- Taxpayers use Form 8949 to report all capital asset transactions
- Form 8949 itemizes and sums capital gains and losses
- Wash sales and tax-loss carryovers are tracked via Form 8949
If you’re new to using Form 8949 from the Internal Revenue Service, or IRS, then you may feel intimidated. Don’t be! Form 8949 is like an annual report card for your investment portfolio, designed to help you with accurately reporting capital gains and losses.
Tax calculations are often complex, but understanding and correctly using Form 8949 can make the chore of doing your taxes a little easier. Keep reading to learn more about Form 8949 and how to use it to report capital gains and losses plus account for wash sales.
What is Form 8949?
Form 8949, titled Sales and Other Dispositions of Capital Assets, is a tax form used by U.S. taxpayers to report capital gains and losses. If you sell or exchange cryptocurrencies, stocks, bonds, real estate, or other capital assets and realize a capital gain or loss during the tax year, then you're typically required to complete Form 8949 to detail each of your investment transactions for the IRS.
Think of Form 8949 as a detailed diary of your investment activity. Just as a diary records events day by day, Form 8949 requires you to list each investment transaction that occurred in the tax year and provide pertinent information such as when it occurred, what you originally paid for the asset (your cost basis), and your net profit or loss. Form 8949, which also enables you to carry over tax losses from the prior year, is designed to reflect the financial impact of your trading and investing activity.
Form 8949 may incorporate information from a variety of sources. Some financial institutions send Forms 1099-B or 1099-S, or substitute statements, directly to you and the IRS to report your sales of securities (1099-B) and real estate (1099-S). Digital asset holders may receive Form 1099-B from a cryptocurrency exchange, although crypto platforms are not strictly required to use this form for reporting to the IRS.
Accuracy is key when completing Form 8949—that’s because misreporting capital gains or losses can cause you to incur IRS penalties or additional taxes. The information that you provide to complete Form 8949 needs to match the information included in any Forms 1099-B or 1099-S that you receive. If your crypto exchange doesn’t provide you with any IRS forms—or even if it does—you can use cryptocurrency tax software to ensure that the data on your Form 8949 is complete and accurate.
How to use Form 8949
You may be wondering how Form 8949 is structured and what’s required to complete this tax document. Let’s explore the steps to use Form 8949 to correctly report all of your short-term and long-term capital gains and losses.
1. Collect and organize your investment transaction data
Completing Form 8949 starts with collecting all of the relevant data pertaining to your capital asset transactions for the tax year. For every trade or sale of cryptocurrency, NFTs, stocks, bonds, real estate, and other assets, you’ll need:
- A brief description of the capital asset
- The date that you originally purchased or acquired the asset
- The date that you traded or sold the asset
- The amount of money that you received from the trade or sale
- What you paid for the asset, or its value at the time of acquisition
- Information pertaining to any adjustments, such as how much you paid in trading commissions or crypto transaction processing fees
Gathering and organizing all of the necessary information for Form 8949 is perhaps the most important and time consuming part of completing this document. Traditional tax software and tax tools specialized for digital assets can both make this task a little easier.
2. Separate transactions by their holding periods
Form 8949 is divided into two parts—short-term and long-term holdings. If you hold an asset for less than a year, it's classified as short term. Assets that you own for a year or more earn the “long term” designation.
Your second step is to tag each of your investment transactions as “short term” or “long term” and group them accordingly. Because of how Form 8949 is organized, separating your assets by their holding periods is a necessary precursor to using the form to enter data.
3. Enter all transaction details into Form 8949
With your investment transaction data organized and sorted, you’re ready to enter all of the data into Form 8949. If all of your holdings during the tax year were short term, then you only need to complete Part I of the form—and you can focus on only Part II if you just have long-term transactions. Many investors accrue a mix of short- and long-term holdings and are obligated to complete the entire Form 8949.
Before you dive into the tedious process of entering the details of every investment transaction into Form 8949—here’s some good news for many investors: Receiving a Form 1099-B or 1099-S from a financial institution that includes the cost bases of your transactions may exempt you from reporting those transactions on Form 8949. Provided that those transactions don’t require any additional adjustments or special considerations, you only need to report the relevant totals on Schedule D of IRS Form 1040.
But just because you can skip reporting 1099-B and 1099-S transactions on Form 8949 doesn’t mean that you should. If some of your investment transactions are not included in any Form 1099-B or 1099-S—or are spread across multiple 1099-Bs and 1099-Ss—then using Form 8949 to detail all of your investment transactions for the tax year is a smart idea to ensure accurate reporting to the IRS.
You may need to report more transactions than can fit on Form 8949 as it’s structured. Don’t fret—if you need more space, you can use additional copies of Form 8949 to list all of your investment transactions.
4. Calculate the capital gain or loss for each transaction
Your next step after entering your transaction details into Form 8949 is to do some math. For each capital asset, whether classified as short- or long-term, you need to quantify the profit or loss.
Subtract the cost basis of each asset and any adjustments from the dollar amount that you earned from the sale. If the resulting number is positive, then you’ve generated a profit and need to report a capital gain. If the number is negative, then you’re entitled to report a capital loss on Form 8949.
5. Calculate your total capital gain or loss
After quantifying the capital gains and losses for each of your investment transactions, you’re ready to calculate the total values that are required by Form 8949. Here’s what you need to sum for your short-term and long-term holdings:
- The proceeds that you received from capital asset trades or sales
- What you paid for the capital assets, or their values at the time of acquisition
- All cost basis adjustments
- Capital gains and losses
Completing this step indicates whether you earned a net profit or generated a net loss from your trading and investing activities. Since short- and long-term capital assets are grouped separately, you may have mixed results such as a short-term capital loss and long-term capital gain.
6. Check your work
Form 8949 requires plenty of detailed information—especially if you’re an active trader with many short- and long-term transactions. Ensure that you’ve completed Form 8949 accurately, with no calculation errors, by thoroughly checking your own work.
If you need a checklist, then here’s what to confirm:
- All of your capital asset transactions from the tax year are included
- Your capital asset transactions are appropriately classified as short- or long-term
- All of the transaction details for each investment transaction are correctly entered
- The capital gain or loss for each transaction is accurately calculated
- All of the short-term and long-term totals are correct
7. Transfer the required information to Schedule D
With a complete and accurate Form 8949 in your possession, you’re ready to transfer the relevant information to Schedule D of IRS Form 1040. The totals that you transfer from Form 8949 to Schedule D are used to calculate the tax consequences of your trading and investing activities. A net capital gain typically generates a tax liability while a net capital loss generally produces a tax benefit.
8. File Form 8949 with your taxes
Although you report the totals from Form 8949 on Schedule D, the IRS still requires you to submit a completed Form 8949 when you file your taxes. Whether you submit your taxes electronically or by mail, make sure to include Form 8949 as part of the package.
Using Form 8949 to account for wash sales
If you need to report a wash sale, then Form 8949 is the place to do it. A wash sale occurs if you sell a capital asset at a loss and then repurchase the same or a substantially identical asset within a defined period of time—typically 30 days.
Accounting for a wash sale on Form 8949 is fairly straightforward and requires reporting an adjusted cost basis that sums the original cost basis with the disallowed loss. You’ll also need to enter the code "W" for “wash sale” in column (f) of the form. Identifying wash sales is potentially more challenging than reporting them, as wash sales may be easily overlooked and can occur inadvertently in many scenarios.
Beginner mistakes when using Form 8949
Nobody likes making mistakes on tax documents, so let’s review some of the most common pitfalls that you may encounter when completing Form 8949:
- Not reporting all of your transactions
- Incorrectly organizing your holdings
- Incorrectly calculating an asset’s cost basis
- Miscalculating an asset’s holding period
- Improperly accounting for wash sales
- Excluding or miscalculating adjustments
- Not using tax-loss carryover benefits
The first beginner mistake is typically maintaining capital asset transaction data that is incomplete or disorganized. Using a software solution to comprehensively gather and organize your transaction data across platforms can help with bypassing many of these pitfalls.
How to learn more about Form 8949
Want to learn more about Form 8949? Check out these ways to enhance your understanding:
- Review Form 8949 directly
- Read the Form 8949 instructions
- Explore IRS publications such as Publication 544—"Sales and Other Dispositions of Assets”
- Use the IRS Interactive Tax Assistant to get customized answers to tax questions
- Access tutorials and webinars from tax preparation software platforms
- Consult a tax professional with your Form 8949 questions
Every U.S. investor who has ever traded or sold an investment needs to thoroughly understand and know how to complete Form 8949. (Welcome to adulting! ☺) By taking a deep dive into Form 8949 and how it’s used to report capital gains and losses, you’re already making the right moves to efficiently and accurately complete this form at tax time.