Free-quent Flyer
Blogger
Masochist that I am, I file my own taxes. This is pretty annoying, and the more stuff you do, the more annoying it gets. I've previously written quick and dirty tax calculations for sole proprietors and the self-employed, and for the Earned Income Credit and Retirement Savings Contribution Credit.
I've started day trading with a small amount of money in the Robinhood app (this is just gambling for fun, not any kind of retirement/savings/etc. plan), and since I'm good/lucky I'm going to generate capital gains for the first time this year.
I've spent most of today figuring out how the capital gains tax system works. The point of this post is if you're interested in filing your own taxes and don't want to have to go through dozens of worksheets figuring out which forms you really need to file.
All the below only applies to capital gains and losses realized in a taxable brokerage account. No houses, S corporations, losses/casualties, conflict-of-interest sales, etc. Just buying and selling publicly traded securities at arm's length.
Dividends
If you receive dividends during the tax year, you'll receive a 1099-DIV with the amount of your dividends in box 1a. You report that number on Form 1040, line 9a.
Qualified Dividends
Some or all of your dividends may be reported in box 1b on form 1099-DIV. These may be qualified dividends, but they may not be!
Dividends reported in box 1b on form 1099-DIV are only actually qualified dividends if you held the security for 61 of the 121 days beginning 60 days before the ex-dividend date. You may need to calculate this manually.
If you held the security for 61 of those 121 days (the days don't have to be consecutive), then report the amount in box 1b on form 1040, line 9b. You'll need that number later.
Fill out Schedule D
If you realize capital gains during the year, fill out Form 1040 Schedule D.
In Part I you report your short term gains and losses (securities sold 1 year or sooner after purchasing them).
In Part II you report your long term gains and losses (securities sold more than 1 year after purchasing them).
In Part III you calculate your total capital gain or loss from the tax year. The key thing to note here is that while short term capital gains are taxed less favorably than long term capital gains, short term capital losses can offset long term capital gains.
There are two numbers you need to take away from this form. First, enter your total capital gain from Schedule D, line 16 on Form 1040, line 13. Second, note EITHER your long-term capital gains on line 15 OR your long-term capital gains less your short-term capital losses on line 16, whichever is SMALLER. You'll need this number in a moment.
Calculate your taxes!
There's no special line for capital gains taxes compared to other kinds of taxes. You enter your total tax owed, as usual, on Form 1040, line 44. Here's how to calculate it.
Take your total taxable income on Form 1040, line 43 and subtract your actually qualified dividends from line 9b and your long term capital gains (less short term losses, if applicable) from Schedule D, line 15 or 16, whichever is smaller. The remaining amount is the part of your income subject to regular income tax rates. Calculate your income taxes on that amount using the Tax Table in Form 1040 Instructions.
Now there are three possible situations
Relatedly, although not strictly speaking part of the capital gains tax framework, if your Adjusted Gross Income is above $125,000(married filing separately)/$200,000(singe and head of household)/$250,000(married filing jointly) then you have to file form 8960 and pay an additional 3.8% tax on all "Net Investment Income" in excess of the income threshold. Report that amount on Form 1040, line 62.
I've started day trading with a small amount of money in the Robinhood app (this is just gambling for fun, not any kind of retirement/savings/etc. plan), and since I'm good/lucky I'm going to generate capital gains for the first time this year.
I've spent most of today figuring out how the capital gains tax system works. The point of this post is if you're interested in filing your own taxes and don't want to have to go through dozens of worksheets figuring out which forms you really need to file.
All the below only applies to capital gains and losses realized in a taxable brokerage account. No houses, S corporations, losses/casualties, conflict-of-interest sales, etc. Just buying and selling publicly traded securities at arm's length.
Dividends
If you receive dividends during the tax year, you'll receive a 1099-DIV with the amount of your dividends in box 1a. You report that number on Form 1040, line 9a.
Qualified Dividends
Some or all of your dividends may be reported in box 1b on form 1099-DIV. These may be qualified dividends, but they may not be!
Dividends reported in box 1b on form 1099-DIV are only actually qualified dividends if you held the security for 61 of the 121 days beginning 60 days before the ex-dividend date. You may need to calculate this manually.
If you held the security for 61 of those 121 days (the days don't have to be consecutive), then report the amount in box 1b on form 1040, line 9b. You'll need that number later.
Fill out Schedule D
If you realize capital gains during the year, fill out Form 1040 Schedule D.
In Part I you report your short term gains and losses (securities sold 1 year or sooner after purchasing them).
In Part II you report your long term gains and losses (securities sold more than 1 year after purchasing them).
In Part III you calculate your total capital gain or loss from the tax year. The key thing to note here is that while short term capital gains are taxed less favorably than long term capital gains, short term capital losses can offset long term capital gains.
There are two numbers you need to take away from this form. First, enter your total capital gain from Schedule D, line 16 on Form 1040, line 13. Second, note EITHER your long-term capital gains on line 15 OR your long-term capital gains less your short-term capital losses on line 16, whichever is SMALLER. You'll need this number in a moment.
Calculate your taxes!
There's no special line for capital gains taxes compared to other kinds of taxes. You enter your total tax owed, as usual, on Form 1040, line 44. Here's how to calculate it.
Take your total taxable income on Form 1040, line 43 and subtract your actually qualified dividends from line 9b and your long term capital gains (less short term losses, if applicable) from Schedule D, line 15 or 16, whichever is smaller. The remaining amount is the part of your income subject to regular income tax rates. Calculate your income taxes on that amount using the Tax Table in Form 1040 Instructions.
Now there are three possible situations
- If the part of your income subject to regular income tax rates is LESS than $37,450(single or married filing separately)/$74,900(married filing jointly)/$50,200(head of household), subtract the difference from your qualified dividends and net long term capital gains. That difference is tax-free. Then multiply the remainder of your qualified dividends and net long term capital gains by 15%. Add that amount to your ordinary income tax amount, and write the total on Form 1040, line 44.
- If the part of your income subject to regular income tax rates is BETWEEN the amounts above and $413,200(single)/$232,425(married filing separately)/$464,850(married filing jointly)/$439,000(head of household), then multiply the entire amount of your qualified dividends and net long term capital gains by 15%, add that amount to your ordinary income tax amount, and write the total on Form 1040, line 44.
- Finally, if your income subject to regular income tax rates is ABOVE the amounts above, or any portion of your qualified dividends and net long term capital gains takes your total taxable income (Form 1040, line 43) above those amounts, the excess amount is taxed at a total rate of 20% (add an additional 5% of the excess amount to the amount calculated in step 2). Add that amount to your tax owed and write it on Form 1040, line 44.
Relatedly, although not strictly speaking part of the capital gains tax framework, if your Adjusted Gross Income is above $125,000(married filing separately)/$200,000(singe and head of household)/$250,000(married filing jointly) then you have to file form 8960 and pay an additional 3.8% tax on all "Net Investment Income" in excess of the income threshold. Report that amount on Form 1040, line 62.