Considerations
The following are some of the reasons why filing the Schedule D can be somewhat difficult. Click the appropriate link for a detailed explanation of the reason:
Reason #1: 2003 'Transition Year'
If you are figuring gains and losses on Schedule D for 2003, the number one reason for additional angst is the Jobs and Growth Tax Relief Reconciliation Act of 2003. Among the "tax relief" given by the new tax law is the reduction in the tax on net capital gains. 2003 is the "transition year" for this tax relief. Most net capital gain realized before May 26, 2003, is taxed at a maximum 20% rate, while net capital gain realized after May 5, 2003, is taxed at 15%. In making this transition, however, capital losses must be similarly segregated and netted against either pre-May 6 or post-May 5 long-term capital gains. The 2003 Schedule D requires a separate netting for gain or loss for the entire year and post-May 5 gain or loss. If the sale takes place before May 6 only, special five-year reduced gain rates may apply.
Most brokerage firms do not provide investors with an accurate summary of gains and losses; it is the responsibility of the individual investor to track cost basis and calculate their own gains and losses. Brokers will provide you with a form 1099-B listing all the stock sales you made throughout the year. But, they do not identify which tax-lots you sold, what your gains or losses were, or whether they were short or long term. Unless you provide instructions to your broker identifying specific tax-lots to sell and receive written confirmation, you must account for stock sales using the First In First Out (FIFO) method. This means for each sell order placed, you must match it to the appropriate tax-lot(s) originally purchased. Further, sells can go across multiple lots, perhaps resulting in both short and long term gains and losses. Complications magnify if you re-invest dividends or if you systematically invest smaller amounts.
The IRS implemented the Wash Sale Rule to prevent investors from generating artificial losses to reduce your taxes. In short, if an investor sells a security for a loss, and re-purchases that security (or a substantially identical security) 30 days before or after the sell date, the loss is deferred for tax purposes. Investors need to offset the deferred loss with a wash sale cost adjustment on the newly acquired tax-lot. Again, brokers do not notify investors when or if they have wash sales. It is up to each individual investor to scan their trading history, identify wash sales, and make the appropriate cost basis adjustments.
Reason #4: Corporate Action activity
A Corporate Action is essentially any material change to a security, including name changes, stock splits, spin-offs, and mergers, to name just a few. In many cases, a corporate action will result in a new position or a change to the cost basis of your security. Not surprisingly, it is up to the investor to make all necessary cost basis adjustments for each security. With over 8,000 corporate actions annually that affect a stock's cost basis, the odds are good you will encounter one sooner or later. Some corporate actions are manageable: To account for a stock split, investors must divide the total cost of the initial purchase by the new share amount to come up with an adjusted cost per share. Other corporate actions, however, require more laborious calculations. Mergers can be either; taxable, in which case you need to realize an 'artificial' sale and re-purchase; or non-taxable, in which case you need to allocate cost basis to the new security. Each corporate action type has its own rules that investors must learn if they are to accurately complete their Schedule D.