What to report on Form 8949
There are different rules for partnerships and corporations, but let's focus on individuals. The IRS says you, as an individual investor, should use Form 8949 to report the following:
- 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 used in your trade or business.
- Nonbusiness bad debts.
- Worthlessness of a security.
- The election to defer capital gain invested in a qualified opportunity fund (QOF).
- The disposition of interests in QOFs.
(QOFs are the investment vehicle for participating in the Opportunity Zone Program created in 2017. More on that below.)
Preparations for filing IRS Form 8949
At the top of each Form 8949 you have to file, you'll need to check box A, B, or C, depending on what you indicated on Form 1099-B. Those boxes indicate whether the broker reported your cost basis (which includes commissions, of course) or whether you had capital asset transactions that were not reported to you on Form 1099-B or a substitute statement.
And now, remember those two separate sections for long- and short-term investments? Here's how they're separated in Form 8949:
- Short-term transactions reported on a 1099-B, where the basis was reported to the IRS.
- Short-term transactions reported on a 1099-B, where the basis was not reported to the IRS.
- Short-term transactions that don't have a 1099-B.
- Long-term transactions reported on a 1099-B, where the basis was reported to the IRS.
- Long-term transactions reported on a 1099-B, where the basis was not reported to the IRS.
- Long-term transactions that don't have a 1099-B.
To complicate matters, some situations require you to fill out more than one Form 8949. Notes CommunityTax, "For example, if you received 1099-B forms for three long-term investment transactions, but the basis was not reported to the IRS on two of them, you'll need to fill out separate versions of Form 8949 for each transaction in which the basis wasn't reported,"
Don't let it all come out in the wash
While other income, from employment and investments alike, can be offset by losses in your equity and real property investments, the IRS has put boundaries around that practice, including the wash sale.
Here's how Fidelity Investments defines that: "The wash-sale rule prohibits selling an investment for a loss and replacing it with the same or a 'substantially identical' investment 30 days before or after the sale. If you do have a wash sale, the IRS will not allow you to write off the investment loss, which could make your taxes for the year higher than you hoped."
It can happen easily. Say you bought shares of ABC REIT for $100 a share, it fell to $50 a share, and you sell it at a loss of $50 a share. But then it drops to $25 a share and you want to jump back in. (Of course, that would be one volatile REIT, but this is just a hypothetical.) If you haven't waited 30 calendar days before you make that transaction, you've run afoul of the wash-sale rule if you take a loss for that security on that year's tax return.
In fact, not only can you not take that loss, but you have to add the loss to the cost basis of the new stock you bought, and the holding period of the first purchase gets tacked onto the holding period of the replacement purchase, an issue if that first purchase was a short-term hold itself.
All this and more is in IRS Publication 550.
Cryptocurrency and IRS Form 8949
Entrepreneurial types who venture into cryptocurrency need to be hip to using Form 8949, too. According to CryptoTrader.tax, do this:
- Calculate gains and losses from cryptocurrency transactions.
- Complete IRS Form 8949.
- Include your totals from 8949 on Form Schedule D.
- Include any crypto income on Schedule 1 (or Schedule C if you are engaging in crypto taxes as self-employed).
- Complete the rest of your tax return.
The site includes illustrated examples on how to handle capital gains from such trading.
Form 8949 and opportunity zones
New to all this is how to handle deferred gains from the sale or exchange of an investment in a qualified opportunity zone fund. The IRS says that as of the 2019 tax year, those also need to be reported on Form 8949.
According to Cadre Insights, a taxpayer who elects to defer a capital gain through an opportunity fund should report the gain "in the standard manner" on Form 8949 and then include an additional Form 8949 to report the deferral of capital gain thusly:
- Use Part I and check box (C) if deferring short-term capital gains.
- Use Part II and check box (F) if deferring short-term capital gains.
- Enter the Name and EIN of the Qualified Opportunity Fund in box (a) Description of property.
- Enter date of investment in box (b) Date acquired.
- Enter "Z" in box (f) Code.
- Enter investment (amount) in boxes (g) Amount of Adjustment and (g) Gain or (loss).
The blog adds that a taxpayer who reports other capital gains with either box (C) on Part I or box (F) on Part II checked may use the same Form 8949 to report the deferral of capital gain as specified above.
Cadre Insights is from Cadre, a capital investments firm that includes this caveat in its blog about reporting: "All investors should consult their tax or legal advisers prior to filing any tax returns relating to their investment in a qualified opportunity fund, and this guide should not be construed as tax advice to a particular investor or investors."
Same here from Millionacres: Consult your tax professional about Form 8949 and all the other potentially complicated matters that go into properly handling the tax returns you're required to file each year.