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Just how miserable or enjoyable Schedule D is depends on two things: 1) having good records, 2) how much you have to pay. Before we talk about records, let me just say that focusing on how much you have earned should make paying the taxes less painful. OK, not for everyone, but it's much easier on your stress levels to keep firmly in mind that you wouldn't be paying those taxes unless you had made money.
Also, it might help to reflect a bit on the fact that we can make money in the stock market because those taxes support one of the most open and honest business climates in the world. For all its faults, the SEC does a pretty good job of keeping things on the up and up. If you've any doubt about that, may I recommend Eat the Rich by P.J. O'Rourke. Heck, I recommend it even if you have no doubts. It's a terrific book that contrasts economic systems all over the world and draws some startlingly sound conclusions. It's also one of the funniest books I've ever read.
But back to records. A schedule D isn't that difficult to cope with if you have two pieces of paper for each stock that you've sold in the past year. You need the original trade confirmation report from when you bought the stock and the trade confirmation from when you sold it. If you didn't keep the paper work, I hope you wrote down the following: For each stock that you sold, you will need to report the day you bought it, the day you sold it, the total price you paid for it (including commission), and the amount you received from the sale (minus commission). You identify each trade with a description that is usually the ticker and number of shares, but doesn't have to be. More about that later.
I'm not going to go through Schedule D line by line. (I can hear the sigh of relief from all over the country.) All I want to do is give you an overview so that what you are doing makes sense. It's really a very simple and logical form once you get the big picture.
All Uncle Sam wants to know are two things: Is your gain (or loss) short term or long term. And how much did you make or lose on the transaction.
Short term means the stock was held for less than a year. Long terms means it was held for more than a year. Here's how you tell. If you bought the stock on, say, March 4 and sold it on or before the following March 4, it is a short-term gain. You have to hold it at least one day beyond the date on which you bought it to qualify for long-term status. Uncle Sam doesn't count the purchase day, which makes sense. If you bought on the 4th and sold it the next day, on the 5th, you've really only owned it for one day, not two. No break for leap years.
Long-term status is definitely something you want. Short-term gains are taxed at your regular tax rate (28% if you are in that bracket, 39.6% if you are in the highest bracket, etc.). Long-terms gains are taxed at 10% for those in the 15% bracket and at 20% for everyone else. In a few years we will even have a superlong-term rate.
OK, you've got your dates and you've got your net transaction values for each stock you've sold. [Net transaction value = (total proceeds from sale - commission) - (total purchase price + commission).] Some of those net transactions will be positive (most, I hope). Some will be negative. The big picture is, you add up all the long-term transactions to get your net long-term gain (or loss).
Then you do the same thing for your short-term transactions.
Your long-term gains are taxed at long-term rates and your short-term gains are taxed at your regular tax rate. If you have a loss in either category, it will offset your other gains, and up to $3000 worth of losses can be used to offset regular income (anything over $3000 in losses is carried over to the next year). The rules for offsetting gains are discussed in more depth in our TAX FAQ.
You notice I haven't mentioned anything at all about shares or share prices. That's right. Uncle Sam doesn't care one bit about shares. This is probably the greatest source of confusion when it comes to reporting stock gains. Forget about the number of shares. Forget about share prices. All you need to report is the total amount of each transaction.
In the instructions, the IRS suggests that you identify each transaction and uses an example like "100 shares ABC." This is just for identification purposes, but it confuses people because of stock splits. If you bought 100 shares of ABC and it split, and you decide to sell half your shares, do you say you are selling 100 shares or 50 shares? Answer: It doesn't matter.
If you were to report shares and use the stock price, you could make it look like your investment had a 0% return if the stock price had doubled. You bought 100 shares at $50, the stocks doubles and splits, so you sell 100 at $50, pay no taxes, and keep the other 100 shares. Cool, eh? Won't work. That's why the IRS just wants the gross amounts. If you bought 100 shares for $5010 (100 x $50 + $10 commission), and sold half of what you bought, you would report your cost basis as $2505 because that's what you paid for stock you sold. So if the stock doubled after the split and was again selling for $50, your 100 shares would sell for $4990 (after commission), but your cost basis would be $2505, giving you a gain of $2485.
It's really not that difficult to do a Schedule D as long as you've got those pieces of paper. Integrating the gains and losses into your 1040 is a bit more complicated, but I have a wonderful suggestion for handling that: TurboTax Online. You can actually go to a website and fill out your entire tax form online. Some people can even zip it off to the IRS electronically. (Maybe everyone can do it this year. Last year you needed a special pilot study number.) It costs much less than buying your own tax program and was, if anything, easier to use. I used the service last year and loved it.
(Disclosure: I didn't love it so much that I bought shares in the parent company, Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %>. In fact, I won't buy shares in that company until they improve their customer service, which seems to have as its main goal keeping customers from actually talking to a customer service rep.)
With our without TurboTax Online, you will probably find our Tax Area helpful -- or, for bedtime reading, try The Motley Fool's Investment Tax Guide 2000 hot off the presses.
And, of course, I will be bugging you about your taxes periodically for the next several months.
Fool on and prosper!