2.2 Sales, losses, and special capital asset rules

Achievable IRS SEE Part 1

2. Retirement, investment, and supplemental income

Our IRS SEE Part 1 course is currently in development and is a work-in-progress.

Sales, losses, and special capital asset rules

9 min read

Font

Discuss

Feedback

Sales of capital assets and securities

Definitions

Capital assets: Items that can appreciate in value, such as real estate, collectibles, stocks, bonds, and digital currency held for investment.
Cost basis (basis): The original purchase price of an investment, adjusted for factors like stock splits, dividends, and return of capital distributions.

Capital assets include any item that can appreciate in value, such as real estate, collectible items, stocks, bonds, and digital currency held for investment. Assets that are held for one year less and sold are short-term transactions and taxed at ordinary income tax rates; assets that are sold for more than one year are long term transactions. Capital gain rates apply to long term sales. Combined capital losses are limited to $3,000 per year. The excess losses are carried over until used up.

Cost basis, also known as “basis”, is the purchase price original value of your investment. Cost basis is adjusted for stock splits, dividends, and return of capital distributions and is used to determine the capital gain or loss when the asset is sold. Basis will be discussed in more detail in Part 2-Businesses. Refer to IRS.gov for more information.

Amount realized and amount recognized

Definitions

Amount realized: The total value received from a sale or disposition of an asset.
Amount recognized: The gain or loss that is reported for tax purposes after adjustments.

Amount realized is the total value received from a sale or disposition of an asset, including cash, the fair market value of any property received, and the value of any liabilities assumed by the buyer. Amount recognized is the gain or loss that is actually reported for tax purposes. It’s calculated by subtracting the cost basis (initial purchase price plus improvements) and any expenses associated with the sale from the amount realized.

Example:

Chris sold a stock for $$10, 000$ ; his initial cost (basis) was $$2, 500$ . Chris’s amount realized is $$10, 000$ , and his realized gain is $$7, 500$ . The amount recognized is $$7, 500$ , the taxable portion, which in this case is the same as the realized gain.

Short-term capital gain example:

On January 29, 2025 Johnny purchased $100$ shares of XYZ stock, total $1, 000$ . On February 20, 2025, Johnny sold the same shares for $$1, 700$ . Johnny has realized a $$700$ short-term gain on which he will also recognize (taxable), Johnny’s tax rate will be whatever his normal tax rate according to the amount of his taxable income.

Short-term capital loss example:

On February 12, 2025, Mary purchased $100$ shares of XYZ stock at $$5$ a share, for a total of $$500$ . On April 25, 2025, the stock went down in price to $$2$ a share, so Mary sold all $100$ shares. Mary realizes and recognizes a short-term loss of $$300$ . Mary will recognize a loss at her own tax rate.

Long-term capital gain examples:

On February 18, 2024, Esmeralda went to a yard sale and bought a silver tea set for $$35$ . Then Esmeralda paid $$85$ to make a minor repair to the silver tea set before she decided to sell it. On May 13, 2025, Esmaralda sold the silver tea set for $$200$ . Esmaralda recognized $$200$ , which was the amount she received from the sale, but her $$85$ repair was added to her $$35$ original basis, making her adjusted basis $$120$ . Therefore, Esmeralda recognizes (pays tax on) $$80$ . Esmaralda will have capital gains tax treatment on the sale of the silver tea set.

On February 18, 2022, Michael bought $100$ shares of RocketCola total of $$4, 000$ . On December 20, 2024, Michael sold all $100$ RocketCola shares for $$6, 000$ . Michael has realized and recognized a $$2, 000$ long-term capital gain. Michael will have capital gain tax treatment on this transaction.

Long-term capital loss examples:

On March 7, 2023, April bought $400$ shares of XYZ Stock for $$2, 000$ . On April 24, 2025, she sold the same amount of shares for $$1, 800$ . April has realized and recognized a $$200$ long-term capital loss.

Bernard bought a house that needed repairs for $$38, 000$ . Five years later, Bernard gave up trying to sell it for a profit, so he sold the house for $$19, 000$ . Bernard has realized a $$19, 000$ capital loss (but only recognizes a $$3, 000$ capital loss limitation for the tax year and carries over the remaining amount against future capital gain.

Stock splits

Definitions

Stock split: When a company increases the number of its shares by dividing existing shares into multiple shares.

In a stock split, a company divides its existing shares into more shares. For instance, a 2-for-1 split means each share is split into two new shares. For example, if Harold owns $10$ shares and the corporation declares a 2-for-1 split for its shareholders, then Harold will receive $10$ more shares, bringing his total to $20$ shares. The total value of your shares before and after the split remains the same. The price per share decreases proportionally to the increase in the number of shares.

Scenario:

Company: ABC Corp.
Pre-Split Price: $ $100$ per share
Investor: Marcus owns $10$ shares of ABC Corp.
Split: ABC Corp. announces a 2-for-1 stock split.

Before the split, Marcus owned $10$ shares at $$100$ each, for a total value of $$1, 000$ ( $10$ shares $$100$ /share = $$1, 000$ ).

After the split, Marcus owns $20$ shares ( $10$ shares $\times 2 = 20$ shares). The price per share is now $$50$ (the original price divided by the split ratio: $$100$ / $2$ = $$50$ ). Marcus’s total value remains $$1, 000$ ( $20$ shares $\times $50$ /share $= $$1, 000$ ).

On June 3, 2025, the fair market value of ABC stock rose to $$70$ a share, so Marcus sells $10$ shares of ABC for $$700$ . Marcus will realize and recognize a gain of $$200$ ( $10$ /sh $\times$ $$70$ /share) minus cost basis ( $10$ /share $\times$ $$50$ /share).

Remember that Marcus still holds $10$ remaining shares of ABC stock, which he can sell at a later time. Marcus’s tax treatment will depend on the length of time that he has held the shares he had sold.

Wash sales

Definitions

Wash sale: A transaction where a security is sold at a loss and repurchased within 30 days, disallowing the loss for tax purposes.

A wash sale is a transaction in which an investor sells a security at a loss and repurchases a substantially similar security op to 30 days after the sale. The wash rule applies to stocks, contracts, options, and all other types of securities and trading. The disallowed wash sale loss is added to the basis of the repurchased security.

Wash sale disallowed loss example:

On January 30, Curtis overheard a hot tip on a stock and decided to buy $1000$ shares of Dit Dit Corporation for $$5$ a share. On February 11, the stock had lost half its value; Curtis got impatient and sold all of his shares to cut his loss. The next day, Curtis repurchased $1000$ shares of Dit Dit Corporation for $$2, 400$ . Curtis will realize a $$2, 500$ loss but can not recognize the loss for tax purposes because he had not held Dit Dit Corporation stock for at least $30$ days. Sales of securities are reported on Schedule D, Form 1040, but day traders who can establish that they have earned a substantial amount of income from trading can apply to the IRS to become “day trader” status and can deduct more of their normally partial or nondeductible expenses as a deductible business expense. Sales of personal items for a profit are taxable, but if sold for a loss, are not deductible. Ordinary income tax rates apply to these transactions.

The basis of inherited securities is their fair market value at the date of death.

Mark-to-market tax rules

Definitions

Mark-to-market (MTM): An accounting method that treats assets as sold at fair market value at the end of the tax year.

The mark-to-market (MTM) tax rules primarily apply to traders in securities or commodities who make a specific election under Section 475(f) of the Internal Revenue Code. This accounting method treats certain assets as if they were sold at their fair market value on the last business day of the tax year.

Sales of business property are either an ordinary gain or loss reported on Form 4797. Details will be discussed in part 2 of this course.

Digital Assets

Definitions

Digital assets: Assets such as cryptocurrencies and NFTs that are treated as property for tax purposes.

The Internal Revenue Service (IRS) has long taken the position that digital assets are treated the same as other property and are taxed when you receive them as payment for a transaction or when you sell them or trade them in a transaction. Like other property, digital assets are not taxed when you receive them for payment for services.

However, issues have come up when digital assets are received for other purposes, such as through forks, staking, or mining - transactions involving digital assets which as capital assets would be reported on Form 8949. Digital assets are not viewed by the IRS as securities, and the wash sale rules do not apply to digital asset transactions. Digital assets are treated as capital assets along with other capital assets for tax loss harvesting. When digital assets are received for other purposes, such as forks, mining, or staking – transactions involving digital assets which as capital assets would be reported on Form 8949 and then carried to Schedule D.

Form 1099-DA, Digital Asset Proceeds From Broker Transactions, is an IRS information return used by digital asset brokers (such as cryptocurrency exchanges) to report proceeds from sales, exchanges, and other dispositions of digital assets such as cryptocurrencies and non-fungible tokens to both taxpayers and the IRS. Taxpayers must use the information on Form 1099-DA, along with their own detailed records, to properly calculate capital gains or losses and report them on Form 8949 and Schedule D of their Form 1040.

Sales of capital assets and securities

Capital assets: real estate, collectibles, stocks, bonds, digital currency (for investment)
Short-term (≤1 year): taxed at ordinary income rates; Long-term (>1 year): capital gain rates
Capital loss limit: $3,000/year; excess carried forward

Cost basis

Original purchase price, adjusted for splits, dividends, return of capital
Determines gain or loss on sale

Amount realized and amount recognized

Amount realized: total value received (cash, property, liabilities assumed)
Amount recognized: taxable gain/loss = amount realized – (basis + sale expenses)

Short-term and long-term capital gains/losses

Short-term: held ≤1 year; taxed at ordinary rates
Long-term: held >1 year; taxed at capital gain rates
Losses: only $3,000 deductible per year; remainder carried forward

Stock splits

Increases number of shares, decreases price per share proportionally
Total value remains unchanged
Adjusted basis per share decreases after split

Wash sales

Loss disallowed if substantially identical security repurchased within 30 days
Disallowed loss added to basis of new security
Applies to stocks, options, contracts, etc.
Does not apply to digital assets

Reporting and special rules

Sales reported on Schedule D, Form 1040
Day traders may qualify for business expense deductions
Personal items: gains taxable, losses not deductible
Inherited securities: basis = fair market value at date of death

Mark-to-market tax rules

Applies to traders electing Section 475(f)
Assets treated as sold at fair market value at year-end
Business property sales: reported on Form 4797

Digital Assets

Treated as property, not securities, for tax purposes
Taxed when sold, exchanged, or received for forks, staking, mining
Wash sale rules do not apply
Report transactions on Form 8949, Schedule D
Form 1099-DA: reports digital asset proceeds from brokers to IRS and taxpayer

Next | 2.3 Capital gains and income

Sales, losses, and special capital asset rules

Sales of capital assets and securities

Definitions

Capital assets: Items that can appreciate in value, such as real estate, collectibles, stocks, bonds, and digital currency held for investment.
Cost basis (basis): The original purchase price of an investment, adjusted for factors like stock splits, dividends, and return of capital distributions.

Amount realized and amount recognized

Definitions

Amount realized: The total value received from a sale or disposition of an asset.
Amount recognized: The gain or loss that is reported for tax purposes after adjustments.

Example:

Chris sold a stock for $$10, 000$ ; his initial cost (basis) was $$2, 500$ . Chris’s amount realized is $$10, 000$ , and his realized gain is $$7, 500$ . The amount recognized is $$7, 500$ , the taxable portion, which in this case is the same as the realized gain.

Short-term capital gain example:

On January 29, 2025 Johnny purchased $100$ shares of XYZ stock, total $1, 000$ . On February 20, 2025, Johnny sold the same shares for $$1, 700$ . Johnny has realized a $$700$ short-term gain on which he will also recognize (taxable), Johnny’s tax rate will be whatever his normal tax rate according to the amount of his taxable income.

Short-term capital loss example:

On February 12, 2025, Mary purchased $100$ shares of XYZ stock at $$5$ a share, for a total of $$500$ . On April 25, 2025, the stock went down in price to $$2$ a share, so Mary sold all $100$ shares. Mary realizes and recognizes a short-term loss of $$300$ . Mary will recognize a loss at her own tax rate.

Long-term capital gain examples:

On February 18, 2024, Esmeralda went to a yard sale and bought a silver tea set for $$35$ . Then Esmeralda paid $$85$ to make a minor repair to the silver tea set before she decided to sell it. On May 13, 2025, Esmaralda sold the silver tea set for $$200$ . Esmaralda recognized $$200$ , which was the amount she received from the sale, but her $$85$ repair was added to her $$35$ original basis, making her adjusted basis $$120$ . Therefore, Esmeralda recognizes (pays tax on) $$80$ . Esmaralda will have capital gains tax treatment on the sale of the silver tea set.

On February 18, 2022, Michael bought $100$ shares of RocketCola total of $$4, 000$ . On December 20, 2024, Michael sold all $100$ RocketCola shares for $$6, 000$ . Michael has realized and recognized a $$2, 000$ long-term capital gain. Michael will have capital gain tax treatment on this transaction.

Long-term capital loss examples:

On March 7, 2023, April bought $400$ shares of XYZ Stock for $$2, 000$ . On April 24, 2025, she sold the same amount of shares for $$1, 800$ . April has realized and recognized a $$200$ long-term capital loss.

Bernard bought a house that needed repairs for $$38, 000$ . Five years later, Bernard gave up trying to sell it for a profit, so he sold the house for $$19, 000$ . Bernard has realized a $$19, 000$ capital loss (but only recognizes a $$3, 000$ capital loss limitation for the tax year and carries over the remaining amount against future capital gain.

Stock splits

Definitions

Stock split: When a company increases the number of its shares by dividing existing shares into multiple shares.

Scenario:

Company: ABC Corp.
Pre-Split Price: $ $100$ per share
Investor: Marcus owns $10$ shares of ABC Corp.
Split: ABC Corp. announces a 2-for-1 stock split.

Before the split, Marcus owned $10$ shares at $$100$ each, for a total value of $$1, 000$ ( $10$ shares $$100$ /share = $$1, 000$ ).

After the split, Marcus owns $20$ shares ( $10$ shares $\times 2 = 20$ shares). The price per share is now $$50$ (the original price divided by the split ratio: $$100$ / $2$ = $$50$ ). Marcus’s total value remains $$1, 000$ ( $20$ shares $\times $50$ /share $= $$1, 000$ ).

On June 3, 2025, the fair market value of ABC stock rose to $$70$ a share, so Marcus sells $10$ shares of ABC for $$700$ . Marcus will realize and recognize a gain of $$200$ ( $10$ /sh $\times$ $$70$ /share) minus cost basis ( $10$ /share $\times$ $$50$ /share).

Remember that Marcus still holds $10$ remaining shares of ABC stock, which he can sell at a later time. Marcus’s tax treatment will depend on the length of time that he has held the shares he had sold.

Wash sales

Definitions

Wash sale: A transaction where a security is sold at a loss and repurchased within 30 days, disallowing the loss for tax purposes.

Wash sale disallowed loss example:

On January 30, Curtis overheard a hot tip on a stock and decided to buy $1000$ shares of Dit Dit Corporation for $$5$ a share. On February 11, the stock had lost half its value; Curtis got impatient and sold all of his shares to cut his loss. The next day, Curtis repurchased $1000$ shares of Dit Dit Corporation for $$2, 400$ . Curtis will realize a $$2, 500$ loss but can not recognize the loss for tax purposes because he had not held Dit Dit Corporation stock for at least $30$ days. Sales of securities are reported on Schedule D, Form 1040, but day traders who can establish that they have earned a substantial amount of income from trading can apply to the IRS to become “day trader” status and can deduct more of their normally partial or nondeductible expenses as a deductible business expense. Sales of personal items for a profit are taxable, but if sold for a loss, are not deductible. Ordinary income tax rates apply to these transactions.

The basis of inherited securities is their fair market value at the date of death.

Mark-to-market tax rules

Definitions

Mark-to-market (MTM): An accounting method that treats assets as sold at fair market value at the end of the tax year.

Sales of business property are either an ordinary gain or loss reported on Form 4797. Details will be discussed in part 2 of this course.

Digital Assets

Definitions

Digital assets: Assets such as cryptocurrencies and NFTs that are treated as property for tax purposes.

Achievable IRS SEE Part 1

2. Retirement, investment, and supplemental income

Our IRS SEE Part 1 course is currently in development and is a work-in-progress.