee reports interest income belonging to another

person.

Both co-owners' funds used. If you and the other

co-owner each contribute part of the bond's purchase

price, the interest generally is taxable to each of you in

proportion to the amount each of you paid.

Community property. If you and your spouse live in a

community property state and hold bonds as community

property, one-half of the interest is considered received by

each of you. If you file separate returns, each of you gen-

erally must report one-half of the bond interest. For more

information about community property, see Pub. 555.

Table 1-2. These rules are also shown in Table 1-2.

Child as only owner. Interest on U.S. savings bonds

bought for and registered only in the name of your child is

income to your child, even if you paid for the bonds and

are named as beneficiary. If the bonds are Series EE or

Series I bonds, the interest on the bonds is income to your

child in the earlier of the year the bonds are cashed or dis-

posed of or the year the bonds mature, unless your child

chooses to report the interest income each year.

Choice to report interest each year. The choice to

report the accrued interest each year can be made either

by your child or by you for your child. This choice is made

by filing an income tax return that shows all the interest

earned to date, and by stating on the return that your child

chooses to report the interest each year. Either you or

your child should keep a copy of this return.

Unless your child is otherwise required to file a tax re-

turn for any year after making this choice, your child does

not have to file a return only to report the annual accrual of

U.S. savings bond interest under this choice. However,

see Tax on unearned income of certain children, earlier,

under General Information. Neither you nor your child can

change the way you report the interest unless you request

permission from the IRS, as discussed earlier under

Change from method 2.

Ownership transferred. If you bought Series EE or Ser-

ies I bonds entirely with your own funds and had them re-

issued in your co-owner's name or beneficiary's name

alone, you must include in your gross income for the year

of reissue all interest that you earned on these bonds and

have not previously reported. But, if the bonds were reis-

sued in your name alone, you do not have to report the in-

terest accrued at that time.

This same rule applies when bonds (other than bonds

held as community property) are transferred between

spouses or incident to divorce.

Example. You bought Series EE bonds entirely with

your own funds. You did not choose to report the accrued

interest each year. Later, you transfer the bonds to your

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former spouse under a divorce agreement. You must in-

clude the deferred accrued interest, from the date of the

original issue of the bonds to the date of transfer, in your

income in the year of transfer. Your former spouse in-

cludes in income the interest on the bonds from the date

of transfer to the date of redemption.

Who Pays the Tax on U.S. Savings

Bond Interest

Table 1-2.

IF ... THEN the interest must be

reported by ...

you buy a bond in your name and

the name of another person as

co-owners, using only your own

funds

you.

you buy a bond in the name of

another person, who is the sole

owner of the bond

the person for whom you bought

the bond.

you and another person buy a

bond as co-owners, each

contributing part of the purchase

price

both you and the other co-owner,

in proportion to the amount each

paid for the bond.

you and your spouse, who live in

a community property state, buy a

bond that is community property.

you and your spouse. If you file

separate returns, both you and

your spouse generally report half

of the interest.

Purchased jointly. If you and a co-owner each con-

tributed funds to buy Series E, Series EE, or Series I

bonds jointly and later have the bonds reissued in the

co-owner's name alone, you must include in your gross in-

come for the year of reissue your share of all the interest

earned on the bonds that you have not previously repor-

ted. The former co-owner does not have to include in

gross income at the time of reissue his or her share of the

interest earned that was not reported before the transfer.

This interest, however, as well as all interest earned after

the reissue, is income to the former co-owner.

This income-reporting rule also applies when the bonds

are reissued in the name of your former co-owner and a

new co-owner. But the new co-owner will report only his or

her share of the interest earned after the transfer.

If bonds that you and a co-owner bought jointly are reis-

sued to each of you separately in the same proportion as

your contribution to the purchase price, neither you nor

your co-owner has to report at that time the interest

earned before the bonds were reissued.

Example 1. You and your spouse each spent an equal

amount to buy a $1,000 Series EE savings bond. The

bond was issued to you and your spouse as co-owners.

You both postpone reporting interest on the bond. You

later have the bond reissued as two $500 bonds, one in

your name and one in your spouse's name. At that time

neither you nor your spouse has to report the interest

earned to the date of reissue.

Example 2. You bought a $1,000 Series EE savings

bond entirely with your own funds. The bond was issued

to you and your spouse as co-owners. You both post-

poned reporting interest on the bond. You later have the

bond reissued as two $500 bonds, one in your name and

one in your spouse's name. You must report half the inter-

est earned to the date of reissue.

Transfer to a trust. If you own Series E, Series EE, or

Series I bonds and transfer them to a trust, giving up all

rights of ownership, you must include in your income for

that year the interest earned to the date of transfer if you

have not already reported it. However, if you are consid-

ered the owner of the trust and if the increase in value

both before and after the transfer continues to be taxable

to you, you can continue to defer reporting the interest

earned each year. You must include the total interest in

your income in the year you cash or dispose of the bonds

or the year the bonds finally mature, whichever is earlier.

The same rules apply to previously unreported interest

on Series EE or Series E bonds if the transfer to a trust

consisted of Series HH or Series H bonds you acquired in

a trade for the Series EE or Series E bonds. See Savings

bonds traded, later.

Decedents. The manner of reporting interest income on

Series E, Series EE, or Series I bonds, after the death of

the owner (decedent), depends on the accounting and in-

come-reporting methods previously used by the dece-

dent.

Decedent who reported interest each year. If the

bonds transferred because of death were owned by a per-

son who used an accrual method, or who used the cash

method and had chosen to report the interest each year,

the interest earned in the year of death up to the date of

death must be reported on that person's final return. The

person who acquires the bonds includes in income only

interest earned after the date of death.

Decedent who postponed reporting interest. If the

transferred bonds were owned by a decedent who had

used the cash method and had not chosen to report the

interest each year, and who had bought the bonds entirely

with his or her own funds, all interest earned before death

must be reported in one of the following ways.

1. The surviving spouse or personal representative (ex-

ecutor, administrator, etc.) who files the final income

tax return of the decedent can choose to include on

that return all interest earned on the bonds before the

decedent's death. The person who acquires the

bonds then includes in income only interest earned

after the date of death.

2. If the choice in (1) is not made, the interest earned up

to the date of death is income in respect of the dece-

dent and should not be included in the decedent's fi-

nal return. All interest earned both before and after the

decedent's death (except any part reported by the es-

tate on its income tax return) is income to the person

who acquires the bonds. If that person uses the cash

method and does not choose to report the interest

each year, he or she can postpone reporting it until

the year the bonds are cashed or disposed of or the

year they mature, whichever is earlier. In the year that

person reports the interest, he or she can claim a

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deduction for any federal estate tax paid on the part of

the interest included in the decedent's estate.

For more information on income in respect of a decedent,

see Pub. 559, Survivors, Executors, and Administrators.

Example 1. Your uncle, a cash method taxpayer, died

and left you a $1,000 Series EE bond. He had bought the

bond for $500 and had not chosen to report the interest

each year. At the date of death, interest of $200 had ac-

crued on the bond, and its value of $700 was included in

your uncle's estate. Your uncle's executor chose not to in-

clude the $200 accrued interest in your uncle's final in-

come tax return. The $200 is income in respect of the de-

cedent.

You are a cash method taxpayer and do not choose to

report the interest each year as it is earned. If you cash

the bond when it reaches a value of $1,000, you report

$500 interest income—the difference between the value of

$1,000 and the original cost of $500.

Example 2. If, in Example 1, the executor had chosen

to include the $200 accrued interest in your uncle's final

return, you would report only $300 as interest when you

cashed the bond. $300 is the interest earned after your

uncle's death.

Example 3. If, in Example 1, you make or have made

the choice to report the increase in redemption value as

interest each year, you include in gross income for the

year you acquire the bond all of the unreported increase in

value of all Series E, Series EE, and Series I bonds you

hold, including the $200 on the bond you inherited from

your uncle.

Example 4. When your aunt died, she owned Series

HH bonds that she had acquired in a trade for Series EE

bonds. You were the beneficiary of these bonds. Your aunt

used the cash method and did not choose to report the in-

terest on the Series EE bonds each year as it accrued.

Your aunt's executor chose not to include any interest

earned before your aunt's death on her final return.

The income in respect of the decedent is the sum of the

unreported interest on the Series EE bonds and the inter-

est, if any, payable on the Series HH bonds but not re-

ceived as of the date of your aunt's death. You must report

any interest received during the year as income on your

return. The part of the interest payable but not received

before your aunt's death is income in respect of the dece-

dent and may qualify for the estate tax deduction. For in-

formation on when to report the interest on the Series EE

bonds traded, see Savings bonds traded, later.

Savings bonds distributed from a retirement or

profit-sharing plan. If you acquire a U.S. savings bond

in a taxable distribution from a retirement or profit-sharing

plan, your income for the year of distribution includes the

bond's redemption value (its cost plus the interest accrued

before the distribution). When you redeem the bond

(whether in the year of distribution or later), your interest

income includes only the interest accrued after the bond

was distributed. To figure the interest reported as a taxa-

ble distribution and your interest income when you re-

deem the bond, see Worksheet for savings bonds distrib-

uted from a retirement or profit-sharing plan, later.

Savings bonds traded. Prior to September 2004, you

could trade (exchange) Series E or EE bonds for Series H

or HH bonds. At the time of the trade, you had the choice

to postpone (defer) reporting the interest which had been

earned on your Series E or EE bonds until the Series H or

HH bonds received in the trade were redeemed or ma-

tured. Any cash you received in the transaction was in-

come up to the amount of the interest that had accrued on

the Series E or EE bonds. The amount of income that you

chose to postpone reporting was recorded on the face of

the Series H or HH bonds as "Deferred Interest"; this

amount is also equal to the difference between the re-

demption value of the Series H or HH bonds and your

cost. Your cost is the sum of the amount you paid for the

exchanged Series E or EE bonds plus any amount you

had to pay at the time of the transaction.

Example. You traded Series EE bonds that cost you

$2,200 (on which you postponed reporting the interest) for

$2,500 in Series HH bonds and $223 in cash. At the time

of the trade, the Series EE bonds had accrued interest of

$523 and a redemption value of $2,723.

You reported the $223 as taxable income on your tax

return.

You hold the Series HH bonds until maturity, when you

receive $2,500. You must report $300 as interest income

in the year of maturity. This is the difference between their

redemption value, $2,500, and your cost, $2,200 (the

amount you paid for the Series EE bonds).

Note. The $300 amount that is reportable upon re-

demption or maturity may be found on the face of the Ser-

ies HH bond as “Deferred Interest.” If more than one Ser-

ies HH bond is received in the exchange, the total amount

of interest postponed/deferred in the transaction is divided

proportionately among the Series HH bonds.

Choice to report interest in year of trade. You could

have chosen to treat all of the previously unreported ac-

crued interest on Series EE bonds traded for Series HH

bonds as income in the year of the trade. If you made this

choice, it is treated as a change from method 1. See

Change from method 1, earlier.

Note. If you chose to report all of the previously unre-

ported interest in the year of the trade, then there would

be the no "Deferred Interest" recorded on the face of the

new bond.

Note. The subsequent annual interest earnings on the

Series HH bonds received in the exchange would be paid

and reported annually by Treasury regardless of whether

the previously accrued interest was further deferred or re-

ported in the year of the exchange.

Form 1099-INT for U.S. savings bond interest. You

may receive a Form 1099-INT when you redeem a bond.

Box 3 of your Form 1099-INT should show the interest as

the difference between the amount you received and the

amount paid for the bond. However, your Form 1099-INT

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may show more interest than you have to include on your

income tax return. For example, this may happen if any of

the following are true.

•

You chose to report the increase in the redemption

value of the bond each year. The interest shown on

your Form 1099-INT will not be reduced by amounts

previously included in income.

•

You received the bond from a decedent. The interest

shown on your Form 1099-INT will not be reduced by

any interest reported by the decedent before death, or

on the decedent's final return, or by the estate on the

estate's income tax return.

•

Ownership of the bond was transferred. The interest

shown on your Form 1099-INT will not be reduced by

interest that accrued before the transfer.

Note. This is true for paper bonds. Treasury report-

ing process for electronic bonds is more refined. If

Treasury is aware that the transfer of an electronic

savings bond is a reportable event, then the transferor

will receive a 1099-INT for the year of the transfer for

the interest accrued up to the time of the transfer;

when the transferee later disposes of the bond (re-

demption, maturity, or further transfer), the transferee

will receive a 1099-INT showing interest accrued re-

duced by the amount reported to the transferor at the

time of the original transfer.

•

You were named as a co-owner, and the other

co-owner contributed funds to buy the bond. The inter-

est shown on your Form 1099-INT will not be reduced

by the amount you received as nominee for the other

co-owner. (See Co-owners, earlier, for more informa-

tion about the reporting requirements.)

•

You received the bond in a taxable distribution from a

retirement or profit-sharing plan. The interest shown

on your Form 1099-INT will not be reduced by the in-

terest portion of the amount taxable as a distribution

from the plan and not taxable as interest. (This

amount generally is shown on Form 1099-R, Distribu-

tions From Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,

for the year of distribution.)

For more information on including the correct amount of

interest on your return, see U.S. savings bond interest pre-

viously reported or Nominee distributions, later.

Interest on U.S. savings bonds is exempt from

state and local taxes. The Form 1099-INT you re-

ceive will indicate the amount that is for U.S. sav-

ings bonds interest in box 3. Do not include this income on

your state or local income tax return.

Education Savings Bond Program

You may be able to exclude from income all or part of the

interest you receive on the redemption of qualified U.S.

savings bonds during the year if you pay qualified higher

education expenses during the same year. This exclusion

is known as the Education Savings Bond Program.

TIP

You do not qualify for this exclusion if your filing status

is married filing separately.

Form 8815. Use Form 8815 to figure your exclusion. At-

tach the form to your Form 1040 or 1040-SR.

Qualified U.S. savings bonds. A qualified U.S. savings

bond is a Series EE bond issued after 1989 or a Series I

bond. The bond must be issued either in your name (sole

owner) or in your and your spouse's names (co-owners).

You must be at least 24 years old before the bond's issue

date. For example, a bond bought by a parent and issued

in the name of his or her child under age 24 does not qual-

ify for the exclusion by the parent or child.

The issue date of a bond may be earlier than the

date the bond is purchased because the issue

date assigned to a bond is the first day of the

month in which it is purchased.

Beneficiary. You can designate any individual (includ-

ing a child) as a beneficiary of the bond.

Verification by IRS. If you claim the exclusion, the IRS

will check it by using bond redemption information from

the Department of Treasury.

Qualified expenses. Qualified higher educational ex-

penses are tuition and fees required for you, your spouse,

or your dependent to attend an eligible educational institu-

tion.

Qualified expenses include any contribution you make

to a qualified tuition program or to a Coverdell education

savings account. For information about these programs,

see Pub. 970, Tax Benefits for Education.

Qualified expenses do not include expenses for room

and board or for courses involving sports, games, or hob-

bies that are not part of a degree or certificate granting

program.

Eligible educational institutions. These institutions

include most public, private, and nonprofit universities,

colleges, and vocational schools that are accredited and

eligible to participate in student aid programs run by the

Department of Education.

Reduction for certain benefits. You must reduce

your qualified higher educational expenses by all of the

following tax-free benefits.

1. Tax-free part of scholarships and fellowships.

2. Expenses used to figure the tax-free portion of distri-

butions from a Coverdell ESA.

3. Expenses used to figure the tax-free portion of distri-

butions from a qualified tuition program.

4. Any tax-free payments (other than gifts or inheritan-

ces) received as educational assistance, such as:

a. Veterans' educational assistance benefits,

b. Qualified tuition reductions, or

c. Employer-provided educational assistance.

CAUTION

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5. Any expense used in figuring the American Opportu-

nity and lifetime learning credits.

For information about these benefits, see Pub. 970.

Amount excludable. If the total proceeds (interest and

principal) from the qualified U.S. savings bonds you re-

deem during the year are not more than your adjusted

qualified higher educational expenses for the year, you

may be able to exclude all of the interest. If the proceeds

are more than the expenses, you may be able to exclude

only part of the interest.

To determine the excludable amount, multiply the inter-

est part of the proceeds by a fraction. The numerator (top

part) of the fraction is the qualified higher educational ex-

penses you paid during the year. The denominator (bot-

tom part) of the fraction is the total proceeds you received

during the year.

Example. J and L, a married couple, paid $5,000.00

for a $10,000 denominated Series EE U.S. Savings Bond

in January 2007. J and L redeemed (cashed in) the bond

in January 2023 for $8,848.00 ($5,000.00 investment +

$3,848.00 interest). J and L paid $4,000.00 of their child's

college tuition in 2023. J and L are not claiming any credit

for that amount and their child does not receive any

tax-free educational assistance.

To determine the excludable amount, J and L multiply

the interest part of the proceeds ($3,848.00) by a fraction.

The numerator (top part) of the fraction is the qualified

higher educational expenses paid during the year

($4,000.00). The denominator (bottom part) of the fraction

is the total proceeds received during the year ($8,848.00).

Thus, J and L can exclude $3,848.00 x

($4,000.00/$8,848.00) = $1,739.60.

U.S. Treasury Bills,

Notes, and Bonds

Treasury bills, notes, and bonds are direct debts (obliga-

tions) of the U.S. government.

Taxation of interest. Interest income from Treasury bills,

notes, and bonds is subject to federal income tax but is

exempt from all state and local income taxes. You should

receive Form 1099-INT showing the interest (in box 3)

paid to you for the year.

Treasury bills. These bills generally have a 4-week,

8-week, 13-week, 26-week, or 52-week maturity period.

They generally are issued at a discount in the amount of

$100 and multiples of $100. The difference between the

discounted price you pay for the bills and the face value

you receive at maturity is interest income. Generally, you

report this interest income when the bill is paid at maturity.

If you paid a premium for a bill (more than face value), you

generally report the premium as a section 171 deduction

when the bill is paid at maturity. See Discount on

Short-Term Obligations, later.

If you reinvest your Treasury bill at its maturity in a new

Treasury bill, note, or bond, you will receive payment for

the difference between the proceeds of the maturing bill

(par amount less any tax withheld) and the purchase price

of the new Treasury security. However, you must report the

full amount of the interest income on each of your Treas-

ury bills at the time it reaches maturity.

Treasury notes and bonds. Treasury notes have matur-

ity periods of at least 1 year, ranging up to 10 years. Ma-

turity periods for Treasury bonds are generally longer than

10 years. Both generally are issued in denominations of

$100 to $1 million and both generally pay interest every 6

months. Generally, you report this interest for the year

paid. When the notes or bonds mature, you can redeem

these securities for face value or use the proceeds from

the maturing note or bond to reinvest in another note or

bond of the same type and term.

Treasury notes and bonds are sold by auction. Two

types of bids are accepted: competitive bids and noncom-

petitive bids. If you make a competitive bid and a determi-

nation is made that the purchase price is less than the

face value, you will receive a refund for the difference be-

tween the purchase price and the face value. This amount

is considered original issue discount. However, the origi-

nal issue discount rules (discussed later) do not apply if

the discount is less than one-fourth of 1% (0.0025) of the

face amount, multiplied by the number of full years from

the date of original issue to maturity. See De minimis OID,

later. If the purchase price is determined to be more than

the face amount, the difference is a premium. (See Bond

Premium Amortization in chapter 3.)

For other information on these notes or bonds,

write to:

Treasury Retail Securities Services

P.O. Box 9150

Minneapolis, MN 55480-9150

Or, on the Internet, visit www.treasurydirect.gov.

Treasury inflation-protected securities (TIPS). These

securities pay interest twice a year at a fixed rate, based

on a principal amount adjusted to take into account infla-

tion and deflation. For the tax treatment of these securi-

ties, see Inflation-Indexed Debt Instruments, later.

Retirement, sale, or redemption. For information on the

retirement, sale, or redemption of U.S. government obliga-

tions, see Capital or Ordinary Gain or Loss in chapter 4.

Also, see Nontaxable Trades in chapter 4 for information

about trading U.S. Treasury obligations for certain other

designated issues.

Bonds Sold Between Interest Dates

If you sell a bond between interest payment dates, part of

the sales price represents interest accrued to the date of

sale. You must report that part of the sales price as inter-

est income for the year of sale.

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If you buy a bond between interest payment dates, part

of the purchase price represents interest accrued before

the date of purchase. When that interest is paid to you,

treat it as a return of your capital investment, rather than

interest income, by reducing your basis in the bond. See

Accrued interest on bonds, later in this chapter, for infor-

mation on reporting the payment.

Insurance

Life insurance proceeds paid to you as the beneficiary of

the insured person usually are not taxable. But if you re-

ceive the proceeds in installments, you usually must report

part of each installment payment as interest income.

For more information about insurance proceeds re-

ceived in installments, see Pub. 525.

Interest option on insurance. If you leave life insurance

proceeds on deposit with an insurance company under an

agreement to pay interest only, the interest paid to you is

taxable.

Annuity. If you buy an annuity with life insurance pro-

ceeds, the annuity payments you receive are taxed as

pension and annuity income from a nonqualified plan, not

as interest income. See Pub. 939, General Rule for Pen-

sions and Annuities, for information on taxation of pension

and annuity income from nonqualified plans.

State or Local

Government Obligations

Interest you receive on an obligation issued by a state or

local government generally is not taxable. The issuer

should be able to tell you whether the interest is taxable.

The issuer also should give you a periodic (or year-end)

statement showing the tax treatment of the obligation. If

you invested in the obligation through a trust, a fund, or

other organization, that organization should give you this

information.

Even if interest on the obligation is not subject to

income tax, you may have to report a capital gain

or loss when you sell it. Estate, gift, or genera-

tion-skipping tax may apply to other dispositions of the ob-

ligation.

Tax-Exempt Interest

Interest on a bond used to finance government operations

generally is not taxable if the bond is issued by a state, the

District of Columbia, a U.S. territory, or any of their political

subdivisions. Political subdivisions include:

•

Port authorities,

•

Toll road commissions,

•

Utility services authorities,

•

Community redevelopment agencies, and

•

Qualified volunteer fire departments (for certain obli-

gations issued after 1980).

CAUTION

There are other requirements for tax-exempt bonds. Con-

tact the issuing state or local government agency or see

sections 103 and 141 through 150 of the Internal Revenue

Code and the related regulations.

Obligations that are not bonds. Interest on a

state or local government obligation may be tax

exempt even if the obligation is not a bond. For

example, interest on a debt evidenced only by an ordinary

written agreement of purchase and sale may be tax ex-

empt. Also, interest paid by an insurer on default by the

state or political subdivision may be tax exempt.

Registration requirement. A bond issued after June 30,

1983, generally must be in registered form for the interest

to be tax exempt.

Indian tribal government. Bonds issued after 1982 by

an Indian tribal government (including tribal economic de-

velopment bonds issued after February 17, 2009) are

treated as issued by a state. Interest on these bonds gen-

erally is tax exempt if the bonds are part of an issue of

which substantially all proceeds are to be used in the ex-

ercise of any essential government function. However, the

proceeds of a tribal economic development bond issued

after February 17, 2009, are not required to be used in the

exercise of an essential government function in order for

the bond to receive tax-exempt treatment. Interest on pri-

vate activity bonds (other than certain bonds for tribal

manufacturing facilities) is taxable.

Original issue discount. Original issue discount (OID)

on tax-exempt state or local government bonds is treated

as tax-exempt interest.

For information on the treatment of OID when you dis-

pose of a tax-exempt bond, see Tax-exempt state and lo-

cal government bonds, later.

Stripped bonds or coupons. For special rules that

apply to stripped tax-exempt obligations, see Stripped

Bonds and Coupons, later.

Information reporting requirement. If you must file a

tax return, you are required to show any tax-exempt inter-

est you received on your return. This is an information re-

porting requirement only. It does not change tax-exempt

interest to taxable interest. See Reporting tax-exempt in-

terest, later in this chapter.

Taxable Interest

Interest on some state or local obligations is taxable.

Federally guaranteed bonds. Interest on federally guar-

anteed state or local obligations issued after 1983 gener-

ally is taxable. This rule does not apply to interest on obli-

gations guaranteed by the following U.S. government

agencies.

•

Bonneville Power Authority (if the guarantee was un-

der the Northwest Power Act as in effect on July 18,

1984).

•

Department of Veterans Affairs.

TIP

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•

Federal home loan banks. (The guarantee must be

made after July 30, 2008, in connection with the origi-

nal bond issue during the period beginning on July 30,

2008, and ending on December 31, 2010 (or a re-

newal or extension of a guarantee so made), and the

bank must meet safety and soundness requirements.)

•

Federal Home Loan Mortgage Corporation.

•

Federal Housing Administration.

•

Federal National Mortgage Association.

•

Government National Mortgage Corporation.

•

Resolution Funding Corporation.

•

Student Loan Marketing Association.

Tax credit bonds. Use Form 8912, Credit to Holders of

Tax Credit Bonds, to claim the credit for the following tax

credit bonds.

•

Clean renewable energy bond (CREB).

•

New clean renewable energy bond (NCREB).

•

Qualified energy conservation bond (QECB).

•

Qualified zone academy bond (QZAB).

•

Qualified school construction bond (QSCB).

•

Build America bond (BAB).

Generally, in lieu of, or in addition to, receiving periodic

interest payments from the issuer, the holder of the bond

is allowed an income tax credit. The credit compensates

the holder for lending money to the issuer and functions

as interest paid on the bond.

See the Instructions for Form 8912, Credit to Holders of

Tax Credit Bonds, for details and instructions.

Mortgage revenue bonds. The proceeds of these

bonds are used to finance mortgage loans for homebuy-

ers. Generally, interest on state or local government home

mortgage bonds issued after April 24, 1979, is taxable un-

less the bonds are qualified mortgage bonds or qualified

veterans' mortgage bonds.

Arbitrage bonds. Interest on arbitrage bonds issued by

state or local governments after October 9, 1969, is taxa-

ble. An arbitrage bond is a bond of which any portion of

the proceeds is expected to be used to buy (or to replace

funds used to buy) higher yielding investments. A bond is

treated as an arbitrage bond if the issuer intentionally uses

any part of the proceeds of the issue in this manner.

Private activity bonds. Interest on a private activity

bond that is not a qualified bond (defined below) is taxa-

ble. Generally, a private activity bond is part of a state or

local government bond issue that meets both the following

requirements.

1. More than 10% of the proceeds of the issue is to be

used for a private business use.

2. More than 10% of the payment of the principal or in-

terest is:

a. Secured by an interest in property to be used for a

private business use (or payments for this prop-

erty), or

b. Derived from payments for property (or borrowed

money) used for a private business use.

Also, a bond generally is considered a private activity

bond if the proceeds to be used to make or finance loans

to persons other than government units is more than 5%

of the proceeds or $5 million (whichever is less).

Qualified bond. Interest on a private activity bond that

is a qualified bond is tax exempt. A qualified bond is an

exempt-facility bond (including an enterprise zone facility

bond, a New York Liberty bond, a Midwestern disaster

area bond, a Hurricane Ike disaster area bond, a Gulf Op-

portunity Zone bond treated as an exempt-facility bond, or

any recovery zone facility bond), qualified student loan

bond, qualified small issue bond (including a tribal manu-

facturing facility bond), qualified redevelopment bond,

qualified mortgage bond (including a Gulf Opportunity

Zone bond, a Midwestern disaster area bond, or a Hurri-

cane Ike disaster area bond treated as a qualified mort-

gage bond), qualified veterans' mortgage bond, or quali-

fied 501(c)(3) bond (a bond issued for the benefit of

certain tax-exempt organizations).

Interest you receive on these tax-exempt bonds, if is-

sued after August 7, 1986, generally is a “tax preference

item” and may be subject to the AMT. See Form 6251 and

its instructions for more information.

The interest on the following bonds is not a tax prefer-

ence item and is not subject to the AMT.

•

Qualified 501(c)(3) bonds.

•

New York Liberty bonds.

•

Gulf Opportunity Zone bonds.

•

Midwestern disaster area bonds.

•

Hurricane Ike disaster area bonds.

•

Exempt facility bonds for qualified residential rental

projects issued after July 30, 2008.

•

Qualified mortgage bonds issued after July 30, 2008.

•

Qualified veterans' mortgage bonds issued after July

30, 2008.

Qualified bonds issued in 2009 or 2010. The inter-

est on any qualified bond issued in 2009 or 2010 is not a

tax preference item and is not subject to the AMT. For this

purpose, a refunding bond (whether a current or advanced

refunding) is treated as issued on the date the refunded

bond was issued (or on the date the original bond was is-

sued in the case of a series of refundings). However, this

rule does not apply to any refunding bond issued to refund

any qualified bond issued during 2004 through 2008 or af-

ter 2010.

Qualified bonds issued after December 31, 2010.

A portion of the interest on specified private activity bonds

issued after December 31, 2010, may be a tax preference

item subject to the AMT. The tax preference status will ap-

ply to the portion of the interest that remains after reducing

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it by deductions that would be allowed if the interest were

taxable.

Enterprise zone facility bonds. Interest on certain

private activity bonds issued by a state or local govern-

ment to finance a facility used in an empowerment zone or

enterprise community is tax exempt.

New York Liberty bonds. New York Liberty bonds are

bonds issued after March 9, 2002, to finance the construc-

tion and rehabilitation of real property in the designated

“Liberty Zone” of New York City. Interest on these bonds is

tax exempt.

Market discount. Market discount on a tax-exempt bond

is not tax exempt. If you bought the bond after April 30,

1993, you can choose to accrue the market discount over

the period you own the bond and include it in your income

currently as taxable interest. See Market Discount Bonds,

later. If you do not make that choice, or if you bought the

bond before May 1, 1993, any gain from market discount

is taxable when you dispose of the bond.

For more information on the treatment of market dis-

count when you dispose of a tax-exempt bond, see Dis-

counted Debt Instruments, later.

Discount on

Debt Instruments

Terms you may need to know

(see Glossary):

Market discount

Market discount bond

Original issue discount (OID)

Premium

A debt instrument, such as a bond, note, debenture, or

other evidence of indebtedness, that bears no interest or

bears interest at a lower than current market rate usually

will be issued at less than its face amount. This discount

is, in effect, additional interest income. The following are

some types of discounted debt instruments.

•

U.S. Treasury bonds.

•

Corporate bonds.

•

Municipal bonds.

•

Certificates of deposit.

•

Notes between individuals.

•

Stripped bonds and coupons.

•

Collateralized debt obligations (CDOs).

The discount on these instruments (except municipal

bonds) is taxable in most instances. The discount on mu-

nicipal bonds generally is not taxable (but see State or

Local Government Obligations, earlier, for exceptions).

See also REMICs, FASITs, and Other CDOs, later, for in-

formation about applying the rules discussed in this sec-

tion to the regular interest holder of a real estate mortgage

investment conduit, a financial asset securitization invest-

ment trust, or other CDO.

Original Issue

Discount (OID)

OID is a form of interest. You generally include OID in your

income as it accrues over the term of the debt instrument,

whether or not you receive any payments from the issuer.

A debt instrument generally has OID when the instru-

ment is issued for a price that is less than its stated re-

demption price at maturity. OID is the difference between

the stated redemption price at maturity and the issue

price.

All debt instruments that pay no interest before maturity

are presumed to be issued at a discount. Zero coupon

bonds are one example of these instruments.

The OID accrual rules generally do not apply to

short-term obligations (those with a fixed maturity date of

1 year or less from date of issue). See Discount on

Short-Term Obligations, later.

For information about the sale of a debt instrument with

OID, see Original issue discount (OID) on debt instru-

ments, later.

De minimis OID. You can treat the discount as zero if it is

less than one-fourth of 1% (0.0025) of the stated redemp-

tion price at maturity multiplied by the number of full years

from the date of original issue to maturity. This small dis-

count is known as “de minimis” OID. In the case of a debt

instrument providing for more than one stated principal

payment (an installment obligation), the “de minimis” for-

mula described above is modified. See Regulations sec-

tion 1.1273-1(d)(3).

Example 1. You bought a 10-year bond with a stated

redemption price at maturity of $1,000, issued at $980

with OID of $20. One-fourth of 1% of $1,000 (stated re-

demption price) times 10 (the number of full years from

the date of original issue to maturity) equals $25. Because

the $20 discount is less than $25, the OID is treated as

zero. (If you hold the bond at maturity, you will recognize

$20 ($1,000 − $980) of capital gain.)

Example 2. The facts are the same as in Example 1,

except that the bond was issued at $950. The OID is $50.

Because the $50 discount is more than the $25 figured in

Example 1, you must include the OID in income as it ac-

crues over the term of the bond.

Debt instrument bought after original issue. If you

buy a debt instrument with de minimis OID at a premium,

the discount is not includible in income. If you buy a debt

instrument with de minimis OID at a discount, the discount

is reported under the market discount rules. See Market

Discount Bonds, later in this chapter.

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Exceptions to reporting OID as current income.

The OID rules discussed here do not apply to the fol-

lowing debt instruments.

1. Tax-exempt obligations. (However, see Stripped

tax-exempt obligations, later.)

2. U.S. savings bonds.

3. Short-term debt instruments (those with a fixed matur-

ity date of not more than 1 year from the date of is-

sue).

4. Obligations issued by an individual before March 2,

1984.

5. Loans between individuals, if all the following are true.

a. The lender is not in the business of lending money.

b. The amount of the loan, plus the amount of any

outstanding prior loans between the same individ-

uals, is $10,000 or less.

c. Avoiding any federal tax is not one of the principal

purposes of the loan.

Form 1099-OID

The issuer of the debt instrument (or your broker, if you

held the instrument through a broker) should give you

Form 1099-OID, or a similar statement, if the total OID for

the calendar year is $10 or more. Form 1099-OID will

show, in box 1, the amount of OID for the part of the year

that you held the bond. It also will show, in box 2, the sta-

ted interest you must include in your income. Box 8 shows

OID on a U.S. Treasury obligation for the part of the year

you owned it and is not included in box 1. Box 10 shows

bond premium amortization. A copy of Form 1099-OID will

be sent to the IRS. Do not file your copy with your return.

Keep it for your records.

In most cases, you must report the entire amount in

boxes 1, 2, and 8 of Form 1099-OID as interest income.

But see Refiguring OID shown on Form 1099-OID, later in

this discussion, and also Original issue discount (OID) ad-

justment, later in this chapter, for more information.

Form 1099-OID not received. If you had OID for the

year but did not receive a Form 1099-OID, you may have

to figure the correct amount of OID to report on your re-

turn. See Pub. 1212 for details on how to figure the correct

OID.

Nominee. If someone else is the holder of record (the

registered owner) of an OID instrument belonging to you

and receives a Form 1099-OID on your behalf, that person

must give you a Form 1099-OID.

If you receive a Form 1099-OID that includes amounts

belonging to another person, see Nominee distributions,

later.

Refiguring OID shown on Form 1099-OID. You may

need to refigure the OID shown in box 1 or box 8 of Form

1099-OID if either of the following apply.

•

You bought the debt instrument after its original issue

and paid a premium or an acquisition premium.

•

The debt instrument is a stripped bond or a stripped

coupon (including certain zero coupon instruments).

See Figuring OID, later in this chapter.

See Original issue discount (OID) adjustment, later in this

chapter, for information about reporting the correct

amount of OID.

Premium. You bought a debt instrument at a premium

if its adjusted basis immediately after purchase was

greater than the total of all amounts payable on the instru-

ment after the purchase date, other than qualified stated

interest.

If you bought an OID debt instrument at a premium, you

generally do not have to report any OID as ordinary in-

come.

Qualified stated interest. In general, this is stated in-

terest unconditionally payable in cash or property (other

than debt instruments of the issuer) at least annually at a

fixed rate.

Acquisition premium. You bought a debt instrument

at an acquisition premium if both the following are true.

•

You did not pay a premium.

•

The instrument's adjusted basis immediately after pur-

chase (including purchase at original issue) was

greater than its adjusted issue price. This is the issue

price plus the OID previously accrued, minus any pay-

ment previously made on the instrument other than

qualified stated interest.

Acquisition premium reduces the amount of OID includible

in your income. For information about figuring the correct

amount of OID to include in your income, see Figuring OID

on Long-Term Debt Instruments in Pub. 1212.

Refiguring periodic interest shown on Form

1099-OID. If you disposed of a debt instrument or ac-

quired it from another holder during the year, see Bonds

Sold Between Interest Dates, earlier, for information about

the treatment of periodic interest that may be shown in

box 2 of Form 1099-OID for that instrument.

Applying the OID Rules

The rules for reporting OID depend on the date the

long-term debt instrument was issued.

Debt instruments issued after May 27, 1969 (after

July 1, 1982, if a government instrument), and before

1985. If you hold these debt instruments as capital as-

sets, you must include a part of the discount in your gross

income each year that you own the instruments.

Effect on basis. Your basis in the instrument is in-

creased by the amount of OID you include in your gross

income.

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Debt instruments issued after 1984. For these debt in-

struments, you report the total OID that applies each year

regardless of whether you hold that debt instrument as a

capital asset.

Effect on basis. Your basis in the instrument is in-

creased by the amount of OID you include in your gross

income.

Certificates of Deposit (CDs)

A CD is a debt instrument.

If you buy a CD with a maturity of more than 1 year, you

must include in income each year a part of the total inter-

est due and report it in the same manner as other OID.

This also applies to similar deposit arrangements with

banks, building and loan associations, etc., including:

•

Time deposits,

•

Bonus plans,

•

Savings certificates,

•

Deferred income certificates,

•

Bonus savings certificates, and

•

Growth savings certificates.

Bearer CDs. CDs issued after 1982 generally must be in

registered form. Bearer CDs are CDs not in registered

form. They are not issued in the depositor's name and are

transferable from one individual to another.

Banks must provide the IRS and the person redeeming

a bearer CD with a Form 1099-INT.

Time deposit open account arrangement. This is an

arrangement with a fixed maturity date in which you make

deposits on a schedule arranged between you and your

bank. But there is no actual or constructive receipt of inter-

est until the fixed maturity date is reached. For instance,

you and your bank enter into an arrangement under which

you agree to deposit $100 each month for a period of 5

years. Interest will be compounded twice a year at 7

/2%,

but payable only at the end of the 5-year period. You must

include a part of the interest in your income as OID each

year. Each year the bank must give you a Form 1099-OID

to show you the amount you must include in your income

for the year.

Redemption before maturity. If, before the maturity

date, you redeem a deferred interest account for less than

its stated redemption price at maturity, you can deduct

OID that you previously included in income but did not re-

ceive.

Renewable certificates. If you renew a CD at maturity, it

is treated as a redemption and a purchase of a new certifi-

cate. This is true regardless of the terms of renewal.

Face-Amount Certificates

These certificates are subject to the OID rules. They are a

form of endowment contracts issued by insurance or in-

vestment companies for either a lump-sum payment or pe-

riodic payments, with the face amount becoming payable

on the maturity date of the certificate.

In general, the difference between the face amount and

the amount you paid for the contract is OID. You must in-

clude a part of the OID in your income over the term of the

certificate.

The issuer must give you a statement on Form

1099-OID indicating the amount you must include in your

income each year.

Inflation-Indexed

Debt Instruments

If you hold an inflation-indexed debt instrument (other than

a Series I U.S. savings bond), you must report as OID any

increase in the inflation-adjusted principal amount of the

instrument that occurs while you held the instrument dur-

ing the year. In general, an inflation-indexed debt instru-

ment is a debt instrument on which the payments are ad-

justed for inflation and deflation (such as Treasury

Inflation-Protected Securities). You should receive Form

1099-OID from the payer showing the amount you must

report as OID and any qualified stated interest paid to you

during the year. For more information, see Pub. 1212.

Stripped Bonds and Coupons

If you strip one or more coupons from a bond and sell the

bond or the coupons, the bond and coupons are treated

as separate debt instruments issued with OID.

The holder of a stripped bond has the right to receive

the principal (redemption price) payment. The holder of a

stripped coupon has the right to receive interest on the

bond.

Stripped bonds and stripped coupons include:

•

Zero coupon instruments available through the De-

partment of the Treasury's Separate Trading of Regis-

tered Interest and Principal of Securities (STRIPS)

program and government-sponsored enterprises such

as the Resolution Funding Corporation and the Fi-

nancing Corporation; and

•

Instruments backed by U.S. Treasury securities that

represent ownership interests in those securities, such

as obligations backed by U.S. Treasury bonds offered

primarily by brokerage firms.

Seller. If you strip coupons from a bond and sell the bond

or coupons, include in income the interest that accrued

while you held the bond before the date of sale, to the ex-

tent you did not previously include this interest in your in-

come. For an obligation acquired after October 22, 1986,

you also must include the market discount that accrued

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before the date of sale of the stripped bond (or coupon) to

the extent you did not previously include this discount in

your income.

Add the interest and market discount that you include in

income to the basis of the bond and coupons. Allocate

this adjusted basis between the items you keep and the

items you sell, based on the fair market value of the items.

The difference between the sale price of the bond (or cou-

pon) and the allocated basis of the bond (or coupon) is

your gain or loss from the sale.

Treat any item you keep as an OID bond originally is-

sued and bought by you on the sale date of the other

items. If you keep the bond, treat the amount of the re-

demption price of the bond that is more than the basis of

the bond as OID. If you keep the coupons, treat the

amount payable on the coupons that is more than the ba-

sis of the coupons as OID.

Buyer. If you buy a stripped bond or stripped coupon,

treat it as if it were originally issued on the date you buy it.

If you buy a stripped bond, treat as OID any excess of the

stated redemption price at maturity over your purchase

price. If you buy a stripped coupon, treat as OID any ex-

cess of the amount payable on the due date of the coupon

over your purchase price.

Figuring OID. The rules for figuring OID on stripped

bonds and stripped coupons depend on the date the debt

instruments were purchased, not the date issued.

You must refigure OID shown on the Form 1099-OID

you receive for a stripped bond or coupon. For information

about figuring the correct amount of OID on these instru-

ments to include in your income, see Figuring OID on

Stripped Bonds and Coupons in Pub. 1212. Owners of

stripped bonds and coupons should not rely on the OID

shown in Section II of the OID tables (available by going to

IRS.gov and searching for “OID Tables”) because the

amounts listed in Section II for stripped bonds or coupons

are figured without reference to the date or price at which

you acquired them.

Stripped inflation-indexed debt instruments. OID

on stripped inflation-indexed debt instruments is figured

under the discount bond method. This method is descri-

bed in Regulations section 1.1275-7(e).

Stripped tax-exempt obligations. You do not have to

pay tax on OID on any stripped tax-exempt bond or cou-

pon you bought before June 11, 1987. However, if you ac-

quired it after October 22, 1986, you must accrue OID on

it to determine its basis when you dispose of it. See Origi-

nal issue discount (OID) on debt instruments, later.

You may have to pay tax on part of the OID on stripped

tax-exempt bonds or coupons that you bought after June

10, 1987. For information on figuring the taxable part, see

Tax-Exempt Bonds and Coupons under Figuring OID on

Stripped Bonds and Coupons in Pub. 1212.

Market Discount Bonds

A market discount bond is any bond having market dis-

count except:

•

Short-term obligations (those with fixed maturity dates

of up to 1 year from the date of issue),

•

Tax-exempt obligations you bought before May 1,

1993,

•

U.S. savings bonds, and

•

Certain installment obligations.

Market discount arises when the value of a debt obliga-

tion decreases after its issue date. Generally, this is due to

an increase in interest rates. If you buy a bond on the sec-

ondary market, it may have market discount.

When you buy a market discount bond, you can choose

to accrue the market discount over the period you own the

bond and include it in your income currently as interest in-

come. If you do not make this choice, the following rules

generally apply.

•

You must treat any gain when you dispose of the bond

as ordinary interest income, up to the amount of the

accrued market discount. See Discounted Debt Instru-

ments, later.

•

You must treat any partial payment of principal on the

bond as ordinary interest income, up to the amount of

the accrued market discount. See Partial principal

payments, later in this discussion.

•

If you borrow money to buy or carry the bond, your de-

duction for interest paid on the debt is limited. See

Limit on interest deduction for market discount bonds,

later.

Market discount. Market discount is the amount of the

stated redemption price of a bond at maturity that is more

than your basis in the bond immediately after you acquire

it. You treat market discount as zero if it is less than

one-fourth of 1% (0.0025) of the stated redemption price

of the bond multiplied by the number of full years to matur-

ity (after you acquire the bond).

If a market discount bond also has OID, the market dis-

count is the sum of the bond's issue price and the total

OID includible in the gross income of all holders (for a

tax-exempt bond, the total OID that accrued) before you

acquired the bond, reduced by your basis in the bond im-

mediately after you acquired it.

Bonds acquired at original issue. Generally, a bond

you acquired at original issue is not a market discount

bond. If your adjusted basis in a bond is determined by

reference to the adjusted basis of another person who ac-

quired the bond at original issue, you also are considered

to have acquired it at original issue.

Exceptions. A bond you acquired at original issue can

be a market discount bond if either of the following is true.

•

Your cost basis in the bond is less than the bond's is-

sue price.

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•

The bond is issued in exchange for a market discount

bond under a plan of reorganization. (This does not

apply if the bond is issued in exchange for a market

discount bond issued before July 19, 1984, and the

terms and interest rates of both bonds are the same.)

Accrued market discount. The accrued market dis-

count is figured in one of two ways.

Ratable accrual method. Treat the market discount

as accruing in equal daily installments during the period

you hold the bond. Figure the daily installments by divid-

ing the market discount by the number of days after the

date you acquired the bond, up to and including its matur-

ity date. Multiply the daily installments by the number of

days you held the bond to figure your accrued market dis-

count.

Constant yield method. Instead of using the ratable

accrual method, you can choose to figure the accrued dis-

count using a constant interest rate (the constant yield

method). Make this choice by attaching to your timely filed

return a statement identifying the bond and stating that

you are making a constant interest rate election. The

choice takes effect on the date you acquired the bond. If

you choose to use this method for any bond, you cannot

change your choice for that bond.

For information about using the constant yield method,

see Constant yield method under Debt Instruments Issued

After 1984 in Pub. 1212. To use this method to figure mar-

ket discount (instead of OID), treat the bond as having

been issued on the date you acquired it. Treat the amount

of your basis (immediately after you acquired the bond) as

the issue price and apply the formula shown in Pub. 1212.

Choosing to include market discount in income cur-

rently. You can make this choice if you have not revoked

a prior choice to include market discount in income cur-

rently within the last 5 calendar years. Make the choice by

attaching to your timely filed return a statement in which

you:

•

State that you have included market discount in your

gross income for the year under section 1278(b) of the

Internal Revenue Code, and

•

Describe the method you used to figure the accrued

market discount for the year.

Once you make this choice, it will apply to all market

discount bonds you acquire during the tax year and in

later tax years. You cannot revoke your choice without the

consent of the IRS. See Rev. Proc. 2023-24 for informa-

tion on how to revoke your election.

Also, see Election To Report All Interest as OID, later. If

you make that election, you must use the constant yield

method.

Effect on basis. You increase the basis of your bonds

by the amount of market discount you include in your in-

come.

Partial principal payments. If you receive a partial pay-

ment of principal on a market discount bond you acquired

after October 22, 1986, and you did not choose to include

the discount in income currently, you must treat the pay-

ment as ordinary interest income up to the amount of the

bond's accrued market discount. Reduce the amount of

accrued market discount reportable as interest at disposi-

tion by that amount.

There are three methods you can use to figure accrued

market discount for this purpose.

1. On the basis of the constant yield method, described

earlier.

2. In proportion to the accrual of OID for any accrual pe-

riod, if the debt instrument has OID.

3. In proportion to the amount of stated interest paid in

the accrual period, if the debt instrument has no OID.

Under method (2) above, figure accrued market dis-

count for a period by multiplying the total remaining mar-

ket discount by a fraction. The numerator (top part) of the

fraction is the OID for the period, and the denominator

(bottom part) is the total remaining OID at the beginning of

the period.

Under method (3) above, figure accrued market dis-

count for a period by multiplying the total remaining mar-

ket discount by a fraction. The numerator is the stated in-

terest paid in the accrual period, and the denominator is

the total stated interest remaining to be paid at the begin-

ning of the accrual period.

Discount on

Short-Term Obligations

When you buy a short-term obligation (one with a fixed

maturity date of 1 year or less from the date of issue),

other than a tax-exempt obligation, you generally can

choose to include any discount and interest payable on

the obligation in income currently. If you do not make this

choice, the following rules generally apply.

•

You must treat any gain when you sell, exchange, or

redeem the obligation as ordinary income, up to the

amount of the ratable share of the discount. See Dis-

counted Debt Instruments, later.

•

If you borrow money to buy or carry the obligation,

your deduction for interest paid on the debt is limited.

See Limit on interest deduction for short-term obliga-

tions, later.

Short-term obligations for which no choice is availa-

ble. You must include any discount or interest in current

income as it accrues for any short-term obligation (other

than a tax-exempt obligation) that is:

•

Held by an accrual-basis taxpayer;

•

Held primarily for sale to customers in the ordinary

course of your trade or business;

•

Held by a bank, regulated investment company, or

common trust fund;

•

Held by certain pass-through entities;

•

Identified as part of a hedging transaction; or

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•

A stripped bond or stripped coupon held by the per-

son who stripped the bond or coupon (or by any other

person whose basis in the obligation is determined by

reference to the basis in the hands of the person who

stripped the bond or coupon).

Effect on basis. Increase the basis of your obligation by

the amount of discount you include in income currently.

Figuring the accrued discount. Figure the accrued dis-

count by using either the ratable accrual method or the

constant yield method discussed in Accrued market dis-

count, earlier.

Government obligations. For an obligation described

above that is a short-term government obligation, the

amount you include in your income for the current year is

the accrued acquisition discount, if any, plus any other ac-

crued interest payable on the obligation. The acquisition

discount is the stated redemption price at maturity minus

your basis.

If you choose to use the constant yield method to figure

accrued acquisition discount, treat the cost of acquiring

the obligation as the issue price. If you choose to use this

method, you cannot change your choice.

Nongovernment obligations. For an obligation listed

above that is not a government obligation, the amount you

include in your income for the current year is the accrued

OID, if any, plus any other accrued interest payable. If you

choose the constant yield method to figure accrued OID,

apply it by using the obligation's issue price.

Choosing to include accrued acquisition discount

instead of OID. You can choose to report accrued ac-

quisition discount (defined earlier under Government obli-

gations) rather than accrued OID on these short-term obli-

gations. Your choice will apply to the year for which it is

made and to all later years and cannot be changed with-

out the consent of the IRS.

You must make your choice by the due date of your re-

turn, including extensions, for the first year for which you

are making the choice. Attach a statement to your return

or amended return indicating:

•

Your name, address, and social security number;

•

The choice you are making and that it is being made

under section 1283(c)(2) of the Internal Revenue

Code;

•

The period for which the choice is being made and the

obligation to which it applies; and

•

Any other information necessary to show you are enti-

tled to make this choice.

Choosing to include accrued discount and other in-

terest in current income. If you acquire short-term dis-

count obligations that are not subject to the rules for cur-

rent inclusion in income of the accrued discount or other

interest, you can choose to have those rules apply. This

choice applies to all short-term obligations you acquire

during the year and in all later years. You cannot change

this choice without the consent of the IRS.

The procedures to use in making this choice are the

same as those described for choosing to include acquisi-

tion discount instead of OID on nongovernment obliga-

tions in current income. However, you should indicate that

you are making the choice under section 1282(b)(2) of the

Internal Revenue Code.

Also, see the following discussion. If you make the elec-

tion to report all interest currently as OID, you must use

the constant yield method.

Election To Report

All Interest as OID

Generally, you can elect to treat all interest on a debt in-

strument acquired during the tax year as OID and include

it in income currently. For purposes of this election, inter-

est includes stated interest, acquisition discount, OID, de

minimis OID, market discount, de minimis market dis-

count, and unstated interest as adjusted by any amortiza-

ble bond premium or acquisition premium. See Regula-

tions section 1.1272-3.

When To Report

Interest Income

Terms you may need to know

(see Glossary):

Accrual method

Cash method

When to report your interest income depends on whether

you use the cash method or an accrual method to report

income.

Cash method. Most individual taxpayers use the cash

method. If you use this method, you generally report your

interest income in the year in which you actually or con-

structively receive it. However, there are special rules for

reporting the discount on certain debt instruments. See

U.S. Savings Bonds and Discount on Debt Instruments,

earlier.

Example. On September 1, 2021, you loaned another

individual $2,000 at 4% compounded annually. You are

not in the business of lending money. The note stated that

principal and interest would be due on August 31, 2023. In

2023, you received $2,163.20 ($2,000 principal and

$163.20 interest). If you use the cash method, you must

include in income on your 2023 return the $163.20 in inter-

est you received in that year.

Constructive receipt. You constructively receive in-

come when it is credited to your account or made availa-

ble to you. You do not need to have physical possession of

it. For example, you are considered to receive interest, div-

idends, or other earnings on any deposit or account in a

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bank, savings and loan association, or similar financial in-

stitution, or interest on life insurance policy dividends left

to accumulate, when they are credited to your account

and subject to your withdrawal.

You constructively receive income on the deposit or ac-

count even if you must:

•

Make withdrawals in multiples of even amounts,

•

Give a notice to withdraw before making the with-

drawal,

•

Withdraw all or part of the account to withdraw the

earnings, or

•

Pay a penalty on early withdrawals, unless the interest

you are to receive on an early withdrawal or redemp-

tion is substantially less than the interest payable at

maturity.

Accrual method. If you use an accrual method, you re-

port your interest income when you earn it, whether or not

you have received it. Interest is earned over the term of

the debt instrument.

Example. If, in the previous example, you use an ac-

crual method, you must include the interest in your income

as you earn it. You would report the interest as follows:

2021, $26.67; 2022, $81.06; and 2023, $55.47.

Coupon bonds. Generally, interest on coupon bonds is

taxable in the year the coupon becomes due and payable.

It does not matter when you mail the coupon for payment.

How To Report

Interest Income

Terms you may need to know

(see Glossary):

Nominee

Original issue discount (OID)

Generally, you report all your taxable interest income on

Form 1040 or 1040-SR, line 2b.

Schedule B (Form 1040). You must complete Sched-

ule B (Form 1040), Part I, if any of the following apply.

1. Your taxable interest income is more than $1,500.

2. You are claiming the interest exclusion under the Edu-

cation Savings Bond Program (discussed earlier).

3. You received interest from a seller-financed mortgage,

and the buyer used the property as a home.

4. You received a Form 1099-INT for U.S. savings bond

interest that includes amounts you reported in a previ-

ous tax year.

5. You received, as a nominee, interest that actually be-

longs to someone else.

6. You received a Form 1099-INT for interest on frozen

deposits.

7. You received a Form 1099-INT for interest on a bond

you bought between interest payment dates.

8. You are reporting OID in an amount less than the

amount shown on Form 1099-OID.

9. You are reporting interest income of less than the

amount shown on a Form 1099 due to amortizable

bond premium.

In Part I, line 1, list each payer's name and the amount re-

ceived from each. If you received a Form 1099-INT or

Form 1099-OID from a brokerage firm, list the brokerage

firm as the payer.

Reporting tax-exempt interest. Total your tax-exempt

interest (such as interest or accrued OID on certain state

and municipal bonds, including zero coupon municipal

bonds) reported on Form 1099-INT, box 8; Form

1099-OID, box 11; and exempt-interest dividends from a

mutual fund or other regulated investment company repor-

ted on Form 1099-DIV, box 12. Add these amounts to any

other tax-exempt interest you received. Report the total on

line 2a of Form 1040 or 1040-SR.

Form 1099-INT, box 9, and Form 1099-DIV, box 13,

show the tax-exempt interest subject to the AMT on Form

6251. These amounts already are included in the amounts

on Form 1099-INT, box 8, and Form 1099-DIV, box 12. Do

not add the amounts in Form 1099-INT, box 9, and Form

1099-DIV, box 13, to, or subtract them from, the amounts

on Form 1099-INT, box 8, and Form 1099-DIV, box 12.

Do not report interest from an individual retire-

ment arrangement (IRA) as tax-exempt interest.

Form 1099-INT. Your taxable interest income, except for

interest from U.S. savings bonds and Treasury obligations,

is shown in box 1 of Form 1099-INT. Add this amount to

any other taxable interest income you received. See the

Form 1099-INT Instructions for Recipient if you have inter-

est from a security acquired at a premium. You must report

all your taxable interest income even if you do not receive

a Form 1099-INT. Contact your financial institution if you

do not receive a Form 1099-INT by February 15. Your

identifying number may be truncated on any paper Form

1099-INT you receive.

If you forfeited interest income because of the early

withdrawal of a time deposit, the deductible amount will be

shown on Form 1099-INT in box 2. See Penalty on early

withdrawal of savings, later.

Box 3 of Form 1099-INT shows the interest income you

received from U.S. savings bonds, Treasury bills, Treasury

notes, and Treasury bonds. Generally, add the amount

shown in box 3 to any other taxable interest income you

received. If part of the amount shown in box 3 was previ-

ously included in your interest income, see U.S. savings

bond interest previously reported, later. If you redeemed

U.S. savings bonds you bought after 1989 and you paid

qualified educational expenses, see Interest excluded un-

der the Education Savings Bond Program, later.

CAUTION

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Box 4 of Form 1099-INT will contain an amount if you

were subject to backup withholding. Include the amount

from box 4 on Form 1040 or 1040-SR, line 25b.

Box 5 of Form 1099-INT shows your share of invest-

ment expenses of a single-class REMIC. This amount is

included in box 1 and is not deductible.

Box 6 of Form 1099-INT shows foreign tax paid. You

may be able to claim this tax as a deduction or a credit on

your Form 1040 or 1040-SR. See your tax return instruc-

tions. Box 7 of Form 1099-INT shows the country or U.S.

territory to which the foreign tax was paid.

For a covered security, if you made an election under

section 1278(b) to include market discount in income as it

accrues and you notified your payer of the election in writ-

ing in accordance with Regulations section 1.6045-1(n)

(5), box 10 of Form 1099-INT shows the market discount

that accrued on the debt instrument during the year while

held by you. Report this amount on your income tax return

as directed in the Instructions for Form 1040 or 1040-SR.

For a covered security, box 11 shows the amount of

premium amortization for the year, unless you notified the

payer in writing in accordance with Regulations section

1.6045-1(n)(5) that you did not want to amortize bond pre-

mium under section 171. If an amount is reported in this

box, see the Instructions for Schedule B (Form 1040). If an

amount is not reported in this box for a covered security

acquired at a premium, the payer has reported a net

amount of interest in box 1, 3, 8, or 9, whichever is appli-

cable. If the amount in this box is greater than the amount

of interest paid on the covered security, see Regulations

section 1.171-2(a)(4).

Form 1099-OID. The taxable OID on a discounted obli-

gation for the part of the year you owned it is shown in

box 1 of Form 1099-OID. Include this amount in your total

taxable interest income. But see Refiguring OID shown on

Form 1099-OID, earlier. Your identifying number may be

truncated on any paper Form 1099-OID you receive.

You must report all taxable OID even if you do not re-

ceive a Form 1099-OID.

Box 2 of Form 1099-OID shows any taxable interest on

the obligation other than OID. Add this amount to the OID

shown in box 1 and include the result in your total taxable

income.

If you bought and/or sold an obligation during the year,

see Bonds Sold Between Interest Dates, earlier, for infor-

mation about the treatment of periodic interest that may be

shown in box 2 of Form 1099-OID.

If you forfeited interest or principal on the obligation be-

cause of an early withdrawal, the deductible amount will

be shown in box 3. See Penalty on early withdrawal of

savings, later.

Box 4 of Form 1099-OID will contain an amount if you

were subject to backup withholding. Report the amount

from box 4 on Form 1040 or 1040-SR, line 25b.

Box 5 shows the market discount that accrued on the

debt instrument during the year while held by you for a

covered security acquired with OID, if you made an elec-

tion under section 1278(b) to include market discount in

income as it accrues and you notified your payer of the

election in writing in accordance with Regulations section

1.6045-1(n)(5).

For a taxable covered security, box 6 shows the amount

of acquisition premium amortization for the year that re-

duces the amount of OID that is included as interest on

your income tax return.

Box 9 of Form 1099-OID shows your share of invest-

ment expenses of a single-class REMIC. This amount is

not deductible.

U.S. savings bond interest previously reported. If you

received a Form 1099-INT for U.S. savings bond interest,

the form may show interest you do not have to report. See

Form 1099-INT for U.S. savings bond interest, earlier.

On Schedule B (Form 1040), Part I, line 1, report all the

interest shown on your Form 1099-INT. Then follow these

steps.

1. Several rows above line 2, enter a subtotal of all inter-

est listed on line 1.

2. Below the subtotal, enter “U.S. Savings Bond Interest

Previously Reported” and enter amounts previously

reported or interest accrued before you received the

bond.

3. Subtract these amounts from the subtotal and enter

the result on line 2.

Example 1. Your parents bought U.S. savings bonds

for you when you were a child. The bonds were issued in

your name, and the interest on the bonds was reported

each year as it accrued. See Choice to report interest

each year, earlier.

In March 2023, you redeemed one of the bonds—a

$1,000 Series EE bond. The bond was originally issued in

March 2004 for $500.00. When you redeemed the bond,

you received $729.20 for it.

The Form 1099-INT you received shows interest in-

come of $229.20. However, since the interest on your sav-

ings bonds was reported yearly, you need only include the

$2.80 interest that accrued from January 2023 to March

2023.

On Schedule B (Form 1040), Part I, line 1, enter your in-

terest income as shown on Form 1099-INT—$229.20. If

you had other taxable interest income, you would enter it

next and then enter a subtotal, as described earlier, before

going to the next step. Several rows above line 2, enter

“U.S. Savings Bond Interest Previously Reported” and en-

ter $226.40 ($229.20 − $2.80). Subtract $226.40 from

$229.20 and enter $2.80 on Schedule B (Form 1040),

line 2. Add this amount to your subtotal (if any) and in the

total on Schedule B (Form 1040), line 4.

Example 2. Your uncle died and left you a $1,000 Ser-

ies EE bond. You redeem the bond for $1,000.

Your uncle paid $500 for the bond, so $500 of the

amount you receive upon redemption is interest income.

Your uncle's executor included in your uncle's final return

$200 of the interest that had accrued at the time of your

uncle's death. You have to include only $300 in your in-

come.

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The bank where you redeem the bond gives you a

Form 1099-INT showing interest income of $500. You also

receive a Form 1099-INT showing taxable interest income

of $300 from your savings account.

You file Form 1040 or 1040-SR and complete Sched-

ule B (Form 1040). On line 1 of Schedule B (Form 1040),

you list the $500 and $300 interest amounts shown on

your Forms 1099. Several rows above line 2, you put a

subtotal of $800. Below this subtotal, enter “U.S. Savings

Bond Interest Previously Reported” and enter the $200 in-

terest included in your uncle's final return. Subtract the

$200 from the subtotal and enter $600 on line 2. You then

complete the rest of the form.

Worksheet for savings bonds distributed from a

retirement or profit-sharing plan. If you cashed a sav-

ings bond acquired in a taxable distribution from a retire-

ment or profit-sharing plan (as discussed under U.S. Sav-

ings Bonds, earlier), your interest income does not include

the interest accrued before the distribution and taxed as a

distribution from the plan.

Use the worksheet below to figure the amount you

subtract from the interest shown on Form

1099-INT.

A. Enter the amount of cash received upon redemption

of the bond ..........................

B. Enter the value of the bond at the time of distribution

by the plan ...........................

C. Subtract the amount on line B from the amount on

line A. This is the amount of interest accrued on the

bond since it was distributed by the plan ........

D. Enter the amount of interest shown on your Form

1099-INT ............................

E. Subtract the amount on line C from the amount on

line D. This is the amount you include in “U.S. Savings

Bond Interest Previously Reported” ............

Your employer should tell you the value of each bond

on the date it was distributed.

Example. You received a distribution of Series EE U.S.

savings bonds in December 2020 from your company's

profit-sharing plan.

In March 2023, you redeemed a $100 Series EE bond

that was part of the distribution you received in 2020. You

received $92.68 for the bond the company bought in May

2006. The value of the bond at the time of distribution in

2020 was $85.36. (This is the amount you included on

your 2020 return.) The bank gave you a Form 1099-INT

that shows $42.68 interest (the total interest from the date

the bond was purchased to the date of redemption). Since

a part of the interest was included in your income in 2020,

you need to include in your 2023 income only the interest

that accrued after the bond was distributed to you.

On Schedule B (Form 1040), line 1, include all the inter-

est shown on your Form 1099-INT as well as any other

taxable interest income you received. Several rows above

line 2, put a subtotal of all interest listed on line 1. Below

this subtotal, enter “U.S. Savings Bond Interest Previously

Reported” and enter the amount figured on the worksheet

below.

A. Enter the amount of cash received upon

redemption of the bond .................

$92.68

B. Enter the value of the bond at the time of

distribution by the plan ..................

$85.36

C. Subtract the amount on line B from the amount on

line A. This is the amount of interest accrued on the

bond since it was distributed by the plan .......

$7.32

D. Enter the amount of interest shown on your Form

1099-INT ..........................

$42.68

E. Subtract the amount on line C from the amount on

line D. This is the amount you include in “U.S.

Savings Bond Interest Previously Reported” .....

$35.36

Subtract $35.36 from the subtotal and enter the result on

Schedule B (Form 1040), line 2. You then complete the

rest of the form.

Interest excluded under the Education Savings Bond

Program. Use Form 8815 to figure your interest exclusion

when you redeem qualified savings bonds and pay quali-

fied higher education expenses during the same year.

For more information on the exclusion and qualified

higher education expenses, see the earlier discussion un-

der Education Savings Bond Program.

Interest on seller-financed mortgage. If an individual

buys his or her home from you in a sale that you finance,

you must report the amount of interest received on Sched-

ule B (Form 1040), line 1. Include on line 1 the buyer's

name, address, and SSN. If you do not, you may have to

pay a $50 penalty. The buyer may have to pay a $50 pen-

alty if he or she does not give you this information.

You also must give your name, address, and SSN (or

EIN) to the buyer. If you do not, you may have to pay a $50

penalty.

Frozen deposits. Even if you receive a Form 1099-INT

for interest on deposits that you could not withdraw at the

end of 2023, you must exclude these amounts from your

gross income. (See Interest income on frozen deposits,

earlier.) Do not include this income on line 2b of Form

1040 or 1040-SR. On Schedule B (Form 1040), Part I, in-

clude the full amount of interest shown on your Form

1099-INT on line 1. Several rows above line 2, put a subto-

tal of all interest income. Below this subtotal, enter “Frozen

Deposits” and show the amount of interest that you are ex-

cluding. Subtract this amount from the subtotal and enter

the result on line 2.

Accrued interest on bonds. If you received a Form

1099-INT that reflects accrued interest paid on a bond you

bought between interest payment dates, include the full

amount shown as interest on the Form 1099-INT on

Schedule B (Form 1040), Part I, line 1. Then, below a sub-

total of all interest income listed, enter “Accrued Interest”

and the amount of accrued interest you paid to the seller.

That amount is taxable to the seller, not you. Subtract that

amount from the interest income subtotal. Enter the result

on line 2b of Form 1040 or 1040-SR.

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For more information, see Bonds Sold Between Interest

Dates, earlier.

Nominee distributions. If you received a Form 1099-INT

that includes an amount you received as a nominee for the

real owner, report the full amount shown as interest on the

Form 1099-INT on Part I, line 1 of Schedule B (Form

1040). Then, below a subtotal of all interest income listed,

enter “Nominee Distribution” and the amount that actually

belongs to someone else. Subtract that amount from the

interest income subtotal. Enter the result on line 2b of

Form 1040 or 1040-SR.

File Form 1099-INT with the IRS. If you received in-

terest as a nominee in 2023, you must file a Form

1099-INT for that interest with the IRS. Send Copy A of

Form 1099-INT with a Form 1096, Annual Summary and

Transmittal of U.S. Information Returns, to your Internal

Revenue Service Center by February 28, 2024 (April 1,

2024, if you file Form 1099-INT electronically). Give the

actual owner of the interest Copy B of the Form 1099-INT

by January 31, 2024. On Form 1099-INT, you should be

listed as the “Payer.” Prepare one Form 1099-INT for each

other owner and show that person as the “Recipient.”

However, you do not have to file Form 1099-INT to show

payments for your spouse. For more information about the

reporting requirements and the penalties for failure to file

(or furnish) certain information returns, see the General In-

structions for Certain Information Returns.

Similar rules apply to OID reported to you as a nominee

on Form 1099-OID. You must file a Form 1099-OID with

Form 1096 to show the proper distributions of the OID.

Example. You and your sibling have a joint savings ac-

count that paid $1,500 interest for 2023. Your sibling de-

posited 30% of the funds in this account, and you and

your sibling have agreed to share the yearly interest in-

come in proportion to the amount each of you has inves-

ted. Because your SSN was given to the bank, you re-

ceived a Form 1099-INT for 2023 that includes the interest

income earned belonging to your sibling. This amount is

$450, or 30% of the total interest of $1,500.

You must give your sibling a Form 1099-INT by January

31, 2024, showing $450 of interest income your sibling

earned for 2023. You also must send a copy of the nomi-

nee Form 1099-INT, along with Form 1096, to the Internal

Revenue Service Center by February 28, 2024 (April 1,

2024, if you file Form 1099-INT electronically). Show your

own name, address, and SSN as that of the “Payer” on the

Form 1099-INT. Show your sibling's name, address, and

SSN in the blocks provided for identification of the “Recipi-

ent.”

When you prepare your own federal income tax return,

report the total amount of interest income, $1,500, on

Schedule B (Form 1040), Part I, line 1, and identify the

name of the bank that paid this interest. Show the amount

belonging to your sibling, $450, as a subtraction from a

subtotal of all interest on Schedule B (Form 1040) and

identify this subtraction as a “Nominee Distribution.” (Your

sibling will report the $450 of interest income on any in-

come tax return your sibling files and identify you as the

payer of that amount.)

Original issue discount (OID) adjustment. If you are

reporting OID in an amount less than the amount shown

on Form 1099-OID or other written statement (such as for

a REMIC regular interest), include the full amount of OID

shown on your Form 1099-OID or other statement on

Schedule B (Form 1040), Part I, line 1. Show OID you do

not have to report below a subtotal of the interest and OID

listed. Identify the amount as “OID Adjustment” and sub-

tract it from the subtotal.

Penalty on early withdrawal of savings. If you with-

draw funds from a certificate of deposit or other deferred

interest account before maturity, you may be charged a

penalty. The Form 1099-INT or similar statement given to

you by the financial institution will show the total amount of

interest in box 1 and will show the penalty separately in

box 2. You must include in income all interest shown in

box 1. You can deduct the penalty on Schedule 1 (Form

1040), line 18.

Dividends and

Other Distributions

Dividends can be distributions of money, stock, or other

property paid to you by a corporation or by a mutual fund.

You also may receive dividends through a partnership, an

estate, a trust, or an association that is taxed as a corpo-

ration. However, some amounts you receive called divi-

dends actually are interest income. See Dividends that are

actually interest, earlier.

The most common kinds of distributions are:

•

Ordinary dividends,

•

Capital gain distributions, and

•

Nondividend distributions.

Most distributions are paid in cash (check). However, dis-

tributions can consist of more stock, stock rights, other

property, or services.

Form 1099-DIV. Most corporations use Form 1099-DIV

to show you the distributions you received from them dur-

ing the year. Keep this form with your records. You do not

have to attach it to your tax return. Your identifying number

may be truncated on any paper Form 1099-DIV you re-

ceive.

Dividends not reported on Form 1099-DIV. Even if

you do not receive a Form 1099-DIV, you must still report

all your taxable dividend income. For example, you may

receive distributive shares of dividends from partnerships

or S corporations. These dividends are reported to you on

Schedule K-1 (Form 1065) and Schedule K-1 (Form

1120S).

Nominees. If someone receives distributions as a

nominee for you, that person will give you a Form

1099-DIV which will show distributions received on your

behalf.

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If you receive a Form 1099-DIV that includes amounts

belonging to another person, see Nominees under How

To Report Dividend Income, later, for more information.

Form 1099-MISC. Certain substitute payments in lieu of

dividends or tax-exempt interest received by a broker on

your behalf must be reported to you on Form 1099-MISC,

Miscellaneous Information, or a similar statement. See

also Reporting Substitute Payments, later.

Incorrect amount shown on a Form 1099. If you re-

ceive a Form 1099 that shows an incorrect amount (or

other incorrect information), you should ask the issuer for

a corrected form. The new Form 1099 you receive should

be denoted “Corrected.”

Dividends on stock sold. If stock is sold, exchanged, or

otherwise disposed of after a dividend is declared but be-

fore it is paid, the owner of record (usually the payee

shown on the dividend check) must include the dividend

in income.

Dividends received in January. If a mutual fund (or

other regulated investment company) or real estate invest-

ment trust (REIT) declares a dividend (including any ex-

empt-interest dividend or capital gain distribution) in Octo-

ber, November, or December, payable to shareholders of

record on a date in one of those months but actually pays

the dividend during January of the next calendar year, you

are considered to have received the dividend on Decem-

ber 31. You report the dividend in the year it was declared.

Ordinary Dividends

Ordinary dividends are the most common type of distribu-

tion from a corporation or a mutual fund. They are paid out

of earnings and profits and are ordinary income to you.

This means they are not capital gains. You can assume

that any dividend you receive on common or preferred

stock is an ordinary dividend unless the paying corpora-

tion or mutual fund tells you otherwise. Ordinary dividends

will be shown in box 1a of the Form 1099-DIV you receive.

Qualified Dividends

Qualified dividends are the ordinary dividends subject to

the same 0%, 15%, or 20% maximum tax rate that applies

to net capital gain. They should be shown in box 1b of the

Form 1099-DIV you receive.

See the instructions for Form 1040 to calculate the in-

come tax on net capital gain and qualified dividends.

The maximum rate on qualified dividends applies only if

all of the following requirements are met.

•

The dividends must have been paid by a U.S. corpora-

tion or a qualified foreign corporation. (See Qualified

foreign corporation, later.)

•

The dividends are not of the type listed later under

Dividends that are not qualified dividends.

•

You meet the holding period (discussed next).

Holding period. You must have held the stock for more

than 60 days during the 121-day period that begins 60

days before the ex-dividend date. The ex-dividend date is

the first date following the declaration of a dividend on

which the buyer of a stock is not entitled to receive the

next dividend payment. When counting the number of

days you held the stock, include the day you disposed of

the stock, but not the day you acquired it. See the exam-

ples below.

Exception for preferred stock. In the case of prefer-

red stock, you must have held the stock more than 90

days during the 181-day period that begins 90 days before

the ex-dividend date if the dividends are due to periods to-

taling more than 366 days. If the preferred dividends are

due to periods totaling less than 367 days, the holding pe-

riod in the preceding paragraph applies.

Example 1. You bought 5,000 shares of XYZ Corp.

common stock on July 5, 2023. XYZ Corp. paid a cash

dividend of 10 cents per share. The ex-dividend date was

July 12, 2023. Your Form 1099-DIV from XYZ Corp. shows

$500 in box 1a (ordinary dividends) and in box 1b (quali-

fied dividends). However, you sold the 5,000 shares on

August 8, 2023. You held your shares of XYZ Corp. for

only 34 days of the 121-day period (from July 6, 2023,

through August 8, 2023). The 121-day period began on

May 13, 2023 (60 days before the ex-dividend date), and

ended on September 10, 2023. You have no qualified divi-

dends from XYZ Corp. because you held the XYZ stock

for less than 61 days.

Example 2. Assume the same facts as in Example 1

except that you bought the stock on July 11, 2023 (the day

before the ex-dividend date), and you sold the stock on

September 13, 2023. You held the stock for 63 days (from

July 12, 2023, through September 13, 2023). The $500 of

qualified dividends shown in box 1b of your Form

1099-DIV are all qualified dividends because you held the

stock for 61 days of the 121-day period (from July 12,

2023, through September 13, 2023).

Example 3. You bought 10,000 shares of ABC Mutual

Fund common stock on July 5, 2023. ABC Mutual Fund

paid a cash dividend of 10 cents per share. The ex-divi-

dend date was July 12, 2023. The ABC Mutual Fund advi-

ses you that the portion of the dividend eligible to be trea-

ted as qualified dividends equals 2 cents per share. Your

Form 1099-DIV from ABC Mutual Fund shows total ordi-

nary dividends of $1,000 and qualified dividends of $200.

However, you sold the 10,000 shares on August 8, 2023.

You have no qualified dividends from ABC Mutual Fund

because you held the ABC Mutual Fund stock for less

than 61 days.

Holding period reduced where risk of loss is di-

minished. When determining whether you met the mini-

mum holding period discussed earlier, you cannot count

any day during which you meet any of the following condi-

tions.

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1. You had an option to sell, were under a contractual

obligation to sell, or had made (and not closed) a

short sale of substantially identical stock or securities.

2. You were grantor (writer) of an option to buy substan-

tially identical stock or securities.

3. Your risk of loss is diminished by holding one or more

other positions in substantially similar or related prop-

erty.

For information about how to apply condition (3), see

Regulations section 1.246-5.

Qualified foreign corporation. A foreign corporation is

a qualified foreign corporation if it meets any of the follow-

ing conditions.

1. The corporation is incorporated in a U.S. territory.

2. The corporation is eligible for the benefits of a com-

prehensive income tax treaty with the United States

that the Department of the Treasury determines is sat-

isfactory for this purpose and that includes an ex-

change of information program. For a list of those

treaties, see Table 1-3.

3. The corporation does not meet (1) or (2) above, but

the stock for which the dividend is paid is readily trad-

able on an established securities market in the United

States. See Readily tradable stock, later.

Exception. A corporation is not a qualified foreign cor-

poration if it is a passive foreign investment company dur-

ing its tax year in which the dividends are paid or during its

previous tax year.

Controlled foreign corporation (CFC). Dividends

paid out of a CFC's earnings and profits that were not pre-

viously taxed are qualified dividends if the CFC is other-

wise a qualified foreign corporation and the other require-

ments in this discussion are met. Certain dividends paid

by a CFC that would be treated as a passive foreign in-

vestment company but for section 1297(d) of the Internal

Revenue Code may be treated as qualified dividends. For

more information, see Notice 2004-70, which can be

found at IRS.gov/irb/2004-44_IRB#NOT-2004-70.

Readily tradable stock. Any stock or American de-

positary receipt in respect of that stock is considered to

satisfy requirement (3) under Qualified foreign corporation

if it is listed on a national securities exchange that is regis-

tered under section 6 of the Securities Exchange Act of

1934 or on the Nasdaq Stock Market. For a list of the ex-

changes that meet these requirements, see National

Securities Exchange | Investor.gov.

Table 1-3. Income Tax Treaties

Income tax treaties that the United States has with the following

countries satisfy requirement (2) under Qualified foreign corporation.

Australia Indonesia Romania

Austria Ireland Russia

Bangladesh Israel Federation

Barbados Italy Slovak

Belgium Jamaica Republic

Bulgaria Japan Slovenia

Canada Kazakhstan South Africa

China Korea Spain

Cyprus Latvia Sri Lanka

Czech Lithuania Sweden

Republic Luxembourg Switzerland

Denmark Malta Thailand

Egypt Mexico Trinidad

Estonia Morocco and

Finland Netherlands Tobago

France New Zealand Tunisia

Germany Norway Turkey

Greece Pakistan Ukraine

Hungary Philippines United

Iceland Poland Kingdom

India Portugal Venezuela

Note. The treaty with Hungary is terminated as of

2024. The treaty ceases to have effect for tax withheld at

source for amounts paid or credited on or after January 1,

2024. The treaty ceases to have effect for other taxes for

taxable periods beginning on or after January 1, 2024. A

new treaty with Chile comes into effect in 2024. The treaty

comes into effect for tax withheld at source for amounts

paid or credited on or after February 1, 2024. The treaty

comes into effect for other taxes for taxable periods begin-

ning on or after January 1, 2024.

For the latest information about developments re-

lated to Pub. 550, such as tax treaties between

the United States and particular countries, go to

www.IRS.gov/Pub550.

Dividends that are not qualified dividends. The fol-

lowing dividends are not qualified dividends. They are not

qualified dividends even if they are shown in box 1b of

Form 1099-DIV.

•

Capital gain distributions.

•

Dividends paid on deposits with mutual savings

banks, cooperative banks, credit unions, U.S. building

and loan associations, U.S. savings and loan associa-

tions, federal savings and loan associations, and simi-

lar financial institutions. Report these amounts as in-

terest income.

•

Dividends from a corporation that is a tax-exempt or-

ganization or farmer's cooperative during the corpora-

tion's tax year in which the dividends were paid or dur-

ing the corporation's previous tax year.

•

Dividends paid by a corporation on employer securi-

ties held on the date of record by an employee stock

ownership plan (ESOP) maintained by that

corporation.

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•

Dividends on any share of stock to the extent you are

obligated (whether under a short sale or otherwise) to

make related payments for positions in substantially

similar or related property.

•

Payments in lieu of dividends, but only if you know or

have reason to know the payments are not qualified

dividends.

•

Payments shown on Form 1099-DIV, box 1b, from a

foreign corporation to the extent you know or have rea-

son to know the payments are not qualified dividends.

Dividends Used To

Buy More Stock

The corporation in which you own stock may have a divi-

dend reinvestment plan. This plan lets you choose to use

your dividends to buy (through an agent) more shares of

stock in the corporation instead of receiving the dividends

in cash. Most mutual funds also permit shareholders to

automatically reinvest distributions in more shares in the

fund, instead of receiving cash. If you use your dividends

to buy more stock at a price equal to its fair market value,

you must still report the dividends as income.

If you are a member of a dividend reinvestment plan

that lets you buy more stock at a price less than its fair

market value, you must report as dividend income the fair

market value of the additional stock on the dividend pay-

ment date.

You also must report as dividend income any service

charge subtracted from your cash dividends before the

dividends are used to buy the additional stock. But you

may be able to deduct the service charge.

In some dividend reinvestment plans, you can invest

more cash to buy shares of stock at a price less than fair

market value. If you choose to do this, you must report as

dividend income the difference between the cash you in-

vest and the fair market value of the stock you buy. When

figuring this amount, use the fair market value of the stock

on the dividend payment date.

Money Market Funds

Report amounts you receive from money market funds as

dividend income. Money market funds are a type of mu-

tual fund and should not be confused with bank money

market accounts that pay interest.

Capital Gain Distributions

Capital gain distributions (also called capital gain divi-

dends) are paid to you or credited to your account by mu-

tual funds (or other regulated investment companies) and

real estate investment trusts (REITs). They will be shown

in box 2a of the Form 1099-DIV you receive from the mu-

tual fund or REIT.

Report capital gain distributions as long-term capital

gains, regardless of how long you owned your shares in

the mutual fund or REIT. See Capital gain distributions un-

der How To Report Dividend Income, later in this chapter.

Qualified Opportunity Fund (QOF). Effective Decem-

ber 22, 2017, section 1400Z-2 provides a temporary de-

ferral of inclusion in gross income for capital gains inves-

ted in QOFs, and permanent exclusion of capital gains

from the sale or exchange of an investment in the QOF if

the investment is held for at least 10 years. See the Form

8949 instructions on how to report your election to defer

eligible gains invested in a QOF. For additional informa-

tion, please see Opportunity Zones Frequently Asked

Questions available at www.IRS.gov/Newsroom/

Opportunity-Zones-Frequently-Asked-Questions.

Qualified Opportunity Investment. If you held a quali-

fied investment in a qualified opportunity fund (QOF) at

any time during the year, you must file your return with

Form 8997, Initial and Annual Statement of Qualified Op-

portunity Fund Investments, attached. See Form 8997 in-

structions.

Undistributed capital gains of mutual funds and RE-

ITs. Some mutual funds and REITs keep their long-term

capital gains and pay tax on them. You must treat your

share of these gains as distributions, even though you did

not actually receive them. However, they are not included

on Form 1099-DIV. Instead, they are reported to you in

box 1a of Form 2439.

Form 2439 also will show how much, if any, of the un-

distributed capital gains is:

•

Unrecaptured section 1250 gain (box 1b),

•

Gain from qualified small business stock (section

1202 gain, box 1c), or

•

Collectibles (28%) gain (box 1d).

For information about these terms, see Capital Gain Tax

Rates in chapter 4.

The tax paid on these gains by the mutual fund or REIT

is shown in box 2 of Form 2439.

Basis adjustment. Increase your basis in your mutual

fund, or your interest in a REIT, by the difference between

the gain you report and the credit you claim for the tax

paid.

Nondividend Distributions

A nondividend distribution is a distribution that is not paid

out of the earnings and profits of a corporation or a mutual

fund. You should receive a Form 1099-DIV or other state-

ment showing you the nondividend distribution. On Form

1099-DIV, a nondividend distribution will be shown in

box 3. If you do not receive such a statement, you report

the distribution as an ordinary dividend.

Basis adjustment. A nondividend distribution reduces

the basis of your stock. It is not taxed until your basis in

the stock is fully recovered. This nontaxable portion also is

called a return of capital; it is a return of your investment in

the stock of the company. If you buy stock in a corporation

in different lots at different times, and you cannot definitely

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identify the shares subject to the nondividend distribution,

reduce the basis of your earliest purchases first.

When the basis of your stock has been reduced to zero,

report any additional nondividend distribution you receive

as a capital gain. Whether you report it as a long-term or

short-term capital gain depends on how long you have

held the stock. See Holding Period in chapter 4.

Example 1. You bought stock in 2010 for $100. In

2013, you received a nondividend distribution of $80. You

did not include this amount in your income, but you re-

duced the basis of your stock to $20. You received a non-

dividend distribution of $30 in 2023. The first $20 of this

amount reduced your basis to zero. You report the other

$10 as a long-term capital gain for 2023. You must report

as a long-term capital gain any nondividend distribution

you receive on this stock in later years.

Example 2. You bought shares in XYZ Mutual Fund in

2019 for $12 per share. In 2020, you received a nondivi-

dend distribution of $5 per share. You reduced your basis

in each share by $5 to an adjusted basis of $7. In 2021,

you received a nondividend distribution of $1 per share

and further reduced your basis in each share to $6. In

2022, you received a nondividend distribution of $2 per

share. Your basis was reduced to $4 per share. In 2023,

the nondividend distribution from the mutual fund was $5

per share. You reduce your basis in each share to zero

and report $1 of gain per share. See the Instructions for

Form 8949 for details and more information.

For more information on Form 8949 and Sched-

ule D (Form 1040), see Reporting Capital Gains

and Losses in chapter 4. Also, see the Instruc-

tions for Form 8949 and the Instructions for Schedule D

(Form 1040).

Liquidating Distributions

Liquidating distributions, sometimes called liquidating divi-

dends, are distributions you receive during a partial or

complete liquidation of a corporation. These distributions

are, at least in part, one form of a return of capital. They

may be paid in one or more installments. You will receive

Form 1099-DIV from the corporation showing you the

amount of the liquidating distribution in box 9 or 10.

Any liquidating distribution you receive is not taxable to

you until you have recovered the basis of your stock. After

the basis of your stock has been reduced to zero, you

must report the liquidating distribution as a capital gain.

Whether you report the gain as a long-term or short-term

capital gain depends on how long you have held the stock.

See Holding Period in chapter 4.

Stock acquired at different times. If you acquired

stock in the same corporation in more than one transac-

tion, you own more than one block of stock in the corpora-

tion. If you receive distributions from the corporation in

complete liquidation, you must divide the distribution

among the blocks of stock you own in the following pro-

portion: the number of shares in that block over the total

number of shares you own. Divide distributions in partial

TIP

liquidation among that part of the stock redeemed in the

partial liquidation. After the basis of a block of stock is re-

duced to zero, you must report the part of any later distri-

bution for that block as a capital gain.

Distributions less than basis. If the total liquidating

distributions you receive are less than the basis of your

stock, you may have a capital loss. You can report a capi-

tal loss only after you have received the final distribution in

liquidation that results in the redemption or cancellation of

the stock. Whether you report the loss as a long-term or

short-term capital loss depends on how long you held the

stock. See Holding Period in chapter 4.

Distributions of Stock

and Stock Rights

Distributions by a corporation of its own stock are com-

monly known as stock dividends. Stock rights (also known

as “stock options”) are distributions by a corporation of

rights to acquire the corporation's stock. Generally, stock

dividends and stock rights are not taxable to you, and you

do not report them on your return.

Taxable stock dividends and stock rights. Distribu-

tions of stock dividends and stock rights are taxable to you

if any of the following apply.

1. You or any other shareholder have the choice to re-

ceive cash or other property instead of stock or stock

rights.

2. The distribution gives cash or other property to some

shareholders and an increase in the percentage inter-

est in the corporation's assets or earnings and profits

to other shareholders.

3. The distribution is in convertible preferred stock and

has the same result as in (2).

4. The distribution gives preferred stock to some com-

mon stock shareholders and common stock to other

common stock shareholders.

5. The distribution is on preferred stock. (The distribu-

tion, however, is not taxable if it is an increase in the

conversion ratio of convertible preferred stock made

solely to take into account a stock dividend, stock

split, or similar event that would otherwise result in re-

ducing the conversion right.)

The term “stock” includes rights to acquire stock, and

the term “shareholder” includes a holder of rights or con-

vertible securities.

If you receive taxable stock dividends or stock rights,

include their fair market value at the time of distribution in

your income.

Constructive distributions. You must treat certain

transactions that increase your proportionate interest in

the earnings and profits or assets of a corporation as if

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they were distributions of stock or stock rights. These con-

structive distributions are taxable if they have the same re-

sult as a distribution described in (2), (3), (4), or (5) of the

above discussion.

This treatment applies to a change in your stock's con-

version ratio or redemption price, a difference between

your stock's redemption price and issue price, a redemp-

tion not treated as a sale or exchange of your stock, and

any other transaction having a similar effect on your inter-

est in the corporation.

Preferred stock redeemable at a premium. If you

receive preferred stock having a redemption price higher

than its issue price, the difference (the redemption pre-

mium) generally is taxable as a constructive distribution of

additional stock on the preferred stock.

For stock issued before October 10, 1990, you include

the redemption premium in your income ratably over the

period during which the stock cannot be redeemed. For

stock issued after October 9, 1990, you include the re-

demption premium on the basis of its economic accrual

over the period during which the stock cannot be re-

deemed, as if it were original issue discount on a debt in-

strument. See Original Issue Discount (OID), earlier in this

chapter.

The redemption premium is not a constructive distribu-

tion, and is not taxable as a result, in the following situa-

tions.

1. The stock was issued before October 10, 1990 (be-

fore December 20, 1995, if redeemable solely at the

option of the issuer), and the redemption premium is

“reasonable.” (For stock issued before October 10,

1990, only the part of the redemption premium that is

not “reasonable” is a constructive distribution.) The re-

demption premium is reasonable if it is not more than

10% of the issue price on stock not redeemable for 5

years from the issue date or is in the nature of a pen-

alty for making a premature redemption.

2. The stock was issued after October 9, 1990 (after De-

cember 19, 1995, if redeemable solely at the option of

the issuer), and the redemption premium is de mini-

mis. The redemption premium is de minimis if it is less

than one-fourth of 1% (0.0025) of the redemption

price multiplied by the number of full years from the

date of issue to the date redeemable.

3. The stock was issued after October 9, 1990, and must

be redeemed at a specified time or is redeemable at

your option, but the redemption is unlikely because it

is subject to a contingency outside your control (not

including the possibility of default, insolvency, etc.).

4. The stock was issued after December 19, 1995, and

is redeemable solely at the option of the issuer, but

the redemption premium is in the nature of a penalty

for premature redemption or redemption is not more

likely than not to occur. The redemption will be treated

under a “safe harbor” as not more likely than not to oc-

cur if all of the following are true.

a. You and the issuer are not related under the rules

discussed in chapter 4 under Losses on Sales or

Trades of Property, substituting “20%” for “50%.”

b. There are no plans, arrangements, or agreements

that effectively require or are intended to compel

the issuer to redeem the stock.

c. The redemption would not reduce the stock's

yield.

Basis. Your basis in stock or stock rights received in a

taxable distribution is their fair market value when distrib-

uted. If you receive stock or stock rights that are not taxa-

ble to you, see Stocks and Bonds, later, for information on

how to figure their basis.

Fractional shares. You may not own enough stock in a

corporation to receive a full share of stock if the corpora-

tion declares a stock dividend. However, with the approval

of the shareholders, the corporation may set up a plan in

which fractional shares are not issued but instead are

sold, and the cash proceeds are given to the sharehold-

ers. Any cash you receive for fractional shares under such

a plan is treated as an amount realized on the sale of the

fractional shares. Report this transaction on Form 8949.

Enter your gain or loss, the difference between the cash

you receive and the basis of the fractional shares sold, in

column (h) of Schedule D (Form 1040) in Part I or Part II,

whichever is appropriate.

Report these transactions on Form 8949 with the

correct box checked.

For more information on Form 8949 and Schedule D

(Form 1040), see Reporting Capital Gains and Losses in

chapter 4. Also, see the Instructions for Form 8949 and

the Instructions for Schedule D (Form 1040).

Example. You own one share of common stock that

you bought on January 6, 2014, for $100. The corporation

declared a common stock dividend of 5% on June 30,

2023. The fair market value of the stock at the time the

stock dividend was declared was $200. You were paid $10

for the fractional-share stock dividend under a plan descri-

bed in the discussion above. You figure your gain or loss

as follows.

Fair market value of old stock ............... $200.00

Fair market value of stock dividend

(cash received) ........................

+ 10.00

Fair market value of old stock and stock dividend ... $210.00

Basis (cost) of old stock

after the stock dividend

(($200 ÷ $210) × $100) ................... $95.24

Basis (cost) of stock dividend

(($10 ÷ $210) × $100) ....................

+ 4.76

Total ............................... $100.00

Cash received ......................... $10.00

Basis (cost) of stock dividend ............... − 4.76

Gain $5.24

CAUTION

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Because you had held the share of stock for more than

1 year at the time the stock dividend was declared, your

gain on the stock dividend is a long-term capital gain.

Scrip dividends. A corporation that declares a stock

dividend may issue you a scrip certificate that entitles you

to a fractional share. The certificate generally is nontaxa-

ble when you receive it. If you choose to have the corpora-

tion sell the certificate for you and give you the proceeds,

your gain or loss is the difference between the proceeds

and the part of your basis in the corporation's stock alloca-

ted to the certificate.

However, if you receive a scrip certificate that you can

choose to redeem for cash instead of stock, the certificate

is taxable when you receive it. You must include its fair

market value in income on the date you receive it.

Other Distributions

You may receive any of the following distributions during

the year.

Exempt-interest dividends. Exempt-interest dividends

you receive from a mutual fund or other regulated invest-

ment company are not included in your taxable income.

(However, see Information reporting requirement, next.)

Exempt-interest dividends should be shown in box 12 of

Form 1099-DIV.

Information reporting requirement. Although ex-

empt-interest dividends are not taxable, you must show

them on your tax return if you have to file a return. See Re-

porting tax-exempt interest, earlier.

Alternative minimum tax treatment. Exempt-interest

dividends paid from specified private activity bonds may

be subject to the AMT. The exempt-interest dividends sub-

ject to the AMT should be shown in box 13 of Form

1099-DIV. See Form 6251 and its instructions for more in-

formation.

Dividends on insurance policies. Insurance policy divi-

dends the insurer keeps and uses to pay your premiums

are not taxable. However, you must report as taxable inter-

est income the interest that is paid or credited on divi-

dends left with the insurance company.

If dividends on an insurance contract (other than a

modified endowment contract) are distributed to you, they

are a partial return of the premiums you paid. Do not in-

clude them in your gross income until they are more than

the total of all net premiums you paid for the contract. (For

information on the treatment of a distribution from a modi-

fied endowment contract, see Distribution Before Annuity

Starting Date From a Nonqualified Plan under Taxation of

Nonperiodic Payments in Pub. 575.) See instructions for

the Form 1040 or Form 1040-SR for where to report.

Dividends on veterans' insurance. Dividends you re-

ceive on veterans' insurance policies are not taxable. In

addition, interest on dividends left with the Department of

Veterans Affairs is not taxable.

Patronage dividends. Generally, patronage dividends

you receive in money from a cooperative organization are

included in your income. You should receive Form

1099-PATR, Taxable Distributions Received from Cooper-

atives.

Do not include in your income patronage dividends you

receive on:

•

Property bought for your personal use, or

•

Capital assets or depreciable property bought for use

in your business. But you must reduce the basis (cost)

of the items bought. If the dividend is more than the

adjusted basis of the assets, you must report the ex-

cess as income.

These rules are the same whether the cooperative pay-

ing the dividend is a taxable or tax-exempt cooperative.

Alaska Permanent Fund dividends. Do not report

these amounts as dividends. Instead, include these

amounts on Schedule 1 (Form 1040), line 8g.

How To Report

Dividend Income

Terms you may need to know

(see Glossary):

Nominee

Restricted stock

Use Form 1040 or 1040-SR to report your dividend in-

come. Report the total of your ordinary dividends on

line 3b of Form 1040 or 1040-SR. Report qualified divi-

dends on line 3a.

Form 1099-DIV. If you owned stock on which you re-

ceived $10 or more in dividends and other distributions,

you should receive a Form 1099-DIV. Even if you do not

receive a Form 1099-DIV, you must report all your divi-

dend income.

See Form 1099-DIV and its instructions for more infor-

mation on how to report dividend income.

Form 1040 or 1040-SR. You must complete Schedule B

(Form 1040), Part II, and attach it to your Form 1040 or

1040-SR, if:

•

Your ordinary dividends (Form 1099-DIV, box 1a) are

more than $1,500, or

•

You received, as a nominee, dividends that actually

belong to someone else.

If your ordinary dividends are more than $1,500, you also

must complete Schedule B (Form 1040), Part III.

List on Schedule B (Form 1040), Part II, line 5, each

payer's name and the ordinary dividends you received. If

your securities are held by a brokerage firm (in “street

name”), list the name of the brokerage firm shown on

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Form 1099-DIV as the payer. If your stock is held by a

nominee who is the owner of record, and the nominee

credited or paid you dividends on the stock, show the

name of the nominee and the dividends you received or

for which you were credited.

Enter on line 6 the total of the amounts listed on line 5.

(However, if you hold stock as a nominee, see Nominees,

later.) Also, enter this total on line 3b of Form 1040 or

1040-SR.

Dividends received on restricted stock. Restricted

stock is stock you get from your employer for services you

perform and that is nontransferable and subject to a sub-

stantial risk of forfeiture. You do not have to include the

value of the stock in your income when you receive it.

However, if you get dividends on restricted stock, you

must include them in your income as wages, not divi-

dends. See Restricted Property in Pub. 525 for information

on restricted stock dividends.

Your employer should include these dividends in the

wages shown on your Form W-2, Wage and Tax State-

ment. If you also get a Form 1099-DIV for these dividends,

list them on Schedule B (Form 1040), Part II, line 5, with

the other dividends you received. Enter a subtotal of all

your dividend income several rows above line 6. Below the

subtotal, enter “Dividends on restricted stock reported as

wages on Form 1040 or 1040-SR, line 1,” and enter the

dividends included in your wages on line 1 of Form 1040

or 1040-SR. Subtract this amount from the subtotal and

enter the result on line 6.

Election. You can choose to include the value of re-

stricted stock in gross income as pay for services. If you

make this choice, report the dividends on the stock like

any other dividends. List them on Part II, line 5, of Sched-

ule B (Form 1040), along with your other dividends (if the

amount of ordinary dividends received from all sources is

more than $1,500). If you receive both a Form 1099-DIV

and a Form W-2 showing these dividends, do not include

the dividends in your wages reported on line 1 of Form

1040 or 1040-SR. Attach a statement to your Form 1040

or 1040-SR explaining why the amount shown on line 1 of

your Form 1040 or 1040-SR is different from the amount

shown on your Form W-2.

Independent contractor. If you received restricted

stock for services as an independent contractor, the rules

in the previous discussion apply. Generally, you must treat

dividends you receive on the stock as income from

self-employment.

Qualified dividends. Report qualified dividends (Form

1099-DIV, box 1b) on line 3a of Form 1040 or 1040-SR.

The amount in box 1b is already included in box 1a. Do

not add the amount in box 1b to, or subtract it from, the

amount in box 1a. Do not include any of the following on

line 3a.

•

Qualified dividends you received as a nominee. See

Nominees, later.

•

Dividends on stock for which you did not meet the

holding period. See Holding period, earlier, under

Qualified Dividends.

•

Dividends on any share of stock to the extent you are

obligated (whether under a short sale or otherwise) to

make related payments for positions in substantially

similar or related property.

•

Payments in lieu of dividends, but only if you know or

have reason to know the payments are not qualified

dividends.

•

Payments shown on Form 1099-DIV, box 1b, from a

foreign corporation to the extent you know or have rea-

son to know the payments are not qualified dividends.

If you have qualified dividends, you must figure your tax

by completing the Qualified Dividends and Capital Gain

Tax Worksheet in the Form 1040 or 1040-SR instructions

or the Schedule D Tax Worksheet in the Schedule D

(Form 1040) instructions, whichever applies.

Investment interest deducted. If you claim a deduc-

tion for investment interest, you may have to reduce the

amount of your qualified dividends that are eligible for the

0%, 15%, or 20% tax rate. Reduce it by the qualified divi-

dends you choose to include in investment income when

figuring the limit on your investment interest deduction.

This is done on the Qualified Dividends and Capital Gain

Tax Worksheet or the Schedule D Tax Worksheet. For

more information about the limit on investment interest,

see Interest Expenses in chapter 3.

Capital gain distributions. If you received capital gain

distributions, you report them directly on Form 1040 or

1040-SR, line 7; or on Schedule D (Form 1040), line 13,

depending on your situation. If you received capital gain

distributions from a mutual fund or real estate investment

trust (REIT), the distributions of net realized short-term

capital gains are not treated as capital gains. Instead, they

are included on Form 1099-DIV as ordinary dividends. Re-

port them on your tax return as ordinary dividends.

Exceptions to filing Form 8949 and Schedule D (Form

1040). There are certain situations where you may not

have to file Form 8949 and/or Schedule D (Form 1040).

Exception 1. You do not have to file Form 8949 or

Schedule D (Form 1040) if you have no capital losses and

your only capital gains are capital gain distributions from

Form(s) 1099-DIV, box 2a. (If any Form(s) 1099-DIV you

receive have an amount in box 2b (unrecaptured section

1250 gain), box 2c (section 1202 gain), or box 2d (collecti-

bles (28%) gain), you do not qualify for this exception.) If

you qualify for this exception, report your capital gain dis-

tributions directly on line 7 of Form 1040 or 1040-SR (and

check the box). Also, use the Qualified Dividends and

Capital Gain Tax Worksheet in the Form 1040 or 1040-SR

instructions to figure your tax.

Exception 2. You must file Schedule D (Form 1040),

but generally do not have to file Form 8949, if Exception 1

does not apply and your only capital gains and losses are:

•

Capital gain distributions;

•

A capital loss carryover;

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•

A gain from Form 2439; Form 6252, Installment Sale

Income; or Part I of Form 4797, Sales of Business

Property;

•

A gain or loss from Form 4684, Casualties and Thefts;

Form 6781, Gains and Losses From Section 1256

Contracts and Straddles; or Form 8824;

•

A gain or loss from a partnership, S corporation, es-

tate, or trust; or

•

Gains and losses from transactions for which you re-

ceived a Form 1099-B that shows basis was reported

to the IRS and for which you do not need to make any

adjustments in column (g) of Form 8949 or enter any

codes in column (f) of Form 8949.

Undistributed capital gains. Follow the Instructions

for the Shareholder on Form 2439 to report undistributed

capital gains and the tax paid by the mutual fund on those

gains.

Nondividend distributions. Report nondividend distri-

butions (box 3 of Form 1099-DIV) only after your basis in

the stock has been reduced to zero. After the basis of your

stock has been reduced to zero, you must show this ex-

cess amount on Form 8949, Part I, if you held the stock 1

year or less. Show it on Form 8949, Part II, if you held the

stock for more than 1 year. Enter the name of the com-

pany in column (a) of Form 8949. Report the amount of

the excess distribution in column (d) and your zero basis

in column (e) of Form 8949.

Report these transactions on Form 8949 with the

correct box checked.

For more information on Form 8949 and Schedule D

(Form 1040), see Reporting Capital Gains and Losses in

chapter 4. Also, see the Instructions for Form 8949 and

the Instructions for Schedule D (Form 1040).

Nominees. If you received ordinary dividends as a nomi-

nee (that is, the dividends are in your name but actually

belong to someone else), include them on Part II, line 5 of

Schedule B (Form 1040). Several rows above line 6, put a

subtotal of all dividend income listed on line 5. Below this

subtotal, enter “Nominee Distribution” and show the

amount received as a nominee. Subtract the total of your

nominee distributions from the subtotal. Enter the result

on line 6.

If you received a capital gain distribution or were alloca-

ted an undistributed capital gain as a nominee, report only

the amount that belongs to you on Form 1040 or 1040-SR,

line 7; or Schedule D (Form 1040), line 13, whichever is

appropriate. Attach a statement to your return showing the

full amount you received or were allocated and the

amount you received or were allocated as a nominee.

File Form 1099-DIV with the IRS. If you received divi-

dends as a nominee in 2023, you must file a Form

1099-DIV (or Form 2439) for those dividends with the IRS.

Send the Form 1099-DIV with a Form 1096 to your Internal

Revenue Service Center by February 28, 2024 (April 1,

2024, if you file Form 1099-DIV electronically). Give the

actual owner of the dividends Copy B of the Form

CAUTION

1099-DIV by January 31, 2024. On Form 1099-DIV, you

should be listed as the “Payer.” The other owner should be

listed as the “Recipient.” You do not, however, have to file

a Form 1099-DIV to show payments for your spouse. For

more information about the reporting requirements and

the penalties for failure to file (or furnish) certain informa-

tion returns, see the General Instructions for Certain Infor-

mation Returns and the Instructions for Form 2439.

Liquidating distributions. If you receive a liquidating

distribution on stock, the corporation will give you a Form

1099-DIV showing the liquidating distribution in boxes 9

and 10.

Stripped

Preferred Stock

If the dividend rights are stripped from certain preferred

stock, the holder of the stripped preferred stock may have

to include amounts in income equal to the amounts that

would have been included if the stock were a bond with

OID.

Stripped preferred stock defined. Stripped preferred

stock is any stock that meets both of the following tests.

1. There has been a separation in ownership between

the stock and any dividend on the stock that has not

become payable.

2. The stock:

a. Is limited and preferred as to dividends,

b. Does not participate in corporate growth to any

significant extent, and

c. Has a fixed redemption price.

Treatment of buyer. If you buy stripped preferred stock

after April 30, 1993, you must include certain amounts in

your gross income while you hold the stock. These

amounts are ordinary income. They are equal to the

amounts you would have included in gross income if the

stock were a bond that:

1. Was issued on the purchase date of the stock, and

2. Has OID equal to:

a. The redemption price for the stock, minus

b. The price at which you bought the stock.

Include these amounts on Schedule 1 (Form 1040),

line 8z.

This treatment also applies to you if you acquire the

stock in such a way (for example, by gift) that your basis in

the stock is determined by using a buyer's basis.

Treatment of person stripping stock. If you strip the

rights to one or more dividends from preferred stock, you

are treated as having purchased the stock. You are treated

as making the purchase on the date you disposed of the

dividend rights. Your adjusted basis in the preferred stock

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is treated as your purchase price. The rules described in

Treatment of buyer, earlier, apply to you.

REMICs, FASITs,

and Other CDOs

Holders of interests in real estate mortgage investment

conduits (REMICs), financial asset securitization invest-

ment trusts (FASITs), and other collateralized debt obliga-

tions (CDOs) must follow special rules for reporting in-

come and any expenses from these investment products.

REMICs

A REMIC is an entity formed for the purpose of holding a

fixed pool of mortgages secured by interests in real prop-

erty. A REMIC issues regular and residual interests to in-

vestors. A REMIC generally is not treated as a corpora-

tion, partnership, or trust. For purposes of subtitle F of the

Internal Revenue Code (Procedure and Administration), a

REMIC generally is treated as a partnership with the resid-

ual interest holders treated as the partners. The regular in-

terests are treated as debt instruments.

REMIC income or loss is not income or loss from a pas-

sive activity.

For more information about the qualifications and tax

treatment that apply to a REMIC and the interests of in-

vestors in a REMIC, see sections 860A through 860G of

the Internal Revenue Code, and the regulations under

those sections.

Regular Interest

A REMIC can have several classes (also known as

“tranches”) of regular interests. A regular interest uncondi-

tionally entitles the holder to receive a specified principal

amount (or other similar amount).

A REMIC regular interest is treated as a debt instru-

ment for income tax purposes. Accordingly, the OID, mar-

ket discount, and income reporting rules that apply to

bonds and other debt instruments as described earlier in

this publication under Discount on Debt Instruments apply,

with certain modifications discussed below.

Generally, you report your income from a regular inter-

est on line 2b of Form 1040 or 1040-SR. For more infor-

mation on how to report interest and OID, see How To Re-

port Interest Income, earlier.

Holders must use accrual method. Holders of regular

interests must use an accrual method of accounting to re-

port OID and interest income. Because income under an

accrual method is not determined by the receipt of cash,

you may have to include OID or interest income in your

taxable income even if you have not received any cash

payments.

Forms 1099-INT and 1099-OID. You should receive a

copy of Form 1099-INT or Form 1099-OID from the RE-

MIC. See the General Instructions for Certain Information

Returns for information on when you should receive your

copy of Form 1099-INT or Form 1099-OID and a written

statement providing additional information. The statement

should contain enough information to enable you to figure

your accrual of market discount or amortizable bond pre-

mium.

Form 1099-INT shows interest income that accrued to

you for the period you held the regular interest.

Form 1099-OID shows OID and interest, if any, that ac-

crued to you for the period you held the regular interest.

You will not need to make any adjustments to the amounts

reported even if you held the regular interest for only a part

of the calendar year. However, if you bought the regular in-

terest at a premium or acquisition premium, see Refigur-

ing OID shown on Form 1099-OID, earlier.

You may not get a Form 1099. Corporations and

other persons specified in Regulations section

1.6049-7(c) will not receive Forms 1099. These persons

and fiscal year taxpayers may obtain tax information by

contacting the REMIC or the issuer of the CDO, if they

hold their interest directly from the REMIC or issuer of the

CDO. Pub. 938, Real Estate Mortgage Investment Con-

duits (REMICs) Reporting Information, explains how to re-

quest this information.

Pub. 938 is available only on the Internet at

IRS.gov/pub938.

If you hold a regular interest or CDO through a nominee

(rather than directly), you can request the information from

the nominee.

Allocated investment expenses. A single-class REMIC

will report your share of its investment expenses in box 5

of Form 1099-INT or box 9 of Form 1099-OID. This

amount is not deductible. A single-class REMIC is one

that generally would be classified as a trust for tax purpo-

ses if it had not elected REMIC status.

Redemption of regular interests at maturity. Redemp-

tion of debt instruments at their maturity is treated as a

sale or exchange. You must report redemptions on your

tax return whether or not you realize gain or loss on the

transaction. Your basis is your adjusted issue price, which

includes any OID you previously reported in income.

Any amount you receive on the retirement of a debt in-

strument is treated as if you had sold or exchanged that

instrument. A debt instrument is retired when it is reac-

quired or redeemed by the issuer and canceled.

Sale or exchange of a regular interest. Some of

your gain on the sale or exchange of a REMIC regular in-

terest may be ordinary income. The ordinary income part,

if any, is:

•

The amount that would have been included in your in-

come if the yield to maturity on the regular interest had

been 110% of the applicable federal rate at the begin-

ning of your holding period, minus

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•

The amount you included in your income.

Residual Interest

A residual interest is an interest in a REMIC that is not a

regular interest. It is designated as a residual interest by

the REMIC.

If you acquire a residual interest in a REMIC, you must

take into account on a quarterly basis your daily portion of

the taxable income or net loss of the REMIC for each day

during the tax year you hold the residual interest. You must

report these amounts as ordinary income or loss.

Basis in the residual interest. Your basis in the residual

interest is increased by taxable income you take into ac-

count. Your basis is decreased (but not below zero) by the

cash or the fair market value of any property distributed to

you, and by any net loss you have taken into account. If

you sell or transfer your residual interest, you must adjust

your basis to reflect your share of the REMIC's taxable in-

come or net loss immediately before the sale or transfer.

See Wash Sales, in chapter 4, for more information about

selling a residual interest.

Treatment of distributions. You must include in your

gross income the part of any distribution that is more than

your adjusted basis. Treat the distribution as a gain from

the sale or exchange of your residual interest.

Schedule Q (Form 1066). If you hold a REMIC residual

interest, you should receive Schedule Q (Form 1066),

Quarterly Notice to Residual Interest Holder of REMIC

Taxable Income or Net Loss Allocation, and instructions

from the REMIC each quarter. Schedule Q (Form 1066)

will indicate your share of the REMIC's quarterly taxable

income (or loss). Do not attach Schedule Q (Form 1066)

to your tax return. Keep it for your records.

Use Schedule E (Form 1040), Part IV, to report your to-

tal share of the REMIC's taxable income (or loss) for each

quarter included in your tax year.

For more information about reporting your income (or

loss) from a residual interest in a REMIC, follow the In-

structions for Schedule Q (Form 1066) and Schedule E

(Form 1040).

Collateralized Debt Obligations

(CDOs)

A CDO is a debt instrument, other than a REMIC regular

interest, that is secured by a pool of mortgages or other

evidence of debt and that has principal payments subject

to acceleration. (Note: While REMIC regular interests are

collateralized debt obligations, they have unique rules that

do not apply to CDOs issued before 1987.) CDOs, also

known as “pay-through bonds,” are commonly divided into

different classes (also called “tranches”).

CDOs can be secured by a pool of mortgages, automo-

bile loans, equipment leases, or credit card receivables.

For more information about the qualifications and the

tax treatment that apply to an issuer of a CDO, see section

1272(a)(6) of the Internal Revenue Code and the regula-

tions under that section.

The OID, market discount, and income-reporting rules

that apply to bonds and other debt instruments, as descri-

bed earlier in this chapter under Discount on Debt Instru-

ments, also apply to a CDO.

You must include interest income from your CDO in

your gross income under your regular method of account-

ing. Also, include any OID accrued on your CDO during

the tax year.

Generally, you report your income from a CDO on

line 2b of Form 1040 or 1040-SR. For more information

about reporting these amounts on your return, see How To

Report Interest Income, earlier.

Forms 1099-INT and 1099-OID. You should receive a

copy of Form 1099-INT or Form 1099-OID generally by

January 31, 2024. See the General Instructions for Certain

Information Returns for information on when you should

receive your copy of Form 1099-INT or Form 1099-OID

and a written statement providing additional information.

The statement should contain enough information about

the CDO to enable you to figure your accrual of market

discount or amortizable bond premium.

Form 1099-INT shows the interest income paid to you

for the period you held the CDO.

Form 1099-OID shows the OID accrued to you and the

interest, if any, paid to you for the period you held the

CDO. You should not need to make any adjustments to

the amounts reported even if you held the CDO for only a

part of the calendar year. However, if you bought the CDO

at a premium or acquisition premium, see Refiguring OID

shown on Form 1099-OID, earlier.

If you did not receive a Form 1099, see You may not get

a Form 1099, earlier.

FASITs

A financial asset securitization investment trust (FASIT) is

an entity that securitizes debt obligations such as credit

card receivables, home equity loans, and automobile

loans.

A regular interest in a FASIT is treated as a debt instru-

ment. The rules described under Collateralized Debt Obli-

gations (CDOs), earlier, apply to a regular interest in a FA-

SIT, except that a holder of a regular interest in a FASIT

must use an accrual method of accounting to report OID

and interest income.

For more information about FASITs, see sections 860H

through 860L of the Internal Revenue Code.

Beginning January 1, 2005, the special rules for

FASITs are repealed. However, the special rules

still apply to any FASIT in existence on October

22, 2004, to the extent that regular interests issued by the

FASIT before that date continue to remain outstanding in

accordance with the original terms of issuance.

CAUTION

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S Corporations

In general, an S corporation does not pay a tax on its in-

come. Instead, its income and expenses are passed

through to the shareholders, who then report these items

on their own income tax returns.

If you are an S corporation shareholder, your share of

the corporation's current year income or loss and other tax

items are taxed to you whether or not you receive any

amount. Generally, those items increase or decrease the

basis of your S corporation stock, as appropriate. For

more information on basis adjustments for S corporation

stock, see

Stocks and Bonds, later.

Generally, S corporation distributions, except dividend

distributions, are considered a return of capital and reduce

your basis in the stock of the corporation. The part of any

distribution that is more than your basis is treated as a

gain from the sale or exchange of property. The corpora-

tion's distributions may be in the form of cash or property.

S corporation distributions are not treated as dividends

except in certain cases in which the corporation has accu-

mulated earnings and profits from years before it became

an S corporation.

Reporting S corporation income, deductions, and

credits. The S corporation should send you a copy of

Schedule K-1 (Form 1120S) showing your share of the S

corporation's income, credits, and deductions for the tax

year. You must report your distributive share of the S cor-

poration's income, gain, loss, deductions, or credits on the

appropriate lines and schedules of your Form 1040 or

1040-SR.

For more information about your treatment of S corpo-

ration tax items, see Shareholder's Instructions for Sched-

ule K-1 (Form 1120S).

Limit on losses and deductions. The deduction for

your share of losses and deductions shown on Sched-

ule K-1 (Form 1120S) is limited to the adjusted basis of

your stock and any debt the corporation owes you. Any

loss or deduction not allowed because of this limit is car-

ried over and treated as a loss or deduction in the next tax

year.

Passive activity losses. Rules apply that limit losses

from passive activities. Your copy of Schedule K-1 (Form

1120S) and its instructions will explain the limits and tell

you where on your return to report your share of S corpo-

ration items from passive activities.

Form 8582. If you have a passive activity loss from an

S corporation, you must complete Form 8582 to figure the

allowable loss to enter on your return. See Pub. 925 for

more information.

Investment Clubs

An investment club is formed when a group of friends,

neighbors, business associates, or others pool their

money to invest in stock or other securities. The club may

or may not have a written agreement, a charter, or bylaws.

Usually, the group operates informally with members

pledging to pay a monthly regular amount into the club.

Some clubs have a committee that gathers information on

securities, selects the most promising securities, and rec-

ommends that the club invest in them. Other clubs rotate

these responsibilities among all their members. Most

clubs require all members to vote for or against all invest-

ments, sales, trades, and other transactions.

Identifying number. Each club must have an EIN to use

when filing its return. The club's EIN also may have to be

given to the payer of dividends or other income from in-

vestments recorded in the club's name. To obtain an EIN,

apply online at IRS.gov/Businesses/Small-Businesses-&-

Self-Employed/Apply-for-an-Employer-Identification-

Number-(EIN)-Online or file Form SS-4, Application for

Employer Identification Number. See chapter 5, How To

Get Tax Help, for more information about how to get this

form.

Investments in name of member. When an invest-

ment is recorded in the name of one club member, this

member must give its SSN to the payer of investment in-

come. (When an investment is held in the names of two or

more club members, the SSN of only one member must

be given to the payer.) This member is considered the re-

cord owner for the actual owner, the investment club. This

member is a “nominee” and must file an information return

with the IRS. For example, the nominee member must file

Form 1099-DIV for dividend income, showing the club as

the owner of the dividend, its SSN, and the EIN of the

club.

Tax Treatment of the Club

Generally, an investment club is treated as a partnership

for federal tax purposes unless it chooses otherwise. In

some situations, however, it is taxed as a corporation or a

trust.

Clubs formed before 1997. Before 1997, the rules for

determining how an investment club is treated were differ-

ent from those explained in the following discussions. An

investment club that existed before 1997 is treated for

later years the same way it was treated before 1997, un-

less it chooses to be treated a different way under the new

rules. To make that choice, the club must file Form 8832,

Entity Classification Election.

Club as a Partnership

If your club is not taxed as a corporation or a trust, it will be

treated as a partnership.

Filing requirement. If your investment club is treated as

a partnership, it must file Form 1065, U.S. Return of Part-

nership Income. However, as a partner in the club, you

must report on your individual return your share of the

club's income, gains, losses, deductions, and credits for

the club's tax year. (Its tax year generally must be the

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same tax year as that of the partners owning a majority in-

terest.) You must report these items whether or not you

actually receive any distribution from the partnership.

Schedule K-1 (Form 1065). You should receive a copy

of Schedule K-1 (Form 1065) from the partnership. The

amounts shown on Schedule K-1 (Form 1065) are your

share of the partnership's income, deductions, and cred-

its. Report each amount on the appropriate lines and

schedules of your income tax return.

The club's expenses for producing or collecting in-

come, for managing investment property, or for determin-

ing any tax are listed separately on Schedule K-1 (Form

1065).

For more information about reporting your income from

a partnership, see the Schedule K-1 (Form 1065) instruc-

tions. Also, see Pub. 541, Partnerships.

Passive activity losses. Rules apply that limit losses

from passive activities. Your copy of Schedule K-1 (Form

1065) and its instructions will tell you where on your return

to report your share of partnership items from passive ac-

tivities. If you have a passive activity loss from a partner-

ship, you must complete Form 8582 to figure the amount

of the allowable loss to enter on your tax return.

No social security coverage for investment club earn-

ings. If an investment club partnership's activities are

limited to investing in savings certificates, stock, or securi-

ties, and collecting interest or dividends for its members'

accounts, a member's share of income is not earnings

from self-employment. You cannot voluntarily pay the

self-employment tax to increase your social security cov-

erage and ultimate benefits.

Club as a Corporation

An investment club formed after 1996 is taxed as a corpo-

ration if:

•

It is formed under a federal or state law that refers to it

as incorporated or as a corporation, body corporate,

or body politic;

•

It is formed under a state law that refers to it as a

joint-stock company or joint-stock association; or

•

It chooses to be taxed as a corporation.

Choosing to be taxed as a corporation. To choose to

be taxed as a corporation, the club cannot be a trust (see

Club as a Trust, later) or otherwise subject to special treat-

ment under the tax law. The club must file Form 8832 to

make the choice.

Filing requirement. If your club is taxed as a corpora-

tion, it must file Form 1120, U.S. Corporation Income Tax

Return. In that case, you do not report any of its income or

expenses on your individual return. All ordinary income

and expenses and capital gains and losses must be repor-

ted on the Form 1120. Any distribution the club makes that

qualifies as a dividend must be reported on Form

1099-DIV if total distributions to the shareholder are $10

or more for the year.

You must report any distributions you receive from the

club on your individual return. You should receive a copy

of Form 1099-DIV from the club showing the distributions

you received.

Some corporations can choose not to be taxed and

have earnings taxed to the shareholders. See S Corpora-

tions, earlier.

For more information about corporations, see Pub. 542,

Corporations.

Club as a Trust

In a few cases, an investment club is taxed as a trust. In

general, a trust is an arrangement through which trustees

take title to property for the purpose of protecting or con-

serving it for the beneficiaries under the ordinary rules ap-

plied in chancery or probate courts. An arrangement is

treated as a trust for tax purposes if its purpose is to vest

in trustees responsibility for protecting and conserving

property for beneficiaries who cannot share in that respon-

sibility and so are not associates in a joint enterprise for

the conduct of business for profit. If you need more infor-

mation about trusts, see Regulations section 301.7701-4.

Filing requirement. If your club is taxed as a trust, it

must file Form 1041, U.S. Income Tax Return for Estates

and Trusts. You should receive a copy of Schedule K-1

(Form 1041) from the trust. Report the amounts shown on

Schedule K-1 (Form 1041) on the appropriate lines and

schedules of your income tax return.

Tax Shelters and Other

Reportable

Transactions

Introduction

Investments that yield tax benefits are sometimes called

“tax shelters.” In some cases, Congress has concluded

that the loss of revenue is an acceptable side effect of

special tax provisions designed to encourage taxpayers to

make certain types of investments. In many cases, how-

ever, losses from tax shelters produce little or no benefit to

society, or the tax benefits are exaggerated beyond those

intended. Those cases are called “abusive tax shelters.”

An investment that is considered a tax shelter is subject to

restrictions, including the requirement that it be disclosed.

See Disclosure of reportable transactions, later.

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Topics

This chapter discusses:

•

Abusive Tax Shelters,

•

Rules To Curb Abusive Tax Shelters,

•

Investor Reporting,

•

Penalties, and

•

Whether To Invest.

Useful Items

You may want to see:

Publication

538 Accounting Periods and Methods

561 Determining the Value of Donated Property

925 Passive Activity and At-Risk Rules

Form (and Instructions)

8275 Disclosure Statement

8275-R Regulation Disclosure Statement

8283 Noncash Charitable Contributions

8865 Return of U.S. Persons With Respect to

Certain Foreign Partnerships

8886 Reportable Transaction Disclosure Statement

8918 Material Advisor Disclosure Statement

8938 Statement of Specified Foreign Financial

Assets

See chapter 5, How To Get Tax Help, for information about

getting these publications and forms.

Abusive Tax Shelters

Abusive tax shelters are marketing schemes involving arti-

ficial transactions with little or no economic reality. They

often make use of unrealistic allocations, inflated apprais-

als, losses in connection with nonrecourse loans, mis-

matching of income and deductions, financing techniques

that do not conform to standard commercial business

practices, or mischaracterization of the substance of the

transaction. Despite appearances to the contrary, the tax-

payer generally risks little.

Abusive tax shelters commonly involve package deals

designed from the start to generate losses, deductions, or

credits that will be far more than the present or future in-

vestment. For example, abusive tax shelters may promise

investors from the start that future inflated appraisals will

enable them to deduct charitable contribution deductions

based on those appraisals. (But see the appraisal require-

ments discussed under Rules To Curb Abusive Tax Shel-

ters, later.) They are commonly marketed in terms of the

ratio of tax deductions allegedly available to each dollar

invested. This ratio (or “write-off”) is frequently said to be

several times greater than one-to-one.

538

561

925

8275

8275-R

8283

8865

8886

8918

8938

Because there are many types of abusive tax shelters,

it is not possible to list all the factors you should consider

in determining whether an offering is an abusive tax shel-

ter. However, you should ask the following questions,

which might provide a clue to the abusive nature of the

plan.

•

Do the tax benefits far outweigh the economic bene-

fits? Are the tax benefits the primary reason for the

transaction?

•

Is this a transaction you would seriously consider if

you hoped to make a profit?

•

Do shelter assets really exist and, if so, are they in-

sured for less than their purchase price?

•

Is there a nontax justification for the way profits and

losses are allocated to partners?

•

Do the facts and supporting documents make eco-

nomic sense? For example, are there sales and re-

sales of the tax shelter property at ever increasing pri-

ces?

•

Does the investment plan involve a gimmick, device,

or sham to hide the economic reality of the transac-

tion?

•

Does the promoter offer to backdate documents? Are

you instructed to backdate checks covering your in-

vestment?

•

Is your debt a real debt or are you assured by the pro-

moter that you will never have to pay it?

•

Does this transaction involve laundering U.S. source

income through foreign corporations incorporated in a

tax haven and owned by U.S. shareholders?

Rules To Curb

Abusive Tax Shelters

Congress has enacted a series of income tax laws de-

signed to halt the growth of abusive tax shelters. These

provisions include the following.

Disclosure of reportable transactions. You must

disclose information for each reportable transaction in

which you participate. See Reportable Transaction Disclo-

sure Statement, later.

Material advisors with respect to any reportable trans-

action must disclose information about the transaction on

Form 8918, Material Advisor Disclosure Statement. To de-

termine whether you are a material advisor to a transac-

tion, see the Instructions for Form 8918.

Material advisors will receive a reportable transaction

number for the disclosed reportable transaction. They

must provide this number to all persons to whom they ac-

ted as a material advisor. They must provide the number

at the time the transaction is entered into. If they do not

have the number at that time, they must provide it within

60 days from the date the number is mailed to them. For

information on penalties for failure to disclose and failure

to maintain lists, see sections 6707, 6707A, and 6708.

40 Chapter 2 Tax Shelters and Other Reportable

Transactions

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Requirement to maintain list. Material advisors

must maintain a list of persons to whom they provide ma-

terial aid, assistance, or advice on any reportable transac-

tion. The list must be available for inspection by the IRS,

and the information required to be included on the list

must generally be kept for 7 years. See Regulations sec-

tion 301.6112-1 for more information (including what infor-

mation is required to be included on the list).

Confidentiality privilege. The confidentiality privilege

between you and a federally authorized tax practitioner

does not apply to written communications made after Oc-

tober 21, 2004, regarding the promotion of your direct or

indirect participation in any tax shelter.

Appraisal requirement for donated property. If you

claim a deduction of more than $5,000 for an item or

group of similar items of donated property, you must gen-

erally get a qualified appraisal. See section 170 and Form

8283 for more information. If you claim a deduction of

more than $500,000 for the donated property, you must

generally attach the qualified appraisal to your return. If

you file electronically, see Form 8453, U.S. Individual In-

come Tax Transmittal for an IRS e-file Return, and its in-

structions. See Pub. 561 for information about appraisals.

Passive activity loss and credit limits. The passive

activity loss and credit rules limit the amount of losses and

credits that can be claimed from passive activities and

limit the amount that can offset nonpassive income, such

as certain portfolio income from investments. See Pub.

925 for information about income, losses, and credits from

passive activities.

Interest on penalties. If you are assessed an accu-

racy-related or civil fraud penalty (as discussed under

Penalties, later), interest will be imposed on the amount of

the penalty from the due date of the return (including any

extensions) to the date you pay the penalty.

Accounting method restriction. Tax shelters gener-

ally cannot use the cash method of accounting.

Uniform capitalization rules. The uniform capitaliza-

tion rules generally apply to producing property or acquir-

ing it for resale. Under those rules, the direct cost and part

of the indirect cost of the property must be capitalized or

included in inventory. See Pub. 538 for uniform capitaliza-

tion rules.

Denial of deduction for interest on an underpay-

ment due to a reportable transaction. You cannot de-

duct any interest you paid or accrued on any part of an un-

derpayment of tax due to an understatement arising from

a reportable transaction if the relevant facts affecting the

tax treatment of the item are not adequately disclosed.

See Reportable transaction, later. This rule applies to re-

portable transactions entered into in tax years beginning

after October 22, 2004.

Authority for Disallowance of Tax Benefits

The IRS has published guidance concluding that the

claimed tax benefits of various abusive tax shelters should

be disallowed. The guidance is the IRS’s conclusion on

how the law is applied to a particular set of facts. Guid-

ance is published in the Internal Revenue Bulletin for tax-

payers' information and also for use by IRS officials. So, if

your return is examined and an abusive tax shelter is iden-

tified and challenged, published guidance dealing with

that type of shelter, which disallows certain claimed tax

shelter benefits, could serve as the basis for the examin-

ing official's challenge of the tax benefits you claimed. In

such a case, the examiner will not compromise even if you

or your representative believe you have authority for the

positions taken on your tax return. In addition, the exam-

iner can also assess penalties based on the facts and cir-

cumstances.

The courts are generally unsympathetic to taxpay-

ers involved in abusive tax shelter schemes and

have ruled in favor of the IRS in the majority of the

cases in which these shelters have been challenged.

Investor Reporting

You may be required to file a reportable transaction disclo-

sure statement.

Reportable Transaction Disclosure

Statement

Use Form 8886 to disclose information for each reportable

transaction in which you participated. See Reportable

transaction, later. Generally, you must attach Form 8886 to

your return for each tax year in which you participated in

the transaction. Under certain circumstances, a transac-

tion must be disclosed within 90 days of the transaction

being identified as a listed transaction or a transaction of

interest. See Listed transaction, later. In addition, for the

first year Form 8886 is attached to your return, you must

send a copy of the form to:

Internal Revenue Service

OTSA Mail Stop 4915

1973 Rulon White Blvd.

Ogden, UT 84201

If you file your return electronically, the copy sent to The

Office of Tax Shelter Analysis (OTSA) must show exactly

the same information, word for word, provided with the

electronically filed return and it must be provided on the

official IRS Form 8886 or an exact copy of the form. If you

use a computer-generated or substitute Form 8886, it

must be an exact copy of the official IRS form.

If you fail to file Form 8886 as required or fail to include

any required information on the form, you may have to pay

a penalty. See Penalty for failure to disclose a reportable

transaction, later.

The following discussion briefly describes reportable

transactions. For more details, see the Instructions for

Form 8886.

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Reportable transaction. A reportable transaction is any

of the following.

•

A listed transaction.

•

A confidential transaction.

•

A transaction with contractual protection.

•

A loss transaction.

•

A transaction of interest entered into after November

1, 2006.

Note. Transactions with a brief asset holding period

were removed from the definition of reportable transaction

for transactions entered into after August 2, 2007.

Listed transaction. A listed transaction is the same

as, or substantially similar to, one of the types of transac-

tions the IRS has determined to be a tax-avoidance trans-

action. These transactions have been identified in notices,

regulations, and other published guidance issued by the

IRS.

For more information, go to Abusive Tax Shelters and

Transactions, where you will find a link to a list of listed

transactions.

Confidential transaction. A confidential transaction

is offered to you under conditions of confidentiality and for

which you have paid an advisor a minimum fee. A transac-

tion is offered under conditions of confidentiality if the ad-

visor who is paid the fee places a limit on your disclosure

of the tax treatment or tax structure of the transaction and

the limit protects the confidentiality of the advisor's tax

strategies. The transaction is treated as confidential even

if the conditions of confidentiality are not legally binding on

you.

Transaction with contractual protection. Generally,

a transaction with contractual protection is one in which

you or a related party has the right to a full or partial refund

of fees if all or part of the intended tax consequences of

the transaction are not sustained, or a transaction for

which the fees are contingent on realizing the tax benefits

from the transaction. For information on exceptions, see

Revenue Procedure 2007-20, 2007-7 I.R.B. 517, available

at IRS.gov/irb/2007-07_IRB#RP-2007-20.

Loss transaction. For individuals, a loss transaction

is one that results in a deductible loss if the gross amount

of the loss is at least $2 million in a single tax year or $4

million in any combination of tax years. A loss from a for-

eign currency transaction under section 988 is a loss

transaction if the gross amount of the loss is at least

$50,000 in a single tax year, whether or not the loss flows

through from an S corporation or partnership.

Certain losses (such as losses from casualties, thefts,

and condemnations) are excepted from this category and

do not have to be reported on Form 8886. For information

on other exceptions, see Revenue Procedure 2013-11,

2013-2 I.R.B. 269, available at IRS.gov/irb/

2013-02_IRB#RP-2013-11. See Updates on reportable

transactions, later, for updates on loss transactions.

Transaction of interest. A transaction of interest is a

transaction entered into after November 1, 2006, that is

the same as, or substantially similar to, one of the types of

transactions that the IRS has identified by notice, regula-

tion, or other published guidance as a transaction of inter-

est. For more information, go to Abusive Tax Shelters and

Transactions, where you will find a link to a list of transac-

tions of interest.

Updates on reportable transactions. For updates

on all reportable transactions, go to Abusive Tax Shelters

and Transactions.

Penalties

Investing in an abusive tax shelter may lead to substantial

expenses. First, the promoter generally charges a sub-

stantial fee. If your return is examined by the IRS and a tax

deficiency is determined, you will have to pay more taxes

and interest on the underpayment, possibly a 20%, 30%,

or even 40% accuracy-related penalty, or a 75% civil fraud

penalty. You may also be subject to the penalty for failure

to pay tax. These penalties are explained in the following

paragraphs.

Accuracy-related penalties. An accuracy-related pen-

alty of 20% can be imposed for underpayments of tax due

to:

•

Negligence or disregard of rules or regulations,

•

Substantial understatement of tax,

•

Substantial valuation misstatements (increased to

40% for gross valuation misstatements),

•

Transactions lacking economic substance (increased

to 40% for nondisclosed noneconomic substance

transactions),

•

Undisclosed foreign financial asset understatements

(40% for tax years beginning after March 18, 2010), or

•

Disallowance of a deduction for a qualified conserva-

tion contribution by a pass-through entity under sec-

tion 170(h)(7).

If you are charged an accuracy-related penalty, interest

will be imposed on the amount of the penalty from the due

date of the return (including extensions) to the date you

pay the penalty.

The 20% penalties do not apply to any underpayment

attributable to a reportable transaction understatement

subject to an accuracy-related penalty (discussed later).

Negligence or disregard of rules or regulations.

The penalty for negligence or disregard of rules or regula-

tions is imposed only on the part of the underpayment due

to negligence or disregard of rules or regulations. Gener-

ally, the penalty will not be charged if you can show you

had reasonable cause for understating your tax and that

you acted in good faith.

Negligence includes any failure to make a reasonable

attempt to comply with the provisions of the Internal Reve-

nue Code. It also includes any failure to keep adequate

books and records. A return position that has a reasona-

ble basis is not negligence. See Regulations section

1.6662-3(b)(1).

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Disregard includes any careless, reckless, or inten-

tional disregard of rules or regulations.

The penalty for disregard of rules and regulations can

be avoided if all the following are true.

•

You keep adequate books and records.

•

You have a reasonable basis for your position on the

tax issue.

•

You make an adequate disclosure of your position.

Use Form 8275 to make your disclosure and attach it to

your return. To disclose a position contrary to a regulation,

use Form 8275-R. Use Form 8886 to disclose a reportable

transaction. See Reportable transaction, earlier.

Substantial understatement of tax. An understate-

ment is considered to be substantial if it is more than the

greater of:

•

10% of the tax required to be shown on the return, or

•

$5,000.

For tax years 2018 through 2025, if you claim any deduc-

tion allowed under section 199A, an understatement is

considered to be substantial if it is more than the greater

of:

•

5% of the tax required to be shown on the return, or

•

$5,000.

In general, “understatement” means the excess of:

1. The amount of the tax required to be shown on the re-

turn for the tax year; over

2. The amount of the tax imposed which is shown on the

return, reduced by any rebate (within the meaning of

section 6211(b)(2)).

For items other than tax shelters, you can file Form

8275 or Form 8275-R to disclose items that could cause a

substantial understatement of income tax. In that way, you

can avoid the substantial understatement penalty if you

have a reasonable basis for your position on the tax issue.

Disclosure of the tax shelter item on a tax return does not

reduce the amount of the understatement.

Also, the understatement penalty will not be imposed if

you can show there was reasonable cause for the under-

payment caused by the understatement and that you ac-

ted in good faith. An important factor in establishing rea-

sonable cause and good faith will be the extent of your

effort to determine your proper tax liability under the law.

Substantial valuation misstatement. In general, you

are liable for a 20% penalty for a substantial valuation mis-

statement if any the following are true.

•

The value or adjusted basis of any property claimed

on the return is 150% or more of the correct amount.

•

You underpaid your tax by more than $5,000 because

of the misstatement.

•

You cannot establish that you had reasonable cause

for the underpayment and that you acted in good faith.

You may be assessed a penalty of 40% for a gross val-

uation misstatement. If you misstate the value or the

adjusted basis of property by 200% or more of the amount

determined to be correct, you will be assessed a penalty

of 40%, instead of 20%, of the amount you underpaid be-

cause of the gross valuation misstatement. The penalty

rate is also 40% if the property's correct value or adjusted

basis is zero.

Transaction lacking economic substance. The eco-

nomic substance doctrine only applies to an individual

that entered into a transaction in connection with a trade

or business or an activity engaged in for the production of

income. A transaction has economic substance for you as

an individual taxpayer only if:

•

The transaction changes your economic position in a

meaningful way (apart from federal income tax ef-

fects), and

•

You have a substantial purpose (apart from federal in-

come tax effects) for entering into the transaction.

For purposes of determining whether economic sub-

stance exists, a transaction's profit potential will only be

taken into account if the present value of the reasonably

expected pre-tax profit from the transaction is substantial

compared to the present value of the expected net tax

benefits that would be allowed if the transaction were re-

spected.

If any part of your underpayment is due to any disallow-

ance of claimed tax benefits by reason of a transaction

lacking economic substance or failing to meet the require-

ments of any similar rule of law, that part of your underpay-

ment will be subject to the 20% accuracy-related penalty

even if you had a reasonable cause and acted in good

faith concerning that part.

Additionally, the penalty increases to 40% if you do not

adequately disclose, on your return or in a statement at-

tached to your return, the relevant facts affecting the tax

treatment of a transaction that lacks economic substance.

Relevant facts include any facts affecting the tax treatment

of the transaction.

You may be subject to a 20% penalty based on

the excessive amount of an erroneous claim for

an income tax refund or credit. If that excessive

amount results from a transaction found to be lacking eco-

nomic substance, it will NOT be treated as due to reason-

able cause.

Undisclosed foreign financial asset understate-

ment. For tax years beginning after March 18, 2010, you

may be liable for a 40% penalty for an understatement of

your tax liability due to an undisclosed foreign financial as-

set. An undisclosed foreign financial asset is any asset for

which an information return, required to be provided under

sections 6038, 6038B, 6038D, 6046A, or 6048 for any tax

year, is not provided. The penalty applies to any part of an

underpayment related to the following undisclosed foreign

financial assets.

•

Any foreign business you control, reportable on Form

5471, Information Return of U.S. Persons With Re-

spect To Certain Foreign Corporations, or Form 8865,

Return of U.S. Persons With Respect to Certain For-

eign Partnerships.

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•

Certain transfers of property to a foreign corporation or

partnership, reportable on Form 926, Return by a U.S.

Transferor of Property to a Foreign Corporation, or cer-

tain distributions to a foreign person, reportable on

Form 8865.

•

Your ownership interest in an otherwise undisclosed

foreign financial asset, reportable on Form 8275 or

8275-R. See the Instructions for Form 8275 or Form

8275-R.

Instead of, or in addition to, Form 8275 or 8275-R,

you may have to file Form 8938, Statement of

Specified Foreign Financial Assets, with your tax

return. See the Instructions for Form 8938 for details.

•

Your acquisition, disposition, or substantial change in

ownership interest in a foreign partnership, reportable

on Form 8865.

•

Creation or transfer of money or property to certain

foreign trusts, reportable on Form 3520, Annual Re-

turn To Report Transactions With Foreign Trusts and

Receipt of Certain Foreign Gifts.

Penalty for incorrect appraisals. The person who pre-

pares an appraisal of the value of property may have to

pay a penalty if:

•

He or she knows, or reasonably should have known,

that the appraisal would be used in connection with a

return or claim for refund; and

•

The claimed value of the property on a return or claim

for refund based on that appraisal results in a substan-

tial valuation misstatement or a gross valuation mis-

statement. See Substantial valuation misstatement,

earlier.

For details on the penalty amount and exceptions, see

Pub. 561.

Penalty for failure to disclose a reportable transac-

tion. If you fail to include any required information regard-

ing a reportable transaction on a return or statement, you

may have to pay a penalty of 75% of the decrease in tax

shown on your return as a result of such transaction (or

that would have resulted if the transaction were respected

for federal tax purposes). See Reportable transaction, ear-

lier. For an individual, the minimum penalty is $5,000 and

the maximum is $10,000 (or $100,000 for a listed transac-

tion). This penalty is in addition to any other penalty that

may be imposed.

The IRS may rescind or abate the penalty for failing to

disclose a reportable transaction under certain limited cir-

cumstances but cannot rescind the penalty for failing to

disclose a listed transaction. See Revenue Procedure

2007-21, as updated by Treasury Decision 9686 and An-

nouncement 2016-1, for information on rescission.

Accuracy-related penalty for a reportable transaction

understatement. If you have a reportable transaction un-

derstatement, you may have to pay a penalty equal to

20% of the amount of that understatement. This applies to

any item due to a listed transaction or other reportable

transaction with a significant purpose of avoiding or evad-

CAUTION

ing federal income tax. The penalty is 30% rather than

20% for the part of any reportable transaction understate-

ment if the transaction was not properly disclosed.

This penalty does not apply to the part of an under-

statement on which the fraud penalty, gross valuation mis-

statement penalty, or penalty for nondisclosure of noneco-

nomic substance transactions is imposed.

Civil fraud penalty. If any underpayment of tax on your

return is due to fraud, a penalty of 75% of the underpay-

ment will be added to your tax.

Joint return. The fraud penalty on a joint return ap-

plies to a spouse only if some part of the underpayment is

due to the fraud of that spouse.

Failure to pay tax. If a deficiency is assessed and is not

paid within 10 days of the demand for payment, you may

be penalized with up to a 25% addition to tax if the failure

to pay continues.

Whether To Invest

Take into account the risks, benefits, and the source of ev-

ery financial transaction before investing. You may wish to

consider professional legal and financial advice for help in

evaluating the transaction.

Investment Expenses

Terms you may need to know

(see Glossary):

At-risk rules

Passive activity

Portfolio income

Topics

This chapter discusses:

•

Limits on Deductions,

•

Interest Expenses,

•

Bond Premium Amortization,

•

Nondeductible Interest Expenses,

•

How To Report Investment Interest Expenses, and

•

When To Report Investment Expenses.

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Useful Items

You may want to see:

Publication

925 Passive Activity and At-Risk Rules

Form (and Instructions)

Schedule A (Form 1040) Itemized Deductions

4952 Investment Interest Expense Deduction

8615 Tax for Certain Children Who Have Unearned

Income

8814 Parents’ Election To Report Child's Interest and

Dividends

See chapter 5, How To Get Tax Help, for information about

getting these publications and forms.

Limits on Deductions

Your deductions for investment expenses may be limited

by:

•

The at-risk rules,

•

The passive activity loss limits, or

•

The limit on investment expenses.

The at-risk rules and passive activity rules are ex-

plained briefly in this section. The limit on investment inter-

est is explained later in this chapter under Interest Expen-

ses.

At-risk rules. Special at-risk rules apply to most in-

come-producing activities. These rules limit the amount of

loss you can deduct to the amount you risk losing in the

activity. Generally, this is the cash and the adjusted basis

of property you contribute to the activity. It also includes

money you borrow for use in the activity if you are person-

ally liable for repayment or if you use property not used in

the activity as security for the loan. For more information,

see Pub. 925.

Passive activity losses and credits. The amount of los-

ses and tax credits you can claim from passive activities is

limited. Generally, you are allowed to deduct passive ac-

tivity losses only up to the amount of your passive activity

income. Also, you can use credits from passive activities

only against tax on the income from passive activities.

There are exceptions for certain activities, such as rental

real estate activities.

Passive activity. A passive activity is generally any

activity involving the conduct of any trade or business in

which you do not materially participate and any rental ac-

tivity. However, if you are involved in renting real estate,

the activity is not a passive activity if both of the following

are true.

•

More than one-half of the personal services you per-

form during the year in all trades or businesses are

performed in real property trades or businesses in

which you materially participate.

925

Schedule A (Form 1040)

4952

8615

8814

•

You perform more than 750 hours of services during

the year in real property trades or businesses in which

you materially participate.

The term “trade or business” generally means any activity

that involves the conduct of a trade or business, is con-

ducted in anticipation of starting a trade or business, or in-

volves certain research or experimental expenditures.

However, it does not include rental activities or certain ac-

tivities treated as incidental to holding property for invest-

ment.

You are considered to materially participate in an activ-

ity if you are involved on a regular, continuous, and sub-

stantial basis in the operations of the activity.

Other income (nonpassive income). Generally, you

can use losses from passive activities only to offset in-

come from passive activities. You cannot use passive ac-

tivity losses to offset your other income, such as your wa-

ges or your portfolio income. Portfolio income includes

gross income from interest, dividends, annuities, or royal-

ties that is not derived in the ordinary course of a trade or

business. It also includes gains or losses (not derived in

the ordinary course of a trade or business) from the sale

or trade of property (other than an interest in a passive ac-

tivity) producing portfolio income or held for investment.

This includes capital gain distributions from mutual funds

(and other regulated investment companies (RICs)) and

real estate investment trusts (REITs).

You cannot use passive activity losses to offset Alaska

Permanent Fund dividends.

Expenses. Do not include in the computation of your

passive activity income or loss:

•

Expenses (other than interest) that are clearly and di-

rectly allocable to your portfolio income, or

•

Interest expense properly allocable to portfolio in-

come.

However, this interest and other expenses may be subject

to other limits. These limits are explained in the rest of this

chapter.

Additional information. For more information about

determining and reporting income and losses from pas-

sive activities, see Pub. 925.

Interest Expenses

This section discusses interest expenses you may be able

to deduct as an investor.

For information on business interest, see chapter 8 of

Pub. 334, Tax Guide for Small Business.

You generally cannot deduct personal interest. How-

ever, you can deduct qualified home mortgage interest, as

explained in Pub. 936, Home Mortgage Interest Deduc-

tion, and interest on certain student loans, as explained in

Pub. 970, Tax Benefits for Education.

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Investment Interest

If you borrow money to buy property you hold for invest-

ment, the interest you pay is investment interest. You can

deduct investment interest subject to the limit discussed

later. However, you cannot deduct interest you incurred to

produce tax-exempt income. See Tax-exempt income,

later. You also cannot deduct interest expenses on strad-

dles discussed under Interest expense and carrying

charges on straddles, later.

Investment interest does not include any qualified

home mortgage interest or any interest taken into account

in computing income or loss from a passive activity.

Investment property. Property held for investment in-

cludes property that produces interest, dividends, annui-

ties, or royalties not derived in the ordinary course of a

trade or business. It also includes property that produces

gain or loss (not derived in the ordinary course of a trade

or business) from the sale or trade of property producing

these types of income or held for investment (other than

an interest in a passive activity). Investment property also

includes an interest in a trade or business activity in which

you did not materially participate (other than a passive ac-

tivity).

Partners, shareholders, and beneficiaries. To de-

termine your investment interest, combine your share of

investment interest from a partnership, S corporation, es-

tate, or trust with your other investment interest.

Allocation of Interest Expense

If you borrow money for business, personal purposes, or

investment, you must allocate the debt among those pur-

poses. Only the interest expense on the part of the debt

used for investment purposes is treated as investment ex-

pense. The allocation is not affected by the use of prop-

erty that secures the debt.

Example 1. You borrow $10,000 and use $8,000 to

buy stock. You use the other $2,000 to buy items for your

home. Because 80% of the debt is used for, and allocated

to, investment purposes, 80% of the interest on that debt

is investment interest. The other 20% is nondeductible

personal interest.

Debt proceeds received in cash. If you receive debt

proceeds in cash, the proceeds are generally not treated

as investment property.

Debt proceeds deposited in account. If you deposit

debt proceeds in an account, that deposit is treated as in-

vestment property, regardless of whether the account

bears interest. But, if you withdraw the funds and use

them for another purpose, you must reallocate the debt to

determine the amount considered to be for investment

purposes.

Example 2. Assume in Example 1 that you borrowed

the money on March 1 and immediately bought the stock

for $8,000. You did not buy the household items until June

1. You had deposited the $2,000 in the bank. You had no

other transactions on the bank account until June. You did

not sell the stock, and you made no principal payments on

the debt. You paid interest from another account. The

$8,000 is treated as being used for an investment pur-

pose. The $2,000 is treated as being used for an invest-

ment purpose for the 3-month period. Your total interest

expense for 3 months on this debt is investment interest.

In June, when you spend the $2,000 for household items,

you must begin to allocate 80% of the debt and the inter-

est expense to investment purposes and 20% to personal

purposes.

Amounts paid within 30 days. If you receive loan

proceeds in cash or if the loan proceeds are deposited in

an account, you can treat any payment (up to the amount

of the proceeds) made from any account you own, or from

cash, as made from those proceeds. This applies to any

payment made within 30 days before or after the proceeds

are received in cash or deposited in your account.

If you received the loan proceeds in cash, you can treat

the payment as made on the date you received the cash

instead of the date you actually made the payment.

Payments on debt may require new allocation. As

you repay a debt used for more than one purpose, you

must reallocate the balance. You must first reduce the

amount allocated to personal purposes by the repayment.

You then reallocate the rest of the debt to find what part is

for investment purposes.

Example 3. If, in Example 2, you repay $500 on No-

vember 1, the entire repayment is applied against the

amount allocated to personal purposes. The debt balance

is now allocated as $8,000 for investment purposes and

$1,500 for personal purposes. Until the next reallocation is

necessary, 84% ($8,000 ÷ $9,500) of the debt and the in-

terest expense is allocated to investment.

Pass-through entities. If you use borrowed funds to buy

an interest in a partnership or S corporation, then the in-

terest on those funds must be allocated based on the as-

sets of the entity. If you contribute to the capital of the en-

tity, you can make the allocation using any reasonable

method.

Additional allocation rules. For more information about

allocating interest expense, see chapter 8 of Pub. 334.

When To Deduct Investment Interest

If you use the cash method of accounting, you must pay

the interest expense before you can deduct it.

If you use an accrual method of accounting, you can

deduct interest over the period it accrues, regardless of

when you pay it. For an exception, see Unpaid expenses

owed to related party, later in this chapter.

Example. You borrowed $1,000 on August 18, 2023,

payable in 90 days at 4% interest. On November 17, 2023,

you paid this with a new note for $1,010, due on February

16, 2024. If you use the cash method of accounting, you

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cannot deduct any part of the $10 interest on your return

for 2023 because you did not actually pay it in that year. If

you use an accrual method, you may be able to deduct a

portion of the interest on the loans through December 31,

2023, on your return for 2023.

Interest paid in advance. Generally, if you pay interest

in advance for a period that goes beyond the end of the

tax year, you must spread the interest over the tax years to

which it belongs under the OID rules discussed in chap-

ter 1. You can deduct in each year only the interest for that

year.

Interest on margin accounts. If you are a cash method

taxpayer, you can deduct interest on margin accounts to

buy taxable securities as investment interest in the year

you paid it. You are considered to have paid interest on

these accounts only when you actually pay the broker or

when payment becomes available to the broker through

your account. Payment may become available to the

broker through your account when the broker collects divi-

dends or interest for your account, or sells securities held

for you or received from you.

Limit on interest deduction for market discount

bonds. The amount you can deduct for interest expense

you paid or accrued during the year to buy or carry a mar-

ket discount bond may be limited. This limit does not apply

if you accrue the market discount and include it in your in-

come currently.

Under this limit, the interest is deductible only to the ex-

tent it is more than:

1. The total interest and OID includible in gross income

for the bond for the year, plus

2. The market discount for the number of days you held

the bond during the year.

Figure the amount in (2) above using the rules for figuring

accrued market discount in chapter 1 under Market Dis-

count Bonds.

Interest not deducted due to limit. In the year you

dispose of the bond, you can deduct any interest expense

you were not allowed to deduct in earlier years because of

the limit.

Choosing to deduct disallowed interest expense

before the year of disposition. You can choose to de-

duct disallowed interest expense in any year before the

year you dispose of the bond, up to your net interest in-

come from the bond during the year. The rest of the disal-

lowed interest expense remains deductible in the year you

dispose of the bond.

Net interest income. This is the interest income (in-

cluding OID) from the bond that you include in income for

the year, minus the interest expense paid or accrued dur-

ing the year to purchase or carry the bond.

Limit on interest deduction for short-term obliga-

tions. If the current income inclusion rules discussed in

chapter 1 under Discount on Short-Term Obligations do

not apply to you, the amount you can deduct for interest

expense you paid or accrued during the year to buy or

carry a short-term obligation is limited.

The interest is deductible only to the extent it is more

than:

•

The amount of acquisition discount or OID on the obli-

gation for the tax year, plus

•

The amount of any interest payable on the obligation

for the year that is not included in income because of

your accounting method (other than interest taken into

account in determining the amount of acquisition dis-

count or OID).

The method of determining acquisition discount and OID

for short-term obligations is discussed in chapter 1 under

Discount on Short-Term Obligations.

Interest not deducted due to limit. In the year you

dispose of the obligation, or, if you choose, in another year

in which you have net interest income from the obligation,

you can deduct any interest expense you were not allowed

to deduct for an earlier year because of the limit. Follow

the same rules provided in the earlier discussion under

Limit on interest deduction for market discount bonds.

Limit on Deduction

Generally, your deduction for investment interest expense

is limited to your net investment income.

You can carry over the amount of investment interest

you could not deduct because of this limit to the next tax

year. The interest carried over is treated as investment in-

terest paid or accrued in that next year.

You can carry over disallowed investment interest to the

next tax year even if it is more than your taxable income in

the year the interest was paid or accrued.

Net Investment Income

Determine the amount of your net investment income by

subtracting your investment expenses (other than interest

expense) from your investment income.

Investment income. Generally, investment income in-

cludes your gross income from property held for invest-

ment such as interest, dividends, annuities, and royalties.

Investment income does not include Alaska Permanent

Fund dividends. It also does not include qualified divi-

dends or net capital gain unless you choose to include

them.

Choosing to include qualified dividends. Invest-

ment income generally does not include qualified divi-

dends, discussed in chapter 1. However, you can choose

to include all or part of your qualified dividends in invest-

ment income.

You make this choice by completing Form 4952,

line 4g, according to its instructions.

If you choose to include any of your qualified dividends

in investment income, you must reduce your qualified divi-

dends that are eligible for the lower capital gains tax rates

by the same amount.

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Choosing to include net capital gain. Investment in-

come generally does not include net capital gain from dis-

posing of investment property (including capital gain distri-

butions from mutual funds). However, you can choose to

include all or part of your net capital gain in investment in-

come.

You make this choice by completing Form 4952,

line 4g, according to its instructions.

If you choose to include any of your net capital gain in

investment income, you must reduce your net capital gain

that is eligible for the lower capital gains tax rates by the

same amount.

For more information about the capital gains rates, see

Capital Gain Tax Rates in chapter 4.

Before making either choice, consider the overall

effect on your tax liability. Compare your tax if you

make one or both of these choices with your tax if

you do not.

Investment income of child reported on parent's re-

turn. Investment income includes the part of your child's

interest and dividend income you choose to report on your

return. If the child does not have qualified dividends,

Alaska Permanent Fund dividends, or capital gain distribu-

tions, this is the amount on line 6 of Form 8814. Include it

on line 4a of Form 4952.

Example. Your 8-year-old child has interest income of

$2,600, which you choose to report on your own return.

You enter $2,600 on Form 8814, lines 1a and 4, and $100

on lines 6 and 12, and complete Part II. You also enter

$100 on Schedule 1 (Form 1040), line 8z. Your investment

income includes this $100.

Child's qualified dividends. If part of the amount you

report is your child's qualified dividends, that part (which is

reported on Form 1040, line 3a) generally does not count

as investment income. However, you can choose to in-

clude all or part of it in investment income, as explained

under Choosing to include qualified dividends, earlier.

Your investment income also includes the amount on

Form 8814, line 12 (or, if applicable, the reduced amount

figured next under Child's Alaska Permanent Fund divi-

dends).

Child's Alaska Permanent Fund dividends. If part of

the amount you report is your child's Alaska Permanent

Fund dividends, that part does not count as investment in-

come. To figure the amount of your child's income that you

can consider your investment income, start with the

amount on Form 8814, line 6. Multiply that amount by a

percentage that is equal to the Alaska Permanent Fund

dividends divided by the total amount on Form 8814,

line 4. Subtract the result from the amount on Form 8814,

line 12.

Example. Your 10-year-old child has taxable interest

income of $4,000 and Alaska Permanent Fund dividends

of $2,000. You choose to report this on your return. You

enter $4,000 on Form 8814, line 1a; $2,000 on line 2a;

and $6,000 on line 4. You then enter $3,500 on Form

8814, lines 6 and 12; and Schedule 1 (Form 1040),

TIP

line 8z. You figure the amount of your child's income that

you can consider your investment income as follows.

$3,500 − ($3,500 × ($2,000 ÷ $6,000)) = $2,333

You include the result, $2,333, on Form 4952, line 4a.

Child's capital gain distributions. If part of the

amount you report is your child's capital gain distributions,

that part (which is reported on Schedule D (Form 1040),

line 13; or Form 1040, line 7) generally does not count as

investment income. However, you can choose to include

all or part of it in investment income, as explained under

Choosing to include net capital gain, earlier.

Your investment income also includes the amount on

Form 8814, line 12 (or, if applicable, the reduced amount

figured under Child's Alaska Permanent Fund dividends,

earlier).

Investment expenses. Investment expenses are your al-

lowed deductions (other than interest expense) directly

connected with the production of investment income.

Losses from passive activities. Income or expenses

that you used in computing income or loss from a passive

activity are not included in determining your investment in-

come or investment expenses (including investment inter-

est expense). See Pub. 925 for information about passive

activities.

Example. Ted is a partner in a partnership that oper-

ates a business. However, he does not materially partici-

pate in the partnership's business. Ted's interest in the

partnership is considered a passive activity.

Ted's investment income from interest and dividends

(other than qualified dividends) is $10,000. His investment

expenses (other than interest) are $3,200. His investment

interest expense is $8,000. Ted also has income from the

partnership of $2,000.

Ted figures his net investment income and the limit on

his investment interest expense deduction in the following

way.

Total investment income .................... $10,000

Minus: Investment expenses (other than interest) .... 3,200

Net investment income ..................... $6,800

Deductible investment interest expense for the year ... $6,800

The $2,000 of income from the passive activity is not

used in determining Ted's net investment income. His in-

vestment interest deduction for the year is limited to

$6,800, the amount of his net investment income.

Form 4952

Use Form 4952 to figure your deduction for investment in-

terest. See Form 4952 for more information.

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Exception to use of Form 4952. You do not have to

complete Form 4952 or attach it to your return if you meet

all of the following tests.

•

Your investment income from interest and ordinary div-

idends minus any qualified dividends is more than

your investment interest expense.

•

You do not have any other deductible investment ex-

penses.

•

You have no carryover of investment interest expense

from 2022.

If you meet all of these tests, you can deduct all of your

investment interest.

Bond Premium Amortization

If you pay a premium to buy a bond, the premium is part of

your basis in the bond. If the bond yields taxable interest,

you can choose to amortize the premium. This generally

means that each year, over the life of the bond, you use a

part of the premium to reduce the amount of interest in-

cludible in your income. If you make this choice, you must

reduce your basis in the bond by the amortization for the

year.

If the bond yields tax-exempt interest, you must amor-

tize the premium. This amortized amount is not deductible

in determining taxable income. However, each year, you

must reduce your basis in the bond (and tax-exempt inter-

est otherwise reportable on your tax return) by the amorti-

zation for the year.

If you acquire a security, such as a bond, at a premium,

you may receive a Form 1099-INT or Form 1099-OID. See

the instructions on those forms to determine if the

amounts of interest reported to you have been reduced by

amortizable bond premium for the period.

Bond premium. Bond premium is the amount by which

your basis in the bond right after you get it is more than the

total of all amounts payable on the bond after you get it

(other than payments of qualified stated interest). For ex-

ample, a bond with a maturity value of $1,000 generally

would have a $50 premium if you buy it for $1,050.

Special rules to determine amounts payable on a

bond. For special rules that apply to determine the

amounts payable on a variable rate bond, an inflation-in-

dexed debt instrument, a bond that provides for certain al-

ternative payment schedules (for example, a bond callable

prior to the stated maturity date of the bond), or a bond

that provides for remote or incidental contingencies, see

Regulations section 1.171-3.

Basis. In general, your basis for figuring bond premium

amortization is the same as your basis for figuring any loss

on the sale of the bond. However, you may need to use a

different basis for:

•

Convertible bonds,

•

Bonds you got in a trade, and

•

Bonds whose basis has to be determined using the

basis of the person who transferred the bond to you.

See Regulations section 1.171-1(e).

Dealers. A dealer in taxable bonds (or anyone who holds

them mainly for sale to customers in the ordinary course

of a trade or business, or who would properly include

bonds in inventory at the close of the tax year) cannot

claim a deduction for amortizable bond premium.

See section 75 of the Internal Revenue Code for the

treatment of bond premium by a dealer in tax-exempt

bonds.

How To Figure Amortization

For bonds issued after September 27, 1985, you must am-

ortize bond premium using a constant yield method on the

basis of the bond's yield to maturity, determined by using

the bond's basis and compounding at the close of each

accrual period.

Constant yield method. Figure the bond premium amor-

tization for each accrual period as follows.

Step 1: Determine your yield. Your yield is the dis-

count rate that, when used in figuring the present value of

all remaining payments to be made on the bond (including

payments of qualified stated interest), produces an

amount equal to your basis in the bond. Figure the yield as

of the date you got the bond. It must be constant over the

term of the bond and must be figured to at least two deci-

mal places when expressed as a percentage.

If you do not know the yield, consult your broker or tax

advisor. Databases available to them are likely to show the

yield at the date of purchase.

Step 2: Determine the accrual periods. You can

choose the accrual periods to use. They may be of any

length and may vary in length over the term of the bond,

but each accrual period can be no longer than 1 year, and

each scheduled payment of principal or interest must oc-

cur either on the first or the final day of an accrual period.

The computation is simplest if accrual periods are the

same as the intervals between interest payment dates.

Step 3: Determine the bond premium for the ac-

crual period. To do this, multiply your adjusted acquisi-

tion price at the beginning of the accrual period by your

yield. Then, subtract the result from the qualified stated in-

terest for the period.

Your adjusted acquisition price at the beginning of the

first accrual period is the same as your basis. After that, it

is your basis decreased by the amount of bond premium

amortized for earlier periods, and the amount of any pay-

ment previously made on the bond other than a payment

of qualified stated interest.

Example. On February 1, 2022, you bought a taxable

bond for $110,000. The bond has a stated principal

amount of $100,000, payable at maturity on February 1,

2029, making your premium $10,000 ($110,000 −

$100,000). The bond pays qualified stated interest of

$10,000 on February 1 of each year. Your yield is

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8.07439% compounded annually. You choose to use an-

nual accrual periods ending on February 1 of each year.

To find your bond premium amortization for the accrual pe-

riod ending on February 1, 2023, you multiply the adjusted

acquisition price at the beginning of the period ($110,000)

by your yield. When you subtract the result ($8,881.83)

from the qualified stated interest for the period ($10,000),

you find that your bond premium amortization for the pe-

riod is $1,118.17.

Special rules to figure amortization. For special

rules to figure the bond premium amortization on a varia-

ble rate bond, an inflation-indexed debt instrument, a

bond that provides for certain alternative payment sched-

ules (for example, a bond callable prior to the stated ma-

turity date of the bond), or a bond that provides for remote

or incidental contingencies, see Regulations section

1.171-3.

Choosing To Amortize

You choose to amortize the premium on taxable bonds by

reporting the amortization for the year on your income tax

return for the first tax year you want the choice to apply.

You should attach a statement to your return that you are

making this choice under section 171. See

How To Report

Amortization next.

This choice is binding for the year you make it and for

later tax years. It applies to all taxable bonds you own in

the year you make the choice and also to those you ac-

quire in later years.

You can change your decision to amortize bond pre-

mium only with the written approval of the IRS. To request

approval, use Form 3115. For more information on re-

questing approval, see section 5 of Revenue Procedure

2023-24 in Internal Revenue Bulletin 2023-26. You can

find Revenue Procedure 2023-24 at IRS.gov/irb/

2023-28_IRB#REV-PROC-2023-24.

How To Report Amortization

(Taxable Bonds)

Subtract the bond premium amortization from your interest

income from these bonds.

Report the bond's interest on Schedule B (Form 1040),

line 1. Under your last entry on line 1, put a subtotal of all

interest listed on line 1. Below this subtotal, enter the am-

ortizable bond premium allocable to the interest payments

for the year and label this amount “ABP Adjustment.” Sub-

tract this amount from the subtotal, and enter the result on

line 2.

Bond premium amortization more than interest. If the

amount of your bond premium amortization for an accrual

period is more than the qualified stated interest for the pe-

riod, you can include the difference in Other Itemized De-

ductions on Schedule A (Form 1040), line 16.

But your deduction is limited to the amount by which

your total interest inclusions on the bond in prior accrual

periods is more than your total bond premium deductions

on the bond in prior periods. Any amount you cannot de-

duct because of this limit can be carried forward to the

next accrual period.

Pre-1998 election to amortize bond premium. Gener-

ally, if you first elected to amortize bond premium before

1998, the above treatment of the premium does not apply

to bonds you acquired before 1988.

Bonds acquired before October 23, 1986. The amorti-

zation of the premium on these bonds is a miscellaneous

itemized deduction not subject to the 2%-of-adjus-

ted-gross-income limit.

Bonds acquired after October 22, 1986, but before

1988. The amortization of the premium on these bonds is

investment interest expense subject to the investment in-

terest limit, unless you choose to treat it as an offset to in-

terest income on the bond.

Nondeductible Interest

Expenses

Some interest expenses that you incur as an investor are

not deductible.

Single-premium life insurance, endowment, and an-

nuity contracts. You cannot deduct interest on money

you borrow to buy or carry a single-premium life insur-

ance, endowment, or annuity contract.

Used as collateral. If you use a single-premium annu-

ity contract as collateral to obtain or continue a mortgage

loan, you cannot deduct any interest on the loan that is

collateralized by the annuity contract. Figure the amount

of interest expense disallowed by multiplying the current

interest rate on the mortgage loan by the lesser of the

amount of the annuity contract used as collateral or the

amount of the loan.

Borrowing on insurance. Generally, you cannot deduct

interest on money you borrow to buy or carry a life insur-

ance, endowment, or annuity contract if you plan to sys-

tematically borrow part or all of the increases in the cash

value of the contract. This rule applies to the interest on

the total amount borrowed to buy or carry the contract, not

just the interest on the borrowed increases in the cash

value.

Tax-exempt income. You cannot deduct interest expen-

ses you incur to produce tax-exempt income, such as in-

terest on money you borrow to buy tax-exempt securities

or shares in a mutual fund or other regulated investment

company that distributes only exempt-interest dividends.

Short-sale expenses. The rule disallowing a deduc-

tion for interest expenses on debt proceeds used to pur-

chase tax-exempt securities applies to amounts you pay in

connection with personal property used in a short sale or

amounts paid by others for the use of any collateral in con-

nection with the short sale. However, it does not apply to

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the expenses you incur if you deposit cash as collateral for

the property used in the short sale and the cash does not

earn a material return during the period of the sale. Short

sales are discussed under Short Sales in chapter 4.

Expenses for both tax-exempt and taxable income.

You may have expenses that are for both tax-exempt and

taxable income. If you cannot specifically identify what

part of the expenses is for each type of income, you can

divide the expenses, using reasonable proportions based

on facts and circumstances. You must attach a statement

to your return showing how you divided the expenses and

stating that each deduction claimed is not based on

tax-exempt income.

One accepted method for dividing expenses is to do it

in the same proportion that each type of income is to the

total income. If the expenses relate in part to capital gains

and losses, include the gains, but not the losses, in figur-

ing this proportion. To find the part of the expenses that is

for the tax-exempt income, divide your tax-exempt income

by the total income and multiply your expenses by the re-

sult.

Example. You received $6,000 in interest income;

$4,800 was tax exempt and $1,200 was taxable. In earn-

ing this income, you had $500 of expenses. You cannot

specifically identify the amount of each expense item that

is for each income item, so you must divide your expen-

ses. 80% ($4,800 tax-exempt interest divided by $6,000

total interest) of your expenses is for the tax-exempt in-

come. You cannot deduct $400 (80% of $500) of the ex-

penses. You can deduct $100 (the rest of the expenses)

because they are for the taxable interest.

State income taxes. If you itemize your deductions,

you can deduct, as taxes, state income taxes on interest

income that is exempt from federal income tax. But you

cannot deduct, as either taxes or investment expenses,

state income taxes on other exempt income.

Interest expense and carrying charges on straddles.

You cannot deduct interest and carrying charges allocable

to personal property that is part of a straddle. The nonde-

ductible interest and carrying charges are added to the

basis of the straddle property. However, this treatment

does not apply if:

•

All the offsetting positions making up the straddle ei-

ther consist of one or more qualified covered call op-

tions and the optioned stock, or consist of section

1256 contracts (and the straddle is not part of a larger

straddle); or

•

The straddle is a hedging transaction.

For information about straddles, including definitions of

the terms used in this discussion, see Straddles in chap-

ter 4.

Interest includes any amount you pay or incur in con-

nection with personal property used in a short sale. How-

ever, you must first apply the rules discussed under Pay-

ments in lieu of dividends in chapter 4.

To determine the interest on market discount bonds

and short-term obligations that are part of a straddle, you

must first apply the rules discussed under Limit on interest

deduction for market discount bonds and Limit on interest

deduction for short-term obligations, earlier.

Nondeductible amount. Figure the nondeductible in-

terest and carrying charges on straddle property as fol-

lows.

1. Add:

a. Interest on indebtedness incurred or continued to

buy or carry the personal property, and

b. All other amounts (including charges to insure,

store, or transport the personal property) paid or

incurred to carry the personal property.

2. Subtract from the amount in (1):

a. Interest (including OID) includible in gross income

for the year on the personal property,

b. Any income from the personal property treated as

ordinary income on the disposition of short-term

government obligations or as ordinary income un-

der the market discount and short-term bond pro-

visions—see Discount on Debt Instruments in

chapter 1,

c. The dividends includible in gross income for the

year from the personal property, and

d. Any payment on a loan of the personal property for

use in a short sale that is includible in gross in-

come.

Basis adjustment. Add the nondeductible amount to

the basis of your straddle property.

How To Report

Investment Interest Expenses

To deduct your investment interest expenses, you must

itemize deductions on Schedule A (Form 1040). Enter

your deductible investment interest expense on Sched-

ule A (Form 1040), line 9. Include any deductible short

sale expenses. (See Short Sales in chapter 4 for informa-

tion on these expenses.) Also attach a completed Form

4952 if you used that form to figure your investment inter-

est expense.

Investment expenses from nonpublicly offered mu-

tual fund or real estate mortgage investment conduit

(REMIC). If you hold an interest in a nonpublicly offered

mutual fund, your investment expenses will be shown in

box 6 of Form 1099-DIV. Publicly offered mutual funds are

discussed later.

If you hold an interest in a REMIC, any expenses relat-

ing to your residual interest investment will be shown on

Schedule Q (Form 1066), line 3b. Any expenses relating

to your regular interest investment will appear in box 5 of

Form 1099-INT or box 9 of Form 1099-OID.

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Including mutual fund or REMIC expenses in in-

come. Your share of the investment expenses of a RE-

MIC or a nonpublicly offered mutual fund, as described

above, is considered to be an indirect deduction through

that pass-through entity. You must include in your gross in-

come an amount equal to the expenses allocated to you,

whether or not you are able to claim a deduction for those

expenses. If you are a shareholder in a nonpublicly offered

mutual fund, you must include on your return the full

amount of ordinary dividends or other distributions of

stock, as shown in box 1a of Form 1099-DIV. If you are a

residual interest holder in a REMIC, you must report as or-

dinary income on Schedule E (Form 1040) the total

amounts shown on Schedule Q (Form 1066), lines 1b and

3b. If you are a REMIC regular interest holder, you must in-

clude the amount of any expense allocation you received

on Form 1040 or 1040-SR, line 2b.

Publicly offered mutual funds. Most mutual funds are

publicly offered. These mutual funds, generally, are traded

on an established securities exchange. These funds do

not pass investment expenses through to you. Instead, the

dividend income they report to you in box 1a of Form

1099-DIV is already reduced by your share of investment

expenses. As a result, you cannot deduct the expenses on

your return.

Include the amount from box 1a of Form 1099-DIV in

your income.

A publicly offered mutual fund is one that:

1. Is continuously offered pursuant to a public offering,

2. Is regularly traded on an established securities mar-

ket, and

3. Is held by or for no fewer than 500 persons at any time

during the year.

Contact your mutual fund if you are not sure whether it is

publicly offered.

For information on how to report amortizable bond pre-

mium, see Bond Premium Amortization, earlier in this

chapter.

When To Report Investment

Expenses

If you use the cash method to report income and expen-

ses, you generally deduct your expenses, except for cer-

tain prepaid interest, in the year you pay them.

If you use an accrual method, you generally deduct

your expenses when you incur a liability for them, rather

than when you pay them.

See also When To Deduct Investment Interest, earlier in

this chapter.

Unpaid expenses owed to related party. If you use an

accrual method, you cannot deduct interest and other ex-

TIP

penses owed to a related cash-basis person until payment

is made and the amount is includible in the gross income

of that person. The relationship, for purposes of this rule,

is determined as of the end of the tax year for which the

interest or expense would otherwise be deductible. If a de-

duction is denied under this rule, this rule will continue to

apply even if your relationship with the person ceases to

exist before the amount is includible in the gross income

of that person.

This rule generally applies to those relationships listed

in chapter 4 under Related Party Transactions. It also ap-

plies to accruals by partnerships to partners, partners to

partnerships, shareholders to S corporations, and S cor-

porations to shareholders.

The postponement of deductions for unpaid expenses

and interest under the related party rule does not apply to

OID, regardless of when payment is made. This rule also

does not apply to loans with below-market interest rates or

to certain payments for the use of property and services

when the lender or recipient has to include payments peri-

odically in income, even if a payment has not been made.

Sales and Trades of

Investment Property

Introduction

This chapter explains the tax treatment of sales and

trades of investment property.

Investment property. This is property that produces in-

vestment income. Examples include stocks, bonds, and

Treasury bills and notes. Property used in a trade or busi-

ness is not investment property.

Form 1099-B. If you sold property such as stocks, bonds,

mutual funds, or certain commodities through a broker

during the year, the broker should send you, for each sale,

a Form 1099-B, Proceeds From Broker and Barter Ex-

change Transactions. You should receive the Form 1099-B

for 2023 by February 15, 2024. It will show the gross pro-

ceeds from the sale. The IRS will also get a copy of Form

1099-B from the broker.

Use the Form 1099-B received from your broker to

complete Form 8949, Sales and Other Dispositions of

Capital Assets. If you sold a covered security in 2023, your

broker will send you a Form 1099-B that shows your basis.

This will help you complete Form 8949. Generally, a cov-

ered security is a security you acquired after 2010, with

certain exceptions explained in the Instructions for Form

8949.

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For more information on Form 8949 and Sched-

ule D (Form 1040), see Reporting Capital Gains

and Losses in this chapter. Also see the Instruc-

tions for Form 8949 and the Instructions for Schedule D

(Form 1040).

Nominees. 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.

If you receive a Form 1099-B that includes gross pro-

ceeds belonging to another person, see Nominees, later,

under Reporting Capital Gains and Losses for more infor-

mation.

Other property transactions. Certain transfers of prop-

erty are discussed in other IRS publications. These in-

clude:

•

Sale of your main home, discussed in Pub. 523, Sell-

ing Your Home;

•

Installment sales, covered in Pub. 537;

•

Various types of transactions involving business prop-

erty, discussed in Pub. 544, Sales and Other Disposi-

tions of Assets;

•

Transfers of property at death, covered in Pub. 559;

and

•

Disposition of an interest in a passive activity, dis-

cussed in Pub. 925.

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 or

Commodities.

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

TIP

551

Schedule D (Form 1040)

6781

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.

What Is a

Sale or Trade?

Terms you may need to know

(see Glossary):

Equity option

Futures contract

Marked-to-market rule

Nonequity option

Options dealer

Regulated futures contract

Section 1256 contract

Short sale

This section explains what is a sale or trade. It also ex-

plains certain transactions and events that are treated as

sales or trades.

A sale is generally a transfer of property for money or a

mortgage, note, or other promise to pay money.

A trade is a transfer of property for other property or

services, and may be taxed in the same way as a sale.

Sale and purchase. Ordinarily, a transaction is not a

trade when you voluntarily sell property for cash and im-

mediately buy similar property to replace it. The sale and

purchase are two separate transactions. But see

Like-Kind Exchanges under Nontaxable Trades, later.

Redemption of stock. 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.

Dividend versus sale or trade. Whether a redemp-

tion is treated as a sale, trade, dividend, or other distribu-

tion depends on the circumstances in each case. Both di-

rect and indirect ownership of stock will be considered.

The redemption is treated as a sale or trade of stock if:

•

The redemption is not essentially equivalent to a divi-

dend—see Dividends and Other Distributions in chap-

ter 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

8582

8824

8949

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•

The redemption is a distribution in partial liquidation of

a corporation.

Redemption or retirement of bonds. A redemption or

retirement of bonds or notes at their maturity is generally

treated as a sale or trade. See Stocks, stock rights, and

bonds and Discounted Debt Instruments, later.

In addition, a significant modification of a bond is trea-

ted as a trade of the original bond for a new bond. For de-

tails, see Regulations section 1.1001-3.

Surrender of stock. 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. The surrendering shareholder must

reallocate his or her basis in the surrendered shares to the

shares he or she retains.

Trade of investment property for an annuity. 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. 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.

Figure the present value of the annuity according to fac-

tors used by commercial insurance companies issuing an-

nuities.

Transfer by inheritance. 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 disposi-

tion. No taxable gain or deductible loss results from the

transfer.

Termination of certain rights and obligations. 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. Any gain or loss is treated as a capital gain or loss.

This rule does not apply to the retirement of a debt in-

strument. See Redemption or retirement of bonds, earlier.

Worthless Securities

Stocks, stock rights, and bonds (other than those held for

sale by a securities dealer) that became completely worth-

less during the tax year are treated as though they were

sold on the last day of the tax year. This affects whether

your capital loss is long term or short term. See Holding

Period, later.

Worthless securities also include securities that you

abandon after March 12, 2008. To abandon a security, you

must permanently surrender and relinquish all rights in the

security and receive no consideration in exchange for it.

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 ex-

change, contribution to capital, dividend, or gift.

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. Do

not deduct them in the year the stock became worthless.

How to report loss. Report worthless securities on Form

8949, Part I or Part II, whichever applies.

Report your worthless securities transactions on

Form 8949 with the correct box checked for these

transactions. See Form 8949 and the Instructions

for Form 8949.

Filing a claim for refund. If you do not claim a loss for a

worthless security on your original return for the year it be-

comes worthless, you can file a claim for a credit or refund

due to the loss. You must use Form 1040-X, Amended

U.S. Individual Income Tax Return, to amend your return

for the year the security became worthless. 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. (Claims not due to worthless secur-

ities or bad debts must generally 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.) For more information about

filing a claim, see Publication 556, Examination of Re-

turns, Appeals Rights, and Claims for Refund.

Constructive Sales

of Appreciated

Financial Positions

You are treated as having made a constructive sale when

you enter into certain transactions involving an appreci-

ated financial position (defined later) in stock, a partner-

ship interest, or certain debt instruments. You must recog-

nize gain as if the position were disposed of at its fair

market value on the date of the constructive sale. This

gives you a new holding period for the position that begins

on the date of the constructive sale. Then, when you close

the transaction, you reduce your gain (or increase your

loss) by the gain recognized on the constructive sale.

Constructive sale. 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 re-

lating 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).

CAUTION

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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. For

this purpose, a related person is any related party descri-

bed under Related Party Transactions, later in this chap-

ter.

Exception for nonmarketable securities. You are

not treated as having made a constructive sale solely be-

cause you entered into a contract for sale of any stock,

debt instrument, or partnership interest that is not a mar-

ketable security if it settles within 1 year of the date you

enter into it.

Exception for certain closed transactions. Do not

treat a transaction as a constructive sale if all of the follow-

ing are true.

1. You closed the transaction on or before the 30th day

after the end of your tax year.

2. You held the appreciated financial position throughout

the 60-day period beginning on the date you closed

the transaction.

3. Your risk of loss was not reduced at any time during

that 60-day period by holding certain other positions.

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.

This exception also applies to successive short sales of

an entire appreciated financial position. For more informa-

tion, see Revenue Ruling 2003-1 in Internal Revenue Bul-

letin 2003-3. This bulletin is available at IRS.gov/pub/irs-

irbs/irb03-03.pdf.

Appreciated financial position. This is any interest in

stock, a partnership interest, or a debt instrument (includ-

ing a futures or forward contract, a short sale, or an op-

tion) if disposing of the interest would result in a gain.

Exceptions. An appreciated financial position does

not include the following.

1. Any position from which all of the appreciation is ac-

counted for under marked-to-market rules, including

section 1256 contracts (described later under Section

1256 Contracts Marked to Market).

2. Any position in a debt instrument if:

a. The position unconditionally entitles the holder to

receive a specified principal amount;

b. 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 1.860G-1(a)(3); and

c. The position is not convertible, either directly or in-

directly, into stock of the issuer (or any related

person).

3. Any hedge with respect to a position described in (2).

Certain trust instruments treated as stock. 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).

Sale of appreciated financial position. 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. However, if you hold another ap-

preciated financial position and dispose of the original po-

sition 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 po-

sition.

Section 1256 Contracts

Marked to Market

If you hold a section 1256 contract at the end of the tax

year, you must generally treat it as sold at its fair market

value on the last business day of the tax year.

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.

Exceptions. A section 1256 contract does not in-

clude:

•

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.

For more details, including definitions of these terms, see

section 1256.

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Regulated futures contract. 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. A qualified board of exchange is a

domestic board of trade designated as a contract mar-

ket by the Commodity Futures Trading Commission,

any board of trade or exchange approved by the Sec-

retary of the Treasury, or a national securities ex-

change registered with the Securities and Exchange

Commission (SEC).

Foreign currency contract. This is a contract that:

•

Requires delivery of a foreign currency that has posi-

tions 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.

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 satis-

fied.

Special rules apply to certain foreign currency transac-

tions. These transactions may result in ordinary gain or

loss treatment. For details, see Internal Revenue Code

section 988 and Regulations sections 1.988-1(a)(7) and

1.988-3.

Nonequity option. This is any listed option (defined

later) that is not an equity option. Nonequity options in-

clude debt options, commodity futures options, currency

options, and broad-based stock index options. 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).

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.

Cash-settled options. 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 SEC determines that the stock index is broad based.

This rule does not apply to options established before

the SEC determines that the stock index is broad based.

Listed option. This is any option traded on, or subject

to the rules of, a qualified board or exchange (as dis-

cussed earlier under Regulated futures contract). A listed

option, however, does not include an option that is a right

to acquire stock from the issuer.

Dealer equity option. 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.

An “options dealer” is any person registered with an ap-

propriate national securities exchange as a market maker

or specialist in listed options.

Equity option. 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.

Equity options include options on a group of stocks only if

the group is a narrow-based stock index.

Dealer securities futures contract. 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 op-

tion, is purchased or granted by the dealer) in the nor-

mal 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).

A securities futures contract that is not a dealer securities

futures contract is treated as described later under Securi-

ties Futures Contracts.

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. 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.

Hedging exception. The marked-to-market rules do not

apply to hedging transactions. See Hedging Transactions,

later.

60/40 rule. Under the marked-to-market system, 60% of

your capital gain or loss will be treated as a long-term cap-

ital gain or loss, and 40% will be treated as a short-term

capital gain or loss. This is true regardless of how long you

actually held the property.

Example. On June 1, 2022, you bought a regulated fu-

tures contract for $50,000. On December 31, 2022 (the

last business day of your tax year), the fair market value of

the contract was $57,000. You recognized a $7,000 gain

on your 2022 tax return. You treated 60% of the gain as

long-term capital gain and 40% as short-term capital gain.

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On February 1, 2023, you sold the contract for $56,000.

Because you recognized a $7,000 gain on your 2022 re-

turn, you recognize a $1,000 loss ($57,000 − $56,000) on

your 2023 tax return, treated as 60% long-term and 40%

short-term capital loss.

Limited partners or entrepreneurs. The 60/40 rule

does not apply to dealer equity options or dealer securi-

ties futures contracts that result in capital gain or loss allo-

cable to limited partners or limited entrepreneurs (defined

later under Hedging Transactions). Instead, these gains or

losses are treated as short term.

Terminations and transfers. The marked-to-market

rules also apply if your obligation or rights under section

1256 contracts are terminated or transferred during the tax

year. In this case, use the fair market value of each section

1256 contract at the time of termination or transfer to de-

termine the gain or loss. Terminations or transfers may re-

sult from any offsetting, delivery, exercise, assignment, or

lapse of your obligation or rights under section 1256 con-

tracts.

Loss carryback election. An individual having a net

section 1256 contracts loss (defined later) can generally

elect to carry this loss back 3 years instead of carrying it

over to the next year. See How To Report, later, for infor-

mation about reporting this election on your return.

The loss carried back to any year under this election

cannot be more than the net section 1256 contracts gain

in that year. In addition, the amount of loss carried back to

an earlier tax year cannot increase or produce a net oper-

ating loss for that year.

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. 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.

If only a portion of the net section 1256 contracts loss is

absorbed by carrying the loss back, the unabsorbed por-

tion can be carried forward, under the capital loss carry-

over rules, to the year following the loss. For more informa-

tion, see Capital Losses, later. 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 sec-

tion 1256 contracts loss absorbed in the carryback years

and an additional long-term capital gain of 60% of the ab-

sorbed loss. 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.

Net section 1256 contracts loss. 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 deter-

mined without this election.

Net section 1256 contracts gain. This gain is the

lesser of:

•

The capital gain net income for the carryback year de-

termined by taking into account only gains and losses

from section 1256 contracts, or

•

The capital gain net income for that year.

Figure your net section 1256 contracts gain for any carry-

back year without regard to the net section 1256 contracts

loss for the loss year or any later tax year.

Traders in section 1256 contracts. Gain or loss from

the trading of section 1256 contracts is capital gain or loss

subject to the marked-to-market rules. However, this does

not apply to contracts held for purposes of hedging prop-

erty if any loss from the property would be an ordinary

loss.

Treatment of underlying property. The determina-

tion of whether an individual's gain or loss from any prop-

erty is ordinary or capital gain or loss is made without re-

gard to the fact that the individual is actively engaged in

dealing in or trading section 1256 contracts related to that

property.

Deferral of net gain from section 1256 contracts due

to investment in Qualified Opportunity Fund. For

special rules relating to the deferral of net gain from sec-

tion 1256 contracts, see section 1400Z-2. See the Form

8949 instructions for how to report.

How To Report

If you disposed of regulated futures or foreign currency

contracts in 2023 (or had unrealized profit or loss on these

contracts that were open at the end of 2022 or 2023), you

should receive Form 1099-B from your broker.

Form 6781. 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. This includes the amount shown in box 11 of Form

1099-B. Then enter the net amount of these gains and los-

ses on Schedule D (Form 1040), line 4 or line 11, as ap-

propriate. Include a copy of Form 6781 with your income

tax return.

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. Follow the Form

6781 instructions for completing Part I.

Loss carryback election. To carry back your loss under

the election procedures described earlier, file Form

1040-X or Form 1045, Application for Tentative Refund, for

the year to which you are carrying the loss with an amen-

ded Form 6781 and an amended Schedule D (Form 1040)

attached. Follow the instructions for completing Form

6781 for the loss year to make this election.

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Hedging Transactions

The marked-to-market rules, described earlier, do not ap-

ply to hedging transactions. A transaction is a hedging

transaction if both of the following conditions are met.

1. You entered into the transaction in the normal course

of your trade or business primarily to manage the risk

of:

a. Price changes or currency fluctuations on ordinary

property you hold (or will hold); or

b. Interest rate or price changes, or currency fluctua-

tions, on your current or future borrowings or ordi-

nary obligations.

2. You clearly identified the transaction as being a hedg-

ing transaction before the close of the day on which

you entered

into it.

This hedging transaction exception does not apply to

transactions entered into by or for any syndicate. A syndi-

cate 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. 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. However, an inter-

est is not considered held by a limited partner or entrepre-

neur 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 partici-

pates in the management of the entity.

Hedging loss limit. If you are a limited partner or entre-

preneur in a syndicate, the amount of a hedging loss you

can claim is limited. 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.

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. Ig-

nore any hedging transaction items in determining this

taxable income. If you have a hedging loss that is disal-

lowed because of this limit, you can carry it over to the

next tax year as a deduction resulting from a hedging

transaction.

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.

The limit on hedging losses does not apply to any

hedging loss to the extent that it is more than all your un-

recognized gains from hedging transactions at the end of

the tax year that are from the trade or business in which

the hedging transaction occurred. The term “unrecognized

gain” has the same meaning as defined under Loss Defer-

ral Rules, later.

Sale of property used in a hedge. 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.

Self-Employment Income

Gains and losses derived in the ordinary course of a com-

modity or option dealer's trading in section 1256 contracts

and property related to these contracts are included in net

earnings from self-employment. See the Instructions for

Schedule SE (Form 1040). In addition, the rules relating to

contributions to self-employment retirement plans apply.

For information on retirement plan contributions, see Pub.

560 and Pub. 590-A.

Basis of

Investment Property

Terms you may need to know

(see Glossary):

Basis

Fair market value

Original issue discount (OID)

Basis is a way of measuring your investment in property

for tax purposes. You must know the basis of your prop-

erty to determine whether you have a gain or loss on its

sale or other disposition.

Investment property you buy normally has an original

basis equal to its cost. 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.

Cost Basis

The basis of property you buy is usually its cost. The cost

is the amount you pay in cash, debt obligations, or other

property or services.

Unstated interest. If you buy property on a time-pay-

ment 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. You generally

have unstated interest if your interest rate is less than the

applicable federal rate. For more information, see Unsta-

ted Interest and Original Issue Discount (OID) in Pub. 537.

Basis Other Than Cost

There are times when you must use a basis other than

cost. In these cases, you may need to know the property's

fair market value or the adjusted basis of the previous

owner.

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Fair market value. 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. Sales of similar prop-

erty, around the same date, may be helpful in figuring fair

market value.

Property Received for Services

If you receive investment property for services, you must

include the property's fair market value in income. The

amount you include in income then becomes your basis in

the property. 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.

Restricted property. If you receive, as payment for serv-

ices, property that is subject to certain restrictions, your

basis in the property is generally its fair market value when

it becomes substantially vested. Property becomes sub-

stantially vested when it is transferable or is no longer sub-

ject to substantial risk of forfeiture, whichever happens

first. See Restricted Property in Pub. 525 for more infor-

mation.

Bargain purchases. If you buy investment property at

less than fair market value, as payment for services, you

must include the difference in income. Your basis in the

property is the price you pay plus the amount you include

in income.

Property Received

in Taxable Trades

If you received investment property in trade for other prop-

erty, 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.

Example. You trade A Company stock for B Company

stock having a fair market value of $1,200. If the adjusted

basis of the A Company stock is less than $1,200, you

have a taxable gain on the trade. If the adjusted basis of

the A Company stock is more than $1,200, you have a de-

ductible loss on the trade. The basis of your B Company

stock is $1,200. If you later sell the B Company stock for

$1,300, you will have a gain of $100.

Property Received

in Nontaxable Trades

If you have a nontaxable trade, you do not recognize gain

or loss until you dispose of the real property you received

in the trade. See Nontaxable Trades, later.

The basis of property you received in a nontaxable or

partly nontaxable trade is generally the same as the adjus-

ted basis of the property you gave up. Increase this

amount by any cash you paid, additional costs you had,

and any gain recognized. 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.

Property Received

From Your Spouse

If property is transferred to you from your spouse (or for-

mer spouse, if the transfer is incident to your divorce), your

basis is the same as your spouse's or former spouse's ad-

justed basis just before the transfer. See Transfers Be-

tween Spouses, later.

Recordkeeping. The transferor must give you the

records necessary to determine the adjusted ba-

sis and holding period of the property as of the

date of the transfer.

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.

Fair market value less than donor's adjusted basis. 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. 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.

No gain or loss. If you use the basis for figuring a

gain and the result is a loss, and then use the basis for fig-

uring a loss and the result is a gain, you will have neither a

gain nor a loss.

Example. You receive a gift of investment property

having an adjusted basis of $10,000 at the time of the gift.

The fair market value at the time of the gift is $9,000. You

later sell the property for $9,500. Your basis for figuring

gain is $10,000, and $9,500 minus $10,000 results in a

$500 loss. Your basis for figuring loss is $9,000, and

$9,500 minus $9,000 results in a $500 gain. You have nei-

ther gain nor loss.

Fair market value equal to or more than donor's ad-

justed basis. 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 dur-

ing the period you hold the property. Also, you may be al-

lowed to add to the donor's adjusted basis all or part of

any gift tax paid, depending on the date of the gift.

Gift received after 1976. 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. You figure this part by

RECORDS

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multiplying the gift tax paid on the gift by a fraction. The

numerator (top part) is the net increase in value of the gift

and the denominator (bottom part) is the amount of the

gift.

The net increase in value of the gift is the fair market

value of the gift minus the donor's adjusted basis. The

amount of the gift is its value for gift tax purposes after re-

duction by any annual exclusion and marital or charitable

deduction that applies to the gift.

Example. In 2023, you received a gift of property from

your mother. 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. The amount of the gift for gift tax purposes was

$84,000 ($101,000 minus the $17,000 annual exclusion),

and your mother paid a gift tax of $19,320. 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 .......................... $ 19,320

Multiplied by 0.726 ($61,000 ÷ $84,000) ......... 0.726

Gift tax due to net increase in value ............ $ 14,026

Plus: Adjusted basis of property to

your mother ..........................

40,000

Your basis in the property $ 54,026

Part sale, part gift. 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 ad-

justed basis in the property at the time of the transfer. Add

to that amount the amount of any gift tax paid on the gift,

as described in the preceding discussion. For figuring

loss, your basis is limited to the property's fair market

value at the time of the transfer.

Gift tax information. For information on gift tax, see

Pub. 559. For information on figuring the amount of gift tax

to add to your basis, see Property Received as a Gift in

Pub. 551.

Property Received as Inheritance

Before or after 2010. 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 is generally its fair market value (its appraised

value on Form 706, United States Estate (and Genera-

tion-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.

In certain circumstances, the executor of an estate (or

other person) required to file Form 706 after July 15, 2015,

will be required to provide a Schedule A (Form 8971) to

you as a beneficiary who receives or is to receive property

from the estate. If you receive Schedule A (Form 8971),

use the final estate tax value of the property reported on

the Schedule A to determine your basis in the property.

If no Form 706 was filed, or the executor was not re-

quired to provide you Schedule A (Form 8971), use the

appraised value on the date of death for state inheritance

or transmission taxes. For stocks and bonds, if no Form

706 was filed and there are no state inheritance or trans-

mission 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.

Appreciated property you gave the decedent. 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. 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. Appreciated property is any property whose

fair market value on the day you gave it to the decedent

was more than its adjusted basis.

More information. See Pub. 551 for more information

on the basis of inherited property, including community

property, property held by a surviving tenant in a joint ten-

ancy or tenancy by the entirety, a qualified joint interest,

and a farm or closely held business.

Inherited in 2010 and executor elected to file Form

8939. If you inherited property from a decedent who died

in 2010 and the executor made the election to file Form

8939, see Revenue Procedure 2011-41 to figure your ba-

sis. Revenue Procedure 2011-41 is available at

IRS.gov/rb/2011-35_IRB#RP-2011-41.

For additional information on an executor making the

election, see also Notice 2011-66, 2011-35 I.R.B. 184,

available at IRS.gov/irb/2011-35_IRB#NOT-2011-66.

Adjusted Basis

Before you can figure any gain or loss on a sale, ex-

change, or other disposition of property or figure allowable

depreciation, depletion, or amortization, you must usually

make certain adjustments (increases and decreases) to

the basis of the property. The result of these adjustments

to the basis is the adjusted basis.

Adjustments to the basis of stocks and bonds are ex-

plained in the following discussion. For information about

other adjustments to basis, see Pub. 551.

Stocks and Bonds

The basis of stocks or bonds you own is generally the pur-

chase price plus the costs of purchase, such as commis-

sions and recording or transfer fees. If you acquired stock

or bonds other than by purchase, your basis is usually de-

termined by fair market value or the previous owner's ad-

justed basis as discussed earlier under Basis Other Than

Cost.

The basis of stock must be adjusted for certain events

that occur after purchase. For example, if you receive

more stock from nontaxable stock dividends or stock

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splits, you must reduce the basis of your original stock.

You must also reduce your basis when you receive nondi-

vidend distributions (discussed in chapter 1). These distri-

butions, up to the amount of your basis, are a nontaxable

return of capital.

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 adjus-

ted basis in securities. To find out more, go to IRS.gov/

Filing.

Identifying stock or bonds sold. If you can adequately

identify the shares of stock or the bonds you sold, their ba-

sis is the cost or other basis of the particular shares of

stock or bonds.

Adequate identification. 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.

Broker holds stock. If you have left the stock certifi-

cates with your broker or other agent, you will make an ad-

equate identification if you:

•

Tell your broker or other agent the particular stock to

be sold or transferred at the time of the sale or trans-

fer, and

•

Receive a written confirmation of this from your broker

or other agent within a reasonable time.

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.

Single stock certificate. If you bought stock in differ-

ent lots at different times and you hold a single stock cer-

tificate for this stock, you will make an adequate identifica-

tion 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.

If you sell part of the stock represented by a single cer-

tificate directly to the buyer instead of through a broker,

you will make an adequate identification if you keep a writ-

ten record of the particular stock that you intend to sell.

Bonds. These methods of identification also apply to

bonds sold or transferred.

Identification not possible. If you buy and sell se-

curities at various times in varying quantities and you can-

not adequately identify the shares you sell, the basis of

the securities you sell is the basis of the securities you ac-

quired first. Except for certain mutual fund shares, dis-

cussed later, you cannot use the average price per share

to figure gain or loss on the sale of the shares.

TIP

Example. You bought 100 shares of stock of XYZ

Corporation in 2008 for $10 per share. In January 2009,

you bought another 200 shares for $11 per share. In July

2009, you gave your son 50 shares. In December 2011,

you bought 100 shares for $9 per share. In April 2023, you

sold 130 shares. You cannot identify the shares you dis-

posed of, so you must use the stock you acquired first to

figure the basis. The shares of stock you gave your son

had a basis of $500 (50 × $10). You figure the basis of the

130 shares of stock you sold in April 2023 as follows:

50 shares (50 × $10) balance of stock bought in

2008 ................................ $ 500

80 shares (80 × $11) stock bought in January 2009 .. 880

Total basis of stock sold in 2023 $1,380

Shares in a mutual fund or real estate investment

trust (REIT). The basis of shares in a mutual fund (or

other regulated investment company) or a REIT is gener-

ally figured in the same way as the basis of other stock

and usually includes any commissions or load charges

paid for the purchase.

Example. You bought 100 shares of Fund A for $10

per share. You paid a $50 commission to the broker for the

purchase. Your cost basis for each share is $10.50

($1,050 ÷ 100).

Commissions and load charges. The fees and

charges you pay to acquire or redeem shares of a mutual

fund are not deductible. You can usually add acquisition

fees and charges to your cost of the shares and thereby

increase your basis. A fee paid to redeem the shares is

usually a reduction in the redemption price (sales price).

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.

1. You get a reinvestment right because of the purchase

of the shares or the payment of the fee or charge.

2. You dispose of the shares within 90 days of the pur-

chase date.

3. You acquire new shares in the same mutual fund or

another mutual fund, for which the fee or charge is re-

duced or waived because of the reinvestment right

you got when you acquired the original shares.

The amount of the original fee or charge in excess of

the reduction in (3) is added to the cost of the original

shares. The rest of the original fee or charge is added to

the cost basis of the new shares (unless all three condi-

tions above also apply to the purchase of the new shares).

Choosing average basis for mutual fund shares.

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 2011 in con-

nection with a dividend reinvestment plan (DRP), and left

them on deposit in an account kept by a custodian or

agent. The methods you can use to figure average basis

are explained later.

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Undistributed capital gains. 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 differ-

ence between the amount you included and the amount of

tax paid for you by the fund or REIT. See Undistributed

capital gains of mutual funds and REITs in chapter 1.

Reinvestment right. This is the right to acquire mu-

tual fund shares in the same or another mutual fund with-

out paying a fee or load charge, or by paying a reduced

fee or load charge.

The original cost basis of mutual fund shares you ac-

quire by reinvesting your distributions is the amount of the

distributions used to purchase each full or fractional share.

This rule applies even if the distribution is an exempt-inter-

est dividend that you do not report as income.

Table 4-1. This is a worksheet you can use to

keep track of the adjusted basis of your mutual

fund shares. Enter the cost per share when you

acquire new shares and any adjustments to their basis

when the adjustment occurs. This worksheet will help you

figure the adjusted basis when you sell or redeem shares.

RECORDS

Automatic investment service. 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 brok-

er's commission.

DRPs. If you participate in a DRP and receive stock from

the corporation at a discount, your basis is the full fair mar-

ket value of the stock on the dividend payment date. You

must include the amount of the discount in your income.

Public utilities. If, before 1986, you excluded from in-

come the value of stock you had received under a quali-

fied public utility reinvestment plan, your basis in that

stock is zero.

Stock dividends. Stock dividends are distributions made

by a corporation of its own stock. Generally, stock divi-

dends are not taxable to you. However, see Distributions

of Stock and Stock Rights in chapter 1 for some excep-

tions. If the stock dividends are not taxable, you must di-

vide your basis for the old stock between the old and new

stock.

Table 4-1. Mutual Fund Record

Mutual Fund

Acquired

Adjustment to Basis per Share

Adjusted

Basis

per Share

Sold or Redeemed

Date

Number

Cost

per

Date

Number

Include share received from reinvestment of distributions.

Cost plus or minus adjustments.

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New and old stock identical. If the new stock you re-

ceived as a nontaxable dividend is identical to the old

stock on which the dividend was declared, divide the ad-

justed basis of the old stock by the number of shares of

old and new stock. The result is your basis for each share

of stock.

Example 1. You owned one share of common stock

that you bought for $45. The corporation distributed two

new shares of common stock for each share held. You

then had three shares of common stock. Your basis in

each share is $15 ($45 ÷ 3).

Example 2. You owned two shares of common stock.

You bought one for $30 and the other for $45. The corpo-

ration distributed two new shares of common stock for

each share held. You had six shares after the distribu-

tion—three with a basis of $10 each ($30 ÷ 3) and three

with a basis of $15 each ($45 ÷ 3).

New and old stock not identical. 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 figured differently. 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.

Example. You bought a share of common stock for

$100. Later, the corporation distributed a share of prefer-

red stock for each share of common stock held. 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. You figure the basis of the old and new stock

by dividing your $100 basis between them. The basis of

your common stock is $75 (($150 ÷ $200) × $100), and

the basis of the new preferred stock is $25 (($50 ÷ $200) ×

$100).

Stock bought at various times. 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.

Taxable stock dividends. 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. The basis

of your old stock does not change.

Stock splits. Figure the basis of stock splits in the same

way as stock dividends if identical stock is distributed on

the stock held.

Stock rights. A stock right is a right to acquire a corpora-

tion's stock. It may be exercised, it may be sold if it has a

market value, or it may expire. Stock rights are rarely taxa-

ble when you receive them. See Distributions of Stock and

Stock Rights in chapter 1.

Taxable stock rights. If you receive stock rights that

are taxable, the basis of the rights is their fair market value

at the time of distribution. The basis of the old stock does

not change.

Nontaxable stock rights. If you receive nontaxable

stock rights and allow them to expire, they have no basis.

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. Use a ratio of

the fair market value of each to the total fair market value

of both at the time of distribution.

If the fair market value of the stock rights was less than

15%, their basis is zero. However, you can choose to di-

vide the basis of the old stock between the old stock and

the stock rights. 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.

Basis of new stock. If you exercise the stock rights,

the basis of the new stock is its cost plus the basis of the

stock rights exercised.

Example. You own 100 shares of ABC Company

stock, which cost you $22 per share. The ABC Company

gave you 10 nontaxable stock rights that would allow you

to buy 10 more shares at $26 per share. At the time the

stock rights were distributed, the stock had a market value

of $30, not including the stock rights. Each stock right had

a market value of $3. 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. 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 = $2,178.22, new basis of old stock

($30 ÷ $3,030) × $2,200 = $21.78, basis of rights

If you sell the rights, the basis for figuring gain or loss is

$2.18 ($21.78 ÷ 10) per right. 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 ($2.18), or $28.18 per

share. The remaining basis of the old stock is $21.78 per

share.

Investment property received in liquidation. In gen-

eral, 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.

S corporation stock. You must increase your basis in

stock of an S corporation by your pro rata share of the fol-

lowing items.

•

All income items of the S corporation, including tax-ex-

empt income, that are separately stated and passed

through to you as a shareholder.

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•

The nonseparately stated income of the S corporation.

•

The amount of the deduction for depletion (other than

oil and gas depletion) that is more than the basis of

the property being depleted.

You must decrease your basis in stock of an S corpora-

tion by your pro rata share of the following items.

•

Distributions by the S corporation that were not inclu-

ded in your income.

•

All loss and deduction items of the S corporation that

are separately stated and passed through to you.

•

Any nonseparately stated loss of the S corporation.

•

Any expense of the S corporation that is not deducti-

ble in figuring its taxable income and not properly

chargeable to a capital account.

•

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.

However, your basis in the stock cannot be reduced below

zero.

Qualified small business stock. 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 post-

poned gain on the earlier sale. See Gains on Qualified

Small Business Stock, later.

Short sales. 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.

See Payments in lieu of dividends, later, for information

about deducting payments in lieu of dividends.

Premiums on bonds. If you buy a bond at a premium,

the premium is treated as part of your basis in the bond. If

you choose to amortize the premium paid on a taxable

bond, you must reduce the basis of the bond by the amor-

tized part of the premium each year over the life of the

bond.

For a taxable bond acquired at a premium that is a cov-

ered security, unless you instruct your broker that you do

not want to amortize premium, your broker will report in-

come on the bond and your basis in the bond by amortiz-

ing premium. Your broker may report the amount of pre-

mium amortization for a tax year separately from the

amount of gross interest income in boxes 11 and 12 of

Form 1099-INT or box 10 of Form 1099-OID, or may report

net interest in boxes 1 and 3 of Form 1099-INT or box 2 of

Form 1099-OID.

Although you cannot deduct the premium on a tax-ex-

empt bond, you must amortize it to determine your adjus-

ted basis in the bond. You must reduce the basis of the

bond by the premium you amortized for the period you

held the bond. For a tax-exempt covered security acquired

at a premium, box 13 of Form 1099-INT or box 10 of Form

1099-OID shows the amount of bond premium

amortization allocable to the interest paid during the tax

year. If a net amount of interest appears in box 8 or 9 of

Form 1099-INT, whichever is applicable, box 13 of Form

1099-INT should be blank. If a net amount of interest ap-

pears in box 2 of Form 1099-OID, box 10 of Form

1099-OID should be blank.

See Bond Premium Amortization in chapter 3 for more

information.

Market discount on bonds. If you include market dis-

count on a bond in income currently, increase the basis of

your bond by the amount of market discount you include in

your income. See Market Discount Bonds in chapter 1 for

more information.

Bonds purchased at par value. A bond purchased at

par value (face amount) has no premium or discount.

When you sell or otherwise dispose of the bond, you fig-

ure the gain or loss by comparing the bond proceeds to

the purchase price of the bond.

Example. You purchased a bond several years ago for

its par value of $10,000. You sold the bond this year for

$10,100. You have a gain of $100. However, if you had

sold the bond for $9,900, you would have a loss of $100.

Acquisition discount on short-term obligations. 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. See Discount on Short-Term Obligations in chap-

ter 1 for more information.

Original issue discount (OID) on debt instruments.

Increase the basis of a debt instrument by the OID you in-

clude in your income. See Original Issue Discount (OID) in

chapter 1.

If your debt instrument is a covered security, your

broker will report a basis amount that is adjusted for OID

included in income.

Discounted tax-exempt obligations. OID on tax-ex-

empt obligations is generally not taxable. However, when

you dispose of a tax-exempt obligation issued after Sep-

tember 3, 1982, that you acquired after March 1, 1984,

you must accrue OID on the obligation to determine its ad-

justed basis. The accrued OID is added to the basis of the

obligation to determine your gain or loss. If your tax-ex-

empt obligation is a covered security, your broker will re-

port a basis amount that is adjusted for tax-exempt OID.

For information on determining OID on a long-term obli-

gation, see Debt Instruments Issued After July 1, 1982,

and Before 1985 or Debt Instruments Issued After 1984,

whichever applies, in Pub. 1212 under Figuring OID on

Long-Term Debt Instruments.

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. See Discount on Short-Term

Obligations in chapter 1.

Stripped tax-exempt obligation. 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. For stripped tax-exempt

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bonds or coupons acquired after June 10, 1987, part of

this OID may be taxable. You accrue the OID on these ob-

ligations in the manner described in chapter 1 under Strip-

ped Bonds and Coupons.

Increase your basis in the stripped tax-exempt bond or

coupon by the taxable and nontaxable accrued OID. 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. In addition,

for bonds acquired after June 10, 1987, add to your basis

any accrued market discount not previously reflected in

basis.

How To Figure

Gain or Loss

You figure gain or loss on a sale or trade of property by

subtracting the adjusted basis of the property from the

amount you realize on the sale or trade.

Gain. 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.

Loss. If the adjusted basis of the property you transfer is

more than the amount you realize, the difference is a loss.

Amount realized. The amount you realize from a sale or

trade of property is everything you receive for the property

minus your expenses related to the sale (such as redemp-

tion fees, sales commissions, sales charges, or exit fees).

Amount realized includes the money you receive plus the

fair market value of any property or services you receive.

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 ordi-

nary income will reduce the amount realized from the sale.

For more information, see Pub. 537.

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. See Regulations section 1.1001-1(g). How-

ever, 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.

Fair market value. 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.

Example. You trade A Company stock with an adjus-

ted basis of $7,000 for B Company stock with a fair market

value of $10,000, which is your amount realized. Your gain

is $3,000 ($10,000 – $7,000). 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).

Debt paid off. 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 re-

alized. This is true even if neither you nor the buyer is per-

sonally liable for the debt. 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.

Example. You sell stock that you had pledged as se-

curity for a bank loan of $8,000. Your basis in the stock is

$6,000. The buyer pays off your bank loan and pays you

$20,000 in cash. The amount realized is $28,000

($20,000 + $8,000). Your gain is $22,000 ($28,000 –

$6,000).

Payment of cash. If you trade property and cash for

other property, the amount you realize is the fair market

value of the property you receive. Determine your gain or

loss by subtracting the cash you pay and the adjusted ba-

sis of the property you trade in from the amount you real-

ize. If the result is a positive number, it is a gain. If the re-

sult is a negative number, it is a loss.

No gain or loss. You may have to use a basis for figur-

ing gain that is different from the basis used for figuring

loss. In this case, you may have neither a gain nor a loss.

See No gain or loss in the discussion on the basis of prop-

erty you received as a gift under Basis Other Than Cost,

earlier.

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. If your shares in a mu-

tual fund were acquired all on the same day and for the

same price, figuring their basis is not difficult. However,

shares are generally acquired at various times, in various

quantities, and at various prices. Therefore, figuring your

basis can be more difficult. You can choose to use either a

cost basis or an average basis to figure your gain or loss.

Cost Basis

You can figure your gain or loss using a cost basis only if

you did not previously use an average basis for a sale, ex-

change, or redemption of other shares in the same mutual

fund.

To figure cost basis, you can choose one of the follow-

ing methods.

•

Specific share identification.

•

First-in first-out (FIFO).

Specific share identification. If you adequately identify

the shares you sold, you can use the adjusted basis of

those particular shares to figure your gain or loss.

You will adequately identify your mutual fund shares,

even if you bought the shares in different lots at various

prices and times, if you:

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1. Specify to your broker or other agent the particular

shares to be sold or transferred at the time of the sale

or transfer, and

2. Receive confirmation in writing from your broker or

other agent within a reasonable time of your specifica-

tion of the particular shares sold or transferred.

You continue to have the burden of proving your basis

in the specified shares at the time of sale or transfer.

FIFO. If your shares were acquired at different times or at

different prices and you cannot identify which shares you

sold, use the basis of the shares you acquired first as the

basis of the shares sold. In other words, the oldest shares

you own are considered sold first. You should keep a sep-

arate record of each purchase and any dispositions of the

shares until all shares purchased at the same time have

been disposed of completely.

Table 4-2 illustrates the use of the FIFO method to fig-

ure the cost basis of shares sold, compared with the use

of the average basis method (discussed next).

Average Basis

You can use the average basis method to determine the

basis of shares of stock if the shares are identical to each

other, you acquired them at different times and different

prices and left them in an account with a custodian or

agent, and either:

•

They are shares in a mutual fund (or other regulated

investment company);

•

They are shares you hold in connection with a DRP,

and all the shares you hold in connection with the DRP

are treated as covered securities (defined later); or

•

You acquired them after 2011 in connection with a

DRP.

Average basis is determined by averaging the basis of

all shares of identical stock in an account regardless of

how long you have held the stock. However, shares of

stock in a DRP are not identical to shares of stock with the

same CUSIP number that are not in a DRP. The basis of

each share of identical stock in the account is the aggre-

gate basis of all shares of that stock in the account divided

by the aggregate number of shares.

Transition rule from double-category method. You

may no longer use the double-category method for figur-

ing your average basis. If you were using the double-cate-

gory method for stock you acquired before April 1, 2011,

and you sell, exchange, or otherwise dispose of that stock

on or after April 1, 2011, you must figure the average basis

of this stock by averaging together all identical shares of

stock in the account on April 1, 2011, regardless of the

holding period.

Election of average basis method for covered securi-

ties. To make the election to use the average basis

method for your covered securities, you must send written

notice to the custodian or agent who keeps the account.

The written notice can be made electronically. You must

also notify your broker that you have made the election.

Generally, a covered security is a security you acquired af-

ter 2010, with certain exceptions explained in the Instruc-

tions for Form 8949.

You can make the election to use the average basis

method at any time. The election will be effective for sales

or other dispositions of stocks that occur after you notify

the custodian or agent of your election. Your election must

identify each account with that custodian or agent and

each stock in that account to which the election applies.

The election can also indicate that it applies to all ac-

counts with a custodian or agent, including accounts you

later establish with the custodian or agent.

Election of average basis method for noncovered se-

curities. For noncovered securities, you elect to use the

average basis method on your income tax return for the

first tax year that the election applies. You make the elec-

tion by showing on your return that you used the average

basis method in reporting gain or loss on the sale or other

disposition.

Revoking the average basis method election. You

can revoke an election to use the average basis method

for your covered securities by sending written notice to the

custodian or agent holding the stock for which you want to

revoke the election. The election must generally be re-

voked by the earlier of 1 year after you make the election

or the date of the first sale, transfer, or disposition of the

stock following the election. The revocation applies to all

the stock you hold in an account that is identical to the

shares of stock for which you are revoking the election. Af-

ter revoking your election, your basis in the shares of stock

to which the revocation applies is the basis before averag-

ing.

You may be able to find the average basis of your

shares from information provided by the fund.

Average basis method illustrated. Table 4-2 illustrates

the average basis method of shares sold, compared with

the use of the FIFO method to figure cost basis (dis-

cussed earlier).

Even though you include all unsold shares of identical

stock in an account to figure average basis, you may have

both short-term and long-term gains or losses when you

sell these shares. To determine your holding period, the

shares disposed of are considered to be those acquired

first.

Example. You bought 400 identical shares in the LJO

Mutual Fund: 200 shares on May 11, 2022, and 200

shares on May 16, 2023. On November 16, 2023, you

sold 300 shares. The basis of all 300 shares sold is the

same, but you held 200 shares for more than 1 year, so

your gain or loss on those shares is long term. You held

100 shares for 1 year or less, so your gain or loss on those

shares is short term.

How to figure the basis of shares sold. To figure the

basis of shares you sell, use the steps in the following

worksheet.

TIP

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1. Enter the total adjusted basis of all the shares you

owned in the fund just before the sale. (If you made

an earlier sale of shares in this fund, add the

adjusted basis of any shares you still owned after

the last sale and the adjusted basis of any shares

you acquired after that sale.) ...............

2. Enter the total number of shares you owned in the

fund just before the sale ..................

3. Divide the amount on line 1 by the amount on line 2.

This is your average basis per share .........

4. Enter the number of shares you sold ..........

5. Multiply the amount on line 3 by the amount on

line 4. This is the basis of the shares you sold ..

Example 1. You bought 300 identical shares in the

LJP Mutual Fund: 100 shares in 2019 for $1,000 ($10 per

share); 100 shares in 2020 for $1,200 ($12 per share);

and 100 shares in 2021 for $2,600 ($26 per share). Thus,

the total cost of your shares was $4,800 ($1,000 + $1,200

+ $2,600). On May 6, 2023, you sold 150 shares. The ba-

sis of the shares you sold is $2,400 ($16 per share), fig-

ured as follows.

1. Enter the total adjusted basis of all the shares you

owned in the fund just before the sale. (If you made

an earlier sale of shares in this fund, add the

adjusted basis of any shares you still owned after

the last sale and the adjusted basis of any shares

you acquired after that sale.) ..............

$4,800

2. Enter the total number of shares you owned in the

fund just before the sale .................

300

3. Divide the amount on line 1 by the amount on line 2.

This is your average basis per share ........

$ 16

4. Enter the number of shares you sold ......... 150

5. Multiply the amount on line 3 by the amount on

line 4. This is the basis of the shares you sold ..

$2,400

Remaining shares. The average basis of the shares

you still hold after a sale of some of your shares is the

same as the average basis of the shares sold. The next

time you make a sale, your average basis will still be the

same, unless you have acquired additional shares (or

have made a subsequent adjustment to basis).

Example 2. The facts are the same as in Example 1,

except that you sold an additional 50 shares on December

8, 2023. You do not need to refigure the average basis of

the 150 shares you owned at that time because you ac-

quired or sold no shares, and had no other adjustments to

basis, since the last sale. Your basis is the $16 per share

figured earlier.

Example 3. The facts are the same as in Example 1,

except that you bought an additional 150 identical shares

at $14 per share on September 8, 2023, and then sold 50

shares on December 8, 2023. The total adjusted basis of

all the shares you owned just before the sale is $4,500,

figured as follows.

1. Basis of remaining shares ($16 x 150) ........ $2,400

2. Cost of shares acquired on 9/8/2023 ($14 x

150) .............................

$2,100

3. Total adjusted basis of all shares owned ($2,400 +

$2,100) ...........................

$4,500

The basis of the shares sold is $750 ($15 per share), fig-

ured as follows.

1. Enter the total adjusted basis of all the shares you

owned in the fund just before the sale. (If you made

an earlier sale of shares in this fund, add the

adjusted basis of any shares you still owned after

the last sale and the adjusted basis of any shares

you acquired after that sale.) ..............

$4,500

2. Enter the total number of shares you owned in the

fund just before the sale .................

300

3. Divide the amount on line 1 by the amount on line 2.

This is your average basis per share ........

$ 15

4. Enter the number of shares you sold ......... 50

5. Multiply the amount on line 3 by the amount on

line 4. This is the basis of the shares you sold ..

$ 750

Shares received as gift. If your account includes

shares that you received by gift, and the fair market value

of the shares at the time of the gift was not more than the

donor's basis, special rules apply. You cannot choose to

use the average basis for the account unless you state in

writing that you will treat the basis of the gift shares as the

fair market value at the time you acquire the shares. You

must provide this written statement when you make the

election to use the average basis method, as described

under Election of average basis method for covered se-

curities and Election for average basis method for noncov-

ered securities, earlier, or when you transfer the gift

shares to an account for which you have made the aver-

age basis method election, whichever is later. The state-

ment must be effective for any gift shares identical to the

gift shares to which the average basis method election ap-

plies that you acquire at any time and must remain in ef-

fect as long as the election remains in effect.

When there is a sale, exchange, or redemption of

your shares in a fund, keep the confirmation state-

ment you receive. The statement shows the price

you received for the shares and other information you

need to report gain or loss on your return.

Nontaxable Trades

This section discusses trades that generally do not result

in a taxable gain or a deductible loss. For more informa-

tion on nontaxable trades, see chapter 1 of Pub. 544.

Like-Kind Exchanges

If you trade business or investment real property solely for

other business or investment real property of a like kind,

you do not pay tax on any gain or deduct any loss from the

RECORDS

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trade. To be nontaxable, a trade must meet all six of the

following conditions.

1. The property must be business or investment prop-

erty. You must hold both the property you trade and

the property you receive for productive use in your

trade or business or for investment. Neither property

may be property used for personal purposes, such as

your home or family car.

2. The property you trade and the property you receive

must be real property.

3. There must be a trade of like-kind property. The trade

of real estate for real estate is a trade of like-kind

property. The trade of an apartment house for a store

building is a trade of like-kind property. Real property

located in the United States and real property located

outside the United States are not like-kind property.

4. The property must not be held primarily for sale. The

property you trade and the property you receive must

not be property you sell to customers, such as mer-

chandise.

5. The property to be received must be identified in writ-

ing within 45 days after the date you transfer the prop-

erty given up in the trade. If you received the replace-

ment property before the end of the 45-day period,

you are automatically treated as having met the

45-day written notice requirement.

6. The property to be received must be received by the

earlier of:

a. The 180th day after the date on which you transfer

the property given up in the trade; or

b. The due date, including extensions, for your tax re-

turn for the year in which the transfer of the prop-

erty given up occurs.

If you trade property with a related party in a like-kind

exchange, a special rule may apply. See Related Party

Transactions, later in this chapter. Also, see chapter 1 of

Pub. 544 for more information on exchanges of business

property and special rules for exchanges using qualified

intermediaries or involving multiple properties.

Transition rule for exchanges of personal or intangi-

ble property. Under the Tax Cuts and Jobs Act, section

1031 only applies to exchanges of real property, other

than real property held primarily for sale. Before enact-

ment of the new tax law, section 1031 also applied to cer-

tain exchanges of personal or intangible property. A transi-

tion rule in the new law provides that section 1031 will still

apply to a qualifying exchange of personal or intangible

property if the taxpayer disposed of the exchanged prop-

erty on or before December 31, 2017, or received replace-

ment property on or before December 31, 2017.

Partly nontaxable exchange. If you receive money or

property that is not like-kind property in addition to the

Table 4-2. Example of How To Figure Basis of Shares Sold

This is an example showing two different ways to figure basis. It compares the cost basis using the FIFO method with the average basis method.

Date Action Share Price No. of Shares Total Shares Owned

2/10/2021 Invest $4,000 $25 160 160

8/11/2021 Invest $4,800 $20 240 400

12/15/2021 Reinvest $300 dividend $30 10 410

10/2/2023 Sell 210 shares for

$6,720

$32 210 200

COST BASIS

(FIFO)

To figure the basis of the 210 shares sold on 10/2/2023, use the share price of the first 210 shares you

bought, namely the 160 shares you purchased on 2/10/2021 and 50 of those purchased on 8/11/2021.

$4,000 (cost of 160 shares on 2/10/2021)

+ $1,000 (cost of 50 shares on 8/11/2021)

Basis = $5,000

AVERAGE BASIS To figure the basis of the 210 shares sold on 10/2/2023, use the average basis of all 410 shares owned on

10/2/2023.

$9,100 (cost of 410 shares)

÷ 410 (number of shares)

$22.20 (average basis per share)

$22.20

× 210

Basis = $4,662

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like-kind property, and the preceding six conditions are

met, you have a partly nontaxable trade. You are taxed on

any gain you realize, but only up to the amount of the

money and the fair market value of the property that is not

like-kind you receive. You cannot deduct a loss.

Like-kind property and unlike property transferred.

If you give up unlike property in addition to the like-kind

property, you must recognize gain or loss on the unlike

property you give up. The gain or loss is the difference be-

tween the adjusted basis of the unlike property and its fair

market value.

Like-kind property and money transferred. If condi-

tions (1)–(6) above are met, you have a nontaxable trade

even if you pay money in addition to the like-kind property.

Basis of property received. You figure your basis in

property received in a nontaxable or partly nontaxable

trade as explained under Basis Other Than Cost, earlier.

How to report. You must report the trade of like-kind

property on Form 8824. If you figure a recognized gain or

loss on Form 8824, report it on Schedule D (Form 1040)

or on Form 4797, whichever applies.

For information on using Form 4797, see chapter 4 of

Pub. 544.

Corporate Stocks

The following trades of corporate stocks generally do not

result in a taxable gain or a deductible loss.

Corporate reorganizations. In some instances, a com-

pany will give you common stock for preferred stock, pre-

ferred stock for common stock, or stock in one corporation

for stock in another corporation. If this is a result of a

merger, recapitalization, transfer to a controlled corpora-

tion, bankruptcy, corporate division, corporate acquisition,

or other corporate reorganization, you do not recognize

gain or loss.

Example 1. On April 11, 2023, KP1 Corporation was

acquired by KP2 Corporation. You held 100 shares of KP1

stock with a basis of $3,500. As a result of the acquisition,

you received 70 shares of KP2 stock in exchange for your

KP1 stock. You do not recognize gain or loss on the trans-

action. Your basis in the 70 shares of the new stock is still

$3,500.

Example 2. On July 18, 2023, RGB Corporation di-

vests itself of SFH Corporation. You hold 75 shares of

RGB stock with a basis of $5,400. You receive 25 shares

of SFH stock as a result of the spin-off. You do not recog-

nize any gain or loss on the transaction. You receive infor-

mation from RGB Corporation that your basis in SFH

stock is equal to 10.9624% of your basis in RGB stock

($5,400). Thus, your basis in SFH stock is $592. Your ba-

sis in RGB stock (after the spin-off) is $4,808 ($5,400 –

$592).

Note. In the case of a distribution, the divesting corpo-

ration should send you information that includes details on

how to allocate basis between the old and new stock.

Keep this information until the period of limitations expires

for the year in which you dispose of the stock in a taxable

disposition. Usually, this is 3 years from the date the return

was due or filed, or 2 years from the date the tax was paid,

whichever is later.

Stock for stock of the same corporation. You can ex-

change common stock for common stock or preferred

stock for preferred stock in the same corporation without

having a recognized gain or loss. This is true for a trade

between two stockholders as well as a trade between a

stockholder and the corporation.

Money or other property received. If in an other-

wise nontaxable trade you receive money or other prop-

erty in addition to stock, then your gain on the trade, if any,

is taxed, but only up to the amount of the money or other

property. Any loss is not recognized.

If you received cash for fractional shares, see Fractional

shares in chapter 1.

Nonqualified preferred stock. Nonqualified preferred

stock is generally treated as property other than stock.

Generally, this applies to preferred stock with one or more

of the following features.

•

The holder has the right to require the issuer or a rela-

ted person to redeem or purchase the stock.

•

The issuer or a related person is required to redeem or

purchase the stock.

•

The issuer or a related person has the right to redeem

the stock, and on the issue date, it is more likely than

not that the right will be exercised.

•

The dividend rate on the stock varies with reference to

interest rates, commodity prices, or similar indices.

For a detailed definition of nonqualified preferred stock,

see section 351(g)(2) of the Internal Revenue Code.

Convertible stocks and bonds. You will generally 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.

Example. In November, you bought for $1 a right is-

sued by XYZ Corporation entitling you, on payment of

$99, to subscribe to a bond issued by that corporation.

On December 5, you subscribed to the bond, which

was issued on December 12. The bond contained a

clause stating that you would receive one share of XYZ

Corporation common stock on surrender of one bond and

the payment of $50.

Later, you presented the bond and $50 and received

one share of XYZ Corporation common stock. You did not

have a recognized gain or loss. This is true whether the

fair market value of the stock was more or less than $150

on the date of the conversion.

The basis of your share of stock is $150 ($1 + $99 +

$50). Your holding period is split. Your holding period for

the part based on your ownership of the bond ($100 ba-

sis) begins on December 5. Your holding period for the

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part based on your cash investment ($50 basis) begins on

the day after you acquired the share of stock.

Bonds for stock of another corporation. Generally, if

you convert the bonds of one corporation into common

stock of another corporation, according to the terms of the

bond issue, you must recognize gain or loss up to the dif-

ference between the fair market value of the stock re-

ceived and the adjusted basis of the bonds exchanged. In

some instances, however, such as trades that are part of

mergers or other corporate reorganizations, you will have

no recognized gain or loss if certain requirements are met.

For more information about the tax consequences of con-

verting securities of one corporation into common stock of

another corporation, under circumstances such as those

just described, consult the respective corporations and

the terms of the bond issue. This information is also avail-

able on the prospectus of the bond issue.

Property for stock of a controlled corporation. 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 will ordinarily not

recognize a gain or loss. This rule applies both to individu-

als and to groups who transfer property to a corporation. It

does not apply if the corporation is an investment com-

pany.

If you are in a bankruptcy or a similar proceeding and

you transfer property to a controlled corporation under a

plan, other than a reorganization, you must recognize gain

to the extent the stock you receive in the exchange is used

to pay off your debts.

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.

If this provision applies to you, you may have to attach

to your return a complete statement of all facts pertinent to

the exchange. For details, see Regulations section

1.351-3.

Money or other property received. If, in an other-

wise nontaxable trade of property for corporate stock, you

also receive money or property other than stock, you may

have a taxable gain. However, you are taxed only up to the

amount of money plus the fair market value of the other

property you receive. The rules for figuring taxable gain in

this situation generally follow those for a partly nontaxable

exchange discussed earlier under Like-Kind Exchanges. If

the property you give up includes depreciable property,

the taxable gain may have to be reported as ordinary in-

come because of depreciation. (See chapter 3 of Pub.

544.) No loss is recognized.

Nonqualified preferred stock (described earlier under

Stock for stock of the same corporation) received is gen-

erally treated as property other than stock.

Basis of stock or other property received. The ba-

sis of the stock you receive is generally the adjusted basis

of the property you transfer. Increase this amount by any

amount that was treated as a dividend, plus any gain rec-

ognized on the trade. Decrease this amount by any cash

you received and the fair market value of any other prop-

erty you received.

The basis of any other property you receive is its fair

market value on the date of the trade.

Exchange of Shares in One Mutual

Fund For Shares in Another Mutual

Fund

Any exchange of shares in one fund for shares in another

fund is a taxable exchange. This is true even if you ex-

change shares in one fund for shares in another fund

within the same family of funds. Report any gain or loss on

the shares you gave up as a capital gain or loss in the year

in which the exchange occurs. Usually, you can add any

service charge or fee paid in connection with an exchange

to the cost of the shares acquired. For an exception, see

Commissions and load charges, earlier.

Insurance Policies

and Annuities

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 con-

tract or for an endowment or an annuity contract or for

a qualified long-term care insurance contract,

•

An endowment contract for another endowment con-

tract 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 an 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.

You may also not have to recognize gain or loss from an

exchange of a portion of an annuity contract for another

annuity contract. For transfers completed before October

24, 2011, see Revenue Ruling 2003-76 and Revenue Pro-

cedure 2008-24 in Internal Revenue Bulletin 2008-13.

Revenue Ruling 2003-76 is available at IRS.gov/irb/

2003-33_IRB#RR-2003-76. Revenue Procedure 2008-24

is available at IRS.gov/irb/2008-13_IRB#RP-2008-24. 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. Revenue

Procedure 2011-38 is available at IRS.gov/irb/

2011-30_IRB#RP-2011-38. For tax years beginning after

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 insur-

ance contract, are treated as a separate contract and are

considered partial annuities. A portion of an annuity, en-

dowment, or life insurance contract may be annuitized,

provided that the annuitization period is for 10 years or

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more or for the lives of one or more individuals. The invest-

ment 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.

Exchanges of contracts not included in this list, such as

an annuity contract for an endowment contract, or an an-

nuity or endowment contract for a life insurance contract,

are taxable.

Demutualization of Life

Insurance Companies

A life insurance company may change from a mutual com-

pany to a stock company. This is commonly called demu-

tualization. If you were a policyholder or annuitant of the

mutual company, you may have received either stock in

the stock company or cash in exchange for your equity in-

terest in the mutual company.

If the demutualization transaction qualifies as a tax-free

reorganization under section 368(a)(1) of the Internal Rev-

enue Code, no gain or loss is recognized on the ex-

change. Your holding period for the new stock includes the

period you held an equity interest in the mutual company

as a policyholder or annuitant.

If the demutualization transaction does not qualify as a

tax-free reorganization under section 368(a)(1) of the In-

ternal Revenue Code, you must recognize a capital gain

or loss. Your holding period for the stock does not include

the period you held an equity interest in the mutual com-

pany.

If you received cash in exchange for your equity inter-

est, you must recognize a capital gain. If you held an

equity interest for more than 1 year, your gain is long term.

U.S. Treasury

Notes or Bonds

You can trade certain issues of U.S. Treasury obligations

for other issues, designated by the Secretary of the Treas-

ury, with no gain or loss recognized on the trade.

See the discussion in chapter 1 under U.S. Treasury

Bills, Notes, and Bonds for information about income from

these investments.

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. This

nonrecognition rule does not apply in the following situa-

tions.

•

The recipient spouse or former spouse is a nonresi-

dent alien.

•

Property is transferred in trust and liability exceeds ba-

sis. Gain must be recognized to the extent the amount

of the liabilities assumed by the trust, plus any liabili-

ties on the property, exceed the adjusted basis of the

property.

•

An installment obligation is transferred in trust. For in-

formation on the disposition of an installment obliga-

tion, see Pub. 537.

•

Certain stock redemptions, which are taxable to a

spouse under the tax law, a divorce or separation in-

strument, or a valid written agreement, discussed in

Regulations section 1.1041-2.

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 ex-

change. The recipient's basis in the property will be the

same as the adjusted basis of the giver immediately be-

fore the transfer. 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.

This rule applies for purposes of determining loss as well

as gain. Any gain recognized on a transfer in trust increa-

ses the basis.

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. For more information, see Property Settle-

ments in Pub. 504, Divorced or Separated Individuals.

Related Party Transactions

Special rules apply to the sale or trade of property be-

tween related parties.

Gain on Sale or Trade

of Depreciable Property

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.

See chapter 2 in Pub. 544 for more information.

Like-Kind Exchanges

Generally, if you trade business or investment real prop-

erty for other business or investment real property of a like

kind, no gain or loss is recognized. See Like-Kind Ex-

changes under Nontaxable Trades, earlier.

This rule also applies to trades of real property between

related parties, defined next under Losses on Sales or

Trades of Property. However, if either you or the related

party disposes of the like-kind property within 2 years after

the trade, you both must report any gain or loss not recog-

nized on the original trade on your return for the year in

which the later disposition occurs.

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This rule generally does not apply to:

•

Dispositions due to the death of either related party,

•

Involuntary conversions (see chapter 1 of Pub. 544),

•

Trades and later dispositions whose main purpose is

not the avoidance of federal income tax.

If a property holder's risk of loss on the property is sub-

stantially diminished during any period, that period is not

counted in determining whether the property was dis-

posed of within 2 years. The property holder's risk of loss

is substantially diminished by:

•

The holding of a put on the property,

•

The holding by another person of a right to acquire the

property, or

•

A short sale or any other transaction.

Losses on Sales or

Trades of Property

You cannot deduct a loss on the sale or trade of property,

other than a distribution in complete liquidation of a corpo-

ration, if the transaction is directly or indirectly between

you and the following related parties.

•

Members of your family. This includes only your broth-

ers and sisters, half-brothers and half-sisters, spouse,

ancestors (parents, grandparents, etc.), and lineal de-

scendants (children, grandchildren, etc.).

•

A partnership in which you directly or indirectly own

more than 50% of the capital interest or the profits in-

terest.

•

A corporation in which you directly or indirectly own

more than 50% in value of the outstanding stock (see

Constructive ownership of stock, later).

•

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.

In addition, a loss on the sale or trade of property is not

deductible if the transaction is directly or indirectly be-

tween the following related parties.

•

A grantor and fiduciary, or the fiduciary and benefi-

ciary, of any trust.

•

Fiduciaries of two different trusts, or the fiduciary and

beneficiary of two different trusts, if the same person is

the grantor of both trusts.

•

A trust fiduciary and a corporation of which more than

50% in value of the outstanding stock is directly or in-

directly owned by or for the trust, or by or for the gran-

tor of the trust.

•

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 in-

terest or the profits interest in the partnership.

•

Two S corporations if the same persons own more

than 50% in value of the outstanding stock of each

corporation.

•

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.

•

An executor and a beneficiary of an estate (except in

the case of a sale or trade to satisfy a monetary be-

quest).

•

Two corporations that are members of the same con-

trolled group (under certain conditions, however, these

losses are not disallowed but must be deferred).

•

Two partnerships if the same persons own, directly or

indirectly, more than 50% of the capital interests or the

profit interests in both partnerships.

Multiple property sales or trades. 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.

The gain on each item may be taxable. However, you can-

not deduct the loss on any item. Also, you cannot reduce

gains from the sales of any of these items by losses on the

sales of any of the other items.

Indirect transactions. You cannot deduct your loss on

the sale of stock through your broker if, under a prear-

ranged plan, a related party buys the same stock you had

owned. This does not apply to a trade between related

parties through an exchange that is purely coincidental

and is not prearranged.

Constructive ownership of stock. In determining

whether a person directly or indirectly owns any of the out-

standing stock of a corporation, the following rules apply.

Rule 1. 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.

Rule 2. An individual is considered to own the stock

directly or indirectly owned by or for his or her family. Fam-

ily includes only brothers and sisters, half-brothers and

half-sisters, spouse, ancestors, and lineal descendants.

Rule 3. 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 part-

ner.

Rule 4. When applying rule 1, 2, or 3, stock construc-

tively owned by a person under rule 1 is treated as ac-

tually owned by that person. But stock constructively

owned by an individual under rule 2 or rule 3 is not again

treated as owned by that individual for applying either rule

2 or rule 3 to make another person the constructive owner

of the stock.

Property received from a related party. If you sell or

trade at a gain property you acquired from a related party,

you recognize the gain only to the extent that it is more

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than the loss previously disallowed to the related party.

This rule applies only if you are the original transferee and

you acquired the property by purchase or exchange. This

rule does not apply if the related party's loss was disal-

lowed because of the wash sale rules, described later un-

der Wash Sales.

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.

Example 1. Your sibling sells you stock for $7,600.

Your sibling’s cost basis is $10,000. Your sibling cannot

deduct the loss of $2,400. Later, you sell the same stock

to an unrelated party for $10,500, realizing a gain of

$2,900. Your reportable gain is $500 (the $2,900 gain mi-

nus the $2,400 loss not allowed to your sibling).

Example 2. 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). You cannot de-

duct the loss that was not allowed to your sibling.

Capital Gains

and Losses

Terms you may need to know

(see Glossary):

Call

Commodity future

Conversion transaction

Forward contract

Limited partner

Listed option

Nonequity option

Options dealer

Put

Regulated futures contract

Section 1256 contract

Straddle

Wash sale

This section discusses the tax treatment of gains and los-

ses from different types of investment transactions.

Character of gain or loss. You need to classify your

gains and losses as either ordinary or capital gains or los-

ses. You then need to classify your capital gains and los-

ses as either short term or long term. If you have long-term

gains and losses, you must identify your 28% rate gains

and losses. If you have a net capital gain, you must also

identify any unrecaptured section 1250 gain.

The correct classification and identification helps you

figure the limit on capital losses and the correct tax on

capital gains. For information about determining whether

your capital gain or loss is short term or long term, see

Holding Period, later. For information about 28% rate gain

or loss and unrecaptured section 1250 gain, see Capital

Gain Tax Rates, later.

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 or-

dinary gain or loss, depending on the circumstances.

Generally, a sale or trade of a capital asset (defined next)

results in a capital gain or loss. A sale or trade of a nonca-

pital asset generally results in ordinary gain or loss. De-

pending on the circumstances, a gain or loss on a sale or

trade of property used in a trade or business may be trea-

ted as either capital or ordinary, as explained in Pub. 544.

In some situations, part of your gain or loss may be a capi-

tal gain or loss, and part may be an ordinary gain or loss.

Capital Assets and

Noncapital Assets

For the most part, everything you own and use for per-

sonal purposes, pleasure, or investment is a capital asset.

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.

Any property you own is a capital asset, except the fol-

lowing noncapital assets.

1. Property held mainly for sale to customers or property

that will physically become a part of the merchandise

for sale to customers. For an exception, see Capital

asset treatment for self-created musical works, later.

2. Depreciable property used in your trade or business,

even if fully depreciated.

3. Real property used in your trade or business.

4. A patent; invention, model, or design (whether or not

patented); a secret formula or process; a copyright; a

literary, musical, or artistic composition; a letter or

memorandum; or similar property, held by:

a. A person whose personal efforts created such

property;

b. In the case of a letter, memorandum, or similar

property, a person for whom such property was

prepared or produced; or

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c. 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.

For an exception to this rule, see Capital asset

treatment for self-created musical works, later.

5. 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).

6. U.S. Government publications, including the Congres-

sional Record, that you received:

a. From the U.S. Government (or any governmental

agency) for an amount other than the normal sales

price, or

b. Under circumstances (such as by gift) that entitle

you to the basis of someone who received the

publication for an amount other than the normal

sales price.

7. Certain commodities derivative financial instruments

held by commodities derivatives dealers. For more in-

formation, see section 1221 of the Internal Revenue

Code.

8. 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. For more information, see the defini-

tion of hedging transaction, earlier, and the discussion

of hedging transactions under Commodity Futures,

later.

9. Supplies of a type you regularly use or consume in the

ordinary course of your trade or business.

Investment property. Investment property is a capital

asset. Any gain or loss from its sale or trade is generally a

capital gain or loss.

Gold, silver, stamps, coins, gems, etc. These are

capital assets except when they are held for sale by a

dealer. Any gain or loss from their sale or trade is gener-

ally a capital gain or loss.

Stocks, stock rights, and bonds. All of these, includ-

ing stock received as a dividend, are capital assets except

when they are held for sale by a securities dealer. How-

ever, see Losses on Section 1244 (Small Business) Stock

and Losses on Small Business Investment Company

Stock, later.

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. However,

you cannot deduct a loss from selling personal use prop-

erty.

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 per-

son who created the property or for whom it was pre-

pared or produced.

You must make a separate election for each musical

composition (or copyright in a musical work) sold or ex-

changed during the tax year. Make the election by the due

date (including extensions) of the income tax return for the

tax year of the sale or exchange. Make the election on

Form 8949 and Schedule D (Form 1040) by treating the

sale or exchange as the sale or exchange of a capital as-

set, according to Form 8949 and Schedule D (Form 1040)

and their separate instructions.

You can revoke the election if you have IRS approval.

To get IRS approval, you must submit a request for a letter

ruling under the appropriate IRS revenue procedure. See,

for example, Revenue Procedure 2020-1, available at

IRS.gov/irb/2020-01_IRB#REV-PROC-2020-1. Alterna-

tively, you are granted an automatic 6-month extension

from the due date of your income tax return (excluding ex-

tensions) to revoke the election, provided you timely file

your income tax return, and within this 6-month extension

period, you file Form 1040-X that treats the sale or ex-

change as the sale or exchange of property that is not a

capital asset.

Discounted Debt Instruments

Treat your gain or loss on the sale, redemption, or retire-

ment 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.

Short-term government obligations. 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. This

treatment applies to obligations with a fixed maturity date

of not more than 1 year from the date of issue. Acquisition

discount is the stated redemption price at maturity minus

your basis in the obligation.

However, do not treat these gains as income to the ex-

tent you previously included the discount in income. See

Discount on Short-Term Obligations in chapter 1 for more

information.

Short-term nongovernment obligations. Treat gains

on short-term nongovernment obligations as ordinary in-

come up to your ratable share of OID. This treatment ap-

plies to obligations with a fixed maturity date of not more

than 1 year from the date of issue.

However, to the extent you previously included the dis-

count in income, you do not have to include it in income

again. See Discount on Short-Term Obligations in chap-

ter 1 for more information.

Tax-exempt state and local government bonds. If

these bonds were originally issued at a discount before

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September 4, 1982, or you acquired them before March 2,

1984, treat your part of OID as tax-exempt interest. To fig-

ure your gain or loss on the sale or trade of these bonds,

reduce the amount realized by your part of OID.

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. For more infor-

mation on the basis of these bonds, see Discounted

tax-exempt obligations, earlier in this chapter.

Any gain from market discount is usually taxable on dis-

position or redemption of tax-exempt bonds. If you bought

the bonds before May 1, 1993, the gain from market dis-

count is capital gain. If you bought the bonds after April

30, 1993, the gain from market discount is ordinary in-

come.

You figure 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 hold-

ers. For more information, see Market Discount Bonds in

chapter 1.

A loss on the sale or other disposition of a tax-exempt

state or local government bond is deductible as a capital

loss.

Redeemed before maturity. If a state or local bond

issued before June 9, 1980, is redeemed before it ma-

tures, the OID is not taxable to you.

If a state or local bond issued after June 8, 1980, is re-

deemed before it matures, the part of OID earned while

you hold the bond is not taxable to you. However, you

must report the unearned part of OID as a capital gain.

Example. On July 2, 2012, the date of issue, you

bought a 20-year, 6% municipal bond for $800. The face

amount of the bond was $1,000. The $200 discount was

OID. At the time the bond was issued, the issuer had no

intention of redeeming it before it matured. The bond was

callable at its face amount beginning 10 years after the is-

sue date.

The issuer redeemed the bond at the end of 11 years

(July 2, 2023) for its face amount of $1,000 plus accrued

annual interest of $60. The OID earned during the time

you held the bond, $73, is not taxable. The $60 accrued

annual interest is also not taxable. However, you must re-

port the unearned part of OID, $127 ($200 − $73), as a

capital gain.

Long-term debt instruments issued after May 27,

1969 (or after July 1, 1982, if a government instru-

ment). 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. Your basis in that debt instrument

is increased by the amount of OID that you have included

in your gross income. See Original Issue Discount (OID) in

chapter 1.

If you sell or trade the debt instrument before maturity,

your gain is a capital gain. However, if at the time the in-

strument was originally issued there was an intention to

call it before its maturity, your gain is generally ordinary in-

come to the extent of the entire OID reduced by any

amounts of OID previously includible in your income. In

this case, the rest of the gain is capital gain.

An intention to call a debt instrument before maturity

means there is a written or oral agreement or understand-

ing not provided for in the debt instrument between the is-

suer and original holder that the issuer will redeem the

debt instrument before maturity. In the case of debt instru-

ments that are part of an issue, the agreement or under-

standing must be between the issuer and the original

holders of a substantial amount of the debt instruments in

the issue.

Example 1. On February 9, 2022, you bought at origi-

nal issue for $7,600, Jones Corporation's 10-year, 5%

bond which has a stated redemption price at maturity of

$10,000. On February 13, 2023, you sold the bond for

$9,040. Assume you have included $334 of OID in your

gross income (including the amount accrued for 2023)

and increased your basis in the bond by that amount. Your

basis is now $7,934. If at the time of the original issue

there was no intention to call the bond before maturity,

your gain of $1,106 ($9,040 amount realized minus

$7,934 adjusted basis) is capital gain.

Example 2. If, in Example 1, at the time of original is-

sue there was an intention to call the bond before maturity,

your entire gain is ordinary income. You figure this as fol-

lows:

1. Entire OID ($10,000 stated redemption price at

maturity minus $7,600 issue price) .......... $2,400

2. Minus: Amount previously included

in income ..........................

334

3. Maximum amount of ordinary income ......... $2,066

Because the amount in (3) is more than your gain of

$1,106, your entire gain is ordinary income.

Market discount bonds. If the debt instrument has mar-

ket discount and you chose to include the discount in in-

come as it accrued, increase your basis in the debt instru-

ment by the accrued discount to figure capital gain or loss

on its disposition. If you did not choose to include the dis-

count in income as it accrued, you must report gain as or-

dinary interest income up to the instrument's accrued mar-

ket discount. See Market Discount Bonds in chapter 1.

The rest of the gain is capital gain.

However, a different rule applies if you dispose of a

market discount bond that was:

•

Issued before July 19, 1984; and

•

Purchased by you before May 1, 1993.

In that case, any gain is treated as interest income up to

the amount of your deferred interest deduction for the year

you dispose of the bond. The rest of the gain is capital

gain. (The limit on the interest deduction for market dis-

count bonds is discussed in chapter 3 under When To De-

duct Investment Interest.)

Report the sale or trade of a market discount bond in

Form 8949, Part I or Part II, whichever is appropriate. Use

the table How To Complete Form 8949, Columns (f) and

(g) in the Instructions for Form 8949 to help you figure the

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amounts to report for a sale or trade of a market discount

bond. Also report the amount of accrued market discount

in column (g) as interest income on Schedule B (Form

1040), line 1, and identify it as “Accrued Market Discount.”

Report your sales or trades of a market discount

bond on Form 8949 with the correct box checked

for these transactions. See Form 8949 and the In-

structions for Form 8949.

Retirement of debt instrument. Any amount you re-

ceive on the retirement of a debt instrument is treated in

the same way as if you had sold or traded that instrument.

Notes of individuals. If you hold an obligation of an indi-

vidual issued with OID after March 1, 1984, you must gen-

erally include the OID in your income currently, and your

gain or loss on its sale or retirement is generally capital

gain or loss. An exception to this treatment applies if the

obligation is a loan between individuals and all the follow-

ing requirements are met.

•

The lender is not in the business of lending money.

•

The amount of the loan, plus the amount of any out-

standing prior loans, is $10,000 or less.

•

Avoiding federal tax is not one of the principal purpo-

ses of the loan.

If the exception applies, or the obligation was issued

before March 2, 1984, you do not include the OID in your

income currently. 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. The rest of

the gain, if any, is capital gain. Any loss on the sale or re-

demption is capital loss.

Bearer Obligations

You cannot deduct any loss on an obligation required to

be in registered form that is instead held in bearer form. In

addition, any gain on the sale or other disposition of the

obligation is ordinary income. However, if the issuer was

subject to a tax when the obligation was issued, then you

can deduct any loss, and any gain may qualify for capital

gain treatment.

Obligations required to be in registered form. Any

obligation must be in registered form unless:

•

It is issued by a natural person,

•

It is not of a type offered to the public,

•

It has a maturity at the date of issue of not more than 1

year, or

•

It was issued before 1983.

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

TIP

or bankrupt, you may be able to deduct your loss in one of

two ways.

•

Casualty loss.

•

Nonbusiness bad debt (short-term capital loss).

You can no longer claim any miscellaneous item-

ized deductions, including the deduction for an or-

dinary loss on deposits in insolvent or bankrupt fi-

nancial institutions.

Casualty loss. If you can reasonably estimate your loss,

you can treat the estimated loss as a casualty loss in the

current year.

If you claim a casualty loss, attach Form 4684 to your

return. Each loss must be reduced by $100. The amount

of your casualty loss may be limited. See Pub. 547.

You cannot choose this method if:

•

You own at least 1% of the financial institution,

•

You are an officer of the institution, or

•

You are related to such an owner or officer. You are re-

lated if you and the owner or officer are “related par-

ties,” as defined earlier under Related Party Transac-

tions, or if you are the aunt, uncle, nephew, or niece of

the owner or officer.

If the actual loss that is finally determined is more than

the amount you deducted as an estimated loss, you can

claim the excess loss as a nonbusiness bad debt. If the

actual loss is less than the amount deducted as an esti-

mated loss, you must include in income (in the final deter-

mination year) the excess loss claimed. See Recoveries in

Pub. 525.

Nonbusiness bad debt. If you do not choose to deduct

your estimated loss as a casualty loss or an ordinary loss,

you wait until the year the amount of the actual loss is de-

termined and deduct it as a nonbusiness bad debt in that

year. Report it as a short-term capital loss on Form 8949,

Part I, line 1, as explained under How to report bad debts,

later.

Sale of Annuity

The part of any gain on the sale of an annuity contract be-

fore its maturity date that is based on interest accumulated

on the contract is ordinary income.

Conversion Transactions

Generally, all or part of a gain on a conversion transaction

is treated as ordinary income. This applies to gain on the

disposition or other termination of any position you held as

part of a conversion transaction you entered into after

April 30, 1993.

A conversion transaction is any transaction that meets

both of these tests.

1. Substantially all of your expected return from the

transaction is due to the time value of your net

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investment. In other words, the return on your invest-

ment is, in substance, like interest on a loan.

2. The transaction is one of the following.

a. A straddle as defined under Straddles, later, but

including any set of offsetting positions on stock

established before October 22, 2004.

b. Any transaction in which you acquire property

(whether or not actively traded) at substantially the

same time that you contract to sell the same prop-

erty, or substantially identical property, at a price

set in the contract.

c. Any other transaction that is marketed or sold as

producing capital gains from a transaction descri-

bed in (1).

Amount treated as ordinary income. The amount of

gain treated as ordinary income is the smaller of:

•

The gain recognized on the disposition or other termi-

nation of the position, or

•

The “applicable imputed income amount.”

Applicable imputed income amount. Figure this

amount as follows.

1. Figure the amount of interest that would have accrued

on your net investment in the conversion transaction

for the period ending on the earlier of:

a. The date you dispose of the position, or

b. The date the transaction stops being a conversion

transaction.

To figure this amount, use an interest rate equal to

120% of the “applicable rate,” defined later.

2. Subtract from (1) the amount treated as ordinary in-

come from any earlier disposition or other termination

of a position held as part of the same conversion

transaction.

Applicable rate. If the term of the conversion transac-

tion is indefinite, the applicable rate is the federal

short-term rate in effect under section 6621(b) during the

period of the conversion transaction, compounded daily.

In all other cases, the applicable rate is the “applicable

federal rate” determined as if the conversion transaction

were a debt instrument and compounded semiannually.

The rates discussed above are published by the IRS in

the Internal Revenue Bulletin. The Internal Revenue Bulle-

tin is available through IRS.gov. You can also find applica-

ble federal rates in the Index of Applicable Federal Rates

(AFRs) Rulings at https://apps.IRS.gov/app/picklist/list/

federalRates.html.

See chapter 5, How To Get Tax Help, for information on

contacting the IRS.

Net investment. To determine your net investment in a

conversion transaction, include the fair market value of

any position at the time it becomes part of the transaction.

This means your net investment will generally be the total

amount you invested, less any amount you received for

entering into the position (for example, a premium you re-

ceived for writing a call).

Position with built-in loss. A special rule applies when

a position with a built-in loss becomes part of a conversion

transaction. A built-in loss is any loss you would have real-

ized if you had disposed of or otherwise terminated the

position at its fair market value at the time it became part

of the conversion transaction.

When applying the conversion transaction rules to a

position with a built-in loss, use the position's fair market

value at the time it became part of the transaction. But,

when you dispose of or otherwise terminate the position in

a transaction in which you recognize gain or loss, you

must recognize the built-in loss. The conversion transac-

tion rules do not affect whether the built-in loss is treated

as an ordinary or capital loss.

Netting rule for certain conversion transactions. Be-

fore determining the amount of gain treated as ordinary in-

come, you can net certain gains and losses from positions

of the same conversion transaction. To do this, you have

to dispose of all the positions within a 14-day period that is

within a single tax year. You cannot net the built-in loss

against the gain.

You can net gains and losses only if you identify

the conversion transaction as an identified netting

transaction on your books and records. Each po-

sition of the conversion transaction must be identified be-

fore the end of the day on which the position becomes

part of the conversion transaction. For conversion transac-

tions entered into before February 20, 1996, this require-

ment is met if the identification was made by that date.

Options dealers and commodities traders. These

rules do not apply to options dealers and commodities

traders.

How to report. Use Form 6781 to report conversion

transactions. See the instructions for lines 11 and 13 of

Form 6781.

Commodity Futures

A commodity futures contract is a standardized, ex-

change-traded contract for the sale or purchase of a fixed

amount of a commodity at a future date for a fixed price.

If the contract is a regulated futures contract, the rules

described earlier under Section 1256 Contracts Marked to

Market apply to it.

The termination of a commodity futures contract gener-

ally results in capital gain or loss unless the contract is a

hedging transaction.

Hedging transaction. A futures contract that is a hedg-

ing transaction generally produces ordinary gain or loss. A

futures contract is a hedging transaction if you enter into

the contract in the ordinary course of your business pri-

marily to manage the risk of interest rate or price changes

or currency fluctuations on borrowings, ordinary property,

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or ordinary obligations. (Generally, ordinary property or

obligations are those that cannot produce capital gain or

loss under any circumstances.) For example, the offset or

exercise of a futures contract that protects against price

changes in your business inventory results in an ordinary

gain or loss.

For more information about hedging transactions, see

Regulations section 1.1221-2. Also, see Hedging Transac-

tions under Section 1256 Contracts Marked to Market,

earlier.

If you have multiple transactions in the commodity

futures market during the year, the burden of proof

is on you to show which transactions are hedging

transactions. Clearly identify any hedging transactions on

your books and records before the end of the day you en-

tered into the transaction. It may be helpful to have sepa-

rate brokerage accounts for your hedging and nonhedging

transactions. For specific requirements concerning identi-

fication of hedging transactions and the underlying item,

items, or aggregate risk being hedged, see Regulations

section 1.1221-2(f).

Gains From Certain Constructive Ownership

Transactions

If you have a gain from a constructive ownership transac-

tion entered into after July 11, 1999, involving a financial

asset (discussed later) and the gain would normally be

treated as long-term capital gain, all or part of the gain

may be treated instead as ordinary income. In addition, if

any gain is treated as ordinary income, your tax is in-

creased by an interest charge.

Constructive ownership transactions. The following

are constructive ownership transactions.

•

A notional principal contract in which you have the

right to receive all or substantially all of the investment

yield on a financial asset and you are obligated to re-

imburse all or substantially all of any decline in value

of the financial asset.

•

A forward or futures contract to acquire a financial as-

set.

•

The holding of a call option and writing of a put option

on a financial asset at substantially the same strike

price and maturity date.

This provision does not apply if all the positions are

marked to market. Marked-to-market rules for section

1256 contracts are discussed in detail under Section 1256

Contracts Marked to Market, earlier.

Financial asset. A financial asset, for this purpose, is

any equity interest in a pass-through entity. Pass-through

entities include partnerships, S corporations, trusts, regu-

lated investment companies, and REITs.

Amount of ordinary income. Long-term capital gain is

treated as ordinary income to the extent it is more than the

net underlying long-term capital gain. The net underlying

long-term capital gain is the net capital gain you would

have realized if you acquired the asset for its fair market

RECORDS

value on the date the constructive ownership transaction

was opened and sold the asset for its fair market value on

the date the transaction was closed. If you do not estab-

lish the amount of net underlying long-term capital gain by

clear and convincing evidence, it is treated as zero.

More information. For more information about construc-

tive ownership transactions, see section 1260 of the Inter-

nal Revenue Code.

Losses on Section 1244

(Small Business) Stock

Subject to the limitations discussed under Ordinary loss

limit, later, you can deduct as an ordinary loss, rather than

as a capital loss, a loss on the sale, trade, or worthless-

ness of section 1244 stock. Report the loss on Form 4797,

line 10. Any loss in excess of the amounts described in

Ordinary loss limit, later, should be reported on Form

8949.

Any gain on section 1244 stock is a capital gain if the

stock is a capital asset in your hands. Do not offset gains

against losses that are within the ordinary loss limit, ex-

plained later in this discussion, even if the transactions are

in stock of the same company. Report the gain on Form

8949.

If you must figure a net operating loss, any ordinary loss

from the sale of section 1244 stock is a business loss.

Ordinary loss limit. The amount you can deduct as an

ordinary loss is limited to $50,000 each year. On a joint re-

turn, the limit is $100,000, even if only one spouse has this

type of loss. If your loss is $110,000 and your spouse has

no loss, you can deduct $100,000 as an ordinary loss on a

joint return. The remaining $10,000 is a capital loss.

Section 1244 (small business) stock. This is stock is-

sued for money or property (other than stock and securi-

ties) in a domestic small business corporation. During its 5

most recent tax years before the loss, this corporation

must have derived more than 50% of its gross receipts

from other than royalties, rents, dividends, interest, annui-

ties, and gains from sales and trades of stocks or securi-

ties. If the corporation was in existence for at least 1 year,

but less than 5 years, the 50% test applies to the tax years

ending before the loss. If the corporation was in existence

less than 1 year, the 50% test applies to the entire period

the corporation was in existence before the day of the

loss. However, if the corporation's deductions (other than

the net operating loss and dividends received deductions)

were more than its gross income during this period, this

50% test does not apply.

The corporation must have been largely an operating

company for ordinary loss treatment to apply.

If the stock was issued before July 19, 1984, the stock

must be common stock. If issued after July 18, 1984, the

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stock may be either common or preferred. For more infor-

mation about the requirements of a small business corpo-

ration or the qualifications of section 1244 stock, see sec-

tion 1244 of the Internal Revenue Code and its

regulations.

The stock must be issued to the person taking the

loss. You must be the original owner of the stock to be

allowed ordinary loss treatment. To claim a deductible loss

on stock issued to your partnership, you must have been a

partner when the stock was issued and have remained so

until the time of the loss. You add your distributive share of

the partnership loss to any individual section 1244 stock

loss you may have before applying the ordinary loss limit.

Stock distributed by partnership. If your partner-

ship distributes the stock to you, you cannot treat any later

loss on that stock as an ordinary loss.

Stock sold through underwriter. Stock sold through

an underwriter is not section 1244 stock unless the under-

writer only acted as a selling agent for the corporation.

Stock dividends and reorganizations. Stock you re-

ceive as a stock dividend qualifies as section 1244 stock

if:

•

You receive it from a small business corporation in

which you own stock, and

•

The stock you own meets the requirements when the

stock dividend is distributed.

If you trade your section 1244 stock for new stock in the

same corporation in a reorganization that qualifies as a re-

capitalization or that is only a change in identity, form, or

place of organization, the new stock is section 1244 stock

if the stock you trade meets the requirements when the

trade occurs.

If you hold section 1244 stock and other stock in the

same corporation, not all of the stock you receive as a

stock dividend or in a reorganization will qualify as section

1244 stock. Only that part based on the section 1244

stock you hold will qualify.

Example. Your basis for 100 shares of X common

stock is $1,000. These shares qualify as section 1244

stock. If, as a nontaxable stock dividend, you receive 50

more shares of common stock, the basis of which is deter-

mined from the 100 shares you own, the 50 shares are

also section 1244 stock.

If you also own stock in the corporation that is not sec-

tion 1244 stock when you receive the stock dividend, you

must divide the shares you receive as a dividend between

the section 1244 stock and the other stock. Only the

shares from the former can be section 1244 stock.

Contributed property. To determine ordinary loss on

section 1244 stock you receive in a trade for property, you

have to reduce the basis of the stock if:

•

The adjusted basis (for figuring loss) of the property,

immediately before the trade, was more than its fair

market value; and

•

The basis of the stock is determined by the basis of

the property.

Reduce the basis of the stock by the difference between

the adjusted basis of the property and its fair market value

at the time of the trade. You reduce the basis only to figure

the ordinary loss. Do not reduce the basis of the stock for

any other purpose.

Example. You transfer property with an adjusted basis

of $1,000 and a fair market value of $250 to a corporation

for its section 1244 stock. The basis of your stock is

$1,000, but to figure the ordinary loss under these rules,

the basis of your stock is $250 ($1,000 − $750). If you

later sell the section 1244 stock for $200, your $800 loss

is an ordinary loss of $50 and a capital loss of $750.

Contributions to capital. If the basis of your section

1244 stock has increased, through contributions to capital

or otherwise, you must treat this increase as applying to

stock that is not section 1244 stock when you figure an or-

dinary loss on its sale.

Example. You buy 100 shares of section 1244 stock

for $10,000. You are the original owner. You later make a

$2,000 contribution to capital that increases the total basis

of the 100 shares to $12,000. You then sell the 100 shares

for $9,000 and have a loss of $3,000. You can deduct only

$2,500 ($3,000 × $10,000/$12,000) as an ordinary loss

under these rules. The remaining $500 is a capital loss.

Recordkeeping. You must keep records suffi-

cient to show your stock qualifies as section 1244

stock. Your records must also distinguish your

section 1244 stock from any other stock you own in the

corporation.

Losses on Small Business Investment

Company Stock

A small business investment company (SBIC) is one that

is licensed and operated under the Small Business Invest-

ment Act of 1958.

If you are an investor in SBIC stock, you can deduct as

an ordinary loss, rather than a capital loss, a loss from the

sale, trade, or worthlessness of that stock. A gain from the

sale or trade of that stock is a capital gain. Do not offset

your gains and losses, even if they are on stock of the

same company.

How to report. You report this type of ordinary loss on

Form 4797, Part II, line 10. In addition to the information

required by the form, you must include the name and ad-

dress of the company that issued the stock. If applicable,

also include the reason the stock is worthless and the ap-

proximate date it became worthless. Report a capital gain

from the sale of SBIC stock on Form 8949.

Short sale. If you close a short sale of SBIC stock with

other SBIC stock you bought only for that purpose, any

loss you have on the sale is a capital loss. See Short

Sales, later in this chapter, for more information.

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Holding Period

If you sold or traded investment property, you must deter-

mine your holding period for the property. Your holding pe-

riod determines whether any capital gain or loss was a

short-term or a long-term capital gain or loss.

Long-term or short-term. If you hold investment prop-

erty more than 1 year, any capital gain or loss is a

long-term capital gain or loss. If you hold the property 1

year or less, any capital gain or loss is a short-term capital

gain or loss.

To determine how long you held the investment prop-

erty, begin counting on the date after the day you acquired

the property. The day you disposed of the property is part

of your holding period.

Example. If you bought investment property on Janu-

ary 31, 2022, and sold it on January 28, 2023, your hold-

ing period is not more than 1 year and you have a

short-term capital gain or loss. If you sold it on February 6,

2023, your holding period is more than 1 year and you

have a long-term capital gain or loss.

Securities traded on an established market. For se-

curities 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.

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.

Example. You are a cash method, calendar year tax-

payer. You sold stock on December 31, 2023. According

to the rules of the stock exchange, the sale was closed by

delivery of the stock and payment of the sale price in Jan-

uary 2024. You received payment of the sale price on that

same day. Report your gain or loss on your 2023 return,

even though you received the payment in 2024. The gain

or loss is long term or short term depending on whether

you held the stock more than 1 year. Your holding period

ended on December 31.

U.S. Treasury notes and bonds. The holding period of

U.S. Treasury notes and bonds sold at auction on the ba-

sis of yield starts the day after the Secretary of the Treas-

ury, through news releases, gives notification of accept-

ance to successful bidders. The holding period of U.S.

Treasury notes and bonds sold through an offering on a

subscription basis at a specified yield starts the day after

the subscription is submitted.

Automatic investment service. In determining your

holding period for shares bought by the bank or other

agent, full shares are considered bought first and any frac-

tional shares are considered bought last. Your holding pe-

riod starts on the day after the bank's purchase date. If a

share was bought over more than one purchase date, your

holding period for that share is a split holding period. A

part of the share is considered to have been bought on

CAUTION

each date that stock was bought by the bank with the pro-

ceeds of available funds.

Nontaxable trades. 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 ac-

quired the old property.

Property received as a gift. If you receive a gift of prop-

erty 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.

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.

Inherited property. If you inherited property from some-

one who died before or after 2010, or from someone who

died in 2010 and the executor of the decedent’s estate did

not elect to file Form 8939, your capital gain or loss on any

later disposition of that property is treated as long-term

gain or loss, regardless of how long you held the property.

If you acquired the property from someone who died in

2010 and the executor made the election to file Form

8939, see Revenue Procedure 2011-41 to determine your

holding period. Revenue Procedure 2011-41 is available

at IRS.gov/irb/2011-35_IRB#RP-2011-41. For additional

information on the executor making the election see also

Notice 2011-66, 2011-35 I.R.B. 184, available at

IRS.gov/irb/2011-35_IRB#NOT-2011-66.

Real property bought. 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. However, taking delivery or possession of real prop-

erty under an option agreement is not enough to start the

holding period. The holding period cannot start until there

is an actual contract of sale. The holding period of the

seller cannot end before that time.

Real property repossessed. 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 hold-

ing period for a later sale includes the period you held the

property before the original sale and the period after the

repossession. Your holding period does not include the

time between the original sale and the repossession. That

is, it does not include the period during which the first

buyer held the property. However, the holding period for

any improvements made by the first buyer begins at the

time of repossession.

Stock dividends. The holding period for stock you re-

ceived as a taxable stock dividend begins on the date of

distribution.

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. This rule also applies to

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stock acquired in a spin-off, which is a distribution of stock

or securities in a controlled corporation.

Nontaxable stock rights. Your holding period for non-

taxable stock rights includes the holding period of the un-

derlying stock. The holding period for stock acquired

through the exercise of stock rights begins on the date the

right was exercised.

Section 1256 contracts. Gains or losses on section

1256 contracts open at the end of the year, or terminated

during the year, are treated as 60% long term and 40%

short term, regardless of how long the contracts were

held. See Section 1256 Contracts Marked to Market, ear-

lier.

Option exercised. Your holding period for property you

acquire when you exercise an option begins the day after

you exercise the option.

Wash sales. Your holding period for substantially identi-

cal stock or securities you acquire in a wash sale includes

the period you held the old stock or securities.

Qualified small business stock. Your holding period for

stock you acquired in a tax-free rollover of gain from a sale

of qualified small business stock, described later under

Gains on Qualified Small Business Stock, includes the pe-

riod you held the old stock.

Commodity futures. Your holding period for a commod-

ity received in satisfaction of a commodity futures con-

tract, other than a regulated futures contract subject to In-

ternal Revenue Code section 1256, includes your holding

period for the futures contract if you held the contract as a

capital asset.

Securities futures contract. Your holding period for a

security received in satisfaction of a securities futures con-

tract, other than one that is a section 1256 contract, in-

cludes your holding period for the futures contract if you

held the contract as a capital asset.

Your holding period for a security received in satisfac-

tion of a securities futures contract to sell, other than one

that is a section 1256 contract, is determined by the rules

that apply to short sales, discussed later under Short

Sales.

Loss on mutual fund or REIT stock held 6 months or

less. If you hold stock in a mutual fund (or other regulated

investment company) or REIT for 6 months or less and

then sell it at a loss (other than under a periodic liquidation

plan), special rules may apply.

Capital gain distributions received. The loss (after

reduction for any exempt-interest dividends you received,

as explained later) is treated as a long-term capital loss up

to the total of any capital gain distributions you received

and your share of any undistributed capital gains. Any re-

maining loss is short-term capital loss.

Reinvested distributions. If your dividends and capital

gain distributions are reinvested in new shares, the hold-

ing period of each new share begins the day after that

share was purchased. Therefore, if you sell both the new

shares and the original shares, you might have both

short-term and long-term gains and losses.

Example. On April 3, 2023, you bought a mutual fund

share for $20. On June 16, 2023, the mutual fund paid a

capital gain distribution of $2 per share, which is taxed as

a long-term capital gain. On July 14, 2023, you sold the

share for $17.50. If it were not for the capital gain distribu-

tion, your loss would be a short-term loss of $2.50 ($20 −

$17.50). However, the part of the loss that is not more

than the capital gain distribution ($2) must be reported as

a long-term capital loss. The remaining $0.50 of the loss

can be reported as a short-term capital loss.

Exempt-interest dividends on mutual fund stock. If

you received exempt-interest dividends on the stock, at

least part of your loss is disallowed. You can deduct only

the amount of loss that is more than the exempt-interest

dividends. Report the loss as a short-term capital loss. On

Form 8949, Part I, line 1, column (d), increase the sales

price by the amount of exempt-interest dividends, but do

not increase it to more than the cost or other basis shown

in column (e).

For more information on Form 8949 and Sched-

ule D (Form 1040), see the Instructions for Form

8949 and the Instructions for Schedule D (Form

1040).

Example. On January 10, 2023, you bought a mutual

fund share for $40. On February 7, 2023, the mutual fund

paid a $5 dividend from tax-exempt interest, which is not

taxable to you. On February 14, 2023, you sold the share

for $34. If it were not for the tax-exempt dividend, your loss

would be $6 ($40 − $34). However, you must increase the

sales price from $34 to $39 (to account for the $5 portion

of the loss that is not deductible). You can deduct only $1

as a short-term capital loss.

Loss on stock that paid qualified dividends. Any loss

on the sale or trade of stock must be treated as a

long-term capital loss to the extent you received, from that

stock, qualified dividends (defined in chapter 1) that are

extraordinary dividends. This is true regardless of how

long you actually held the stock. Generally, an extraordi-

nary dividend is a dividend that equals or exceeds 10%

(5% in the case of preferred stock) of your adjusted basis

in the stock.

Nonbusiness Bad Debts

If someone owes you money that you cannot collect, you

have a bad debt. You may be able to deduct the amount

owed to you when you figure your tax for the year the debt

becomes worthless.

There are two kinds of bad debts—business and non-

business. A business bad debt, generally, is one that

comes from operating your trade or business and is de-

ductible as a business loss. All other bad debts are non-

business bad debts and are deductible as short-term cap-

ital losses.

TIP

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Example. An architect made personal loans to sev-

eral friends who were not clients. She could not collect on

some of these loans. They are deductible only as nonbusi-

ness bad debts because the architect was not in the busi-

ness of lending money and the loans do not have any rela-

tionship to her business.

Business bad debts. For information on business bad

debts of an employee, see Pub. 334, Tax Guide For Small

Business (For Individuals Who Use Schedule C).

Deductible nonbusiness bad debts. To be deductible,

nonbusiness bad debts must be totally worthless. You

cannot deduct a partly worthless nonbusiness debt.

Genuine debt required. A debt must be genuine for

you to deduct a loss. A debt is genuine if it arises from a

debtor-creditor relationship based on a valid and enforce-

able obligation to repay a fixed or determinable sum of

money.

Loan or gift. For a bad debt, you must show there

was an intention at the time of the transaction to make a

loan and not a gift. If you lend money to a relative or friend

with the understanding that it may not be repaid, it is con-

sidered a gift and not a loan. You cannot take a bad debt

deduction for a gift. There cannot be a bad debt unless

there is a true creditor-debtor relationship between you

and the person or organization that owes you the money.

When minor children borrow from their parents to pay

for their basic needs, there is no genuine debt. A bad debt

cannot be deducted for such a loan.

Basis in bad debt required. 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. For example, you cannot claim a bad debt deduc-

tion for court-ordered child support not paid to you by your

former spouse. If you are a cash method taxpayer (most

individuals are), you generally cannot take a bad debt de-

duction for unpaid salaries, wages, rents, fees, interest,

dividends, and similar items.

When deductible. You can take a bad debt deduction

only in the year the debt becomes worthless. You do not

have to wait until a debt is due to determine whether it is

worthless. A debt becomes worthless when there is no

longer any chance that the amount owed will be paid.

It is not necessary to go to court if you can show that a

judgment from the court would be uncollectible. You must

only show that you have taken reasonable steps to collect

the debt. Bankruptcy of your debtor is generally good evi-

dence of the worthlessness of at least a part of an unse-

cured and unpreferred debt.

If your bad debt is the loss of a deposit in a financial in-

stitution, see Deposit in Insolvent or Bankrupt Financial In-

stitution, earlier.

Filing a claim for refund. If you do not deduct a bad

debt on your original return for the year it becomes worth-

less, you can file a claim for a credit or refund due to the

bad debt. To do this, use Form 1040-X to amend your re-

turn for the year the debt became worthless. 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. (Claims not due to bad debts or

worthless securities must generally 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.) For more information about

filing a claim, see Pub. 556.

Loan guarantees. If you guarantee a debt that becomes

worthless, you cannot take a bad debt deduction for your

payments on the debt unless you can show either that

your reason for making the guarantee was to protect your

investment or that you entered the guarantee transaction

with a profit motive. If you make the guarantee as a favor

to friends and do not receive any consideration in return,

your payments are considered a gift and you cannot take

a deduction.

Example 1. Henry Lloyd, an officer and principal

shareholder of the Spruce Corporation, guaranteed pay-

ment of a bank loan the corporation received. The corpo-

ration defaulted on the loan and Henry made full payment.

Because Henry guaranteed the loan to protect his invest-

ment in the corporation, Henry can take a nonbusiness

bad debt deduction.

Example 2. Milt and Pat are co-workers. Milt, as a fa-

vor to Pat, guarantees a note at their local credit union. Pat

does not pay the note and declares bankruptcy. Milt pays

off the note. However, since Milt did not enter into the

guarantee agreement to protect an investment or to make

a profit, Milt cannot take a bad debt deduction.

Deductible in year paid. Unless you have rights

against the borrower, discussed next, a payment you

make on a loan you guaranteed is deductible in the year

you make the payment.

Rights against the borrower. When you make pay-

ment on a loan you guaranteed, you may have the right to

take the place of the lender (the right of subrogation). The

debt is then owed to you. If you have this right or some

other right to demand payment from the borrower, you

cannot take a bad debt deduction until these rights be-

come totally worthless.

Debts owed by political parties. You cannot take a

nonbusiness bad debt deduction for any worthless debt

owed to you by:

•

A political party;

•

A national, state, or local committee of a political

party; or

•

A committee, association, or organization that either

accepts contributions or spends money to influence

elections.

Mechanics' and suppliers' liens. Workers and material

suppliers may file liens against property because of debts

owed by a builder or contractor. If you pay off the lien to

avoid foreclosure and loss of your property, you are enti-

tled to repayment from the builder or contractor. If the debt

is uncollectible, you can take a bad debt deduction.

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Insolvency of contractor. You can take a bad debt de-

duction for the amount you deposit with a contractor if the

contractor becomes insolvent and you are unable to re-

cover your deposit. If the deposit is for work unrelated to

your trade or business, it is a nonbusiness bad debt de-

duction.

Secondary liability on home mortgage. If the buyer of

your home assumes your mortgage, you may remain sec-

ondarily liable for repayment of the mortgage loan. If the

buyer defaults on the loan and the house is then sold for

less than the amount outstanding on the mortgage, you

may have to make up the difference. You can take a bad

debt deduction for the amount you pay to satisfy the mort-

gage if you cannot collect it from the buyer.

Worthless securities. If you own securities that become

totally worthless, you can take a deduction for a loss, but

not for a bad debt. See Worthless Securities under What

Is a Sale or Trade, earlier in this chapter.

Recovery of a bad debt. If you deducted a bad debt

and in a later tax year you recover (collect) all or part of it,

you may have to include the amount you recover in your

gross income. However, you can exclude from gross in-

come the amount recovered up to the amount of the de-

duction that did not reduce your tax in the year deducted.

See Recoveries in Pub. 525.

How to report bad debts. Deduct nonbusiness bad

debts as short-term capital losses on Form 8949.

On Form 8949, Part I, line 1, enter the name of the

debtor and “bad debt statement attached” in column (a).

Enter your basis in the bad debt in column (e) and enter

zero in column (d). Use a separate line for each bad debt.

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 with

box C checked.

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 re-

lationship between you and the debtor;

•

The efforts you made to collect the debt; and

•

Why you decided the debt was worthless. For exam-

ple, you could show that the borrower has declared

bankruptcy, or that legal action to collect would proba-

bly not result in payment of any part of the debt.

Short Sales

A short sale occurs when you agree to sell property you

do not own (or own but do not wish to sell). You make this

type of sale in two steps.

•

You sell short. You borrow property and deliver it to a

buyer.

CAUTION

•

You close the sale. At a later date, you either buy sub-

stantially identical property and deliver it to the lender

or make delivery out of property you held at the time of

the sale. Delivery of property borrowed from another

lender does not satisfy this requirement.

You do not realize gain or loss until delivery of property to

close the short sale. You will have a capital gain or loss if

the property used to close the short sale is a capital asset.

The Instructions for Form 1099-B discuss when you

should receive a Form 1099-B for short sales. For more in-

formation, see the Instructions for Form 1099-B.

Reporting a short sale. Report any short sale on Form

8949 in the year it closes. If a short sale closed in 2023

but you did not get a Form 1099-B for it because you en-

tered into it before 2011, report it on a Form 8949 in Part I

or Part II (whichever applies). In column (a), enter (for ex-

ample) “100 sh. XYZ Co. — 2010 short sale closed.” Fill in

the other columns according to their instructions. Report

the short sale the same way if you received a 2023 Form

1099-B that does not show proceeds (sales price).

Exception if property becomes worthless. A different

rule applies if the property sold short becomes substan-

tially worthless. In that case, you must recognize gain as if

the short sale were closed when the property became

substantially worthless.

Exception for constructive sales. Entering into a short

sale may cause you to be treated as having made a con-

structive sale of property. In that case, you will have to rec-

ognize gain on the date of the constructive sale. For de-

tails, see Constructive Sales of Appreciated Financial

Positions, earlier.

Example. On May 5, 2023, you bought 100 shares of

Baker Corporation stock for $1,000. On September 8,

2023, you sold short 100 shares of similar Baker stock for

$1,600. You made no other transactions involving Baker

stock for the rest of 2023 and the first 30 days of 2024.

Your short sale is treated as a constructive sale of an ap-

preciated financial position because a sale of your Baker

stock on the date of the short sale would have resulted in

a gain. You recognize a $600 short-term capital gain from

the constructive sale and your new holding period in the

Baker stock begins on September 8.

Short-Term or Long-Term

Capital Gain or Loss

As a general rule, you determine whether you have

short-term or long-term capital gain or loss on a short sale

by the amount of time you actually hold the property even-

tually delivered to the lender to close the short sale.

Example. Even though you do not own any stock of

Ace Corporation, you contract to sell 100 shares of it,

which you borrow from your broker. After 13 months, when

the price of the stock has risen, you buy 100 shares of Ace

Corporation stock and immediately deliver them to your

broker to close out the short sale. Your loss is a short-term

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capital loss because your holding period for the delivered

property is less than 1 day.

Special rules. Special rules may apply to gains and los-

ses from short sales of stocks, securities, and commodity

and securities futures (other than certain straddles) if you

held or acquired property substantially identical to prop-

erty that sold short. But if the amount of property you sold

short is more than the amount of that substantially identi-

cal property, the special rules do not apply to the gain or

loss on the excess.

Gains and holding period. If you held the substan-

tially identical property for 1 year or less on the date of the

short sale, or if you acquired the substantially identical

property after the short sale and by the date of closing the

short sale, then:

Rule 1. Your gain, if any, when you close the short sale

is a short-term capital gain; and

Rule 2. The holding period of the substantially identi-

cal property begins on the date of the closing of the

short sale or on the date of the sale of this property,

whichever comes first.

Losses. If, on the date of the short sale, you held sub-

stantially identical property for more than 1 year, any loss

you realize on the short sale is a long-term capital loss,

even if you held the property used to close the sale for 1

year or less. Certain losses on short sales of stock or se-

curities are also subject to wash sale treatment. For infor-

mation, see Wash Sales, later.

Mixed straddles. Under certain elections, you can

avoid the treatment of loss from a short sale as long term

under the special rule. These elections are for positions

that are part of a mixed straddle. See Other elections,

later, for more information about these elections.

Reporting Substitute Payments

If any broker transferred your securities for use in a short

sale or similar transaction and received certain substitute

dividend payments on your behalf while the short sale was

open, that broker must give you a Form 1099-MISC or a

similar statement reporting the amount of these payments.

Form 1099-MISC must be used for those substitute pay-

ments totaling $10 or more that are known on the pay-

ment's record date to be in lieu of an exempt-interest divi-

dend, a capital gain dividend, a return of capital

distribution, or a dividend subject to a foreign tax credit, or

that are in lieu of tax-exempt interest. Do not treat these

substitute payments as dividends or interest. Instead, re-

port the substitute payments shown on Form 1099-MISC

as “Other income” on Schedule 1 (Form 1040), line 8z.

Substitute payment. A substitute payment means a

payment in lieu of:

•

Tax-exempt interest (including OID) accrued while the

short sale was open; and

•

A dividend, if the ex-dividend date is after the transfer

of stock for use in a short sale and before the closing

of the short sale.

Payments in lieu of dividends. If you borrow stock to

make a short sale, you may have to remit to the lender

payments in lieu of the dividends distributed while you

maintain your short position. You can deduct these pay-

ments only if you hold the short sale open at least 46 days

(more than 1 year in the case of an extraordinary dividend,

as defined later) and you itemize your deductions.

You deduct these payments as investment interest on

Schedule A (Form 1040). See Interest Expenses in chap-

ter 3 for more information.

If you close the short sale by the 45th day after the date

of the short sale (1 year or less in the case of an extraordi-

nary dividend), you cannot deduct the payment in lieu of

the dividend you make to the lender. Instead, you must in-

crease the basis of the stock used to close the short sale

by that amount.

To determine how long a short sale is kept open, do not

include any period during which you hold, have an option

to buy, or are under a contractual obligation to buy sub-

stantially identical stock or securities.

If your payment is made for a liquidating distribution or

nontaxable stock distribution, or if you buy more shares

equal to a stock distribution issued on the borrowed stock

during your short position, you have a capital expense.

You must add the payment to the cost of the stock sold

short.

Exception. If you close the short sale within 45 days,

the deduction for amounts you pay in lieu of dividends will

be disallowed only to the extent the payments are more

than the amount you receive as ordinary income from the

lender of the stock for the use of collateral with the short

sale. This exception does not apply to payments in place

of extraordinary dividends.

Extraordinary dividends. If the amount of any dividend

you receive on a share of preferred stock equals or ex-

ceeds 5% (10% in the case of other stock) of the amount

realized on the short sale, the dividend you receive is an

extraordinary dividend.

Wash Sales

You cannot deduct losses from sales or trades of stock or

securities in a wash sale unless the loss was incurred in

the ordinary course of your business as a dealer in stock

or securities.

A wash sale occurs when you sell or trade stock or se-

curities at a loss and within 30 days before or after the

sale you:

1. Buy substantially identical stock or securities,

2. Acquire substantially identical stock or securities in a

fully taxable trade,

3. Acquire a contract or option to buy substantially iden-

tical stock or securities, or

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4. Acquire substantially identical stock for your individual

retirement arrangement (IRA) or Roth IRA.

If you sell stock and your spouse or a corporation you con-

trol buys substantially identical stock, you also have a

wash sale.

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). The result is your basis

in the new stock or securities. This adjustment postpones

the loss deduction until the disposition of the new stock or

securities. Your holding period for the new stock or securi-

ties includes the holding period of the stock or securities

sold.

Example 1. You buy 100 shares of X stock for $1,000.

You sell these shares for $750 and within 30 days from the

sale you buy 100 shares of the same stock for $800. Be-

cause you bought substantially identical stock, you cannot

deduct your loss of $250 on the sale. However, you add

the disallowed loss of $250 to the cost of the new stock,

$800, to obtain your basis in the new stock, which is

$1,050.

Example 2. You are an employee of a corporation

with an incentive pay plan. Under this plan, you are given

10 shares of the corporation's stock as a bonus award.

You include the fair market value of the stock in your gross

income as additional pay. You later sell these shares at a

loss. If you receive another bonus award of substantially

identical stock within 30 days of the sale, you cannot de-

duct your loss on the sale.

Options and futures contracts. The wash sale rules ap-

ply to losses from sales or trades of contracts and options

to acquire or sell stock or securities. They do not apply to

losses from sales or trades of commodity futures con-

tracts and foreign currencies. See Coordination of Loss

Deferral Rules and Wash Sale Rules, later, for information

about the tax treatment of losses on the disposition of po-

sitions in a straddle.

Securities futures contract to sell. Losses from the

sale, exchange, or termination of a securities futures con-

tract to sell are generally treated in the same manner as

losses from the closing of a short sale, discussed later in

this section under Short sales.

Warrants. The wash sale rules apply if you sell com-

mon stock at a loss and, at the same time, buy warrants

for common stock of the same corporation. But if you sell

warrants at a loss and, at the same time, buy common

stock in the same corporation, the wash sale rules apply

only if the warrants and stock are considered substantially

identical, as discussed next.

Substantially identical. In determining whether stock or

securities are substantially identical, you must consider all

the facts and circumstances in your particular case. Ordi-

narily, stocks or securities of one corporation are not con-

sidered substantially identical to stocks or securities of an-

other corporation. However, they may be substantially

identical in some cases. For example, in a reorganization,

the stocks and securities of the predecessor and succes-

sor corporations may be substantially identical.

Similarly, bonds or preferred stock of a corporation are

not ordinarily considered substantially identical to the

common stock of the same corporation. However, where

the bonds or preferred stock are convertible into common

stock of the same corporation, the relative values, price

changes, and other circumstances may make these

bonds or preferred stock and the common stock substan-

tially identical. For example, preferred stock is substan-

tially identical to the common stock if the preferred stock:

•

Is convertible into common stock,

•

Has the same voting rights as the common stock,

•

Is subject to the same dividend restrictions,

•

Trades at prices that do not vary significantly from the

conversion ratio, and

•

Is unrestricted as to convertibility.

More or less stock bought than sold. If the number of

shares of substantially identical stock or securities you

buy within 30 days before or after the sale is either more or

less than the number of shares you sold, you must deter-

mine the particular shares to which the wash sale rules

apply. You do this by matching the shares bought with an

equal number of the shares sold. Match the shares bought

in the same order that you bought them, beginning with

the first shares bought. The shares or securities so

matched are subject to the wash sale rules.

Example 1. You bought 100 shares of M stock on

September 20, 2022, for $5,000. On December 13, 2022,

you bought 50 shares of substantially identical stock for

$2,750. On December 20, 2022, you bought 25 shares of

substantially identical stock for $1,125. On January 3,

2023, you sold for $4,000 the 100 shares you bought in

September. You have a $1,000 loss on the sale. However,

because you bought 75 shares of substantially identical

stock within 30 days before the sale, you cannot deduct

the loss ($750) on 75 shares. You can deduct the loss

($250) on the other 25 shares. The basis of the 50 shares

bought on December 13, 2022, is increased by two-thirds

(50 ÷ 75) of the $750 disallowed loss. The new basis of

those shares is $3,250 ($2,750 + $500). The basis of the

25 shares bought on December 20, 2022, is increased by

the rest of the loss to $1,375 ($1,125 + $250).

Example 2. You bought 100 shares of M stock on

September 16, 2022. On January 27, 2023, you sold

those shares at a $1,000 loss. On each of the 4 days from

February 1, 2023, to February 4, 2023, you bought 50

shares of substantially identical stock. You cannot deduct

your $1,000 loss. You must add half the disallowed loss

($500) to the basis of the 50 shares bought on February 1.

Add the other half ($500) to the basis of the shares bought

on February 2.

Loss and gain on same day. Loss from a wash sale of

one block of stock or securities cannot be used to reduce

any gains on identical blocks sold the same day.

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Example. During 2017, you bought 100 shares of X

stock on each of three occasions. You paid $158 per

share for the first block of 100 shares, $100 per share for

the second block, and $95 per share for the third block.

On December 27, 2022, you sold 300 shares of X stock

for $125 per share. On January 10, 2023, you bought 250

shares of identical X stock. You cannot deduct the loss of

$33 per share on the first block because within 30 days af-

ter the date of sale you bought 250 identical shares of X

stock. In addition, you cannot reduce the gain realized on

the sale of the second and third blocks of stock by this

loss.

Dealers. The wash sale rules do not apply to a dealer in

stock or securities if the loss is from a transaction made in

the ordinary course of business.

Short sales. The wash sale rules apply to a loss realized

on a short sale if you sell, or enter into another short sale

of, substantially identical stock or securities within a pe-

riod beginning 30 days before the date the short sale is

complete and ending 30 days after that date.

For purposes of the wash sale rules, a short sale is con-

sidered complete on the date the short sale is entered into

if:

•

On that date, you own stock or securities identical to

those sold short (or by that date you enter into a con-

tract or option to acquire that stock or those securi-

ties); and

•

You later deliver the stock or securities to close the

short sale.

Otherwise, a short sale is not considered complete until

the property is delivered to close the sale.

This treatment also applies to losses from the sale, ex-

change, or termination of a securities futures contract to

sell.

Example. On June 4, you buy 100 shares of stock for

$1,000. You sell short 100 shares of the stock for $750 on

October 15. On October 16, you buy 100 shares of the

same stock for $750. You close the short sale on Novem-

ber 19 by delivering the shares bought on June 4. You

cannot deduct the $250 loss ($1,000 − $750) because the

date of entering into the short sale (October 15) is consid-

ered the date the sale is complete for wash sale purposes

and you bought substantially identical stock within 30 days

from that date.

Residual interests in a real estate mortgage invest-

ment conduit (REMIC). The wash sale rules will gener-

ally apply to the sale of your residual interest in a REMIC

if, during the period beginning 6 months before the sale of

the interest and ending 6 months after that sale, you ac-

quire any residual interest in any REMIC or any interest in

a taxable mortgage pool that is comparable to a residual

interest. REMICs are discussed in chapter 1.

Nondeductible wash sale loss. If you received a Form

1099-B, box 1g will show the amount of wash sale loss

disallowed if:

•

The stock or securities sold were covered securities,

and

•

The substantially identical stock or securities you

bought had the same CUSIP numbers as the stock or

securities you sold and were bought in the same ac-

count as the stock or securities you sold.

However, you cannot deduct a loss from a wash sale

even if it is not reported on Form 1099-B.

How to report. Report a wash sale transaction in Part I

or Part II of Form 8949 with the appropriate box checked.

Complete all columns. Enter “W” in column (f). Enter as a

positive number in column (g) the amount of the loss not

allowed. See the Instructions for Form 8949.

Securities Futures Contracts

A securities futures contract is a contract of sale for future

delivery of a single security or of a narrow-based security

index.

Gain or loss from the contract will generally be treated

in a manner similar to gain or loss from transactions in the

underlying security. This means gain or loss from the sale,

exchange, or termination of the contract will generally

have the same character as gain or loss from transactions

in the property to which the contract relates. Any capital

gain or loss on a sale, exchange, or termination of a con-

tract to sell property will be considered short term, regard-

less of how long you hold the contract. These contracts

are not section 1256 contracts (unless they are dealer se-

curities futures contracts).

Options

Options are generally subject to the rules described in this

section. If the option is part of a straddle, the Loss Deferral

Rules covered later under Straddles may also apply. For

special rules that apply to nonequity options and dealer

equity options, see Section 1256 Contracts Marked to

Market, earlier.

Gain or loss from the sale or trade of an option to buy or

sell property that is a capital asset in your hands, or would

be if you acquired it, is capital gain or loss. If the property

is not or would not be a capital asset, the gain or loss is

ordinary gain or loss.

Example 1. You purchased an option to buy 100

shares of XYZ Company stock. The stock increases in

value, and you sell the option for more than you paid for it.

Your gain is capital gain because the stock underlying the

option would have been a capital asset in your hands.

Example 2. The facts are the same as in Example 1,

except the stock decreases in value and you sell the op-

tion for less than you paid for it. Your loss is a capital loss.

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Option not exercised. If you have a loss because you

did not exercise an option to buy or sell, you are consid-

ered to have sold or traded the option on the date it ex-

pired.

Writer of option. If you write (grant) an option, how you

report your gain or loss depends on whether it was exer-

cised.

If you are not in the business of writing options and an

option you write on stocks, securities, commodities, or

commodity futures is not exercised (or repurchased), the

amount you receive is a short-term capital gain.

If an option requiring you to buy or sell property is exer-

cised, see Writers of puts and calls, later.

Section 1256 contract options. Gain or loss is recog-

nized on the exercise of an option on a section 1256 con-

tract. Section 1256 contracts are defined under Section

1256 Contracts Marked to Market, earlier.

Cash settlement option. A cash settlement option is

treated as an option to buy or sell property. A cash settle-

ment option is any option that on exercise is settled in, or

could be settled in, cash or property other than the under-

lying property.

How to report. Report on Form 8949 gain or loss from

the closing or expiration of an option that is not a section

1256 contract but is a capital asset in your hands. If an op-

tion you purchased expired, enter the expiration date in

column (c) and enter “Expired” in column (d). If an option

that was granted (written) expired, enter the expiration

date in column (b) and enter “Expired” in column (e). Fill in

the other columns as appropriate.

If a call option you sold was exercised and the option

premium you received was not reflected in the sales price

shown on the Form 1099-B you received, enter the pre-

mium as a positive number in column (g) of Form 8949

and enter “E” in column (f).

Puts and Calls

Puts and calls are options on securities and are covered

by the rules just discussed for options. The following are

specific applications of these rules to holders and writers

of options that are bought, sold, or “closed out” in transac-

tions on a national securities exchange, such as the Chi-

cago Board Options Exchange. (But see Section 1256

Contracts Marked to Market, earlier, for special rules that

may apply to nonequity options and dealer equity op-

tions.) These rules are also presented in Table 4-3.

Puts and calls are issued by writers (grantors) to hold-

ers for cash premiums. They are ended by exercise, clos-

ing transaction, or lapse.

A “put option” is the right to sell to the writer, at any time

before a specified future date, a stated number of shares

at a specified price. Conversely, a “call option” is the right

to buy from the writer of the option, at any time before a

specified future date, a stated number of shares of stock

at a specified price.

Holders of puts and calls. If you buy a put or a call, you

may not deduct its cost. It is a capital expenditure.

If you sell the put or the call before you exercise it, the

difference between its cost and the amount you receive for

it is either a long-term or short-term capital gain or loss,

depending on how long you held it.

If the option expires, its cost is either a long-term or

short-term capital loss, depending on your holding period,

which ends on the expiration date.

If you exercise a call, add its cost to the basis of the

stock you bought. If you exercise a put, reduce your

amount realized on the sale of the underlying stock by the

cost of the put when figuring your gain or loss. Any gain or

loss on the sale of the underlying stock is long term or

short term depending on your holding period for the un-

derlying stock.

Put option as short sale. Buying a put option is gen-

erally treated as a short sale, and the exercise, sale, or ex-

piration of the put is a closing of the short sale. See Short

Sales, earlier. If you have held the underlying stock for 1

year or less at the time you buy the put, any gain on the

exercise, sale, or expiration of the put is a short-term capi-

tal gain. The same is true if you buy the underlying stock

after you buy the put but before its exercise, sale, or expi-

ration. Your holding period for the underlying stock begins

on the earliest of:

•

The date you dispose of the stock,

•

The date you exercise the put,

•

The date you sell the put, or

•

The date the put expires.

Writers of puts and calls. If you write (grant) a put or a

call, do not include the amount you receive for writing it in

your income at the time of receipt. Carry it in a deferred

account until:

•

Your obligation expires;

•

You buy, in the case of a put, or sell, in the case of a

call, the underlying stock when the option is exercised;

•

You engage in a closing transaction.

If your obligation expires, the amount you received for

writing the call or put is short-term capital gain.

If a put you write is exercised and you buy the underly-

ing stock, decrease your basis in the stock by the amount

you received for the put. Your holding period for the stock

begins on the date you buy it, not on the date you wrote

the put.

If a call you write is exercised and you sell the underly-

ing stock, increase your amount realized on the sale of the

stock by the amount you received for the call when figur-

ing your gain or loss. The gain or loss is long term or short

term depending on your holding period of the stock.

If you enter into a closing transaction by paying an

amount equal to the value of the put or call at the time of

the payment, the difference between the amount you pay

and the amount you receive for the put or call is a

short-term capital gain or loss.

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Examples of nondealer transactions.

1. Expiration. Ten JJJ call options were issued on April

7, 2023, for $4,000. These equity options expired in

December 2023 without being exercised. If you were

a holder (buyer) of the options, you would recognize a

short-term capital loss of $4,000. If you were a writer

of the options, you would recognize a short-term capi-

tal gain of $4,000.

2. Closing transaction. The facts are the same as in

(1), except that on May 5, 2023, the options were sold

for $6,000. If you were the holder of the options who

sold them, you would recognize a short-term capital

gain of $2,000. If you were the writer of the options

and you bought them back, you would recognize a

short-term capital loss of $2,000.

3. Exercise. The facts are the same as in (1), except

that the options were exercised on May 19, 2023. The

buyer adds the cost of the options to the basis of the

stock bought through the exercise of the options. The

writer adds the amount received from writing the op-

tions to the amount realized from selling the stock to

figure gain or loss. The gain or loss is short term or

long term depending upon the holding period of the

stock.

4. Section 1256 contracts. The facts are the same as

in (1), except the options were nonequity options, sub-

ject to the rules for section 1256 contracts. If you were

a buyer of the options, you would recognize a

short-term capital loss of $1,600, and a long-term

capital loss of $2,400. If you were a writer of the op-

tions, you would recognize a short-term capital gain of

$1,600, and a long-term capital gain of $2,400. See

Section 1256 Contracts Marked to Market, earlier, for

more information.

Straddles

This section discusses the loss deferral rules that apply to

the sale or other disposition of positions in a straddle.

These rules do not apply to the straddles described under

Exceptions, later.

A straddle is any set of offsetting positions on personal

property. For example, a straddle may consist of a pur-

chased option to buy and a purchased option to sell on

the same number of shares of the security, with the same

exercise price and period.

Personal property. This is any actively traded property.

It includes stock options and contracts to buy stock but

generally does not include stock.

Straddle rules for stock. Although stock is generally

excluded from the definition of personal property when ap-

plying the straddle rules, it is included in the following two

situations.

1. The stock is of a type that is actively traded, and at

least one of the offsetting positions is a position on

that stock or substantially similar or related property.

2. The stock is in a corporation formed or availed of to

take positions in personal property that offset posi-

tions taken by any shareholder.

Puts and Calls

Puts

When a put: If you are the holder: If you are the writer:

Is exercised Reduce your amount realized from the sale of the

underlying stock by the cost of the put.

Reduce your basis in the stock you buy by the amount

you received for the put.

Expires Report the cost of the put as a capital loss on the date it

expires.*

Report the amount you received for the put as a

short-term capital gain.

Is sold by the holder Report the difference between the cost of the put and the

amount you receive for it as a capital gain or loss.*

This does not affect you. (But if you buy back the put,

report the difference between the amount you pay and

the amount you received for the put as a short-term

capital gain or loss.)

Calls

When a call: If you are the holder: If you are the writer:

Is exercised Add the cost of the call to your basis in the stock

purchased.

Increase your amount realized on sale of the stock by the

amount you received for the call.

Expires Report the cost of the call as a capital loss on the date it

expires.*

Report the amount you received for the call as a

short-term capital gain.

Is sold by the holder Report the difference between the cost of the call and the

amount you receive for it as a capital gain or loss.*

This does not affect you. (But if you buy back the call,

report the difference between the amount you pay and

the amount you received for the call as a short-term

capital gain or loss.)

* See Holders of puts and calls and Writers of puts and calls in the accompanying text to find whether your gain or loss is short term or long term.

Table 4-3.

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Note. For positions established before October 22,

2004, condition 1 above does not apply. Instead, personal

property includes stock if condition 2 above applies or the

stock was part of a straddle in which at least one of the

offsetting positions was:

•

An option to buy or sell the stock or substantially iden-

tical stock or securities,

•

A securities futures contract on the stock or substan-

tially identical stock or securities, or

•

A position on substantially similar or related property

(other than stock).

Position. A position is an interest in personal property. A

position can be a forward or futures contract or an option.

An interest in a loan denominated in a foreign currency

is treated as a position in that currency. For the straddle

rules, foreign currency for which there is an active inter-

bank market is considered to be actively traded personal

property. See also Foreign currency contract, earlier.

Offsetting position. This is a position that substantially

reduces any risk of loss you may have from holding an-

other position. However, if a position is part of a straddle

that is not an identified straddle (described later), do not

treat it as offsetting to a position that is part of an identified

straddle.

Presumed offsetting positions. Two or more posi-

tions will be presumed to be offsetting if:

•

The positions are established in the same personal

property (or in a contract for this property), and the

value of one or more positions varies inversely with the

value of one or more of the other positions;

•

The positions are in the same personal property, even

if this property is in a substantially changed form, and

the positions' values vary inversely as described in the

first condition;

•

The positions are in debt instruments with a similar

maturity, and the positions' values vary inversely as

described in the first condition;

•

The positions are sold or marketed as offsetting posi-

tions, whether or not the positions are called a strad-

dle, spread, butterfly, or any similar name; or

•

The aggregate margin requirement for the positions is

lower than the sum of the margin requirements for

each position if held separately.

Related persons. To determine if two or more posi-

tions are offsetting, you will be treated as holding any po-

sition your spouse holds during the same period. If you

take into account part or all of the gain or loss for a posi-

tion held by a flow-through entity, such as a partnership or

trust, you are also considered to hold that position.

Loss Deferral Rules

Generally, you can deduct a loss on the disposition of one

or more positions only to the extent the loss is more than

any unrecognized gain you have on offsetting positions.

Unused losses are treated as sustained in the next tax

year.

Unrecognized gain. This is:

•

The amount of gain you would have had on an open

position if you had sold it on the last business day of

the tax year at its fair market value; and

•

The amount of gain realized on a position if, as of the

end of the tax year, gain has been realized but not rec-

ognized.

Example. On July 7, 2023, you entered into a strad-

dle. On December 11, 2023, you closed one position of

the straddle at a loss of $15,000. On December 30, 2023,

the end of your tax year, you have an unrecognized gain of

$12,750 in the offsetting open position. On your 2023 re-

turn, your deductible loss on the position you closed is

limited to $2,250 ($15,000 − $12,750). You must carry for-

ward the unused loss of $12,750.

Note. If you physically settle a position established af-

ter October 21, 2004, that is part of a straddle by deliver-

ing property to which the position relates (and you would

realize a loss on that position if you terminated it), you are

treated as having terminated the position for its fair market

value immediately before the settlement and as having

sold the property used to physically settle the position at

its fair market value.

Exceptions. The loss deferral rules do not apply to:

1. Positions established after October 21, 2004, com-

prising an identified straddle;

2. Certain straddles consisting of qualified covered call

options and the stock to be purchased under the op-

tions;

3. Hedging transactions, described earlier under Section

1256 Contracts Marked to Market; and

4. Straddles consisting entirely of section 1256 con-

tracts, as described earlier under Section 1256 Con-

tracts Marked to Market (but see Identified straddle,

later).

Note. For positions established before October 22,

2004, the loss deferral rules also do not apply to a strad-

dle that is an identified straddle at the end of the tax year.

Identified straddle. Any straddle (other than a strad-

dle described in (2) or (3) above) is an identified straddle if

all the following conditions exist.

•

You clearly identified the straddle on your records be-

fore the close of the day on which you acquired it.

•

For straddles acquired after December 29, 2007, you

identified the positions in the straddle that are offset-

ting with respect to one another (for example, position

A offsets position D, and position B offsets position C).

•

The straddle is not part of a larger straddle.

If there is a loss from any position in an identified strad-

dle, you must increase the basis of each of the positions

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that offset the loss position in the identified straddle. The

increase is the loss multiplied by the following fraction:

Unrecognized gain (if any) on the offsetting position

The total unrecognized gain on all positions that offset

the loss position in the identified straddle

For this purpose, your unrecognized gain is the excess

of the fair market value of the position that is part of an

identified straddle at the time you incur a loss on another

position in the identified straddle, over the fair market

value of that position when you identified it as a position in

the straddle.

If the application of the above rule does not result in the

increase in basis of any offsetting position in the identified

straddle, you must increase the basis of each of the offset-

ting positions in the straddle in a manner that:

•

Is reasonable,

•

Is consistently applied by you,

•

Is consistent with the purposes of the identified strad-

dle rules, and

•

Results in a total increase in the basis of those offset-

ting positions equal to the loss.

If you adopt an allocation method under this rule, you

must describe that method in your books and records.

The identified straddle rules also apply to positions that

are or have been a liability or obligation to you (for exam-

ple, a debt obligation you issued, a written option, or a no-

tional principal contract you entered into).

Neither you nor anyone else can take into account any

loss on a position that is part of an identified straddle to

the extent the loss increases the basis of any positions

that offset the loss position in the identified straddle.

Note. For positions established before October 22,

2004, identified straddles have to meet two additional con-

ditions.

1. All the original positions that you identify were ac-

quired on the same day.

2. All the positions included in condition 1 were dis-

posed of on the same day during the tax year, or none

of the positions were disposed of by the end of the tax

year.

Also, the losses from positions are deferred until you dis-

pose of all the positions in the straddle. The rule dis-

cussed above for increasing the basis of each of the posi-

tions does not apply.

Qualified covered call options and optioned stock.

A straddle is not subject to the loss deferral rules for strad-

dles if both of the following are true.

•

All the offsetting positions consist of one or more

qualified covered call options and the stock to be pur-

chased from you under the options.

•

The straddle is not part of a larger straddle.

But see Special year-end rule, later, for an exception.

A qualified covered call option is any option you grant to

purchase stock you hold (or stock you acquire in connec-

tion with granting the option), but only if all the following

are true.

•

The option is traded on a national securities exchange

or other market approved by the Secretary of the

Treasury.

•

The option is granted more than 30 days before its ex-

piration date.

For covered call options entered into after July 28,

2002, the option is granted not more than 12 months

before its expiration date or satisfies term limitation

and qualified benchmark requirements published in

the Internal Revenue Bulletin.

•

The option is not a deep-in-the-money option.

•

You are not an options dealer who granted the option

in connection with your activity of dealing in options.

•

Gain or loss on the option is capital gain or loss.

A deep-in-the-money option is an option with a strike

price lower than the lowest qualified benchmark (LQB).

The strike price is the price at which the option is to be ex-

ercised. Strike prices are listed in the financial sections of

many newspapers. The LQB is the highest available strike

price that is less than the applicable stock price. However,

the LQB for an option with a term of more than 90 days

and a strike price of more than $50 is the second-highest

available strike price that is less than the applicable stock

price.

The availability of strike prices for equity options with

flexible terms does not affect the determination of the LQB

for an option that is not an equity option with flexible

terms.

The applicable stock price for any stock for which an

option has been granted is:

1. The closing price of the stock on the most recent day

on which that stock was traded before the date on

which the option was granted; or

2. The opening price of the stock on the day on which

the option was granted, but only if that price is greater

than 110% of the price determined in (1).

If the applicable stock price is $25 or less, the LQB will

be treated as not less than 85% of the applicable stock

price. If the applicable stock price is $150 or less, the LQB

will be treated as not less than an amount that is $10 be-

low the applicable stock price.

Example. On May 12, 2023, you held XYZ stock and

you wrote an XYZ/September call option with a strike price

of $120. The closing price of one share of XYZ stock on

May 11, 2023, was $130.25. The strike prices of all XYZ/

September call options offered on May 12, 2023, were as

follows: $110, $115, $120, $125, $130, and $135. Be-

cause the option has a term of more than 90 days, the

LQB is $125, the second-highest strike price that is less

than $130.25, the applicable stock price. The call option is

a deep-in-the-money option because its strike price is

lower than the LQB. As a result, the option is not a

qualified covered call option, and the loss deferral rules

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apply if you closed out the option or the stock at a loss

during the year.

Capital loss on qualified covered call options. If

you hold stock and you write a qualified covered call op-

tion on that stock with a strike price less than the applica-

ble stock price, treat any loss from the option as long-term

capital loss if, at the time the loss was realized, gain on the

sale or exchange of the stock would be treated as

long-term capital gain. The holding period of the stock

does not include any period during which you are the

writer of the option.

Special year-end rule. The loss deferral rules for

straddles apply if all the following are true.

•

The qualified covered call options are closed, or the

stock is disposed of at a loss during any tax year.

•

Gain on disposition of the stock or gain on the options

is includible in gross income in a later tax year.

•

The stock or options were held less than 30 days after

the closing of the options or the disposition of the

stock.

How To Report Gains

and Losses (Form 6781)

As a general rule, report each position (whether or not it is

part of a straddle) on which you have unrecognized gain at

the end of the tax year and the amount of this unrecog-

nized gain in Part III of Form 6781. Use Part II of Form

6781 to figure your gains and losses on straddles. See the

Form 6781 instructions for how to report these gains and

losses.

Coordination of Loss Deferral Rules and

Wash Sale Rules

Rules similar to the wash sale rules apply to any disposi-

tion of a position or positions of a straddle. First apply

Rule 1, explained next, then apply Rule 2. However, Rule

1 applies only if stocks or securities make up a position

that is part of the straddle. If a position in the straddle

does not include stock or securities, use Rule 2.

Rule 1. You cannot deduct a loss on the disposition of

shares of stock or securities that make up the positions of

a straddle if, within a period beginning 30 days before the

date of that disposition and ending 30 days after that date,

you acquired substantially identical stock or securities. In-

stead, the loss will be carried over to the following tax

year, subject to any further application of Rule 1 in that

year. This rule will also apply if you entered into a contract

or option to acquire the stock or securities within the time

period described above. See Loss carryover, later, for

more information about how to treat the loss in the follow-

ing tax year.

Dealers. If you are a dealer in stock or securities, this

loss treatment will not apply to any losses you sustained in

the ordinary course of your business.

Example. You are not a dealer in stock or securities.

On December 1, 2023, you bought stock in XX Corpora-

tion (XX stock) and an offsetting put option. On December

8, 2023, there was $20 of unrealized gain in the put option

and you sold the XX stock at a $20 loss. By December 15,

2023, the value of the put option had declined, eliminating

all unrealized gain in the position. On December 15, you

bought a second XX stock position that is substantially

identical to the XX stock you sold on December 8. At the

end of the year, there is no unrecognized gain in the put

option or in the XX stock. Under these circumstances, the

$20 loss will be disallowed for 2023 under Rule 1 be-

cause, within a period beginning 30 days before Decem-

ber 8 and ending 30 days after that date, you bought stock

substantially identical to the XX stock you sold.

Rule 2. You cannot deduct a loss on the disposition of

less than all the positions of a straddle (your loss position)

to the extent that any unrecognized gain at the close of the

tax year in one or more of the following positions is more

than any loss disallowed under Rule 1.

•

Successor positions.

•

Offsetting positions to the loss position.

•

Offsetting positions to any successor position.

Successor position. A successor position is a posi-

tion that is or was at any time offsetting to a second posi-

tion if both the following conditions are met.

•

The second position was offsetting to the loss position

that was sold.

•

The successor position is entered into during a period

beginning 30 days before and ending 30 days after the

sale of the loss position.

Example 1. On November 3, 2023, you entered into

offsetting long and short positions in non-section 1256

contracts. On November 10, 2023, you disposed of the

long position at a $10 loss. On November 17, 2023, you

entered into a new long position (successor position) that

is offsetting to the retained short position, but not substan-

tially identical to the long position disposed of on Novem-

ber 10. You held both positions through year end, at which

time there was $10 of unrecognized gain in the successor

long position and no unrecognized gain in the offsetting

short position. Under these circumstances, the entire $10

loss will be disallowed for 2023 because there is $10 of

unrecognized gain in the successor long position.

Example 2. The facts are the same as in Example 1,

except that at year end you have $4 of unrecognized gain

in the successor long position and $6 of unrecognized

gain in the offsetting short position. Under these circum-

stances, the entire $10 loss will be disallowed for 2023 be-

cause there is a total of $10 of unrecognized gain in the

successor long position and offsetting short position.

Example 3. The facts are the same as in Example 1,

except that at year end you have $8 of unrecognized gain

in the successor long position and $8 of unrecognized

loss in the offsetting short position. Under these

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circumstances, $8 of the total $10 realized loss will be dis-

allowed for 2023 because there is $8 of unrecognized gain

in the successor long position.

Loss carryover. If you have a disallowed loss that resul-

ted from applying Rule 1 and Rule 2, you must carry it

over to the next tax year and apply Rule 1 and Rule 2 to

that carryover loss. For example, a loss disallowed in 2022

under Rule 1 will not be allowed in 2023, unless the sub-

stantially identical stock or securities (which caused the

loss to be disallowed in 2022) were disposed of during

2023. In addition, the carryover loss will not be allowed in

2023 if Rule 1 or Rule 2 disallows it.

Example. The facts are the same as in the example

under Rule 1. On December 29, 2024, you sell the second

XX stock at a $20 loss and there is $40 of unrecognized

gain in the put option. Under these circumstances, you

cannot deduct in 2024 either the $20 loss disallowed in

2023 or the $20 loss you incurred for the December 29,

2024, sale of XX stock. Rule 1 does not apply because

the substantially identical XX stock was sold during the

year and no substantially identical stock or securities were

bought within the 61-day period. However, Rule 2 does

apply because there is $40 of unrecognized gain in the put

option, an offsetting position to the loss positions.

Capital loss carryover. If the sale of a loss position

would have resulted in a capital loss, you treat the carry-

over loss as a capital loss on the date it is allowed, even if

you would treat the gain or loss on any successor posi-

tions as ordinary income or loss. Likewise, if the sale of a

loss position (in the case of section 1256 contracts) would

have resulted in a 60% long-term capital loss and a 40%

short-term capital loss, you treat the carryover loss under

the 60/40 rule, even if you would treat any gain or loss on

any successor positions as 100% long-term or short-term

capital gain or loss.

Exceptions. The rules for coordinating straddle losses

and wash sales do not apply to the following loss situa-

tions.

•

Loss on the sale of one or more positions in a hedging

transaction. (Hedging transactions are described un-

der Section 1256 Contracts Marked to Market, earlier.)

•

Loss on the sale of a loss position in a mixed straddle

account. (See Mixed straddle account (Election C),

later.)

•

Loss on the sale of a position that is part of a straddle

consisting only of section 1256 contracts.

Holding Period and

Loss Treatment Rules

The holding period of a position in a straddle generally be-

gins no earlier than the date on which the straddle ends

(the date you no longer hold an offsetting position). This

rule does not apply to any position you held more than 1

year before you established the straddle. But see Excep-

tions, later.

Example. On March 10, 2022, you acquired gold. On

January 10, 2023, you entered into an offsetting short gold

forward contract (nonregulated futures contract). On April

3, 2023, you disposed of the short gold forward contract at

no gain or loss. On April 13, 2023, you sold the gold at a

gain. Because the gold had been held for 1 year or less

before the offsetting short position was entered into, the

holding period for the gold begins on April 3, 2023, the

date the straddle ended. Gain recognized on the sale of

the gold will be treated as short-term capital gain.

Loss treatment. Treat the loss on the sale of one or

more positions (the loss position) of a straddle as a

long-term capital loss if both the following are true.

•

You held (directly or indirectly) one or more offsetting

positions to the loss position on the date you entered

into the loss position.

•

You would have treated all gain or loss on one or more

of the straddle positions as long-term capital gain or

loss if you had sold these positions on the day you en-

tered into the loss position.

Mixed straddles. Special rules apply to a loss position

that is part of a mixed straddle and that is a non-section

1256 position. A mixed straddle is a straddle:

•

That is not part of a larger straddle,

•

In which all positions are held as capital assets,

•

In which at least one (but not all) of the positions is a

section 1256 contract, and

•

For which the mixed straddle election (Election A, dis-

cussed later) has not been made.

Treat the loss as 60% long-term capital loss and 40%

short-term capital loss if all the following conditions apply.

•

Gain or loss from the sale of one or more of the strad-

dle positions that are section 1256 contracts would be

considered gain or loss from the sale or exchange of a

capital asset.

•

The sale of no position in the straddle, other than a

section 1256 contract, would result in a long-term cap-

ital gain or loss.

•

You have not made a straddle-by-straddle identifica-

tion election (Election B) or mixed straddle account

election (Election C), both discussed later.

Example. On March 3, 2023, you entered into a long

gold forward contract. On July 14, 2023, you entered into

an offsetting short gold regulated futures contract. You did

not make an election to offset gains and losses from posi-

tions in a mixed straddle. On August 4, 2023, you dis-

posed of the long forward contract at a loss. Because the

gold forward contract was part of a mixed straddle and the

disposition of this non-section 1256 position would not re-

sult in long-term capital loss, the loss recognized on the

termination of the gold forward contract will be treated as

a 60% long-term and 40% short-term capital loss.

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Exceptions. The special holding period and loss treat-

ment for straddle positions does not apply to positions

that:

•

Constitute part of a hedging transaction;

•

Are included in a straddle consisting only of section

1256 contracts; or

•

Are included in a mixed straddle account (Election C),

discussed later.

Mixed Straddle Elections

If you disposed of a position in a mixed straddle and make

one of the elections described in the following discus-

sions, report your gain or loss as indicated in those dis-

cussions. If you do not make any of the elections, report

your gain or loss in Part II of Form 6781. If you disposed of

the section 1256 component of the straddle, enter the rec-

ognized loss (line 10, column (h)) or your gain (line 12,

column (f)) in Part I of Form 6781, on line 1. Do not include

it on line 11 or 13 (Part II).

Mixed straddle election (Election A). You can elect out

of the marked-to-market rules, discussed under Section

1256 Contracts Marked to Market, earlier, for all section

1256 contracts that are part of a mixed straddle. Instead,

the gain and loss rules for straddles will apply to these

contracts. However, if you make this election for an option

on a section 1256 contract, the gain or loss treatment dis-

cussed earlier under Options will apply, subject to the gain

and loss rules for straddles.

You can make this election if:

•

At least one (but not all) of the positions is a section

1256 contract, and

•

Each position forming part of the straddle is clearly

identified as being part of that straddle on the day the

first section 1256 contract forming part of the straddle

is acquired.

If you make this election, it will apply for all later years

as well. It cannot be revoked without the consent of the

IRS. If you made this election, check box A of Form 6781.

Do not report the section 1256 component in Part I.

Other elections. You can avoid the 60% long-term capi-

tal loss treatment required for a non-section 1256 loss po-

sition that is part of a mixed straddle, described earlier, if

you choose either of the two following elections to offset

gains and losses for these positions.

•

Election B. Make a separate identification of the posi-

tions of each mixed straddle for which you are electing

this treatment (the straddle-by-straddle identification

method).

•

Election C. Establish a mixed straddle account for a

class of activities for which gains and losses will be

recognized and offset on a periodic basis.

These two elections are alternatives to the mixed straddle

election. You can choose only one of the three elections.

Use Form 6781 to indicate your election choice by check-

ing box A, B, or C, whichever applies.

Straddle-by-straddle identification election (Elec-

tion B). Under this election, you must clearly identify

each position that is part of the identified mixed straddle

by the earlier of:

•

The close of the day the identified mixed straddle is

established, or

•

The time the position is disposed of.

If you dispose of a position in the mixed straddle before

the end of the day on which the straddle is established,

this identification must be made by the time you dispose

of the position. You are presumed to have properly identi-

fied a mixed straddle if independent verification is used.

If you make this election, any positions you held on the

day before the election are deemed sold for their fair mar-

ket value at the close of the last business day before the

day of the election. For elections made on or before Au-

gust 18, 2014, take this gain or loss into account when fig-

uring taxable income for the year in which the election was

made. For elections made after August 18, 2014, take this

gain or loss into account in the year you would have repor-

ted the gain or loss if the identified mixed straddle had not

been established. In addition, when the gain or loss that

accrued prior to the time the identified mixed straddle was

established is taken into account, it will have the same

character it would have had if the identified mixed straddle

had not been established. See Regulations section

1.1092(b)-6 for details.

The basic tax treatment of gain or loss under this elec-

tion depends on which side of the straddle produced the

total net gain or loss. If the net gain or loss from the strad-

dle is due to the section 1256 contracts, gain or loss is

treated as 60% long-term capital gain or loss and 40%

short-term capital gain or loss. Enter the net gain or loss in

Part I of Form 6781 and identify the election by checking

box B.

If the net gain or loss is due to the non-section 1256 po-

sitions, gain or loss is short-term capital gain or loss. See

the Form 6781 instructions for how to report the net gain

or loss.

For the specific application of the rules of this election,

see Regulations sections 1.1092(b)-3T and 1.1092(b)-6.

Example 1. Straddle established on or before August

18, 2014. On April 2, 2014, you entered into a non-section

1256 position and an offsetting section 1256 contract. You

also made a valid election to treat this straddle as an iden-

tified mixed straddle. On April 9, 2014, you disposed of

the non-section 1256 position at a $600 loss and the sec-

tion 1256 contract at an $800 gain. Under these circum-

stances, the $600 loss on the non-section 1256 position

was offset against the $800 gain on the section 1256 con-

tract. The net gain of $200 from the straddle was treated

as 60% long-term capital gain and 40% short-term capital

gain because it was due to the section 1256 contract.

Example 2. Straddle established after August 18,

2014. On December 2, 2022, you entered into a non-sec-

tion 1256 position for $100. At the end of the day on Janu-

ary 24, 2023, the position had a value of $500. On Janu-

ary 25, 2023, you entered into an offsetting section 1256

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position. You elected to treat the straddle as an identified

mixed straddle.

On February 10, 2023, you closed out the section 1256

contract at a $500 loss and disposed of the non-section

1256 position for $975. Prior to entering into the identified

mixed straddle, you had a $400 unrealized short-term

capital gain on the non-section 1256 position. When you

disposed of the non-section 1256 position on February

10, 2023, you recognized the $400 gain. This gain is fig-

ured as though you had disposed of the position on the

day prior to establishing the identified mixed straddle.

You also realized a gain of $475 ($975 proceeds – $500

value before entering into the identified mixed straddle).

This gain is offset by the $500 loss on the section 1256

contract for a net loss of $25. This net loss is recognized

and treated as 60% long-term capital loss and 40%

short-term capital loss attributable to the section 1256

contract.

Mixed straddle account (Election C). You may elect

to establish one or more accounts for determining gains

and losses from all positions in a mixed straddle. You must

establish a separate mixed straddle account for each sep-

arate designated class of activities.

Generally, you must determine gain or loss for each po-

sition in a mixed straddle account as of the close of each

business day of the tax year. You offset the net section

1256 contracts against the net non-section 1256 positions

to determine the “daily account net gain or loss.”

If the daily account amount is due to non-section 1256

positions, the amount is treated as short-term capital gain

or loss. If the daily account amount is due to section 1256

contracts, the amount is treated as 60% long-term and

40% short-term capital gain or loss.

On the last business day of the tax year, you determine

the “annual account net gain or loss” for each account by

netting the daily account amounts for that account for the

tax year. The “total annual account net gain or loss” is de-

termined by netting the annual account amounts for all

mixed straddle accounts that you had established.

The net amounts keep their long-term or short-term

classification. However, no more than 50% of the total an-

nual account net gain for the tax year can be treated as

long-term capital gain. Any remaining gain is treated as

short-term capital gain. Also, no more than 40% of the to-

tal annual account net loss can be treated as short-term

capital loss. Any remaining loss is treated as long-term

capital loss.

The election to establish one or more mixed straddle

accounts for each tax year must be made by the due date

(without extensions) of your income tax return for the im-

mediately preceding tax year. If you begin trading in a new

class of activities during a tax year, you must make the

election for the new class of activities by the later of either:

•

The due date of your return for the immediately pre-

ceding tax year (without extensions), or

•

60 days after you entered into the first mixed straddle

in the new class of activities.

You make the election on Form 6781 by checking box

C. Attach Form 6781 to your income tax return for the

immediately preceding tax year, or file it within 60 days, if

that applies. Report the annual account net gain or loss

from a mixed straddle account in Part II of Form 6781. In

addition, you must attach a statement to Form 6781 spe-

cifically designating the class of activities for which a

mixed straddle account is established.

For the specific application of the rules of this election,

see Regulations section 1.1092(b)-4T.

Interest expense and carrying charges relating to

mixed straddle account positions. You cannot deduct

interest and carrying charges that are allocable to any po-

sitions held in a mixed straddle account. Treat these

charges as an adjustment to the annual account net gain

or loss and allocate them proportionately between the net

short-term and the net long-term capital gains or losses.

To find the amount of interest and carrying charges that

is not deductible and that must be added to the annual ac-

count net gain or loss, apply the rules described earlier to

the positions held in the mixed straddle account. See In-

terest expense and carrying charges on straddles in chap-

ter 3.

For special rules on the deferral of gain related to a

straddle where the gain is invested in a Qualified Opportu-

nity Fund, see section 1400Z-2 for more details.

Sales of Stock to Employee Stock

Ownership Plans (ESOPs) or Certain

Cooperatives

If you sold qualified securities held for at least 3 years to

an ESOP or eligible worker-owned cooperative, you may

be able to elect to postpone all or part of the gain on the

sale if you bought qualified replacement property (certain

securities) within the period that began 3 months before

the sale and ended 12 months after the sale. If you make

the election, you must recognize gain on the sale only to

the extent the proceeds from the sale exceed the cost of

the qualified replacement property.

You must reduce the basis of the replacement property

by any postponed gain. If you dispose of any replacement

property, you may have to recognize all of the postponed

gain.

Generally, to qualify for the election, the ESOP or coop-

erative must own at least 30% of the outstanding stock of

the corporation that issued the qualified securities. Also,

the qualified replacement property must have been issued

by a domestic operating corporation.

How to make the election. You must make the election

no later than the due date (including extensions) for filing

your tax return for the year in which you sold the stock. If

your original return was filed on time, you may make the

election on an amended return filed no later than 6 months

after the due date of your return (excluding extensions).

Enter “Filed pursuant to section 301.9100-2” at the top of

the amended return and file it at the same address you

used for your original return.

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How to report and postpone gain. Report the sale

in Part II of Form 8949 as you would if you were not mak-

ing the election. Then enter “R” in column (f). Enter the

amount of the postponed gain as a negative number in

column (g). Put it in parentheses to show it is negative.

Complete all remaining columns. If the actual postponed

gain is different from the amount you report, file an amen-

ded return.

Report your sales of stock to ESOPs or certain

cooperatives on Form 8949 with the correct box

checked for these transactions. See Form 8949

and the Instructions for Form 8949.

Also attach the following statements.

1. A “statement of election” that indicates you are mak-

ing an election under section 1042(a) of the Internal

Revenue Code and that includes the following infor-

mation.

a. A description of the securities sold, including the

type and number of shares, the date of the sale,

the amount realized on the sale, and the adjusted

basis of the securities.

b. The name of the ESOP or cooperative to which

the qualified securities were sold.

c. For a sale that was part of a single interrelated

transaction under a prearranged agreement be-

tween taxpayers involving other sales of qualified

securities, the names and identifying numbers of

the other taxpayers under the agreement and the

number of shares sold by the other taxpayers.

2. A notarized “statement of purchase” describing the

qualified replacement property, date of purchase, and

the cost of the property and declaring the property to

be qualified replacement property for the qualified

stock you sold. The statement must have been nota-

rized no later than 30 days after the purchase. If you

have not yet purchased the qualified replacement

property, you must attach the notarized “statement of

purchase” to your income tax return for the year fol-

lowing the election year (or the election will not be

valid).

3. A verified written statement of the domestic corpora-

tion whose employees are covered by the ESOP ac-

quiring the securities, or of any authorized officer of

the cooperative, consenting to the taxes under sec-

tions 4978 and 4979A of the Internal Revenue Code

on certain dispositions, and prohibited allocations of

the stock purchased by the ESOP or cooperative.

More information. For details, see section 1042 of the

Internal Revenue Code and Regulations section

1.1042-1T.

Gains on Qualified

Small Business Stock

This section discusses two provisions of the law that may

apply to gain from the sale or trade of qualified small

CAUTION

business stock. You may qualify for a tax-free rollover of all

or part of the gain. You may be able to exclude gain from

your income.

Qualified small business stock. This is stock that

meets all the following tests.

1. It must be stock in a C corporation.

2. It must have been originally issued after August 10,

1993.

3. The corporation must have total gross assets of $50

million or less at all times after August 9, 1993, and

before it issued the stock. Its total gross assets imme-

diately after it issued the stock must also be $50 mil-

lion or less.

When figuring the corporation's total gross assets,

you must also count the assets of any predecessor of

the corporation. In addition, you must treat all corpora-

tions that are members of the same parent-subsidiary

controlled group as one corporation.

4. You must have acquired the stock at its original issue,

directly or through an underwriter, in exchange for

money or other property (not including stock), or as

pay for services provided to the corporation (other

than services performed as an underwriter of the

stock). In certain cases, your stock may also meet this

test if you acquired it from another person who met

this test, or through a conversion or trade of qualified

small business stock that you held.

5. The corporation must have met the active business

test, defined next, and must have been a C corpora-

tion during substantially all the time you held the

stock.

6. Within the period beginning 2 years before and end-

ing 2 years after the stock was issued, the corporation

cannot have bought more than a de minimis amount

of its stock from you or a related party.

7. Within the period beginning 1 year before and ending

1 year after the stock was issued, the corporation can-

not have bought more than a de minimis amount of its

stock from anyone, unless the total value of the stock

it bought is 5% or less of the total value of all its stock.

For more information about tests 6 and 7, see the regula-

tions under section 1202 of the Internal Revenue Code.

Active business test. A corporation meets this test for

any period of time if, during that period, both the following

are true.

•

It was an eligible corporation, defined below.

•

It used at least 80% (by value) of its assets in the ac-

tive conduct of at least one qualified trade or business,

defined below.

Exception for Specialized Small Business Invest-

ment Company (SSBIC). Any SSBIC is treated as meet-

ing the active business test. An SSBIC is an eligible cor-

poration licensed to operate under section 301(d) of the

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Small Business Investment Act of 1958, as in effect on

May 13, 1993.

Eligible corporation. This is any U.S. corporation

other than:

•

A Domestic International Sales Corporation (DISC) or

a former DISC;

•

A corporation that has made, or whose subsidiary has

made, an election under section 936 of the Internal

Revenue Code;

•

A regulated investment company;

•

A REIT;

•

A REMIC;

•

Certain financial asset securitization investment trusts

(FASITs); or

•

A cooperative.

Qualified trade or business. This is any trade or

business other than:

•

One involving services performed in the fields of

health, law, engineering, architecture, accounting, ac-

tuarial science, performing arts, consulting, athletics,

financial services, or brokerage services;

•

One whose principal asset is the reputation or skill of

one or more employees;

•

Any banking, insurance, financing, leasing, investing,

or similar business;

•

Any farming business (including the business of rais-

ing or harvesting trees);

•

Any business involving the production or extraction of

products for which percentage depletion can be

claimed; or

•

Any business of operating a hotel, motel, restaurant,

or similar business.

Rollover of Gain

You may qualify for a tax-free rollover of capital gain from

the sale of qualified small business stock held more than 6

months. This means that, if you buy certain replacement

stock and make the choice described in this section, you

postpone part or all of your gain.

You postpone the gain by adjusting the basis of the re-

placement stock as described in Basis of replacement

stock, later. This postpones your gain until the year you

dispose of the replacement stock.

You can make this choice if you meet all the following

tests.

•

You buy replacement stock during the 60-day period

beginning on the date of the sale.

•

The replacement stock is qualified small business

stock.

•

The replacement stock continues to meet the active

business requirement for small business stock for at

least the first 6 months after you buy it.

Amount of gain recognized. If you make the choice de-

scribed in this section, you must recognize the capital gain

only up to the following amount.

•

The amount realized on the sale, minus

•

The cost of any qualified small business stock 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 qualified small business stock).

If this amount is less than the amount of your capital gain,

you can postpone the rest of that gain. If this amount

equals or is more than the amount of your capital gain, you

must recognize the full amount of your gain.

Basis of replacement stock. You must subtract the

amount of postponed gain from the basis of your replace-

ment stock.

Holding period of replacement stock. Your holding pe-

riod for the replacement stock includes your holding pe-

riod for the stock sold, except for the purpose of applying

the 6-month holding period requirement for choosing to

roll over the gain on its sale.

Pass-through entity. A pass-through entity (a partner-

ship, S corporation, or mutual fund or other regulated in-

vestment company) may also make the choice to post-

pone gain. The benefit of the postponed gain applies to

your share of the entity's postponed gain if you held an in-

terest in the entity for the entire period the entity held the

stock.

If a pass-through entity sold qualified small business

stock held for more than 6 months and you held an inter-

est in the entity for the entire period the entity held the

stock, you may also choose to postpone gain if you, rather

than the pass-through entity, buy the replacement stock

within the 60-day period.

How to report gain. Report the entire gain realized from

the sale in Part I or Part II of Form 8949. To make the elec-

tion to postpone gain, report the gain as you would if you

were not making the election. Enter “R” in column (f). En-

ter the amount of the postponed gain as a negative num-

ber in column (g). Put it in parentheses to show it is nega-

tive. Complete all remaining columns.

Report these transactions on Form 8949 with the

correct box checked. See Form 8949 and the In-

structions for Form 8949.

You must make the choice to postpone gain no later

than the due date (including extensions) for filing your tax

return for the year in which you sold the stock. If your origi-

nal return was filed on time, you may make the choice on

an amended return filed no later than 6 months after the

due date of your return (excluding extensions). Enter

“Filed pursuant to section 301.9100-2” at the top of the

amended return and file it at the same address you used

for your original return.

CAUTION

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Section 1202 Exclusion

You can generally exclude from your income up to 50% of

your gain from the sale or trade of qualified small business

stock held by you for more than 5 years. The exclusion

can be up to 75% for stock acquired after February 17,

2009, and no later than September 27, 2010, and up to

100% for stock acquired after September 27, 2010. The

exclusion can be up to 60% for certain empowerment

zone business stock for gain attributable to periods on or

before December 31, 2018. The 60% exclusion doesn't

apply to gain attributable to periods after December 31,

2018. See Empowerment zone business stock, later. The

eligible gain minus your section 1202 exclusion is a 28%

rate gain. See Capital Gain Tax Rates, later.

SSBIC stock. If the stock is SSBIC stock you bought as

replacement property for publicly traded securities you

sold at a gain before 2018, you must reduce the basis of

the stock by the amount of any postponed gain on that

earlier sale. But do not reduce your basis by that amount

when figuring your section 1202 exclusion.

Limit on eligible gain. The amount of your gain from

the stock of any one issuer that is eligible for the exclusion

in 2022 is limited to the greater of:

•

Ten times your basis in all qualified stock of the issuer

you sold or exchanged during the year; or

•

$10 million ($5 million for married individuals filing

separately), minus the amount of gain from the stock

of the same issuer you used to figure your exclusion in

earlier years.

How to report gain. Report the sale or exchange on

Form 8949, Part II, with the appropriate box checked, as

you would if you were not taking the exclusion. Then enter

“Q” in column (f) and enter the amount of the excluded

gain as a negative number in column (g). Put it in paren-

theses to show it is negative. Complete all remaining col-

umns. If you are completing line 18 of Schedule D (Form

1040), enter as a positive number the amount of the exclu-

sion on line 2 of the 28% Rate Gain Worksheet in the

Schedule D (Form 1040) instructions. But if you exclude

60% of the gain, enter

/3 of the exclusion. If you exclude

75% of the gain, enter

/3 of the exclusion. If you exclude

100% of the gain, do not enter an amount.

Report these transactions on Form 8949 with the

correct box checked. See Form 8949 and the In-

structions for Form 8949.

More information. For information about additional re-

quirements that may apply, see section 1202 of the Inter-

nal Revenue Code.

Empowerment zone business stock. You can exclude

up to 60% of your gain if you meet all the following addi-

tional requirements.

1. You sell or trade stock in a corporation that qualifies

as an empowerment zone business during substan-

tially all of the time you held the stock.

CAUTION

2. You acquired the stock after December 21, 2000, and

before February 18, 2009.

3. The gain from the sale or exchange of the stock is at-

tributable to periods on or before December 31, 2018.

Condition 1 will still be met if the corporation ceased to

qualify after the 5-year period that begins on the date you

acquired the stock. However, the gain that qualifies for the

60% exclusion cannot be more than the gain you would

have had if you had sold the stock on the date the corpo-

ration ceased to qualify.

Note. If either the 75% or 100% exclusion applies,

then the 60% exclusion does not apply.

Exclusion of Gain From DC Zone

Assets

If you sold or exchanged a District of Columbia Enterprise

Zone (DC Zone) asset that you acquired after 1997 and

before 2012 and held for more than 5 years, you may be

able to exclude the amount of qualified capital gain that

you would otherwise include in income. The exclusion ap-

plies to an interest in, or property of, certain businesses

operating in the District of Columbia.

How to report. Report the sale or exchange on Form

8949, Part II, as you would if you were not taking the exclu-

sion. Enter “X” in column (f) and enter the amount of the

exclusion as a negative number in column (g). Put the

amount in parentheses to show it is negative. See the in-

structions for Form 8949, columns (f), (g), and (h). Com-

plete all remaining columns.

Rollover of Gain From Empowerment

Zone Assets

The election to roll over gain from the sale of empower-

ment zone assets doesn’t apply to sales in tax years be-

ginning after 2020. See section 1397B.

Reporting Capital

Gains and Losses

Generally, report capital gains and losses on Form 8949.

Complete Form 8949 before you complete line 1b, 2, 3,

8b, 9, or 10 of Schedule D (Form 1040).

Use Form 8949 to report:

•

The sale or exchange of a capital asset not reported

on another form or schedule,

•

Gains from involuntary conversions (other than from

casualty or theft) of capital assets not held for busi-

ness or profit,

•

Nonbusiness bad debts, and

•

Worthlessness of a security.

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Use Schedule D (Form 1040) to report:

•

Overall gain or loss from transactions reported on

Form 8949;

•

Certain transactions you do not have to report on

Form 8949;

•

Gain from Form 2439 or 6252 or Part I of Form 4797;

•

Gain or loss from Form 4684, 6781, or 8824;

•

Gain or loss from a partnership, S corporation, estate,

or trust;

•

Capital gain distributions not reported directly on your

Form 1040; and

•

Capital loss carryover from the previous year to the

current year.

On Form 8949, enter all sales and exchanges of capital

assets, including stocks, bonds, etc., and real estate (if

not reported on Form 4684, 4797, 6252, 6781, 8824, or

line 1a or 8a of Schedule D (Form 1040). Include these

transactions even if you did not receive a Form 1099-B or

Form 1099-S, Proceeds From Real Estate Transactions,

for the transaction. Report short-term gains or losses in

Part I. Report long-term gains or losses in Part II. Use as

many Forms 8949 as you need.

Exceptions to filing Form 8949 and Schedule D (Form

1040). There are certain situations where you may not

have to file Form 8949 and/or Schedule D (Form 1040).

Exception 1. You do not have to file Form 8949 or

Schedule D (Form 1040) if you have no capital losses and

your only capital gains are capital gain distributions from

box 2a of Form(s) 1099-DIV. If any Form 1099-DIV you re-

ceive has an amount in box 2b (unrecaptured section

1250 gain), box 2c (section 1202 gain), or box 2d (collecti-

bles (28%) gain), you do not qualify for this exception.

If you qualify for this exception, report your capital gain

distributions directly on Form 1040, line 7, and check the

box on that line. Also use the Qualified Dividends and

Capital Gain Tax Worksheet in the Instructions for Forms

1040 to figure your tax.

Exception 2. You must file Schedule D (Form 1040),

but generally do not have to file Form 8949, if Exception 1

above does not apply and your only capital gains and los-

ses are:

•

Capital gain distributions;

•

A capital loss carryover;

•

A gain from Form 2439 or 6252 or Part I of Form 4797;

•

A gain or loss from Form 4684, 6781, or 8824;

•

A gain or loss from a partnership, S corporation, es-

tate, or trust; or

•

Gains and losses from transactions for which you re-

ceived a Form 1099-B that shows basis was reported

to the IRS, for which the Ordinary box in box 2 is not

checked, and for which you do not need to make any

adjustments in column (g) of Form 8949 or enter any

codes in column (f) of Form 8949.

Installment sales. You cannot use the installment

method to report a gain from the sale of stock or securities

traded on an established securities market. You must re-

port the entire gain in the year of sale (the year in which

the trade date occurs).

At-risk rules. Special at-risk rules apply to most in-

come-producing activities. These rules limit the amount of

loss you can deduct to the amount you risk losing in the

activity. The at-risk rules also apply to a loss from the sale

or trade of an asset used in an activity to which the at-risk

rules apply. For more information, see Pub. 925. Use Form

6198, At-Risk Limitations, to figure the amount of loss you

can deduct.

Passive activity gains and losses. If you have gains or

losses from a passive activity, you may also have to report

them on Form 8582. In some cases, the loss may be limi-

ted under the passive activity rules. Refer to Form 8582

and its instructions for more information about reporting

capital gains and losses from a passive activity.

Form 1099-B transactions. If you sold property, such as

stocks, bonds, or certain commodities, through a broker,

you should receive Form 1099-B from the broker. Use the

Form 1099-B to complete Form 8949 and/or Schedule D

(Form 1040).

If you received a Form 1099-B for a transaction, you

usually report the transaction on Form 8949. Report the

proceeds shown in box 1d of Form 1099-B in column (d)

of either Part I or Part II of Form 8949, whichever applies.

Include in column (g) any selling expenses or option

premiums not reflected in box 1d or box 1e of Form

1099-B. If you include a selling expense in column (g), en-

ter “E” in column (f).

Enter the basis shown in box 1e in column (e). If the ba-

sis shown on Form 1099-B is not correct, see the table

How To Complete Form 8949, Columns (f) and (g), in the

Instructions for Form 8949 for the adjustment you must

make. If no basis is shown on Form 1099-B, enter the cor-

rect basis of the property in column (e). See the instruc-

tions for Form 1099-B, Form 8949, and Schedule D (Form

1040) for more information.

Example 1. You sold 100 shares of Fund HIJ for

$2,500. You paid a $75 commission to the broker for han-

dling the sale. Your Form 1099-B shows that the net sales

proceeds, $2,425 ($2,500 − $75), were reported to the

IRS. Report $2,425 in column (d) of Form 8949. Complete

columns (a), (b), (c), and (e).

Example 2. You sold 200 shares of Fund KLM for

$10,000. You paid a $100 commission at the time of the

sale. The broker reported the gross proceeds to the IRS

on Form 1099-B, so on Form 8949, you enter “E” in col-

umn (f), $10,000 in column (d), and $100 as a negative

adjustment in column (g). Complete all remaining col-

umns.

Section 1256 contracts and straddles. Use Form

6781 to report gains and losses from section 1256 con-

tracts and straddles before entering these amounts on

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Schedule D (Form 1040). Include a copy of Form 6781

with your income tax return.

Market discount bonds. Report the sale or trade of a

market discount bond on Part I or Part II of Form 8949,

whichever is appropriate. See the table How To Complete

Form 8949, Columns (f) and (g), in the Instructions for

Form 8949 to help you figure the amounts to report for a

sale or trade of a market discount bond. Use the Work-

sheet for Accrued Market Discount Adjustment in Column

(g) in those instructions to figure the adjusted accrued

market discount. Also report the amount of accrued mar-

ket discount as interest income on Schedule B (Form

1040), line 1, and identify it as “Accrued Market Discount.”

See the Instructions for Form 8949 for more information.

Form 1099-CAP transactions. If a corporation in which

you own stock has had a change in control or a substantial

change in capital structure, you should receive Form

1099-CAP, Changes in Corporate Control and Capital

Structure, from the corporation. Use the Form 1099-CAP

to fill in Form 8949. If your computations show that you

would have a loss because of the change, do not enter

any amounts on Form 8949 or Schedule D (Form 1040) as

a result of this transaction.

Report the aggregate amount received shown in box 2

of Form 1099-CAP as the sales price in column (d) of ei-

ther Part I or Part II of Form 8949, whichever applies.

Form 1099-S transactions. If you sold or traded reporta-

ble real estate, you should generally receive from the real

estate reporting person a Form 1099-S showing the gross

proceeds.

“Reportable real estate” is defined as any present or fu-

ture ownership interest in any of the following.

•

Improved or unimproved land, including air space.

•

Inherently permanent structures, including any resi-

dential, commercial, or industrial building.

•

A condominium unit and its accessory fixtures and

common elements, including land.

•

Stock in a cooperative housing corporation (as de-

fined in section 216 of the Internal Revenue Code).

•

Any noncontingent interest in standing timber.

A “real estate reporting person” could include the buy-

er's attorney, your attorney, the title or escrow company, a

mortgage lender, your broker, the buyer's broker, or the

person acquiring the biggest interest in the property.

Your Form 1099-S will show the gross proceeds from

the sale or exchange in box 2. See the Instructions for

Form 8949 and the Instructions for Schedule D (Form

1040) for how to report these transactions and include

them in Part I or Part II of Form 8949, as appropriate. How-

ever, report like-kind exchanges on Form 8824 instead.

It is unlawful for any real estate reporting person to sep-

arately charge you for complying with the requirement to

file Form 1099-S.

Nominees. If you receive gross proceeds as a nominee

(that is, the gross proceeds are in your name but actually

belong to someone else), see the Instructions for Form

8949 for how to report these amounts on Form 8949.

File Form 1099-B or Form 1099-S with the IRS. If

you received gross proceeds as a nominee in 2023, you

must file a Form 1099-B or Form 1099-S for those pro-

ceeds with the IRS. Send the Form 1099-B or Form

1099-S with a Form 1096 to your Internal Revenue Serv-

ice Center by February 28, 2024 (April 1, 2024, if you file

Form 1099-B or Form 1099-S electronically). Give the ac-

tual owner of the proceeds Copy B of the Form 1099-B or

Form 1099-S by February 15, 2024. On Form 1099-B, you

should be listed as the “Payer.” The actual owner should

be listed as the “Recipient.” On Form 1099-S, you should

be listed as the “Filer.” The actual owner should be listed

as the “Transferor.” You do not have to file a Form 1099-B

or Form 1099-S to show proceeds for your spouse. For

more information about the reporting requirements and

the penalties for failure to file (or furnish) certain informa-

tion returns, see the General Instructions for Certain Infor-

mation Returns.

Sale of property bought at various times. If you sell a

block of stock or other property that you bought at various

times, report the short-term gain or loss from the sale on

one row in Part I of Form 8949 and the long-term gain or

loss on one row in Part II of Form 8949. Enter “Various” in

column (b) for the “Date acquired.”

Sale expenses. On Form 8949, include in column (g)

any expense of sale, such as broker's fees, commissions,

state and local transfer taxes, and option premiums, un-

less you reported the net sales price in column (d). If you

include an expense of sale in column (g), enter “E” in col-

umn (f).

Short-term gains and losses. Capital gain or loss on

the sale or trade of investment property held 1 year or less

is a short-term capital gain or loss. You report it in Part I of

Form 8949.

You combine your share of short-term capital gain or

loss from partnerships, S corporations, and fiduciaries,

and any short-term capital loss carryover, with your other

short-term capital gains and losses to figure your net

short-term capital gain or loss on line 7 of Schedule D

(Form 1040).

Long-term gains and losses. A capital gain or loss on

the sale or trade of investment property held more than 1

year is a long-term capital gain or loss. You report it in Part

II of Form 8949.

You also report the following in Part II of Schedule D

(Form 1040).

•

Undistributed long-term capital gains from a mutual

fund (or other regulated investment company) or REIT.

•

Your share of long-term capital gains or losses from

partnerships, S corporations, and fiduciaries.

•

All capital gain distributions from mutual funds and

REITs not reported directly on Form 1040, line 7.

•

Long-term capital loss carryovers.

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The result after combining these items with your other

long-term capital gains and losses is your net long-term

capital gain or loss (line 15 of Schedule D (Form 1040)).

Total net gain or loss. To figure your total net gain or

loss, combine your net short-term capital gain or loss

(Schedule D (Form 1040), line 7) with your net long-term

capital gain or loss (Schedule D (Form 1040), line 15). En-

ter the result on Schedule D (Form 1040), Part III, line 16.

If your losses are more than your gains, see Capital Los-

ses, next. If both lines 15 and 16 of your Schedule D

(Form 1040) are gains and your taxable income on your

Form 1040 is greater than zero, see Capital Gain Tax

Rates, later.

Capital Losses

If your capital losses are more than your capital gains, you

can claim a capital loss deduction. Report the deduction

on Form 1040, line 7, enclosed in parentheses.

Limit on deduction. Your allowable capital loss deduc-

tion, figured on Schedule D (Form 1040), is the lesser of:

•

$3,000 ($1,500 if you are married and file a separate

return), or

•

Your total net loss as shown on line 16 of Schedule D

(Form 1040).

You can use your total net loss to reduce your income dol-

lar for dollar, up to the $3,000 limit.

Capital loss carryover. If you have a total net loss on

line 16 of Schedule D (Form 1040) that is more than the

yearly limit on capital loss deductions, you can carry over

the unused part to the next year and treat it as if you had

incurred it in that next year. If part of the loss is still un-

used, you can carry it over to later years until it is com-

pletely used up.

When you figure the amount of any capital loss carry-

over to the next year, you must take the current year's al-

lowable deduction into account, whether or not you

claimed it and whether or not you filed a return for the cur-

rent year.

When you carry over a loss, it remains long term or

short term. A long-term capital loss you carry over to the

next tax year will reduce that year's long-term capital gains

before it reduces that year's short-term capital gains.

Figuring your carryover. The amount of your capital

loss carryover is the amount of your total net loss that is

more than the lesser of:

1. Your allowable capital loss deduction for the year, or

2. Your taxable income increased by your allowable cap-

ital loss deduction for the year.

If your deductions are more than your gross income for

the tax year, use your negative taxable income in figuring

the amount in (2) above.

Complete Worksheet 4-1 to determine the part of your

capital loss that you can carry over.

Worksheet 4-1. Capital Loss Carryover Worksheet Keep for Your Records

Use this worksheet to figure your capital loss carryovers from 2023 to 2024 if Schedule D (Form 1040), line 21, is a loss

and (a) that loss is a smaller loss than the loss on Schedule D (Form 1040), line 16, or (b) if the amount on your 2023

Form 1040, line 15, would be less than zero if you could enter a negative amount on that line. Otherwise, you do not have

any carryovers.

1. Enter the amount from Form 1040, line 15. If the amount would have been a loss, if you could enter a

negative number on that line, enclose the amount in parentheses ............................... 1.

2. Enter the loss from Schedule D (Form 1040), line 21, as a positive amount ........................

3. Combine lines 1 and 2. If zero or less, enter -0- ...............................................

4. Enter the smaller of line 2 or line 3 .........................................................

If line 7 of Schedule D is a loss, go to line 5; otherwise, enter -0- on line 5 and go to line 9.

5. Enter the loss from Schedule D (Form 1040), line 7, as a positive amount .........................

6. Enter any gain from Schedule D (Form 1040), line 15. If a loss, enter -0- ...........

7. Add lines 4 and 6 .......................................................................

8. Short-term capital loss carryover to 2024. Subtract line 7 from line 5. If zero or less, enter -0- ......

If line 15 of Schedule D is a loss, go to line 9; otherwise, skip lines 9 through 13.

9. Enter the loss from Schedule D (Form 1040), line 15, as a positive amount ........................

10. Enter any gain from Schedule D (Form 1040), line 7. If a loss, enter -0- ............

10.

11. Subtract line 5 from line 4. If zero or less, enter -0- .............................

11.

12. Add lines 10 and 11 .....................................................................

12.

13. Long-term capital loss carryover to 2024. Subtract line 12 from line 9. If zero or less, enter -0- .....

13.

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Example. Bob and Shelly sold securities in 2023. The

sales resulted in a capital loss of $7,000. They had no

other capital transactions. Their taxable income was

$26,000. On their joint 2023 return, they can deduct

$3,000. The unused part of the loss, $4,000 ($7,000 −

$3,000), can be carried over to 2024.

If their capital loss had been $2,000, their capital loss

deduction would have been $2,000. They would have no

carryover.

Use short-term losses first. When you figure your

capital loss carryover, use your short-term capital losses

first, even if you incurred them after a long-term capital

loss. If you have not reached the limit on the capital loss

deduction after using the short-term capital losses, use

the long-term capital losses until you reach the limit.

Decedent's capital loss. A capital loss sustained by a

decedent during his or her last tax year (or carried over to

that year from an earlier year) can be deducted only on

the final income tax return filed for the decedent. The capi-

tal loss limits discussed earlier still apply in this situation.

The decedent's estate cannot deduct any of the loss or

carry it over to following years.

Joint and separate returns. If you and your spouse

once filed separate returns and are now filing a joint re-

turn, combine your separate capital loss carryovers. How-

ever, if you and your spouse once filed a joint return and

are now filing separate returns, any capital loss carryover

from the joint return can be deducted only on the return of

the spouse who actually had the loss.

Capital Gain Tax Rates

The tax rates that apply to a net capital gain are generally

lower than the tax rates that apply to other income. These

lower rates are called the maximum capital gain rates.

The term “net capital gain” means the amount by which

your net long-term capital gain for the year is more than

your net short-term capital loss.

For 2023, the maximum capital gain rates are 0%, 15%,

20%, 25%, and 28%. See Table 4-4 for details.

If you figure your tax using the maximum capital

gain rate and the regular tax computation results

in a lower tax, the regular tax computation applies.

Example. All of your net capital gain is from selling

collectibles, so the capital gain rate would be 28%. If you

are otherwise subject to a rate lower than 28%, the 28%

rate does not apply.

Investment interest deducted. If you claim a deduction

for investment interest, you may have to reduce the

amount of your net capital gain that is eligible for the

capital gain tax rates. Reduce it by the amount of the net

TIP

Table 4-4. What Is Your Maximum Capital Gain Rate?

IF your net capital gain is from... AND...

THEN your maximum

capital gain rate is...

collectibles gain 28%

eligible gain on qualified small business stock minus

the section 1202 exclusion 28%

unrecaptured section 1250 gain 25%

other gain

and the regular tax rate that would apply is

37%

your taxable income is...

$553,851 or more if married filing jointly or surviving

spouse;

$523,051 or more if head of household;

$276,901 or more if married filing separately;

$492,301 or more if single; or

$14,651 or more if estate or trust… 20%

other gain

and the regular tax rate that would apply is

22%, 24%, 32%, or 35%

your taxable income is...

$89,251 – $553,850 if married filing jointly or surviving

spouse;

$59,751 – $523,050 if head of household;

$44,626 – $276,900 if married filing separately;

$44,626 – $492,300 if single; or

$3,001 – $14,650 if estate or trust… 15%

other gain

and the regular tax rate that would apply is

10% or 12%

your taxable income is...

$0 – $89,250 if married filing jointly or surviving

spouse;

$0 – $59,750 if head of household;

$0 – $44,625 if married filing separately;

$0 – $44,625 if single; or

$0 – $3,000 if estate or trust… 0%

“Other gain” means any gain that is not collectibles gain, gain on small business stock, or unrecaptured section 1250 gain.

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capital gain you choose to include in investment income

when figuring the limit on your investment interest deduc-

tion. This is done on the Schedule D Tax Worksheet or the

Qualified Dividends and Capital Gain Tax Worksheet. For

more information about the limit on investment interest,

see Interest Expenses in chapter 3.

28% rate gain. This gain includes gain or loss from the

sale of collectibles and the eligible gain from the sale of

qualified small business stock minus the section 1202 ex-

clusion.

Collectibles gain or loss. This is gain or loss from the

sale or trade of a work of art, rug, antique, metal (such as

gold, silver, and platinum bullion), gem, stamp, coin, or al-

coholic beverage held more than 1 year.

Collectibles gain includes gain from the sale of an inter-

est in a partnership, S corporation, or trust due to unreal-

ized appreciation of collectibles.

Gain on qualified small business stock. If you real-

ized a gain from qualified small business stock that you

held more than 5 years, you can generally exclude some

or all of your gain under section 1202. The eligible gain mi-

nus your section 1202 exclusion is a 28% rate gain. See

Gains on Qualified Small Business Stock, earlier in this

chapter.

Unrecaptured section 1250 gain. Generally, this is any

part of your capital gain from selling section 1250 property

(real property) that is due to depreciation (but not more

than your net section 1231 gain), reduced by any net loss

in the 28% group. Use the Unrecaptured Section 1250

Gain Worksheet in the Schedule D (Form 1040) instruc-

tions to figure your unrecaptured section 1250 gain. For

more information about section 1250 property and section

1231 gain, see chapter 3 of Pub. 544.

Tax computation using maximum capital gain rates.

Use the Qualified Dividends and Capital Gain Tax Work-

sheet or the Schedule D Tax Worksheet (whichever ap-

plies) to figure your tax if you have qualified dividends or

net capital gain. You have net capital gain if Schedule D

(Form 1040), lines 15 and 16, are both gains.

Schedule D Tax Worksheet. Use the Schedule D

Tax Worksheet in the Schedule D (Form 1040) instructions

to figure your tax if:

•

You have to file Schedule D (Form 1040); and

•

Schedule D (Form 1040), line 18 (28% rate gain) or

line 19 (unrecaptured section 1250 gain), is more than

zero.

Qualified Dividends and Capital Gain Tax Work-

sheet. If you do not have to use the Schedule D Tax

Worksheet (as explained above) and any of the following

apply, use the Qualified Dividends and Capital Gain Tax

Worksheet in the Instructions for Form 1040 to figure your

tax.

•

You received qualified dividends. (See Qualified Divi-

dends in chapter 1.)

•

You do not have to file Schedule D (Form 1040) and

you received capital gain distributions. (See Excep-

tions to filing Form 8949 and Schedule D (Form

1040 ), earlier.)

•

Schedule D (Form 1040), lines 15 and 16, are both

more than zero.

Alternative minimum tax. These capital gain rates are

also used in figuring alternative minimum tax.

Special Rules for

Traders in Securities

or Commodities

Special rules apply if you are a trader in securities or com-

modities in the business of buying and selling securities or

commodities for your own account. To be engaged in busi-

ness as a trader in securities or commodities, you must

meet all the following conditions.

•

You must seek to profit from daily market movements

in the prices of securities or commodities and not from

dividends, interest, or capital appreciation.

•

Your activity must be substantial.

•

You must carry on the activity with continuity and regu-

larity.

The following facts and circumstances should be con-

sidered in determining if your activity is a securities or

commodities trading business.

•

Typical holding periods for securities or commodities

bought and sold.

•

The frequency and dollar amount of your trades during

the year.

•

The extent to which you pursue the activity to produce

income for a livelihood.

•

The amount of time you devote to the activity.

If your trading activities do not meet the above defini-

tion of a business, you are considered an investor, and not

a trader. It does not matter whether you call yourself a

trader or a “day trader.”

How To Report

Transactions from trading activities result in capital gains

and losses (unless a section 475(f) election has been

made) and must be reported on Form 8949 and Sched-

ule D (Form 1040), as appropriate. Losses from these

transactions are subject to the limit on capital losses ex-

plained earlier in this chapter.

Mark-to-market election made. If you made the section

475(f) mark-to-market election, you should report all gains

and losses from trading as ordinary gains and losses in

Part II of Form 4797, instead of as capital gains and losses

on Form 8949 and Schedule D (Form 1040). In that case,

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securities or commodities (depending upon which election

was made) held at the end of the year in your business as

a trader are marked to market by treating them as if they

were sold for fair market value on the last business day of

the year and gain or loss is recognized. But do not mark to

market any securities or commodities you held for invest-

ment. Report sales from those securities or commodities

on Form 8949 and Schedule D (Form 1040), as appropri-

ate, not Form 4797. See the Instructions for Form 8949

and the Instructions for Schedule D (Form 1040).

Note. You may be a trader in some securities or com-

modities and have some securities or commodities that

are not held in connection with your activities as a trader,

such as those held for investment. The special rules for

marking to market discussed here do not apply to the se-

curities or commodities held for investment. You must

keep detailed records to distinguish those securities or

commodities. The securities or commodities held for in-

vestment must be identified as such in your records on the

day you acquired them (for example, by holding them in a

separate brokerage account) specifically identified under

section 475.

Expenses. Interest expense and other investment ex-

penses that an investor would deduct on Schedule A

(Form 1040) are deducted by a trader on Schedule C

(Form 1040), Profit or Loss From Business, if the expen-

ses are from the trading business. Commissions and other

costs of acquiring or disposing of securities or commodi-

ties (depending upon which election was made) are not

deductible but must be used to figure gain or loss. The

limit on investment interest expense, which applies to in-

vestors, does not apply to interest paid or incurred in a

trading business.

Self-employment tax. Gains and losses from selling se-

curities or commodities as a trader are not subject to

self-employment tax. This is true whether the election is

made or not. For an exception that applies to section 1256

contracts, see Self-Employment Income, earlier.

How To Make the

Mark-to-Market Election

To make the mark-to-market election for 2024, you must

have filed an election statement no later than the due date

for your 2023 return (without regard to extensions). The

statement must be attached to that return or with a prop-

erly filed request for extension of time to file that 2023 re-

turn (Form 4868, Application for Automatic Extension of

Time To File U.S. Individual Income Tax Return). The

statement must have included the following information.

•

That you are making an election under section 475(f)

(1) or (f)(2) of the Internal Revenue Code.

•

The first tax year for which the election is effective.

•

The trade or business for which you are making the

election.

If you are a new taxpayer and not required to file a 2023

income tax return, you make the election for 2023 by

placing the above statement in your books and records no

later than March 15, 2024. Attach a copy of the statement

to your 2024 return.

If your method of accounting for 2023 is inconsistent

with the mark-to-market election, you must change your

method of accounting for securities under Revenue Proce-

dure 2023-24 (or its successor), available at IRS.gov/irb/

2023-28_IRB#REV-PROC-2023-24. Revenue Procedure

2023-24 requires you to file Form 3115, Application for

Change in Accounting Method. Follow its instructions. En-

ter “64” on line 1a of the Form 3115.

If you made a mark-to-market election within 5 taxable

years of revoking a prior election, you can resume the

mark-to-market election of the new election. To restart the

mark-to-market election, you must file an election state-

ment no later than the due date for your 2023 return (with-

out regard to extensions) under Revenue Procedure

99-17, sections 5.03 and 5.04 and follow the non-auto-

matic change procedures to request a change in method

of accounting as described in Rev. Proc. 2015-13.

Once you make the election, it will apply to 2024 and all

later tax years, unless you get permission from the IRS to

revoke it. The effect of making the election is described

under Mark-to-market election made, earlier.

If you want to revoke a prior mark-to-market election

within the 5 taxable years ending with the year of change

for the election, you must follow the non-automatic change

procedures in Revenue Procedure 2015-13 and Revenue

Procedure 2023-24, section 24.02(9).

For more information on this election, see Revenue

Procedure 99-17, on page 52 of Internal Revenue Bulletin

1999-7 at IRS.gov/pub/irs-irbs/irb99-07.pdf.

For information about method of accounting using the

non-automatic change, see Revenue Procedure 2015-13

in Internal Revenue Bulletin 2015-5, available at

IRS.gov/irb/2015-05_IRB#RP-2015-13 and Revenue Pro-

cedure 2023-24 in Internal Revenue Bulletin 2023-28,

available at IRS.gov/irb/2023-28_IRB#REV-

PROC-2023-24.

How To Get Tax Help

If you have questions about a tax issue; need help prepar-

ing your tax return; or want to download free publications,

forms, or instructions, go to IRS.gov to find resources that

can help you right away.

Preparing and filing your tax return. After receiving all

your wage and earnings statements (Forms W-2, W-2G,

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1099-R, 1099-MISC, 1099-NEC, etc.); unemployment

compensation statements (by mail or in a digital format) or

other government payment statements (Form 1099-G);

and interest, dividend, and retirement statements from

banks and investment firms (Forms 1099), you have sev-

eral options to choose from to prepare and file your tax re-

turn. You can prepare the tax return yourself, see if you

qualify for free tax preparation, or hire a tax professional to

prepare your return.

Free options for tax preparation. Your options for pre-

paring and filing your return online or in your local com-

munity, if you qualify, include the following.

•

Free File. This program lets you prepare and file your

federal individual income tax return for free using soft-

ware or Free File Fillable Forms. However, state tax

preparation may not be available through Free File. Go

to IRS.gov/FreeFile to see if you qualify for free online

federal tax preparation, e-filing, and direct deposit or

payment options.

•

VITA. The Volunteer Income Tax Assistance (VITA)

program offers free tax help to people with

low-to-moderate incomes, persons with disabilities,

and limited-English-speaking taxpayers who need

help preparing their own tax returns. Go to IRS.gov/

VITA, download the free IRS2Go app, or call

800-906-9887 for information on free tax return prepa-

ration.

•

TCE. The Tax Counseling for the Elderly (TCE) pro-

gram offers free tax help for all taxpayers, particularly

those who are 60 years of age and older. TCE volun-

teers specialize in answering questions about pen-

sions and retirement-related issues unique to seniors.

Go to IRS.gov/TCE or download the free IRS2Go app

for information on free tax return preparation.

•

MilTax. Members of the U.S. Armed Forces and quali-

fied veterans may use MilTax, a free tax service of-

fered by the Department of Defense through Military

OneSource. For more information, go to

MilitaryOneSource (MilitaryOneSource.mil/MilTax).

Also, the IRS offers Free Fillable Forms, which can

be completed online and then e-filed regardless of in-

come.

Using online tools to help prepare your return. Go to

IRS.gov/Tools for the following.

•

The Earned Income Tax Credit Assistant (IRS.gov/

EITCAssistant) determines if you’re eligible for the

earned income credit (EIC).

•

The Online EIN Application (IRS.gov/EIN) helps you

get an employer identification number (EIN) at no

cost.

•

The Tax Withholding Estimator (IRS.gov/W4App)

makes it easier for you to estimate the federal income

tax you want your employer to withhold from your pay-

check. This is tax withholding. See how your withhold-

ing affects your refund, take-home pay, or tax due.

•

The First-Time Homebuyer Credit Account Look-up

(IRS.gov/HomeBuyer) tool provides information on

your repayments and account balance.

•

The Sales Tax Deduction Calculator (IRS.gov/

SalesTax) figures the amount you can claim if you

itemize deductions on Schedule A (Form 1040).

Getting answers to your tax questions. On

IRS.gov, you can get up-to-date information on

current events and changes in tax law.

•

IRS.gov/Help: A variety of tools to help you get an-

swers to some of the most common tax questions.

•

IRS.gov/ITA: The Interactive Tax Assistant, a tool that

will ask you questions and, based on your input, pro-

vide answers on a number of tax topics.

•

IRS.gov/Forms: Find forms, instructions, and publica-

tions. You will find details on the most recent tax

changes and interactive links to help you find answers

to your questions.

•

You may also be able to access tax information in your

e-filing software.

Need someone to prepare your tax return? There are

various types of tax return preparers, including enrolled

agents, certified public accountants (CPAs), accountants,

and many others who don’t have professional credentials.

If you choose to have someone prepare your tax return,

choose that preparer wisely. A paid tax preparer is:

•

Primarily responsible for the overall substantive accu-

racy of your return,

•

Required to sign the return, and

•

Required to include their preparer tax identification

number (PTIN).

Although the tax preparer always signs the return,

you're ultimately responsible for providing all the

information required for the preparer to accurately

prepare your return and for the accuracy of every item re-

ported on the return. Anyone paid to prepare tax returns

for others should have a thorough understanding of tax

matters. For more information on how to choose a tax pre-

parer, go to Tips for Choosing a Tax Preparer on IRS.gov.

Employers can register to use Business Services On-

line. The Social Security Administration (SSA) offers on-

line service at SSA.gov/employer for fast, free, and secure

W-2 filing options to CPAs, accountants, enrolled agents,

and individuals who process Form W-2, Wage and Tax

Statement, and Form W-2c, Corrected Wage and Tax

Statement.

IRS social media. Go to IRS.gov/SocialMedia to see the

various social media tools the IRS uses to share the latest

information on tax changes, scam alerts, initiatives, prod-

ucts, and services. At the IRS, privacy and security are our

highest priority. We use these tools to share public

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information with you. Don’t post your social security num-

ber (SSN) or other confidential information on social me-

dia sites. Always protect your identity when using any so-

cial networking site.

The following IRS YouTube channels provide short, in-

formative videos on various tax-related topics in English,

Spanish, and ASL.

•

Youtube.com/irsvideos.

•

Youtube.com/irsvideosmultilingua.

•

Youtube.com/irsvideosASL.

Watching IRS videos. The IRS Video portal

(IRSVideos.gov) contains video and audio presentations

for individuals, small businesses, and tax professionals.

Online tax information in other languages. You can

find information on IRS.gov/MyLanguage if English isn’t

your native language.

Free Over-the-Phone Interpreter (OPI) Service. The

IRS is committed to serving taxpayers with limited-English

proficiency (LEP) by offering OPI services. The OPI Serv-

ice is a federally funded program and is available at Tax-

payer Assistance Centers (TACs), most IRS offices, and

every VITA/TCE tax return site. The OPI Service is acces-

sible in more than 350 languages.

Accessibility Helpline available for taxpayers with

disabilities. Taxpayers who need information about ac-

cessibility services can call 833-690-0598. The Accessi-

bility Helpline can answer questions related to current and

future accessibility products and services available in al-

ternative media formats (for example, braille, large print,

audio, etc.). The Accessibility Helpline does not have ac-

cess to your IRS account. For help with tax law, refunds, or

account-related issues, go to IRS.gov/LetUsHelp.

Note. Form 9000, Alternative Media Preference, or

Form 9000(SP) allows you to elect to receive certain types

of written correspondence in the following formats.

•

Standard Print.

•

Large Print.

•

Braille.

•

Audio (MP3).

•

Plain Text File (TXT).

•

Braille Ready File (BRF).

Disasters. Go to IRS.gov/DisasterRelief to review the

available disaster tax relief.

Getting tax forms and publications. Go to IRS.gov/

Forms to view, download, or print all the forms, instruc-

tions, and publications you may need. Or, you can go to

IRS.gov/OrderForms to place an order.

Getting tax publications and instructions in eBook

format. Download and view most tax publications and in-

structions (including the Instructions for Form 1040) on

mobile devices as eBooks at IRS.gov/eBooks.

IRS eBooks have been tested using Apple's iBooks for

iPad. Our eBooks haven’t been tested on other dedicated

eBook readers, and eBook functionality may not operate

as intended.

Access your online account (individual taxpayers

only). Go to IRS.gov/Account to securely access infor-

mation about your federal tax account.

•

View the amount you owe and a breakdown by tax

year.

•

See payment plan details or apply for a new payment

plan.

•

Make a payment or view 5 years of payment history

and any pending or scheduled payments.

•

Access your tax records, including key data from your

most recent tax return, and transcripts.

•

View digital copies of select notices from the IRS.

•

Approve or reject authorization requests from tax pro-

fessionals.

•

View your address on file or manage your communica-

tion preferences.

Get a transcript of your return. With an online account,

you can access a variety of information to help you during

the filing season. You can get a transcript, review your

most recently filed tax return, and get your adjusted gross

income. Create or access your online account at IRS.gov/

Account.

Tax Pro Account. This tool lets your tax professional

submit an authorization request to access your individual

taxpayer IRS online account. For more information, go to

IRS.gov/TaxProAccount.

Using direct deposit. The safest and easiest way to re-

ceive a tax refund is to e-file and choose direct deposit,

which securely and electronically transfers your refund di-

rectly into your financial account. Direct deposit also

avoids the possibility that your check could be lost, stolen,

destroyed, or returned undeliverable to the IRS. Eight in

10 taxpayers use direct deposit to receive their refunds. If

you don’t have a bank account, go to IRS.gov/

DirectDeposit for more information on where to find a bank

or credit union that can open an account online.

Reporting and resolving your tax-related identity

theft issues.

•

Tax-related identity theft happens when someone

steals your personal information to commit tax fraud.

Your taxes can be affected if your SSN is used to file a

fraudulent return or to claim a refund or credit.

•

The IRS doesn’t initiate contact with taxpayers by

email, text messages (including shortened links), tele-

phone calls, or social media channels to request or

verify personal or financial information. This includes

requests for personal identification numbers (PINs),

passwords, or similar information for credit cards,

banks, or other financial accounts.

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•

Go to IRS.gov/IdentityTheft, the IRS Identity Theft

Central webpage, for information on identity theft and

data security protection for taxpayers, tax professio-

nals, and businesses. If your SSN has been lost or

stolen or you suspect you’re a victim of tax-related

identity theft, you can learn what steps you should

take.

•

Get an Identity Protection PIN (IP PIN). IP PINs are

six-digit numbers assigned to taxpayers to help pre-

vent the misuse of their SSNs on fraudulent federal in-

come tax returns. When you have an IP PIN, it pre-

vents someone else from filing a tax return with your

SSN. To learn more, go to IRS.gov/IPPIN.

Ways to check on the status of your refund.

•

Go to IRS.gov/Refunds.

•

Download the official IRS2Go app to your mobile de-

vice to check your refund status.

•

Call the automated refund hotline at 800-829-1954.

The IRS can’t issue refunds before mid-February

for returns that claimed the EIC or the additional

child tax credit (ACTC). This applies to the entire

refund, not just the portion associated with these credits.

Making a tax payment. Payments of U.S. tax must be

remitted to the IRS in U.S. dollars. Digital assets are not

accepted. Go to IRS.gov/Payments for information on how

to make a payment using any of the following options.

•

IRS Direct Pay: Pay your individual tax bill or estimated

tax payment directly from your checking or savings ac-

count at no cost to you.

•

Debit Card, Credit Card, or Digital Wallet: Choose an

approved payment processor to pay online or by

phone.

•

Electronic Funds Withdrawal: Schedule a payment

when filing your federal taxes using tax return prepara-

tion software or through a tax professional.

•

Electronic Federal Tax Payment System: Best option

for businesses. Enrollment is required.

•

Check or Money Order: Mail your payment to the ad-

dress listed on the notice or instructions.

•

Cash: You may be able to pay your taxes with cash at

a participating retail store.

•

Same-Day Wire: You may be able to do same-day

wire from your financial institution. Contact your finan-

cial institution for availability, cost, and time frames.

Note. The IRS uses the latest encryption technology to

ensure that the electronic payments you make online, by

phone, or from a mobile device using the IRS2Go app are

safe and secure. Paying electronically is quick, easy, and

faster than mailing in a check or money order.

CAUTION

What if I can’t pay now? Go to IRS.gov/Payments for

more information about your options.

•

Apply for an online payment agreement (IRS.gov/

OPA) to meet your tax obligation in monthly install-

ments if you can’t pay your taxes in full today. Once

you complete the online process, you will receive im-

mediate notification of whether your agreement has

been approved.

•

Use the Offer in Compromise Pre-Qualifier to see if

you can settle your tax debt for less than the full

amount you owe. For more information on the Offer in

Compromise program, go to IRS.gov/OIC.

Filing an amended return. Go to IRS.gov/Form1040X

for information and updates.

Checking the status of your amended return. Go to

IRS.gov/WMAR to track the status of Form 1040-X amen-

ded returns.

It can take up to 3 weeks from the date you filed

your amended return for it to show up in our sys-

tem, and processing it can take up to 16 weeks.

Understanding an IRS notice or letter you’ve re-

ceived. Go to IRS.gov/Notices to find additional informa-

tion about responding to an IRS notice or letter.

Responding to an IRS notice or letter. You can now

upload responses to all notices and letters using the

Document Upload Tool. For notices that require additional

action, taxpayers will be redirected appropriately on

IRS.gov to take further action. To learn more about the

tool, go to IRS.gov/Upload.

Note. You can use Schedule LEP (Form 1040), Re-

quest for Change in Language Preference, to state a pref-

erence to receive notices, letters, or other written commu-

nications from the IRS in an alternative language. You may

not immediately receive written communications in the re-

quested language. The IRS’s commitment to LEP taxpay-

ers is part of a multi-year timeline that began providing

translations in 2023. You will continue to receive communi-

cations, including notices and letters, in English until they

are translated to your preferred language.

Contacting your local TAC. Keep in mind, many ques-

tions can be answered on IRS.gov without visiting a TAC.

Go to IRS.gov/LetUsHelp for the topics people ask about

most. If you still need help, TACs provide tax help when a

tax issue can’t be handled online or by phone. All TACs

now provide service by appointment, so you’ll know in ad-

vance that you can get the service you need without long

wait times. Before you visit, go to IRS.gov/TACLocator to

find the nearest TAC and to check hours, available serv-

ices, and appointment options. Or, on the IRS2Go app,

under the Stay Connected tab, choose the Contact Us op-

tion and click on “Local Offices.”

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The Taxpayer Advocate

Service (TAS) Is Here To Help

You

What is TAS? TAS is an independent organization

within the IRS that helps taxpayers and protects taxpayer

rights. TAS strives to ensure that every taxpayer is treated

fairly and that you know and understand your rights under

the Taxpayer Bill of Rights.

How can you learn about your taxpayer rights? The

Taxpayer Bill of Rights describes 10 basic rights that all

taxpayers have when dealing with the IRS. Go to

TaxpayerAdvocate.IRS.gov to help you understand what

these rights mean to you and how they apply. These are

your rights. Know them. Use them.

What can TAS do for you? TAS can help you resolve

problems that you can’t resolve with the IRS. And their

service is free. If you qualify for their assistance, you will

be assigned to one advocate who will work with you

throughout the process and will do everything possible to

resolve your issue. TAS can help you if:

•

Your problem is causing financial difficulty for you,

your family, or your business;

•

You face (or your business is facing) an immediate

threat of adverse action; or

•

You’ve tried repeatedly to contact the IRS but no one

has responded, or the IRS hasn’t responded by the

date promised.

How can you reach TAS? TAS has offices in every

state, the District of Columbia, and Puerto Rico. To find

your advocate’s number:

•

Go to TaxpayerAdvocate.IRS.gov/Contact-Us;

•

Download Pub. 1546, The Taxpayer Advocate Service

Is Your Voice at the IRS, available at IRS.gov/pub/irs-

pdf/p1546.pdf;

•

Call the IRS toll free at 800-TAX-FORM

(800-829-3676) to order a copy of Pub. 1546;

•

Check your local directory; or

•

Call TAS toll free at 877-777-4778.

How else does TAS help taxpayers? TAS works to re-

solve large-scale problems that affect many taxpayers. If

you know of one of these broad issues, report it to TAS at

IRS.gov/SAMS. Be sure to not include any personal tax-

payer information.

Low Income Taxpayer Clinics

(LITCs)

LITCs are independent from the IRS and TAS. LITCs rep-

resent individuals whose income is below a certain level

and who need to resolve tax problems with the IRS. LITCs

can represent taxpayers in audits, appeals, and tax collec-

tion disputes before the IRS and in court. In addition,

LITCs can provide information about taxpayer rights and

responsibilities in different languages for individuals who

speak English as a second language. Services are offered

for free or a small fee. For more information or to find an

LITC near you, go to the LITC page at

TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134,

Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/

p4134.pdf.

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Glossary

Accrual method: An accounting

method under which you report your in-

come when you earn it, whether or not

you have received it. You generally de-

duct your expenses when you incur a

liability for them, rather than when you

pay them.

At-risk rules: Rules that limit the

amount of loss you may deduct to the

amount you risk losing in the activity.

Basis: Basis is the amount of your in-

vestment in property for tax purposes.

The basis of property you buy is usu-

ally the cost. Basis is used to figure

gain or loss on the sale or disposition

of investment property.

Below-market loan: A demand loan

(defined later) on which interest is pay-

able at a rate below the applicable fed-

eral rate, or a term loan where the

amount loaned is more than the

present value of all payments due un-

der the loan.

Call: An option that entitles the pur-

chaser to buy, at any time before a

specified future date, property such as

a stated number of shares of stock at a

specified price.

Cash method: An accounting method

under which you report your income in

the year in which you actually or con-

structively receive it. You generally de-

duct your expenses in the year you pay

them.

Commodities trader: A person who

is actively engaged in trading section

1256 contracts and is registered with a

domestic board of trade designated as

a contract market by the Commodities

Futures Trading Commission.

Commodity future: A contract made

on a commodity exchange, calling for

the sale or purchase of a fixed amount

of a commodity at a future date for a

fixed price.

Covered security: Covered securities

are certain securities subject to added

reporting by your broker on any Form

1099-B you may receive. See the

Instructions for Form 1099-B for more

details.

Conversion transaction: Any trans-

action that you entered into after April

30, 1993, that meets both of these

tests:

1. Substantially all of your expected

return from the transaction is due

to the time value of your net invest-

ment.

2. The transaction is one of the fol-

lowing:

a. A straddle, including any set of

offsetting positions on stock.

b. Any transaction in which you

acquire property (whether or

not actively traded) at substan-

tially the same time that you

contract to sell the same prop-

erty or substantially identical

property at a price set in the

contract.

c. Any other transaction that is

marketed or sold as producing

capital gains from a transaction

described in (1).

Demand loan: A loan payable in full at

any time upon demand by the lender.

Dividend: A distribution of money or

other property made by a corporation

to its shareholders out of its earnings

and profits.

Equity option: Any option:

•

To buy or sell stock, or

•

That is valued directly or indirectly

by reference to any stock or nar-

row-based security index.

Fair market value: The price at which

property would change hands between

a willing buyer and a willing seller, both

having reasonable knowledge of the

relevant facts.

Forgone interest: The amount of in-

terest that would be payable for any pe-

riod if interest accrued at the applicable

federal rate and was payable annually

on December 31, minus any interest

payable on the loan for that period.

Forward contract: A contract to de-

liver a substantially fixed amount of

property (including cash) for a substan-

tially fixed price.

Futures contract: An exchange-tra-

ded contract to buy or sell a specified

commodity or financial instrument at a

specified price at a specified future

date. See also Commodity future.

Gift loan: Any below-market loan

where the forgone interest is in the na-

ture of a gift.

Interest: Compensation for the use or

forbearance of money.

Investment interest: The interest you

paid or accrued on money you bor-

rowed that is allocable to property held

for investment.

Limited partner: A partner whose

participation in partnership activities is

restricted, and whose personal liability

for partnership debts is limited to the

amount of money or other property that

they contributed or may have to con-

tribute.

Listed option: Any option (other than

a right to acquire stock from the issuer)

that is traded on (or subject to the rules

of) a qualified board or exchange.

Marked-to-market rule: The treat-

ment of each section 1256 contract

(defined later) held by a taxpayer at the

close of the year as if it were sold for its

fair market value on the last business

day of the year.

Market discount: The stated redemp-

tion price of a bond at maturity minus

your basis in the bond immediately af-

ter you acquire it. Market discount ari-

ses when the value of a debt obligation

decreases after its issue date.

Market discount bond: Any bond

having market discount except:

•

Short-term obligations with fixed

maturity dates of up to 1 year from

the date of issue,

•

Tax-exempt obligations that you

bought before May 1, 1993,

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•

U.S. savings bonds, and

•

Certain installment obligations.

Mutual fund: A mutual fund is a regu-

lated investment company generally

created by “pooling” funds of investors

to allow them to take advantage of di-

versity of investments and professional

management.

Nominee: A person who receives, in

their name, income that actually be-

longs to someone else.

Noncovered security: Noncovered

securities are securities that are not

subject to added reporting by your

broker on any Form 1099-B you may

receive. See the Instructions for Form

1099-B for more details.

Nonequity option: Any listed option

that is not an equity option, such as

debt options, commodity futures op-

tions, currency options, and

broad-based stock index options.

Options dealer: Any person regis-

tered with an appropriate national se-

curities exchange as a market maker or

specialist in listed options.

Original issue discount (OID): The

amount by which the stated redemp-

tion price at maturity of a debt instru-

ment is more than its issue price.

Passive activity: An activity involving

the conduct of a trade or business in

which you do not materially participate

and any rental activity. However, the

rental of real estate is not a passive ac-

tivity if both of the following are true:

•

More than one-half of the personal

services you perform during the

year in all trades or businesses are

performed in real property trades

or businesses in which you materi-

ally participate.

•

You perform more than 750 hours

of services during the year in real

property trades or businesses in

which you materially participate.

Portfolio income: Gross income from

interest, dividends, annuities, or royal-

ties that is not derived in the ordinary

course of a trade or business. It in-

cludes gains from the sale or trade of

property (other than an interest in a

passive activity) producing portfolio

income or held for investment.

Premium: The amount by which your

cost or other basis in a bond right after

you get it is more than the total of all

amounts payable on the bond after you

get it (other than payments of qualified

stated interest).

Private activity bond: A bond that is

part of a state or local government

bond issue of which:

1. More than 10% of the proceeds

are to be used for a private busi-

ness use, and

2. More than 10% of the payment of

the principal or interest is:

a. Secured by an interest in prop-

erty to be used for a private

business use (or payments for

the property), or

b. Derived from payments for

property (or borrowed money)

used for a private business

use.

Put: An option that entitles the pur-

chaser to sell, at any time before a

specified future date, property such as

a stated number of shares of stock at a

specified price.

Real estate mortgage investment

conduit (REMIC): An entity that is

formed for the purpose of holding a

fixed pool of mortgages secured by in-

terests in real property, with multiple

classes of interests held by investors.

These interests may be either regular

or residual.

Regulated futures contract: A sec-

tion 1256 contract that:

•

Provides that amounts that must be

deposited to, or may be withdrawn

from, your margin account depend

on daily market conditions (a sys-

tem of marking to market); and

•

Is traded on, or subject to the rules

of, a qualified board of exchange,

such as a domestic board of trade

designated as a contract market by

the Commodity Futures Trading

Commission or any board of trade

or exchange approved by the Sec-

retary of the Treasury.

Restricted stock: Stock you get for

services you perform that is nontrans-

ferable and is subject to a substantial

risk of forfeiture.

Section 1256 contract: Any:

•

Regulated futures contract,

•

Foreign currency contract as de-

fined in chapter 4 under Foreign

currency contract,

•

Nonequity option,

•

Dealer equity option, or

•

Dealer securities futures contract.

A section 1256 contract does not in-

clude certain swaps as listed in Excep-

tions under Section 1256 Contracts

Marked to Market in chapter 4.

Securities futures contract: A con-

tract of sale for future delivery of a sin-

gle security or of a narrow-based se-

curity index.

Short sale: The sale of property that

you generally do not own. You borrow

the property to deliver to a buyer and,

at a later date, you buy substantially

identical property and deliver it to the

lender.

Straddle: Generally, a set of offsetting

positions on personal property. A strad-

dle may consist of a purchased option

to buy and a purchased option to sell

on the same number of shares of the

security, with the same exercise price

and period.

Stripped preferred stock: Stock that

meets the following tests:

1. There has been a separation in

ownership between the stock and

any dividend on the stock that has

not become payable.

2. The stock:

a. Is limited and preferred as to

dividends,

b. Does not participate in corpo-

rate growth to any significant

extent, and

c. Has a fixed redemption price.

Term loan: Any loan that is not a de-

mand loan.

Wash sale: A sale of stock or securi-

ties at a loss within 30 days before or

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after you buy or acquire in a fully taxa-

ble trade, or acquire a contract or op-

tion to buy, substantially identical stock

or securities.

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To help us develop a more useful index, please let us know if you have ideas for index entries.

See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Index

Abusive tax shelters (See Tax

shelters)

Accrual method 10, 24, 36, 46, 108

Accuracy-related penalty 6

Acquisition discount 23, 64

Adjusted basis 30, 59, 60, 64

Alaska Permanent Fund

dividends 33, 48

Amortization of bond premium 49

Annuities:

Borrowing on 50

Interest on 8

Life insurance proceeds used to

buy 16

Sale of 76

Single-premium 50

Trade for 54, 70

Applicable federal rate 9

Appreciated financial positions 54

Arbitrage bonds 17

Assistance (See Tax help)

At-risk rules 45, 98, 108

Automatic investment service 62,

Average basis 66

Double-category method 66

Illustrated 66

Backup withholding 4

Bad debts 76, 81

Bankrupt financial institutions:

Deposit in 76

Bargain purchases 59

Basis 58, 71, 108

Adjusted 30, 59, 60, 64

Average 66

Cost 58, 65

Inherited property 60

Investment property 58

Like-kind exchanges 69

Other than cost 58

REITs 61

REMIC, residual interest 37

Replacement stock 96

Shares acquired by

reinvestment 62

Stocks and bonds 30, 32, 49, 60

Bearer obligations 20, 76

Below-market loans 8, 108

Bonds:

Accrued interest on 26

Amortization of premium 49

Arbitrage 17

Basis 49, 60

Capital asset 74

Convertible 69

Coupon 24

Enterprise zone facility 18

Federally guaranteed 16

Identification 61

Market discount 18, 47, 64, 75, 99,

108

New York Liberty bonds 18

Par value 64

Premiums on 49, 64, 109

Private activity 17, 109

Redemption or retirement of 54

Sold between interest dates 15

State and local government 74

Stripped 16, 20, 64

Tax credit bonds 17

Tax-exempt 74

Traded flat 8

U.S. savings (See U.S. savings

bonds)

U.S. Treasury (See U.S. Treasury

bills, notes, and bonds)

Brokerage fees 99

Calls and puts 87, 108

Table 4-3 88

Capital assets 73

Capital gain distributions 30, 34,

48, 81

Capital gains and losses 73-81

Constructive ownership

transactions 78

Definition 73

Empowerment zone assets 97

Investment property 74

Long-term 83, 99

Losses, limit on 100

Passive activities 98

Qualified covered call options 91

Qualified small business stock 95

Reporting requirements 91, 96

Short-term 83, 99

Tax rates 101

Table 4-4 101

Capital loss carryover 92, 100

Worksheet 4-1 100

Cash method 10, 23, 46, 108

Reporting options for savings bond

interest 10

Cash-settled options 56

Casualty losses 76

CDOs (Collateralized debt

obligations) 37

Certificates of deposit (CDs) 20

Children:

Alaska Permanent Fund

dividends 48

Capital gain distributions 48

Custodian account for 4

Gifts to 5

Investment income of 3, 48

Qualified dividends 48

Savings account with parent as

trustee 5

U.S. savings bond owner

Co-owners of U.S. savings

bonds 11

Collateralized debt obligations

(CDOs) 37

Collectibles 102

Commissions 61

Commodities traders 108

Commodity futures 77, 81, 108

Community property:

U.S. savings bonds 11

Constructive ownership

transactions 72, 78

Constructive receipt 23

Constructive sales 54

Contractors, insolvency of 83

Conversion transactions 76, 108

Convertible stocks and bonds 69

Cooperatives, sales of stock to 94

Corporate distributions 27

Capital gain 34, 48, 81

Constructive 31

Dividends (See Dividends)

Fractional shares 32

Liquidating 31, 35

Nondividend 30, 35

Return of capital 30

Stock rights 31

Undistributed capital gains 30

Corporate reorganizations 69

Cost basis 58, 65

Coupon bonds 24

Covered security, defined 108

Day traders 102

Dealer equity options 56

Dealer securities futures

contracts 56

Debt instruments, retirement of 76

Decedents 60, 101

U.S. savings bond interest, reporting

of 12

Demand loans 108

Demutualization 71

Deposits, loss on 76

Discount on debt instruments 18

Certificates of deposit 20

Election to report all interest as

OID 23

Face-amount certificates 20

Gain or loss treatment 74

Inflation-indexed 20

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Market discount bonds (See Market

discount bonds)

Original issue discount

(See Original issue discount

(OID))

Short-term obligations 22, 74

Stripped bonds and coupons 20

Discounted debt instruments 18

Discounted tax-exempt

obligations 64

Dividends 27, 108

(See also Form 1099-DIV)

Alaska Permanent Fund 33, 48

Exempt-interest 7, 33, 81

Extraordinary 84

Holding period 28

Insurance policies 33

Money market funds 30

Nominees 27, 35

Ordinary 28

Patronage 33

Payments in lieu of 84

Qualified 28, 34, 48

Qualified foreign corporation 29

Received in January 28

Reinvestment of 81

Reinvestment plans 30, 62

Reporting requirements 27, 33-35

Restricted stock 34

Sale or trade vs. 53

Scrip 33

Sold stock 28

Stock 62, 80

Underreported 4

Veterans' insurance 7, 33

Divorce 59, 71

Education Savings Bond

Program 14

Interest excluded under 26

Employee stock options 2

Employee stock ownership plans

(ESOPs), sales of stock to 94

Employer identification numbers

(EINs) 38

Empowerment zone 97

Endowment contracts 50

Enterprise zone facility bonds 18

Equity option 56, 108

Estate income received by

beneficiary 3

Exchanges of mutual fund

shares 70

Exclusion of gain:

DC zone assets 97

Exempt-interest dividends on

mutual fund stock 81

Face-amount certificates 20

Fair market value 59, 65, 108

Federal guarantee on bonds 16

Financial asset securitization

investment trusts (FASITs) 37

First-in first-out (FIFO) 66

Foreign currency transactions 56

Foreign income 2

Forgone interest 108

Form 1040 or 1040-SR,

Schedule B 24

Form 1040 or Form 1040-SR 33

Form 1040-X 54

Form 1040, Schedule D 96

Form 1041 39

Form 1065 38

Schedule K-1 39

Form 1066, Schedule Q 37, 51

Form 1096 27, 35, 99

Form 1099-B 52, 98, 99

Covered security, defined 108

Noncovered security, defined 109

Form 1099-CAP 99

Form 1099-DIV 3, 27, 33, 35

Form 1099-INT 3, 6, 13, 24, 27, 36,

Form 1099-MISC 28, 84

Form 1099-OID 7, 19, 25, 36, 37

Form 1099-S 99

Form 1120 39

Form 2439 30

Form 3115 11, 50, 103

Form 4684 76

Form 4797 69, 78, 79

Form 4952 48

Form 6198 98

Form 6781 57, 77, 91, 98

Form 8275 43

Form 8275-R 43

Form 8582 38

Form 8615 3

Form 8815 14, 26

Form 8824 69

Form 8832 38

Form 8886 41, 43

Form 8949:

Bad debts 83

Basis adjustment 30

Capital Gains 97

Capital Losses 97

Cooperative, sale to certain 94

Copyrights in musical works 74

Employee stock ownership plan,

sale to 94

Empowerment Zone Assets 97

Exempt-interest dividends 81

Form 1099-B 52, 98

Form 1099-CAP 99

Form 1099-S 99

Fractional shares 32

Gain, qualified small business

stock 97

How to fill in, generally 97

Long-term gains and losses 99

Marked-to-market election 102

Market discount bonds 75, 99

Musical compositions 74

Nominees 99

Nonbusiness bad debt 76

Nondividend distributions 35

Option 87

Property bought at various times 99

Rollover, qualified small business

stock 96

Sale expenses 99

Short-term gains and losses 99

Software 61

Worthless securities 54

Form SS-4 38

Form W-8BEN 5

Form W-9 4

Forward contracts 108

Fractional shares 32, 80

Frozen deposits 8, 26

Futures contracts:

Definition 108

Regulated 56, 109

Securities 81, 85, 86

Futures, commodity 77, 81, 108

Wash sales 85

Gains on qualified small business

stock 95

Gains on sales or trades 65, 71, 73

(See also Capital gains and losses)

Gifts 5, 59, 80, 108

Gifts of shares 67

Glossary 108

Government obligations 23

Hedging transactions 56, 58, 77

Holding period:

Investment property 80

Replacement stock 96

Shares acquired by

reinvestment 81

Straddles 92

Income from sources outside

U.S. 2

Income tax treaties (Table 1-3) 29

Indian tribal government 16

Individual retirement arrangements

(IRAs):

Interest income 7

Inflation-indexed debt

instruments 20, 21

Inherited property:

Basis 60

Holding period 80

Transfer by inheritance 54

Insolvency of contractors 83

Installment sales 98

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Insurance:

Borrowing on 50

Dividends, interest on 8, 33

Interest option on 16

Life insurance companies,

demutualization 71

Life, paid to beneficiary 16

Prepaid premiums 8

Single-premium life 50

Trades 70

Veterans' dividends, interest on 7,

Interest expenses:

Allocation of 46

Investment interest 46, 108

Limit on 47

When to deduct 46

Margin accounts 47

Paid in advance 47

Straddles 51

Interest income 6

Annuity contracts 8

Bonds traded flat 8

Certificates of deposits 7

Condemnation awards 8

Deferred interest accounts 7

Dividends on deposit or share

accounts 7

Frozen deposits 8, 26

Gift for opening account 7

Individual retirement arrangements

(IRAs) 7

Installment sale payments 8

Insurance dividends 8

Money market funds 7

Nominee distributions 7, 11, 13, 27

Prepaid insurance premiums 8

Reporting 23-27

Reporting requirements 24

Seller-financed mortgage 26

Tax refunds 8

Tax-exempt 16, 24

Taxable 7, 8, 15, 16

U.S. savings bonds, person

responsible for tax (Table 1-2) 12

Underreported 4

Unstated 58

Usurious interest 8

VA insurance dividends 7

Investment clubs 38, 39

Investment expenses 44

Allocated 36

At-risk rules 45

Interest 101

Limits on deductions 45

Nondeductible 50

nonpublicly offered mutual fund or

REMIC 51

Investment income 2

Children 3, 48

General Information 3

Net income 47

Records to keep 3

Reporting of (Table 1-1) 6

Investment interest expenses:

Reporting requirements 51

Investment property 46

Basis 58

Definition 52

Gain or loss treatment 74

Gift, received as 59

Holding period 80

Liquidation, received in 63

Nontaxable trades, received in 59

Sales and trades 52

Services, received for 59

Spouse, received from 59

Taxable trades, received in 59

Joint accounts 5

Joint and separate returns 44, 101

Life insurance companies:

demutualization 71

Like-kind exchanges 67, 71

Basis of property received 69

Reporting requirements 69

Limited partners 108

Liquidating distributions 31, 63

Listed options 56, 108

Load charges 61

Loans

Below-market 8, 108

Gift and demand 9, 108

Guarantees 82

Term 9, 109

Local government obligations

(See State or local government

obligations)

Long-term capital gains and

losses 83, 99

Losses on sales or trades 73

(See also Capital gains and losses)

Amount calculation 65

Carryback election 57

Mutual fund or REIT stock held 6

months or less 81

Passive activities 38, 39, 45, 48

Related parties 72

Section 1244 (small business)

stock 78

Small business investment

company stock 79

Wash sales 91

Mark-to-market election 102

Marked-to-market rules 56, 102,

108

Market discount bonds 18, 21, 22,

47, 64, 75, 99, 108

Accrued market discount 22

Maximum rate of capital gains

(Table 4-4) 101

Mechanics' and suppliers' liens 82

Missing children, photographs of 2

Mixed straddles 84, 92

Money market funds 30

Interest income 7

Mortgages:

Revenue bonds 17

Secondary liability on home 83

Seller-financed 26

Municipal bonds 16, 24, 74

(See also State or local government

obligations)

Mutual fund, defined 109

Mutual funds 30, 45, 48, 52, 61, 65,

Individual retirement arrangements

(IRAs) 2

publicly offered 52

Net Investment Income Tax 3

New York Liberty bonds 18

NIIT 3

Nominee distributions:

Dividends 27, 35

Interest income 7, 11, 13, 27

Original issue discount 19

Nominee, defined 109

Nonbusiness bad debts 76, 81

Noncapital assets 73

Noncovered security, defined 109

Nondeductible investment

expenses 50

Nondividend distributions 30

Nonequity options 56, 109

Nonqualified preferred stock 69

Nonresident aliens:

Backup withholding 5

Nontaxable return of capital 30

Nontaxable stock rights 81

Nontaxable trades 67, 80

Notes:

Individuals, bought at discount 76

U.S. Treasury (See U.S. Treasury

bills, notes, and bonds)

Options 86

Calls and puts 87, 108

Cash settlement 56, 87

Dealer equity 56

Deep-in-the-money 90

Employee stock 2

Equity 56, 108

Gain or loss 86, 90

Holding period 81

Listed 56, 108

Nonequity 56, 109

Qualified covered call 90

Reporting requirements 87

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Section 1256 contracts 55, 87

Wash sales 85

Options dealer 109

Ordinary gains and losses 73, 76

Original issue discount:

Nominee distributions 19

Original issue discount (OID) 16,

18-21, 64, 109

Adjustment to 27

Reporting requirements 19

Rules 19

Pass-through entities:

Rollover of gain 96

Passive activities 109

Gains and losses 38, 39, 45, 48, 98

Patronage dividends 33

Penalties:

Accuracy-related 6, 42

Backup withholding 5

Civil fraud 44

Early withdrawal 7, 27

Failure to pay tax 44

Failure to supply SSN 4

Substantial understatement 43

Section 199A deduction 43

Valuation misstatement 43

Political parties:

Debts owed by 82

Portfolio income 109

Preferred stock:

Nonqualified 69

Redeemable at a premium 32

Stripped 35, 109

Premiums on bonds 49, 64, 109

Private activity bonds 17, 109

Public utility stock reinvestment 62

Publications (See Tax help)

Puts and calls 87, 109

Table 4-3 88

Qualified dividends 34

Qualified small business stock 64,

81, 95

Gains on 95

Real estate investment trusts

(REITs) 30, 61, 81

Real estate mortgage investment

conduits (REMICs) 36, 52, 109

Regular interest 36

Residual interest 37, 86

Recordkeeping requirements:

Investment income 3

Small business stock 79

Redemption of stock 53

Redemption or retirement of

bonds 54

Regulated futures contract 56, 109

Reinvestment rights 61

REITs (See Real estate investment

trusts (REITs))

Related party transactions 52,

71-73

Related persons 89

REMICs (See Real estate mortgage

investment conduits (REMICs))

Reorganizations, corporate 69

Reporting requirements:

Bad debts 83

Bond premium amortization 50

Capital gains and losses 91, 96, 97

Dividend income 33

Interest income 24

Interest on U.S. savings bonds 10,

Investment interest expenses 51

Like-kind exchanges 69

Options 87

Original issue discount 19

S corporation income, deductions,

and credits 38

Section 1256 contracts 57

State or local government

obligations 16

Straddles 98

Substitute payments 84

Tax-exempt interest income 24

Trades 102

Repossession of real property 80

Restricted property 59

Restricted stock 34, 109

Retirement of debt instrument 76

Return of capital (See Nondividend

distributions)

Rollover of gain from sale:

Securities 96

S corporations 38, 63

Sales and trades of investment

property 52

Definition 53

Savings bonds (See U.S. savings

bonds)

SBIC stock (See Small business

investment company stock)

Scrip dividends 33

Section 1202 gain 97, 102

Section 1244 stock 78

Section 1250 gain 102

Section 1256 contracts 55, 81, 87,

98, 109

Net gain on 57

Net loss on 57

Reporting requirements 57

Securities:

Holding period 80

Installment sales 98

Rollover of gain from sale 96

Traders in 102

Worthless 54, 83

Securities futures contracts 56, 81,

86, 109

Self-employment income 58

Self-employment tax 103

Seller-financed mortgages 26

Short sales 83, 84

Adjusted basis 64

Defined 109

Expenses of 50

Extraordinary dividends 84

Puts 87

Small business investment

company stock 79

Short-term capital gains and

losses 83, 99

Short-term obligations 22, 23, 64,

Interest deduction, limit on 47

Sixty/forty (60/40) rule 56

Small business investment

company stock 79, 97

Reporting requirements 79

Small business stock 64, 78, 81, 95

Social security number (SSN):

Custodial accounts 4

Joint accounts 4

Requirement to give 4

Specialized small business

investment company stock 97

Spouses:

Transfers between 59, 71

(See also Related party

transactions)

State or local government

obligations 16-18

Market discount bonds (See Market

discount bonds)

Private activity bonds 17, 109

Registration requirement 16

Tax-exempt interest 16

Taxable interest 16

Stock:

Basis 30, 32, 60, 96

Capital asset 74

Constructive ownership 72

Convertible 69

Corporate 69

Dividends (See Dividends)

Fractional shares 32, 80

Identification 61

Installment sales 98

Nonqualified preferred stock 69

Options for employees 2

Public utility, reinvestment 62

Redemption of 53

Replacement stock 96

Restricted stock 34, 109

Rights 31, 63, 81

S corporations 63

Sales to ESOPs or cooperatives 94

Small business 64, 81

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Splits 63

Straddles (See Straddles)

Stripped preferred stock 35, 109

Surrender of 54

Trades 69

Trust instruments treated as 55

Straddles 88-94

Defined 109

Holding period 92

Interest expense and carrying

charges 51

Loss deferral rules 89

Mixed 84, 92, 93

Reporting requirements 98

Stripped bonds and coupons 16,

20, 64

Stripped preferred stock 35, 109

Substitute payments 84

Tables:

Capital gains maximum rate

(Table 4-4) 101

Income tax treaties (Table 1-3) 29

Investment income, reporting of

(Table 1-1) 6

Puts and calls (Table 4-3) 88

U.S. savings bonds, person

responsible for tax (Table 1-2) 12

Tax credit bonds 17

Tax help 103

Tax rates:

Capital gain and losses 101

Tax refunds:

Interest on 8

Tax shelters 39-44

Penalties 42

Reporting requirements 41

Rules to curb abuse 40

Tax-exempt bonds 74

Tax-exempt income:

Expenses of 50

Interest 16, 24

Tax-exempt obligations 16, 21, 64

Taxable income, expenses of 51

Taxes:

State income 51

Term loans 9, 109

Trade or business 45

Traders in securities 102

Trades:

Insurance 70

Investment property 52

Like-kind 67, 71

Nontaxable 59, 67, 80

Reporting requirements 102

Stock 69

Taxable 59

U.S. Treasury notes or bonds 71

Treasury bills, notes, and bonds

(See U.S. Treasury bills, notes, and

bonds)

Treasury inflation-indexed

securities 20

Treasury inflation-protected

securities (TIPS) 15, 20

Treaties, income tax (Table 1-3) 29

Trust income received by

beneficiary 3

U.S. savings bonds 8, 10

Reporting interest on 8, 10

Retirement or profit-sharing plan,

distributed from 13

Worksheet 26

Tax, responsible person

(Table 1-2) 12

U.S. Treasury bills, notes, and

bonds 8, 15, 71, 80

Undistributed capital gains 35

Usurious interest 8

Veterans' insurance:

Dividends on 33

Warrants 85

Wash sales 84-86, 109

Holding period 81

Loss deferral rules, straddles 91

Withholding, backup 4

Worksheets:

Capital loss carryover 100

Worthless securities 54, 83

Publication 550 (2023) 115