Publication 550
Investment
Income and
Expenses
(Including Capital Gains
and Losses)
For use in preparing
2024 Returns
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Contents
Future Developments . . . . . . . . . . . . . . . . . . . . . . . 1
Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Chapter 1. Investment Income . . . . . . . . . . . . . . . 2
General Information . . . . . . . . . . . . . . . . . . . . . . 3
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Discount on Debt Instruments . . . . . . . . . . . . . . 18
When To Report Interest Income . . . . . . . . . . . . 23
How To Report Interest Income . . . . . . . . . . . . . 24
Dividends and Other Distributions . . . . . . . . . . . 27
How To Report Dividend Income . . . . . . . . . . . . 33
Stripped Preferred Stock . . . . . . . . . . . . . . . . . . 35
REMICs, FASITs, and Other CDOs . . . . . . . . . . . 35
S Corporations . . . . . . . . . . . . . . . . . . . . . . . . . 37
Investment Clubs . . . . . . . . . . . . . . . . . . . . . . . 37
Chapter 2. Tax Shelters and Other Reportable
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Abusive Tax Shelters . . . . . . . . . . . . . . . . . . . . . 39
Chapter 3. Investment Expenses . . . . . . . . . . . . 44
Limits on Deductions . . . . . . . . . . . . . . . . . . . . 45
Interest Expenses . . . . . . . . . . . . . . . . . . . . . . . 45
Bond Premium Amortization . . . . . . . . . . . . . . . 49
Nondeductible Interest Expenses . . . . . . . . . . . . 50
How To Report Investment Interest Expenses . . . 51
When To Report Investment Expenses . . . . . . . . 52
Chapter 4. Sales and Trades of
Investment Property . . . . . . . . . . . . . . . . . . . . 52
What Is a Sale or Trade? . . . . . . . . . . . . . . . . . . 53
Basis of Investment Property . . . . . . . . . . . . . . . 59
How To Figure Gain or Loss . . . . . . . . . . . . . . . . 66
Nontaxable Trades . . . . . . . . . . . . . . . . . . . . . . 70
Transfers Between Spouses . . . . . . . . . . . . . . . 73
Related Party Transactions . . . . . . . . . . . . . . . . 73
Capital Gains and Losses . . . . . . . . . . . . . . . . . 75
Reporting Capital Gains and Losses . . . . . . . . 100
Special Rules for Traders in Securities or
Commodities . . . . . . . . . . . . . . . . . . . . . . . 105
Chapter 5. How To Get Tax Help . . . . . . . . . . . . 106
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Future Developments
For the latest information about developments related to
Pub. 550, such as legislation enacted after it was
published, go to IRS.gov/Pub550.
Publication 550 (2024) Catalog Number 15093R
Feb 14, 2025 Department of the Treasury Internal Revenue Service www.irs.gov
Reminders
Foreign source income. If you are a U.S. citizen with in-
vestment income from sources outside the United States
(foreign income), you must report that income on your tax
return unless it is exempt by U.S. law. This is true whether
you reside inside or outside the United States and
whether or not you receive a Form 1099 from the foreign
payer.
Employee stock options. If you received an option to
buy or sell stock or other property as payment for your
services, see Pub. 525, Taxable and Nontaxable Income,
for the special tax rules that apply.
Disaster relief. Relief is available for those affected by
some disasters. See IRS.gov/DisasterTaxRelief.
Photographs of missing children. The Internal Reve-
nue Service is a proud partner with the National Center for
Missing & Exploited Children® (NCMEC). Photographs of
missing children selected by the Center may appear in
this publication on pages that would otherwise be blank.
You can help bring these children home by looking at the
photographs and calling 800-THE-LOST (800-843-5678)
if you recognize a child.
Introduction
This publication provides information on the tax treatment
of investment income and expenses. It includes informa-
tion on the tax treatment of investment income and expen-
ses for individual shareholders of mutual funds or other
regulated investment companies, such as money market
funds. It explains what investment income is taxable and
what investment expenses are deductible. It explains
when and how to show these items on your tax return. It
also explains how to determine and report gains and los-
ses on the disposition of investment property and provides
information on property trades and tax shelters.
The glossary at the end of this publication defines
many of the terms used.
Investment income. This generally includes interest,
dividends, capital gains, and other types of distributions
including mutual fund distributions.
Investment expenses. These include interest paid or in-
curred to acquire investment property and expenses to
manage or collect income from investment property.
Qualified retirement plans and IRAs. The rules in this
publication do not apply to investments held in individual
retirement arrangements (IRAs), section 401(k) plans, and
other qualified retirement plans. The tax rules that apply to
retirement plan distributions are explained in the following
publications.
• Pub. 560, Retirement Plans for Small Business.
• Pub. 571, Tax-Sheltered Annuity Plans (403(b) Plans).TIP
• Pub. 575, Pension and Annuity Income.
• Pub. 590-A, Contributions to Individual Retirement Ar-
rangements (IRAs).
• Pub. 590-B, Distributions from Individual Retirement
Arrangements (IRAs).
• Pub. 721, Tax Guide to U.S. Civil Service Retirement
Benefits.
Comments and suggestions. We welcome your com-
ments about this publication and suggestions for future
editions.
You can send us comments through IRS.gov/
FormComments. Or, you can write to the Internal Revenue
Service, Tax Forms and Publications, 1111 Constitution
Ave. NW, IR-6526, Washington, DC 20224.
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a tax question not answered by this publication or the How
To Get Tax Help section at the end of this publication, go
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1.
Investment Income
Topics
This chapter discusses:
• Interest Income,
• Discount on Debt Instruments,
• When To Report Interest Income,
• How To Report Interest Income,
• Dividends and Other Distributions,
2 Publication 550 (2024)
• How To Report Dividend Income,
• Stripped Preferred Stock,
• Real estate mortgage investment conduits (REMICs),
financial asset securitization investment trusts
(FASITs), and other collateralized debt obligations
(CDOs),
• S Corporations, and
• Investment Clubs.
Useful Items
You may want to see:
Publication
519 U.S. Tax Guide for Aliens
525 Taxable and Nontaxable Income
537 Installment Sales
541 Partnerships
542 Corporations
555 Community Property
559 Survivors, Executors, and Administrators
590-B Distributions from Individual Retirement
Arrangements (IRAs)
925 Passive Activity and At-Risk Rules
938 Real Estate Mortgage Investment Conduits
(REMICs) Reporting Information (And Other
Collateralized Debt Obligations (CDOs))
939 General Rule for Pensions and Annuities
970 Tax Benefits for Education
1212 Guide to Original Issue Discount (OID)
Instruments
Form (and Instructions)
Schedule A (Form 1040) Itemized Deductions
Schedule B (Form 1040) Interest and Ordinary
Dividends
Schedule D (Form 1040) Capital Gains and Losses
Schedule K-1 (Form 1041) Beneficiary's Share of
Income, Deductions, Credits, etc.
Schedule K-1 (Form 1065) Partner's Share of
Income, Deductions, Credits, etc.
Schedule K-1 (Form 1120-S) Shareholder's Share
of Income, Deductions, Credits, etc.
Schedule Q (Form 1066) Quarterly Notice to
Residual Interest Holder of REMIC Taxable
Income or Net Loss Allocation
SS-4 Application for Employer Identification Number
W-2 Wage and Tax Statement
W-8BEN Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding and
Reporting (Individuals)
590-B
1212
Schedule A (Form 1040)
Schedule B (Form 1040)
Schedule D (Form 1040)
Schedule K-1 (Form 1041)
Schedule K-1 (Form 1065)
Schedule K-1 (Form 1120-S)
Schedule Q (Form 1066)
SS-4
W-2
W-8BEN
W-9 Request for Taxpayer Identification Number and
Certification
1040 U.S. Individual Income Tax Return
1040-SR U.S. Income Tax Return for Seniors
1041 U.S. Income Tax Return for Estates and Trusts
1065 U.S. Return of Partnership Income
1096 Annual Summary and Transmittal of U.S.
Information Returns
1099-DIV Dividends and Distributions
1099-INT Interest Income
1099-MISC Miscellaneous Information
1099-OID Original Issue Discount
1099-PATR Taxable Distributions Received From
Cooperatives
1099-R Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc.
1099 General Instructions General Instructions for
Certain Information Returns
1120 U.S. Corporation Income Tax Return
2439 Notice to Shareholder of Undistributed
Long-Term Capital Gains
3115 Application for Change in Accounting Method
6251 Alternative Minimum Tax — Individuals
8582 Passive Activity Loss Limitations
8615 Tax for Certain Children Who Have Unearned
Income
8814 Parents' Election To Report Child's Interest and
Dividends
8815 Exclusion of Interest From Series EE and I U.S.
Savings Bonds Issued After 1989
8818 Optional Form To Record Redemption of
Series EE and I U.S. Savings Bonds Issued
After 1989
8824 Like-Kind Exchanges
8832 Entity Classification Election
8912 Credit to Holders of Tax Credit Bonds
8949 Sales and Other Dispositions of Capital Assets
8960 Net Investment Income Tax—Individuals,
Estates, and Trusts
8997 Initial and Annual Statement of Qualified
Opportunity Fund (QOF) Investments
See chapter 5, How To Get Tax Help, for information about
getting these publications and forms.
General Information
A few items of general interest are covered here.
W-9
1040
1040-SR
1041
1065
1096
1099-DIV
1099-INT
1099-MISC
1099-OID
1099-PATR
1099-R
1099 General Instructions
1120
2439
3115
6251
8582
8615
8814
8815
8818
8824
8832
8912
8949
8960
8997
Publication 550 (2024) Chapter 1 Investment Income 3
Recordkeeping. You should keep a list of the
sources and investment income amounts you re-
ceive during the year. Also, keep the forms you re-
ceive showing your investment income (Form 1099-DIV,
Form 1099-INT, Form 1099–OID, etc.) as an important
part of your records.
Net investment income tax (NIIT). You may be subject
to the NIIT. The NIIT is a 3.8% tax on the lesser of your net
investment income or the amount of your modified adjus-
ted gross income (MAGI) that is over a threshold amount
based on your filing status.
Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household (with qualifying
person)
$200,000
Qualifying surviving spouse with
dependent child
$250,000
For more information, see Form 8960 and the Instruc-
tions for Form 8960.
Tax on unearned income of certain children. Gener-
ally, a child must file Form 8615 if the child:
1. has more than $2,600 of unearned income;
2. is required to file a tax return;
3. meets certain age/earned-income/self-support
thresholds;
4. has at least one parent alive at the end of the year;
and
5. doesn’t file a joint return for the year.
See Form 8615 and its instructions for details.
However, the parent can choose to include the child's
interest and dividends on the parent's return if certain re-
quirements are met. Use Form 8814 for this purpose.
Beneficiary of an estate or trust. Interest, dividends,
and other investment income you receive as a beneficiary
of an estate or trust generally is taxable income. You
should receive a Schedule K-1 (Form 1041), from the fidu-
ciary. Your copy of Schedule K-1 (Form 1041) and its in-
structions will tell you where to report the income on your
Form 1040 or 1040-SR.
Taxpayer Identification Number (TIN). You must give
your name and TIN (either a social security number
(SSN), an employer identification number (EIN), or an in-
dividual tax identification number (ITIN)) to any person re-
quired by federal tax law to make a return, statement, or
other document that relates to you. This includes payers
of interest and dividends. If you do not give your TIN to the
payer, you may have to pay a penalty. In addition, if you do
not provide a certified TIN on Form W-9, the payer must
backup withhold on your interest payments at a rate ofRECORDS
24%. Use Form W-9 to provide the necessary information.
See Form W-9 and its instructions.
TIN for joint account. Generally, if the funds in a joint
account belong to one person, list that person's name first
on the account and give that person's TIN to the payer.
(For information on who owns the funds in a joint account,
see Joint accounts, later.) If the joint account contains
combined funds, give the TIN of the person whose name
is listed first on the account.
These rules apply both to joint ownership by a married
couple and to joint ownership by other individuals. For ex-
ample, if you open a joint savings account with your child
using funds belonging to the child, list the child's name
first on the account and give the child's TIN.
Form W-9 and its instructions provide the following: If
this Form W-9 is for a joint account (other than an account
maintained by a foreign financial institution (FFI)), list first,
and then circle, the name of the person or entity whose
number you entered in Form W-9, Part I. If you are provid-
ing Form W-9 to an FFI to document a joint account, each
holder of the account that is a U.S. person must provide a
Form W-9. See Form W-9 and its instructions.
Custodian account for your child. If your child is the
actual owner of an account that is recorded in your name
as custodian for the child, give the child's TIN to the payer.
For example, you must give your child's SSN to the payer
of dividends on stock owned by your child, even though
the dividends are paid to you as custodian.
Penalty for failure to supply TIN. You may be sub-
ject to a penalty if, when required, you fail to:
• Include your TIN on any return, statement, or other
document;
• Give your TIN to another person who must include it
on any return, statement, or other document; or
• Include the TIN of another person on any return, state-
ment, or other document.
The penalty is $50 for each failure up to a maximum pen-
alty of $100,000 for any calendar year.
This penalty may be abated if you can show that your
failure to provide the TIN was due to reasonable cause
and not to willful neglect.
If you fail to supply a TIN in the manner required, you
also may be subject to backup withholding.
Backup withholding. Your investment income generally
is not subject to regular withholding. However, it may be
subject to backup withholding to ensure that income tax is
collected on the income. The bank, broker, or other payer
of interest, original issue discount (OID), dividends, cash
patronage dividends, or royalties must withhold income
tax on these reportable payments at a rate of 24% under
backup withholding.
Backup withholding applies if:
1. You do not give the payer your TIN in the required
manner;
2. The IRS notifies the payer that you gave an incorrect
TIN;
4 Chapter 1 Investment Income Publication 550 (2024)
3. The IRS notifies the payer that you are subject to
backup withholding on interest or dividends because
you underreported interest or dividends on your in-
come tax return; or
4. You are required, but fail, to certify that you are not
subject to backup withholding for the reason descri-
bed in (3).
Certification. For new accounts paying interest or div-
idends, you must certify under penalties of perjury that
your TIN is correct and that you are not subject to backup
withholding. Your payer will give you a Form W-9, or simi-
lar form, to make this certification. If you fail to make this
certification, backup withholding may begin immediately
on your new account or investment.
Underreported interest and dividends. You will be
considered to have underreported your interest and divi-
dends if the IRS has determined for a tax year that:
• You failed to include any part of a reportable interest or
dividend payment required to be shown on your re-
turn, or
• You were required to file a return and to include a re-
portable interest or dividend payment on that return,
but you failed to file the return.
How to stop backup withholding due to underre-
porting. If you have been notified that you underreported
interest or dividends, you can request a determination
from the IRS to prevent backup withholding from starting
or to stop backup withholding once it has begun. You must
show that at least one of the following situations applies.
• No underreporting occurred.
• You have a bona fide dispute with the IRS about
whether underreporting occurred.
• Backup withholding will cause or is causing an undue
hardship, and it is unlikely that you will underreport in-
terest and dividends in the future.
• You have corrected the underreporting by filing a re-
turn if you did not previously file one and by paying all
taxes, penalties, and interest due for any underrepor-
ted interest or dividend payments.
If the IRS determines that backup withholding should
stop, it will provide you with a certification and will notify
the payers who were sent notices earlier.
How to stop backup withholding due to an incor-
rect TIN. If the IRS notifies a payer that your TIN is incor-
rect, the payer must contact you and ask you to provide
your correct TIN. Follow the instructions provided by the
payer to prevent or stop backup withholding.
Reporting backup withholding. If backup withhold-
ing is deducted from your interest or dividend income or
other reportable payment, the bank or other business
must give you an information return for the year (for exam-
ple, a Form 1099-INT) indicating the amount withheld. The
information return will show any backup withholding as
“Federal income tax withheld.”
Nonresident aliens. Generally, payments made to
nonresident aliens are not subject to backup withholding.
You can use Form W-8BEN to certify exempt status. How-
ever, this does not exempt you from the 30% (or lower
treaty) withholding rate that may apply to your investment
income. For information on the 30% rate, see Pub. 519.
Penalties. There are civil and criminal penalties for
giving false information to avoid backup withholding. The
civil penalty is $500. The criminal penalty, upon convic-
tion, is a fine of up to $1,000, or imprisonment of up to 1
year, or both.
Where to report investment income. Table 1-1 gives
an overview of the forms and schedules to use to report
some common types of investment income. But see the
rest of this publication for detailed information about re-
porting investment income.
Joint accounts. If two or more persons hold property
(such as a savings account, bond, or stock) as joint ten-
ants, tenants by the entirety, or tenants in common, each
person's share of any interest or dividends from the prop-
erty is determined by local law.
Community property states. If you are married and re-
ceive a distribution that is community income, half of the
distribution generally is considered to be received by each
spouse. If you file separate returns, you must each report
one-half of any taxable distribution. See Pub. 555 for more
information on community income.
If the distribution is not considered community property
and you and your spouse file separate returns, each of
you must report your separate taxable distributions.
Example. You and your spouse have a joint money
market account. Under state law, half the income from the
account belongs to you, and half belongs to your spouse.
If you file separate returns, you each report half the in-
come.
Income from property given to a child. Property you
give as a parent to your child under the Model Gifts of Se-
curities to Minors Act, the Uniform Gifts to Minors Act, or
any similar law becomes the child's property.
Income from the property is taxable to the child, except
that any part used to satisfy a legal obligation to support
the child is taxable to the parent or guardian having that
legal obligation.
Savings account with parent as trustee. Interest in-
come from a savings account opened for a minor child,
but placed in the name and subject to the order of the pa-
rents as trustees, is taxable to the child if, under the law of
the state in which the child resides, both of the following
are true.
• The savings account legally belongs to the child.
• The parents are not legally permitted to use any of the
funds to support the child.
Publication 550 (2024) Chapter 1 Investment Income 5
Where To Report Common Types of Investment Income
(For detailed information about reporting investment income, see the rest of this publication, especially How
To Report Interest Income and How To Report Dividend Income in chapter 1.)
Table 1-1.
Type of Income If you file Form 1040 or 1040-SR, report on ...
Tax-exempt interest Line 2a (See the instructions there.)
Taxable interest Line 2b (See the instructions there.)
Savings bond interest you will exclude because of higher
education expenses
Schedule B; also use Form 8815.
Qualified dividends Line 3a (See the instructions there.)
Ordinary dividends Line 3b (See the instructions there.)
Capital gain distributions Line 7, or, if required, Schedule D, line 13. (See the instructions
of Form 1040 or 1040-SR.)
Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b,
2c, or 2d)
See the Form 1099-DIV Instructions for Recipient.
Nondividend distributions (Form 1099-DIV, box 3) Generally not reported.
Undistributed capital gains (Form 2439, boxes 1a–1d) See the Form 2439 Instructions for the Shareholder.
Gain or loss from sales of stocks or bonds Line 7; also use Form 8949, Schedule D, and the Qualified
Dividends and Capital Gain Tax Worksheet or the Schedule D
Tax Worksheet.
Gain or loss from exchanges of like-kind investment property Line 7; also use Schedule D, Form 8824, and the Qualified
Dividends and Capital Gain Tax Worksheet or the Schedule D
Tax Worksheet.
Accuracy-related penalty. An accuracy-related penalty
of 20% can be charged for underpayments of tax due to
negligence or disregard of rules or regulations or substan-
tial understatement of tax. For information on the penalty
and any interest that applies, see Penalties in chapter 2.
Interest Income
Terms you may need to know
(see Glossary):
Accrual method
Below-market loan
Cash method
Demand loan
Forgone interest
Gift loan
Interest
Mutual fund
Nominee
Original issue discount
Private activity bond
Term loan
This section discusses the tax treatment of different types
of interest income.
In general, any interest that you receive or that is credi-
ted to your account and can be withdrawn is taxable in-
come. Exceptions to this rule are discussed later.
Form 1099-INT. Interest income generally is reported to
you on Form 1099-INT, or a similar statement, by banks,
savings and loan associations, and other payers of inter-
est. This form shows you the interest you received during
the year. Keep this form for your records. You do not have
to attach it to your tax return.
Report on your tax return the total interest income you
receive for the tax year. See Form 1099-INT, Instructions
for Recipient to see whether you need to adjust any of the
amounts reported to you.
Interest not reported on Form 1099-INT. Even if you
do not receive a Form 1099-INT, you must still report all of
your interest income. For example, you may receive dis-
tributive shares of interest from partnerships or S corpora-
tions. This interest is reported to you on Schedule K-1
(Form 1065) and Schedule K-1 (Form 1120-S).
Nominees. Generally, if someone receives interest as
a nominee for you, that person must give you a Form
1099-INT showing the interest received on your behalf.
6 Chapter 1 Investment Income Publication 550 (2024)
If you receive a Form 1099-INT and interest as a nomi-
nee for another person, see the discussion on Nominee
distributions, later.
Incorrect amount. If you receive a Form 1099-INT
that shows an incorrect amount (or other incorrect infor-
mation), you should ask the issuer for a corrected form.
The new Form 1099-INT you receive should be denoted
“Corrected.”
Form 1099-OID. Reportable interest income also may be
shown on Form 1099-OID. For more information about
amounts shown on this form, see Original Issue Discount
(OID), later in this chapter.
Exempt-interest dividends. Form 1099-DIV, box 12,
shows exempt-interest dividends from a mutual fund or
other regulated investment company (RIC) paid to you
during the calendar year. See the Instructions for Form
1040 or 1040-SR for where to report.
Form 1099-DIV, box 13, shows exempt-interest divi-
dends subject to the alternative minimum tax (AMT). This
amount is included in box 12. See the Instructions for
Form 6251.
Interest on VA dividends. Interest on insurance divi-
dends left on deposit with the Department of Veterans Af-
fairs (VA) is not taxable. This includes interest paid on divi-
dends on converted United States Government Life
Insurance policies and on National Service Life Insurance
policies.
Individual retirement arrangements (IRAs). Interest
on a Roth IRA generally is not taxable. Interest on a tradi-
tional IRA is tax deferred. You generally do not include it in
your income until you make withdrawals from the IRA. See
Pub. 590-B for more information.
Taxable Interest—General
Taxable interest includes interest you receive from bank
accounts, loans you make to others, and other sources.
The following are some sources of taxable interest.
Dividends that are actually interest. Certain distribu-
tions commonly called dividends are actually interest. You
must report as interest so-called “dividends” on deposits
or on share accounts in:
• Cooperative banks,
• Credit unions,
• Domestic building and loan associations,
• Domestic savings and loan associations,
• Federal savings and loan associations, and
• Mutual savings banks.
The “dividends” will be shown as interest income on Form
1099-INT.
Money market funds. Money market funds are offered
by nonbank financial institutions such as mutual funds and
stock brokerage houses, and pay dividends. Generally,
amounts you receive from money market funds should be
reported as dividends, not as interest.
Certificates of deposit and other deferred interest ac-
counts. If you buy a certificate of deposit or open a defer-
red interest account, interest may be paid at fixed intervals
of 1 year or less during the term of the account. You gen-
erally must include this interest in your income when you
actually receive it or are entitled to receive it without pay-
ing a substantial penalty. The same is true for accounts
that mature in 1 year or less and pay interest in a single
payment at maturity. If interest is deferred for more than 1
year, see Original Issue Discount (OID), later.
Interest subject to penalty for early withdrawal. If
you withdraw funds from a deferred interest account be-
fore maturity, you may have to pay a penalty. You must re-
port the total amount of interest paid or credited to your
account during the year without subtracting the penalty.
See Penalty on early withdrawal of savings, later, for more
information on how to report the interest and deduct the
penalty.
Money borrowed to invest in certificate of deposit.
The interest you pay on money borrowed from a bank or
savings institution to meet the minimum deposit required
for a certificate of deposit from the institution and the inter-
est you earn on the certificate are two separate items. You
must report the total interest you earn on the certificate in
your income. If you itemize deductions, you can deduct
the interest you pay as investment interest, up to the
amount of your net investment income. See Interest Ex-
penses in chapter 3.
Example. You purchase a $10,000 certificate of de-
posit by borrowing $5,000 from the bank and adding an
additional $5,000 of your funds. The certificate earned
$575 at maturity in 2024, but you received only $265,
which represented the $575 you earned minus $310 inter-
est charged on your $5,000 loan. The bank gives you a
Form 1099-INT for 2024 showing the $575 interest you
earned. The bank also gives you a statement showing that
you paid $310 interest for 2024. You must include the
$575 in your income. If you itemize your deductions on
Schedule A (Form 1040), you can deduct $310, subject to
the net investment income limit.
Gift for opening account. If you receive noncash gifts or
services for making deposits or for opening an account in
a savings institution, the value may be reported to you as
interest income on Form 1099-INT and you may have to
report it on your tax return.
For deposits of less than $5,000, gifts or services val-
ued at more than $10 must be reported as interest. For
deposits of $5,000 or more, gifts or services valued at
more than $20 must be reported as interest. The value is
determined by the cost to the financial institution.
Example. You open a savings account at your local
bank and deposit $800. The account earns $20 interest.
You also receive a $15 calculator. If no other interest is
credited to your account during the year, the Form
Publication 550 (2024) Chapter 1 Investment Income 7
1099-INT you receive will show $35 interest for the year.
You must report $35 interest income on your tax return.
Interest on insurance dividends. Interest on insurance
dividends left on deposit with an insurance company that
can be withdrawn annually is taxable to you in the year it is
credited to your account. However, if you can withdraw it
only on the anniversary date of the policy (or other speci-
fied date), the interest is taxable in the year that date oc-
curs.
Prepaid insurance premiums. Any increase in the value
of prepaid insurance premiums, advance premiums, or
premium deposit funds is interest if it is applied to the pay-
ment of premiums due on insurance policies or made
available for you to withdraw.
U.S. obligations. Interest on U.S. obligations, such as
U.S. Treasury bills, notes, and bonds, and obligations is-
sued by any agency or instrumentality of the United States
is taxable for federal income tax purposes.
Interest on tax refunds. Interest you receive on tax re-
funds is taxable income.
Interest on condemnation award. If the condemning
authority pays you interest to compensate you for a delay
in payment of an award, the interest is taxable.
Installment sale payments. If a contract for the sale or
exchange of property provides for deferred payments, it
also usually provides for interest payable with the deferred
payments. Generally, that interest is taxable when you re-
ceive it. If little or no interest is provided for in a deferred
payment contract, part of each payment may be treated as
interest. See Unstated Interest and Original Issue Dis-
count (OID) in Pub. 537.
Interest on annuity contract. Accumulated interest on
an annuity contract you sell before its maturity date is tax-
able.
Usurious interest. Usurious interest is interest charged
at an illegal rate. This is taxable as interest unless state
law automatically changes it to a payment on the principal.
Interest income on frozen deposits. Exclude from your
gross income interest on frozen deposits. A deposit is fro-
zen if, at the end of the year, you cannot withdraw any part
of the deposit because:
• The financial institution is, or may become, bankrupt
or insolvent, or
• The state in which the institution is located has placed
limits on withdrawals because other financial institu-
tions in the state are, or may become, bankrupt or in-
solvent.
The amount of interest you must exclude is the interest
that was credited on the frozen deposits minus the sum of:
• The net amount you withdrew from these deposits
during the year, and
• The amount you could have withdrawn as of the end
of the year (not reduced by any penalty for premature
withdrawals of a time deposit).
If you receive a Form 1099-INT for interest income on de-
posits that were frozen at the end of 2024, see Frozen de-
posits, later, for information about reporting this interest in-
come exclusion on your tax return.
The interest you exclude is treated as credited to your
account in the following year. You must include it in in-
come in the year you can withdraw it.
Example. $100 of interest was credited on your frozen
deposit during the year. You withdrew $80 but could not
withdraw any more as of the end of the year. You must in-
clude $80 in your income and exclude $20 from your in-
come for the year. You must include the $20 in your in-
come for the year you can withdraw it.
Bonds traded flat. If you buy a bond at a discount when
interest has been defaulted or when the interest has ac-
crued but has not been paid, the transaction is described
as trading a bond flat. The defaulted or unpaid interest is
not income and is not taxable as interest if paid later.
When you receive a payment of that interest, it is a return
of capital that reduces the remaining cost basis of your
bond. Interest that accrues after the date of purchase,
however, is taxable interest income for the year received
or accrued. See Bonds Sold Between Interest Dates, later
in this chapter.
Below-Market Loans
Generally, a “below-market loan” means any loan if (a) in
the case of a demand loan, interest is payable on the loan
at a rate less than the applicable federal rate, or (b) in the
case of a term loan, the amount loaned exceeds the
present value (using a discount rate equal to the applica-
ble federal rate) of all payments due under the loan. (See
Code section 7872 for details.) Section 7872 may con-
sider the borrower to pay the lender any forgone interest
and the lender to pay that foregone interest to the bor-
rower. (See Code section 7872.) Thus, the lender may be
compelled to recognize that foregone interest as income
and the borrower may be able to deduct that foregone in-
terest as an expense if the loan proceeds are used for
business or investment. The nature of the forgone interest
that section 7872 considers the lender to return to the bor-
rower depends on the relationship between lender and
borrower. It may be considered a gift, an investment, com-
pensation, etc. (See Code section 7872 for details.)
Loans subject to the rules. The rules for below-market
loans apply to:
• Gift loans,
• Compensation-related loans,
• Corporation-shareholder loans,
• Tax avoidance loans, and
• Certain loans made to qualified continuing care facili-
ties under a continuing care contract.
8 Chapter 1 Investment Income Publication 550 (2024)
A compensation-related loan is any below-market loan
between an employer and an employee or between an in-
dependent contractor and a person for whom the contrac-
tor provides services.
A tax avoidance loan is any below-market loan where
the avoidance of federal tax is one of the main purposes of
the interest arrangement.
Forgone interest. For any period, forgone interest is:
• The amount of interest that would be payable for that
period if interest accrued on the loan at the applicable
federal rate and was payable annually on December
31, minus
• Any interest actually payable on the loan for the pe-
riod.
Applicable federal rate. Applicable federal rates are
published by the IRS each month in the Internal Revenue
Bulletin. The Internal Revenue Bulletin is available through
IRS.gov/IRB. You also can find applicable federal rates in
the Index of Applicable Federal Rates (AFR) Rulings at
https://irs.gov/applicable-federal-rates.
See chapter 5, How To Get Tax Help, for other ways to
get this information.
Rules for below-market loans. The rules that apply to a
below-market loan depend on whether the loan is a gift
loan, demand loan, or term loan.
Gift and demand loans. A gift loan is any below-mar-
ket loan where the forgone interest is in the nature of a gift.
A demand loan is a loan payable in full at any time upon
demand by the lender. A demand loan is a below-market
loan if no interest is charged or if interest is charged at a
rate below the applicable federal rate.
A demand loan or gift loan that is a below-market loan
generally is treated as an arm's-length transaction in
which the lender is treated as having made:
• A loan to the borrower in exchange for a note that re-
quires the payment of interest at the applicable federal
rate, and
• An additional payment to the borrower in an amount
equal to the forgone interest.
The borrower generally is treated as transferring the addi-
tional payment back to the lender as interest. The lender
must report that amount as interest income.
The lender's additional payment to the borrower is trea-
ted as a gift, dividend, contribution to capital, pay for serv-
ices, or other payment, depending on the substance of the
transaction. The borrower may have to report this payment
as taxable income, depending on its classification.
These transfers are considered to occur annually, gen-
erally on December 31.
Term loans. A term loan is any loan that is not a de-
mand loan. A term loan is a below-market loan if the
amount of the loan is more than the present value of all
payments due under the loan.
A lender who makes a below-market term loan other
than a gift loan is treated as transferring an additional
lump-sum cash payment to the borrower (as a dividend,
contribution to capital, etc.) on the date the loan is made.
The amount of this payment is the amount of the loan mi-
nus the present value, at the applicable federal rate, of all
payments due under the loan. An equal amount is treated
as original issue discount (OID). The lender must report
the annual part of the OID as interest income. The bor-
rower may be able to deduct the OID as interest expense.
See Original Issue Discount (OID), later.
Exceptions to the below-market loan rules. Excep-
tions to the below-market loan rules are discussed here.
Exception for loans of $10,000 or less. The rules for
below-market loans do not apply to any day on which the
total outstanding amount of loans between the borrower
and lender is $10,000 or less. This exception applies only
to:
1. Gift loans between individuals if the gift loan is not di-
rectly used to buy or carry income-producing assets,
and
2. Compensation-related loans or corporation-share-
holder loans if the avoidance of federal tax is not a
principal purpose of the interest arrangement.
This exception does not apply to term loans. The gen-
eral below-market loan rules will continue to apply even if
the outstanding balance is reduced to $10,000 or less.
Exception for loans to continuing care facilities.
Loans to qualified continuing care facilities under continu-
ing care contracts are not subject to the rules for be-
low-market loans for the calendar year if the lender or the
lender's spouse is age 65 or older at the end of the year.
For the definitions of qualified continuing care facility and
continuing care contract, see Internal Revenue Code
7872(g)(4) and (h).
Exception for loans without significant tax effect.
Loans are excluded from the below-market loan rules if
their interest arrangements do not have a significant effect
on the federal tax liability of the borrower or the lender.
These loans include:
1. Loans made available by the lender to the general
public on the same terms and conditions that are con-
sistent with the lender's customary business practice;
2. Loans subsidized by a federal, state, or municipal
government that are made available under a program
of general application to the public;
3. Certain employee-relocation loans;
4. Certain loans to or from a foreign person;
5. Gift loans to a charitable organization, contributions to
which are deductible, if the total outstanding amount
of loans between the organization and lender is
$250,000 or less at all times during the tax year; and
6. Other loans on which the interest arrangement can be
shown to have no significant effect on the federal tax
liability of the lender or the borrower.
Publication 550 (2024) Chapter 1 Investment Income 9
For a loan described in (6) above, all the facts and cir-
cumstances are used to determine if the interest arrange-
ment has a significant effect on the federal tax liability of
the lender or borrower. Some factors to be considered
are:
• Whether items of income and deduction generated by
the loan offset each other;
• The amount of these items;
• The cost to you of complying with the below-market
loan rules, if they were to apply; and
• Any reasons other than taxes for structuring the trans-
action as a below-market loan.
If you structure a transaction to meet this exception and
one of the principal purposes of that structure is the avoid-
ance of federal tax, the loan will be considered a
tax-avoidance loan, and this exception will not apply.
Limit on forgone interest for gift loans of $100,000
or less. For gift loans between individuals, if the out-
standing loans between the lender and borrower total
$100,000 or less, the forgone interest to be included in in-
come by the lender and deducted by the borrower is limi-
ted to the amount of the borrower's net investment income
for the year. If the borrower's net investment income is
$1,000 or less, it is treated as zero. This limit does not ap-
ply to a loan if the avoidance of federal tax is one of the
main purposes of the interest arrangement.
U.S. Savings Bonds
This section provides tax information on U.S. savings
bonds. It explains how to report the interest income on
these bonds and how to treat transfers of these bonds.
U.S. savings bonds currently offered to individuals in-
clude Series EE bonds and Series I bonds.
For information about U.S. savings bonds, go to
www.treasurydirect.gov/savings-bonds/. Also, go
to www.treasurydirect.gov/contact-us/ and click
on a topic to find answers to your questions by email.
If you prefer, write to:
Treasury Retail Securities Services
P.O. Box 9150
Minneapolis, MN 55480-9150
Accrual method taxpayers. If you use an accrual
method of accounting, you must report interest on U.S.
savings bonds each year as it accrues. You cannot post-
pone reporting interest until you receive it or until the
bonds mature.
Cash method taxpayers. If you use the cash method of
accounting, as most individual taxpayers do, you generally
report the interest on U.S. savings bonds when you re-
ceive it. But see Reporting options for cash method tax-
payers, later.
Series H and HH bonds. The United States Treasury
sold HH savings bonds from 1980 through August 2004.
HH savings bonds earn interest for up to 20 years. So the
last HH bonds will stop earning interest in 2024. (See
TreasuryDirect.gov/savings-bonds/hh-bonds/.)
Certain HH bonds weren’t available for cash only. To
buy those HH bonds, you had to trade in another security
you had bought earlier. In making the exchange, you may
have used interest the original security had earned to help
pay for the HH bond. If you used an old bond to buy more
than one HH bond, the interest you used to buy the bonds
was divided proportionately among the HH bonds. You
had a choice then for the tax on that interest: pay it then,
or wait and pay it later (defer it). Interest that you decided
to pay later is “deferred interest.” If your HH bond has de-
ferred interest, you see the amount identified on the front
of the bond. You don't have to report deferred interest on
your federal income tax return until you are filing your re-
turn for the year in which the first of these events occurs:
you cash the HH bond; the HH bond stops earning inter-
est; the HH bond is reissued to show a change in owner-
ship that is a taxable event. (See TreasuryDirect.gov/
savings-bonds/hh-bonds/hh-bonds-tax-information.)
Series H bonds were issued before 1980. All Series H
bonds have matured and are no longer earning interest.
In addition to the twice-a-year interest payments, most
H/HH bonds also have a deferred interest component.
The reporting of this as income is addressed later in this
chapter.
Series EE and Series I bonds. Interest on these bonds
is payable when you redeem the bonds. The difference
between the purchase price and the redemption value is
taxable interest.
Series E and EE bonds. Series E bonds were issued
before 1980. All Series E bonds have matured and are no
longer earning interest. Series EE bonds were first offered
in January 1980 and have a maturity period of 30 years;
they were offered in paper (definitive) form until 2012. Pa-
per Series EE and Series E bonds were issued at a dis-
count and increase in value as they earn interest. Elec-
tronic (book-entry) Series EE bonds were first offered in
2003; they are issued at face value and increase in value
as they earn interest. For all Series E and Series EE
bonds, the purchase price plus all accrued interest is pay-
able to you at redemption.
Series I bonds. Series I bonds were first offered in
1998. These are inflation-indexed bonds issued at face
value with a maturity period of 30 years. Series I bonds in-
crease in value as they earn interest. The face value plus
all accrued interest is payable to you at redemption.
Reporting options for cash method taxpayers. If
you use the cash method of reporting income, you can re-
port the interest on Series EE, Series E, and Series I
bonds in either of the following ways.
1. Method 1. Postpone reporting the interest until the
earlier of the year you cash or dispose of the bonds or
the year in which they mature. (However, see Savings
bonds traded, later.)
10 Chapter 1 Investment Income Publication 550 (2024)
2. Method 2. Choose to report the increase in redemp-
tion value as interest each year.
You must use the same method for all Series EE and Ser-
ies I bonds you own. If you do not choose method 2 by re-
porting the increase in redemption value as interest each
year, you must use method 1.
If you plan to cash your bonds in the same year
you will pay for higher education expenses, you
may want to use method 1 because you may be
able to exclude the interest from your income. To learn
how, see Education Savings Bond Program, later.
Change from method 1. If you want to change your
method of reporting the interest from method 1 to method
2, you can do so without permission from the IRS. In the
year of change, you must report all interest accrued to
date and not previously reported for all your bonds.
Once you choose to report the interest each year, you
must continue to do so for all Series EE and Series I
bonds you own and for any you get later, unless you re-
quest permission to change, as explained next.
Change from method 2. To change from method 2 to
method 1, you must request permission from the IRS. Per-
mission for the change is automatically granted if you
send the IRS a statement that meets all the following re-
quirements.
1. You have typed or printed the following number at the
top: “131.”
2. It includes your name and social security number un-
der “131.”
3. It includes the year of change (both the beginning and
ending dates).
4. It identifies the savings bonds for which you are re-
questing this change.
5. It includes your agreement to:
a. Report all interest on any bonds acquired during
or after the year of change when the interest is re-
alized upon disposition, redemption, or final ma-
turity, whichever is earliest; and
b. Report all interest on the bonds acquired before
the year of change when the interest is realized
upon disposition, redemption, or final maturity,
whichever is earliest, with the exception of the in-
terest reported in prior tax years.
You must attach this statement to your tax return for the
year of change, which you must file by the due date (in-
cluding extensions).
You can have an automatic extension of 6 months from
the due date of your return for the year of change (exclud-
ing extensions) to file the statement with an amended re-
turn. On the statement, type or print “Filed pursuant to
section 301.9100-2.” To get this extension, you must have
filed your original return for the year of the change by the
due date (including extensions). See also Revenue Proce-
dure 2015-13, Section 6.03(4).TIP
Instead of filing this statement, you can request permis-
sion to change from method 2 to method 1 by filing Form
3115. In that case, follow the form instructions for an auto-
matic change. No user fee is required.
Co-owners. If a U.S. savings bond is issued in the names
of co-owners, such as you and your child or you and your
spouse, interest on the bond generally is taxable to the
co-owner who bought the bond.
One co-owner's funds used. If you used your funds
to buy the bond, you must pay the tax on the interest. This
is true even if you let the other co-owner redeem the bond
and keep all the proceeds. Under these circumstances,
the co-owner who redeemed the bond will receive a Form
1099-INT at the time of redemption and must provide you
with another Form 1099-INT showing the amount of inter-
est from the bond taxable to you. The co-owner who re-
deemed the bond is a “nominee.” See Nominee distribu-
tions, later, for more information about how a person who
is a nominee reports interest income belonging to another
person.
Both co-owners' funds used. If you and the other
co-owner each contribute part of the bond's purchase
price, the interest generally is taxable to each of you in
proportion to the amount each of you paid.
Community property. If you and your spouse live in a
community property state and hold bonds as community
property, one-half of the interest is considered received by
each of you. If you file separate returns, each of you gen-
erally must report one-half of the bond interest. For more
information about community property, see Pub. 555.
Table 1-2. These rules are also shown in Table 1-2.
Child as only owner. Interest on U.S. savings bonds
bought for and registered only in the name of your child is
income to your child, even if you paid for the bonds and
are named as beneficiary. If the bonds are Series EE or
Series I bonds, the interest on the bonds is income to your
child in the earlier of the year the bonds are cashed or dis-
posed of or the year the bonds mature, unless your child
chooses to report the interest income each year.
Choice to report interest each year. The choice to
report the accrued interest each year can be made either
by your child or by you for your child. This choice is made
by filing an income tax return that shows all the interest
earned to date, and by stating on the return that your child
chooses to report the interest each year. Either you or
your child should keep a copy of this return.
Unless your child is otherwise required to file a tax re-
turn for any year after making this choice, your child does
not have to file a return only to report the annual accrual of
U.S. savings bond interest under this choice. However,
see Tax on unearned income of certain children, earlier,
under General Information. Neither you nor your child can
change the way you report the interest unless you request
permission from the IRS, as discussed earlier under
Change from method 2.
Publication 550 (2024) Chapter 1 Investment Income 11
Ownership transferred. If you bought Series EE or Ser-
ies I bonds entirely with your own funds and had them re-
issued in your co-owner's name or beneficiary's name
alone, you must include in your gross income for the year
of reissue all interest that you earned on these bonds and
have not previously reported. But, if the bonds were reis-
sued in your name alone, you do not have to report the in-
terest accrued at that time.
This same rule applies when bonds (other than bonds
held as community property) are transferred between
spouses or incident to divorce.
Example. You bought Series EE bonds entirely with
your own funds. You did not choose to report the accrued
interest each year. Later, you transfer the bonds to your
former spouse under a divorce agreement. You must in-
clude the deferred accrued interest, from the date of the
original issue of the bonds to the date of transfer, in your
income in the year of transfer. Your former spouse in-
cludes in income the interest on the bonds from the date
of transfer to the date of redemption.
Who Pays the Tax on U.S. Savings
Bond Interest
Table 1-2.
IF ... THEN the interest must be
reported by ...
you buy a bond in your name and
the name of another person as
co-owners, using only your own
funds
you.
you buy a bond in the name of
another person, who is the sole
owner of the bond
the person for whom you bought
the bond.
you and another person buy a
bond as co-owners, each
contributing part of the purchase
price
both you and the other co-owner,
in proportion to the amount each
paid for the bond.
you and your spouse, who live in
a community property state, buy a
bond that is community property
you and your spouse. If you file
separate returns, both you and
your spouse generally report half
of the interest.
Purchased jointly. If you and a co-owner each con-
tributed funds to buy Series E, Series EE, or Series I
bonds jointly and later have the bonds reissued in the
co-owner's name alone, you must include in your gross in-
come for the year of reissue your share of all the interest
earned on the bonds that you have not previously repor-
ted. The former co-owner does not have to include in
gross income at the time of reissue his or her share of the
interest earned that was not reported before the transfer.
This interest, however, as well as all interest earned after
the reissue, is income to the former co-owner.
This income-reporting rule also applies when the bonds
are reissued in the name of your former co-owner and a
new co-owner. But the new co-owner will report only his or
her share of the interest earned after the transfer.
If bonds that you and a co-owner bought jointly are reis-
sued to each of you separately in the same proportion as
your contribution to the purchase price, neither you nor
your co-owner has to report at that time the interest
earned before the bonds were reissued.
Example 1. You and your spouse each spent an equal
amount to buy a $1,000 Series EE savings bond. The
bond was issued to you and your spouse as co-owners.
You both postpone reporting interest on the bond. You
later have the bond reissued as two $500 bonds, one in
your name and one in your spouse's name. At that time
neither you nor your spouse has to report the interest
earned to the date of reissue.
Example 2. You bought a $1,000 Series EE savings
bond entirely with your own funds. The bond was issued
to you and your spouse as co-owners. You both post-
poned reporting interest on the bond. You later have the
bond reissued as two $500 bonds, one in your name and
one in your spouse's name. You must report half the inter-
est earned to the date of reissue.
Transfer to a trust. If you own Series E, Series EE, or
Series I bonds and transfer them to a trust, giving up all
rights of ownership, you must include in your income for
that year the interest earned to the date of transfer if you
have not already reported it. However, if you are consid-
ered the owner of the trust and if the increase in value
both before and after the transfer continues to be taxable
to you, you can continue to defer reporting the interest
earned each year. You must include the total interest in
your income in the year you cash or dispose of the bonds
or the year the bonds finally mature, whichever is earlier.
The same rules apply to previously unreported interest
on Series EE or Series E bonds if the transfer to a trust
consisted of Series HH or Series H bonds you acquired in
a trade for the Series EE or Series E bonds. See Savings
bonds traded, later.
Decedents. The manner of reporting interest income on
Series E, Series EE, or Series I bonds, after the death of
the owner (decedent), depends on the accounting and in-
come-reporting methods previously used by the dece-
dent.
Decedent who reported interest each year. If the
bonds transferred because of death were owned by a per-
son who used an accrual method, or who used the cash
method and had chosen to report the interest each year,
the interest earned in the year of death up to the date of
death must be reported on that person's final return. The
person who acquires the bonds includes in income only
interest earned after the date of death.
Decedent who postponed reporting interest. If the
transferred bonds were owned by a decedent who had
used the cash method and had not chosen to report the
interest each year, and who had bought the bonds entirely
with his or her own funds, all interest earned before death
must be reported in one of the following ways.
1. The surviving spouse or personal representative (ex-
ecutor, administrator, etc.) who files the final income
tax return of the decedent can choose to include on
that return all interest earned on the bonds before the
12 Chapter 1 Investment Income Publication 550 (2024)
decedent's death. The person who acquires the
bonds then includes in income only interest earned
after the date of death.
2. If the choice in (1) is not made, the interest earned up
to the date of death is income in respect of the dece-
dent and should not be included in the decedent's fi-
nal return. All interest earned both before and after the
decedent's death (except any part reported by the es-
tate on its income tax return) is income to the person
who acquires the bonds. If that person uses the cash
method and does not choose to report the interest
each year, he or she can postpone reporting it until
the year the bonds are cashed or disposed of or the
year they mature, whichever is earlier. In the year that
person reports the interest, he or she can claim a de-
duction for any federal estate tax paid on the part of
the interest included in the decedent's estate.
For more information on income in respect of a decedent,
see Pub. 559.
Example 1. Your uncle, a cash method taxpayer, died
and left you a $1,000 Series EE bond. He had bought the
bond for $500 and had not chosen to report the interest
each year. At the date of death, interest of $200 had ac-
crued on the bond, and its value of $700 was included in
your uncle's estate. Your uncle's executor chose not to in-
clude the $200 accrued interest in your uncle's final in-
come tax return. The $200 is income in respect of the de-
cedent.
You are a cash method taxpayer and do not choose to
report the interest each year as it is earned. If you cash
the bond when it reaches a value of $1,000, you report
$500 interest income—the difference between the value of
$1,000 and the original cost of $500.
Example 2. If, in Example 1, the executor had chosen
to include the $200 accrued interest in your uncle's final
return, you would report only $300 as interest when you
cashed the bond. $300 is the interest earned after your
uncle's death.
Example 3. If, in Example 1, you make or have made
the choice to report the increase in redemption value as
interest each year, you include in gross income for the
year you acquire the bond all of the unreported increase in
value of all Series E, Series EE, and Series I bonds you
hold, including the $200 on the bond you inherited from
your uncle.
Example 4. When your aunt died, she owned Series
HH bonds that she had acquired in a trade for Series EE
bonds. You were the beneficiary of these bonds. Your aunt
used the cash method and did not choose to report the in-
terest on the Series EE bonds each year as it accrued.
Your aunt's executor chose not to include any interest
earned before your aunt's death on her final return.
The income in respect of the decedent is the sum of the
unreported interest on the Series EE bonds and the inter-
est, if any, payable on the Series HH bonds but not re-
ceived as of the date of your aunt's death. You must report
any interest received during the year as income on your
return. The part of the interest payable but not received
before your aunt's death is income in respect of the dece-
dent and may qualify for the estate tax deduction. For in-
formation on when to report the interest on the Series EE
bonds traded, see Savings bonds traded, later.
Savings bonds distributed from a retirement or
profit-sharing plan. If you acquire a U.S. savings bond
in a taxable distribution from a retirement or profit-sharing
plan, your income for the year of distribution includes the
bond's redemption value (its cost plus the interest accrued
before the distribution). When you redeem the bond
(whether in the year of distribution or later), your interest
income includes only the interest accrued after the bond
was distributed. To figure the interest reported as a taxa-
ble distribution and your interest income when you re-
deem the bond, see Worksheet for savings bonds distrib-
uted from a retirement or profit-sharing plan, later.
Savings bonds traded. Prior to September 2004, you
could trade (exchange) Series E or EE bonds for Series H
or HH bonds. At the time of the trade, you had the choice
to postpone (defer) reporting the interest which had been
earned on your Series E or EE bonds until the Series H or
HH bonds received in the trade were redeemed or ma-
tured. Any cash you received in the transaction was in-
come up to the amount of the interest that had accrued on
the Series E or EE bonds. The amount of income that you
chose to postpone reporting was recorded on the face of
the Series H or HH bonds as "Deferred Interest"; this
amount is also equal to the difference between the re-
demption value of the Series H or HH bonds and your
cost. Your cost is the sum of the amount you paid for the
exchanged Series E or EE bonds plus any amount you
had to pay at the time of the transaction.
Example. You traded Series EE bonds that cost you
$2,200 (on which you postponed reporting the interest) for
$2,500 in Series HH bonds and $223 in cash. At the time
of the trade, the Series EE bonds had accrued interest of
$523 and a redemption value of $2,723.
You reported the $223 as taxable income on your tax
return.
You hold the Series HH bonds until maturity, when you
receive $2,500. You must report $300 as interest income
in the year of maturity. This is the difference between their
redemption value, $2,500, and your cost, $2,200 (the
amount you paid for the Series EE bonds).
Note. The $300 amount that is reportable upon re-
demption or maturity may be found on the face of the Ser-
ies HH bond as “Deferred Interest.” If more than one Ser-
ies HH bond is received in the exchange, the total amount
of interest postponed/deferred in the transaction is divided
proportionately among the Series HH bonds.
Choice to report interest in year of trade. You could
have chosen to treat all of the previously unreported ac-
crued interest on Series EE bonds traded for Series HH
bonds as income in the year of the trade. If you made this
choice, it is treated as a change from method 1. See
Change from method 1, earlier.
Publication 550 (2024) Chapter 1 Investment Income 13
Note. If you chose to report all of the previously unre-
ported interest in the year of the trade, then there would
be the no "Deferred Interest" recorded on the face of the
new bond.
Note. The subsequent annual interest earnings on the
Series HH bonds received in the exchange would be paid
and reported annually by Treasury regardless of whether
the previously accrued interest was further deferred or re-
ported in the year of the exchange.
Form 1099-INT for U.S. savings bond interest. You
may receive a Form 1099-INT when you redeem a bond.
Form 1099-INT, box 3 should show the interest as the dif-
ference between the amount you received and the amount
paid for the bond. However, your Form 1099-INT may
show more interest than you have to include on your in-
come tax return. For example, this may happen if any of
the following are true.
• You chose to report the increase in the redemption
value of the bond each year. The interest shown on
your Form 1099-INT will not be reduced by amounts
previously included in income.
• You received the bond from a decedent. The interest
shown on your Form 1099-INT will not be reduced by
any interest reported by the decedent before death, or
on the decedent's final return, or by the estate on the
estate's income tax return.
• Ownership of the bond was transferred. The interest
shown on your Form 1099-INT will not be reduced by
interest that accrued before the transfer.
Note. This is true for paper bonds. Treasury report-
ing process for electronic bonds is more refined. If
Treasury is aware that the transfer of an electronic
savings bond is a reportable event, then the transferor
will receive a 1099-INT for the year of the transfer for
the interest accrued up to the time of the transfer;
when the transferee later disposes of the bond (re-
demption, maturity, or further transfer), the transferee
will receive a 1099-INT showing interest accrued re-
duced by the amount reported to the transferor at the
time of the original transfer.
• You were named as a co-owner, and the other
co-owner contributed funds to buy the bond. The inter-
est shown on your Form 1099-INT will not be reduced
by the amount you received as nominee for the other
co-owner. (See Co-owners, earlier, for more informa-
tion about the reporting requirements.)
• You received the bond in a taxable distribution from a
retirement or profit-sharing plan. The interest shown
on your Form 1099-INT will not be reduced by the in-
terest portion of the amount taxable as a distribution
from the plan and not taxable as interest. (This
amount generally is shown on Form 1099-R, for the
year of distribution.)
For more information on including the correct amount of
interest on your return, see U.S. savings bond interest pre-
viously reported or Nominee distributions, later.
Interest on U.S. savings bonds is exempt from
state and local taxes.
Education Savings Bond Program
You may be able to exclude from income all or part of the
interest you receive on the redemption of qualified U.S.
savings bonds during the year if you pay qualified higher
education expenses during the same year. This exclusion
is known as the Education Savings Bond Program. For
taxable years beginning in 2024, the exclusion under §
135, regarding income from United States savings bonds
for taxpayers who pay qualified higher education expen-
ses, begins to phase out for modified adjusted gross in-
come above $145,200 for joint returns and $96,800 for all
other returns. The exclusion is completely phased out for
modified adjusted gross income of $175,200 or more for
joint returns and $111,800 or more for all other returns.
You do not qualify for this exclusion if your filing status
is married filing separately.
Form 8815. Use Form 8815 to figure your exclusion. At-
tach the form to your Form 1040 or 1040-SR.
Qualified U.S. savings bonds. A qualified U.S. savings
bond is a Series EE bond issued after 1989 or a Series I
bond. The bond must be issued either in your name (sole
owner) or in your and your spouse's names (co-owners).
You must be at least 24 years old before the bond's issue
date. For example, a bond bought by a parent and issued
in the name of his or her child under age 24 does not qual-
ify for the exclusion by the parent or child.
The issue date of a bond may be earlier than the
date the bond is purchased because the issue
date assigned to a bond is the first day of the
month in which it is purchased.
Beneficiary. You can designate any individual (includ-
ing a child) as a beneficiary of the bond.
Verification by IRS. If you claim the exclusion, the IRS
will check it by using bond redemption information from
the Department of Treasury.
Qualified expenses. Qualified higher educational ex-
penses are tuition and fees required for you, your spouse,
or your dependent to attend an eligible educational institu-
tion.
Qualified expenses include any contribution you make
to a qualified tuition program or to a Coverdell education
savings account. For information about these programs,
see Pub. 970.
Qualified expenses do not include expenses for room
and board or for courses involving sports, games, or hob-
bies that are not part of a degree or certificate granting
program.
Eligible educational institutions. These institutions
include most public, private, and nonprofit universities,
colleges, and vocational schools that are accredited andTIPCAUTION
!
14 Chapter 1 Investment Income Publication 550 (2024)
eligible to participate in student aid programs run by the
Department of Education.
Reduction for certain benefits. You must reduce
your qualified higher educational expenses by all of the
following tax-free benefits.
1. Tax-free part of scholarships and fellowships.
2. Expenses used to figure the tax-free portion of distri-
butions from a Coverdell ESA.
3. Expenses used to figure the tax-free portion of distri-
butions from a qualified tuition program.
4. Any tax-free payments (other than gifts or inheritan-
ces) received as educational assistance, such as:
a. Veterans' educational assistance benefits,
b. Qualified tuition reductions, or
c. Employer-provided educational assistance.
5. Any expense used in figuring the American Opportu-
nity and lifetime learning credits.
For information about these benefits, see Pub. 970.
Amount excludable. If the total proceeds (interest and
principal) from the qualified U.S. savings bonds you re-
deem during the year are not more than your adjusted
qualified higher educational expenses for the year, you
may be able to exclude all of the interest. If the proceeds
are more than the expenses, you may be able to exclude
only part of the interest.
To determine the excludable amount, multiply the inter-
est part of the proceeds by a fraction. The numerator (top
part) of the fraction is the qualified higher educational ex-
penses you paid during the year. The denominator (bot-
tom part) of the fraction is the total proceeds you received
during the year.
Example. J and L, a married couple, paid $5,000.00
for a $10,000 denominated Series EE U.S. Savings Bond
in January 2008. J and L redeemed (cashed in) the bond
in January 2024 for $8,052.00 ($5,000.00 investment +
$3,052.00 interest). J and L paid $4,000.00 of their child's
college tuition in 2024. J and L are not claiming any credit
for that amount and their child does not receive any
tax-free educational assistance.
To determine the excludable amount, J and L multiply
the interest part of the proceeds ($3,052.00) by a fraction.
The numerator (top part) of the fraction is the qualified
higher educational expenses paid during the year
($4,000.00). The denominator (bottom part) of the fraction
is the total proceeds received during the year ($8,052.00).
Thus, J and L can exclude $3,052.00 x
($4,000.00/$8,052.00) = $1,516.15.
U.S. Treasury Bills,
Notes, and Bonds
Treasury bills, notes, and bonds are direct debts (obliga-
tions) of the U.S. government.
Taxation of interest. Interest income from Treasury bills,
notes, and bonds is subject to federal income tax but is
exempt from all state and local income taxes. You should
receive Form 1099-INT showing the interest (in box 3)
paid to you for the year.
Treasury bills. These bills generally have a 4-week,
8-week, 13-week, 26-week, or 52-week maturity period.
They generally are issued at a discount in the amount of
$100 and multiples of $100. The difference between the
discounted price you pay for the bills and the face value
you receive at maturity is interest income. Generally, you
report this interest income when the bill is paid at maturity.
If you paid a premium for a bill (more than face value), you
generally report the premium as a section 171 deduction
when the bill is paid at maturity. See Discount on
Short-Term Obligations, later.
If you reinvest your Treasury bill at its maturity in a new
Treasury bill, note, or bond, you will receive payment for
the difference between the proceeds of the maturing bill
(par amount less any tax withheld) and the purchase price
of the new Treasury security. However, you must report the
full amount of the interest income on each of your Treas-
ury bills at the time it reaches maturity.
Treasury notes and bonds. Treasury notes have matur-
ity periods of at least 1 year, ranging up to 10 years. Ma-
turity periods for Treasury bonds are generally longer than
10 years. Both generally are issued in denominations of
$100 to $1 million and both generally pay interest every 6
months. Generally, you report this interest for the year
paid. When the notes or bonds mature, you can redeem
these securities for face value or use the proceeds from
the maturing note or bond to reinvest in another note or
bond of the same type and term.
Treasury notes and bonds are sold by auction. Two
types of bids are accepted: competitive bids and noncom-
petitive bids. If you make a competitive bid and a determi-
nation is made that the purchase price is less than the
face value, you will receive a refund for the difference be-
tween the purchase price and the face value. This amount
is considered original issue discount. However, the origi-
nal issue discount rules (discussed later) do not apply if
the discount is less than one-fourth of 1% (0.0025) of the
face amount, multiplied by the number of full years from
the date of original issue to maturity. See De minimis OID,
later. If the purchase price is determined to be more than
the face amount, the difference is a premium. (See Bond
Premium Amortization in chapter 3.)
For other information on these notes or bonds,
write to:
Treasury Retail Securities Services
P.O. Box 9150
Minneapolis, MN 55480-9150
Or, on the Internet, visit www.treasurydirect.gov.
Publication 550 (2024) Chapter 1 Investment Income 15
Treasury inflation-protected securities (TIPS). These
securities pay interest twice a year at a fixed rate, based
on a principal amount adjusted to take into account infla-
tion and deflation. For the tax treatment of these securi-
ties, see Inflation-Indexed Debt Instruments, later.
Retirement, sale, or redemption. For information on the
retirement, sale, or redemption of U.S. government obliga-
tions, see Capital or Ordinary Gain or Loss in chapter 4.
Also, see Nontaxable Trades in chapter 4 for information
about trading U.S. Treasury obligations for certain other
designated issues.
Bonds Sold Between Interest Dates
If you sell a bond between interest payment dates, part of
the sales price represents interest accrued to the date of
sale. You must report that part of the sales price as inter-
est income for the year of sale.
If you buy a bond between interest payment dates, part
of the purchase price represents interest accrued before
the date of purchase. When that interest is paid to you,
treat it as a return of your capital investment, rather than
interest income, by reducing your basis in the bond. See
Accrued interest on bonds, later in this chapter, for infor-
mation on reporting the payment.
Insurance
Life insurance proceeds paid to you as the beneficiary of
the insured person usually are not taxable. But if you re-
ceive the proceeds in installments, you usually must report
part of each installment payment as interest income.
For more information about insurance proceeds re-
ceived in installments, see Pub. 525.
Interest option on insurance. If you leave life insurance
proceeds on deposit with an insurance company under an
agreement to pay interest only, the interest paid to you is
taxable.
Annuity. If you buy an annuity with life insurance pro-
ceeds, the annuity payments you receive are taxed as
pension and annuity income from a nonqualified plan, not
as interest income. See Pub. 939.
State or Local
Government Obligations
Interest you receive on an obligation issued by a state or
local government generally is not taxable. The issuer
should be able to tell you whether the interest is taxable.
The issuer also should give you a periodic (or year-end)
statement showing the tax treatment of the obligation. If
you invested in the obligation through a trust, a fund, or
other organization, that organization should give you this
information.
Even if interest on the obligation is not subject to
income tax, you may have to report a capital gain
or loss when you sell it. Estate, gift, or genera-
tion-skipping tax may apply to other dispositions of the ob-
ligation.
Tax-Exempt Interest
Interest on a bond used to finance government operations
generally is not taxable if the bond is issued by a state, the
District of Columbia, a U.S. territory, or any of their political
subdivisions. Political subdivisions include:
• Port authorities,
• Toll road commissions,
• Utility services authorities,
• Community redevelopment agencies, and
• Qualified volunteer fire departments (for certain obli-
gations issued after 1980).
There are other requirements for tax-exempt bonds. Con-
tact the issuing state or local government agency or see
sections 103 and 141 through 150 of the Internal Revenue
Code and the related regulations.
Obligations that are not bonds. Interest on a
state or local government obligation may be tax
exempt even if the obligation is not a bond. For
example, interest on a debt evidenced only by an ordinary
written agreement of purchase and sale may be tax ex-
empt. Also, interest paid by an insurer on default by the
state or political subdivision may be tax exempt.
Registration requirement. A bond issued after June 30,
1983, generally must be in registered form for the interest
to be tax exempt.
Indian tribal government. Bonds issued after 1982 by
an Indian tribal government (including tribal economic de-
velopment bonds issued after February 17, 2009) are
treated as issued by a state. Interest on these bonds gen-
erally is tax exempt if the bonds are part of an issue of
which substantially all proceeds are to be used in the ex-
ercise of any essential government function. However, the
proceeds of a tribal economic development bond issued
after February 17, 2009, are not required to be used in the
exercise of an essential government function in order for
the bond to receive tax-exempt treatment. Interest on pri-
vate activity bonds (other than certain bonds for tribal
manufacturing facilities) is taxable.
Original issue discount. Original issue discount (OID)
on tax-exempt state or local government bonds is treated
as tax-exempt interest.
For information on the treatment of OID when you dis-
pose of a tax-exempt bond, see Tax-exempt state and lo-
cal government bonds in chapter 4.
Stripped bonds or coupons. For special rules that
apply to stripped tax-exempt obligations, see Stripped
Bonds and Coupons, later.CAUTION
!TIP
16 Chapter 1 Investment Income Publication 550 (2024)
Information reporting requirement. If you must file a
tax return, you are required to show any tax-exempt inter-
est you received on your return. This is an information re-
porting requirement only. It does not change tax-exempt
interest to taxable interest. See Reporting tax-exempt in-
terest, later in this chapter.
Taxable Interest
Interest on some state or local obligations is taxable.
Federally guaranteed bonds. Interest on federally guar-
anteed state or local obligations issued after 1983 gener-
ally is taxable. This rule does not apply to interest on obli-
gations guaranteed by the following U.S. government
agencies.
• Bonneville Power Authority (if the guarantee was un-
der the Northwest Power Act as in effect on July 18,
1984).
• Department of Veterans Affairs.
• Federal home loan banks. (The guarantee must be
made after July 30, 2008, in connection with the origi-
nal bond issue during the period beginning on July 30,
2008, and ending on December 31, 2010 (or a re-
newal or extension of a guarantee so made), and the
bank must meet safety and soundness requirements.)
• Federal Home Loan Mortgage Corporation.
• Federal Housing Administration.
• Federal National Mortgage Association.
• Government National Mortgage Corporation.
• Resolution Funding Corporation.
• Student Loan Marketing Association.
Tax credit bonds. Use Form 8912, to claim the credit for
the following tax credit bonds.
• Clean renewable energy bond (CREB).
• New clean renewable energy bond (NCREB).
• Qualified energy conservation bond (QECB).
• Qualified zone academy bond (QZAB).
• Qualified school construction bond (QSCB).
• Build America bond (BAB).
Generally, in lieu of, or in addition to, receiving periodic
interest payments from the issuer, the holder of the bond
is allowed an income tax credit. The credit compensates
the holder for lending money to the issuer and functions
as interest paid on the bond.
See the Instructions for Form 8912 for details and in-
structions.
Mortgage revenue bonds. The proceeds of these
bonds are used to finance mortgage loans for homebuy-
ers. Generally, interest on state or local government home
mortgage bonds issued after April 24, 1979, is taxable un-
less the bonds are qualified mortgage bonds or qualified
veterans' mortgage bonds.
Arbitrage bonds. Interest on arbitrage bonds issued by
state or local governments after October 9, 1969, is taxa-
ble. An arbitrage bond is a bond of which any portion of
the proceeds is expected to be used to buy (or to replace
funds used to buy) higher yielding investments. A bond is
treated as an arbitrage bond if the issuer intentionally uses
any part of the proceeds of the issue in this manner.
Private activity bonds. Interest on a private activity
bond that is not a qualified bond (defined below) is taxa-
ble. Generally, a private activity bond is part of a state or
local government bond issue that meets both the following
requirements.
1. More than 10% of the proceeds of the issue is to be
used for a private business use.
2. More than 10% of the payment of the principal or in-
terest is:
a. Secured by an interest in property to be used for a
private business use (or payments for this prop-
erty), or
b. Derived from payments for property (or borrowed
money) used for a private business use.
Also, a bond generally is considered a private activity
bond if the proceeds to be used to make or finance loans
to persons other than government units is more than 5%
of the proceeds or $5 million (whichever is less).
Qualified bond. Interest on a private activity bond that
is a qualified bond is tax exempt. A qualified bond is an
exempt-facility bond (including an enterprise zone facility
bond, a New York Liberty bond, a Midwestern disaster
area bond, a Hurricane Ike disaster area bond, a Gulf Op-
portunity Zone bond treated as an exempt-facility bond, or
any recovery zone facility bond), qualified student loan
bond, qualified small issue bond (including a tribal manu-
facturing facility bond), qualified redevelopment bond,
qualified mortgage bond (including a Gulf Opportunity
Zone bond, a Midwestern disaster area bond, or a Hurri-
cane Ike disaster area bond treated as a qualified mort-
gage bond), qualified veterans' mortgage bond, or quali-
fied 501(c)(3) bond (a bond issued for the benefit of
certain tax-exempt organizations).
Interest you receive on these tax-exempt bonds, if is-
sued after August 7, 1986, generally is a “tax preference
item” and may be subject to the AMT. See Form 6251 and
its instructions for more information.
The interest on the following bonds is not a tax prefer-
ence item and is not subject to the AMT.
• Qualified 501(c)(3) bonds.
• New York Liberty bonds.
• Gulf Opportunity Zone bonds.
• Midwestern disaster area bonds.
• Hurricane Ike disaster area bonds.
• Exempt facility bonds for qualified residential rental
projects issued after July 30, 2008.
• Qualified mortgage bonds issued after July 30, 2008.
Publication 550 (2024) Chapter 1 Investment Income 17
• Qualified veterans' mortgage bonds issued after July
30, 2008.
Qualified bonds issued in 2009 or 2010. The inter-
est on any qualified bond issued in 2009 or 2010 is not a
tax preference item and is not subject to the AMT. For this
purpose, a refunding bond (whether a current or advanced
refunding) is treated as issued on the date the refunded
bond was issued (or on the date the original bond was is-
sued in the case of a series of refundings). However, this
rule does not apply to any refunding bond issued to refund
any qualified bond issued during 2004 through 2008 or af-
ter 2010.
Qualified bonds issued after December 31, 2010.
A portion of the interest on specified private activity bonds
issued after December 31, 2010, may be a tax preference
item subject to the AMT. The tax preference status will ap-
ply to the portion of the interest that remains after reducing
it by deductions that would be allowed if the interest were
taxable.
Enterprise zone facility bonds. Interest on certain
private activity bonds issued by a state or local govern-
ment to finance a facility used in an empowerment zone or
enterprise community is tax exempt.
New York Liberty bonds. New York Liberty bonds are
bonds issued after March 9, 2002, to finance the construc-
tion and rehabilitation of real property in the designated
“Liberty Zone” of New York City. Interest on these bonds is
tax exempt.
Market discount. Market discount on a tax-exempt bond
is not tax exempt. If you bought the bond after April 30,
1993, you can choose to accrue the market discount over
the period you own the bond and include it in your income
currently as taxable interest. See Market Discount Bonds,
later. If you do not make that choice, or if you bought the
bond before May 1, 1993, any gain from market discount
is taxable when you dispose of the bond.
For more information on the treatment of market dis-
count when you dispose of a tax-exempt bond, see Dis-
counted Debt Instruments, later.
Discount on
Debt Instruments
Terms you may need to know
(see Glossary):
Market discount
Market discount bond
Original issue discount (OID)
Premium
A debt instrument, such as a bond, note, debenture, or
other evidence of indebtedness, that bears no interest or
bears interest at a lower than current market rate usually
will be issued at less than its face amount. This discount
is, in effect, additional interest income. The following are
some types of discounted debt instruments.
• U.S. Treasury bonds.
• Corporate bonds.
• Municipal bonds.
• Certificates of deposit.
• Notes between individuals.
• Stripped bonds and coupons.
• Collateralized debt obligations (CDOs).
The discount on these instruments (except municipal
bonds) is taxable in most instances. The discount on mu-
nicipal bonds generally is not taxable (but see State or Lo-
cal Government Obligations, earlier, for exceptions). See
also REMICs, FASITs, and Other CDOs, later, for informa-
tion about applying the rules discussed in this section to
the regular interest holder of a real estate mortgage in-
vestment conduit, a financial asset securitization invest-
ment trust, or other CDO.
Original Issue
Discount (OID)
OID is a form of interest. You generally include OID in your
income as it accrues over the term of the debt instrument,
whether or not you receive any payments from the issuer.
A debt instrument generally has OID when the instru-
ment is issued for a price that is less than its stated re-
demption price at maturity. OID is the difference between
the stated redemption price at maturity and the issue
price.
All debt instruments that pay no interest before maturity
are presumed to be issued at a discount. Zero coupon
bonds are one example of these instruments.
The OID accrual rules generally do not apply to
short-term obligations (those with a fixed maturity date of
1 year or less from date of issue). See Discount on
Short-Term Obligations, later.
For information about the sale of a debt instrument with
OID, see Original issue discount (OID) on debt instru-
ments, later.
De minimis OID. You can treat the discount as zero if it is
less than one-fourth of 1% (0.0025) of the stated redemp-
tion price at maturity multiplied by the number of full years
from the date of original issue to maturity. This small dis-
count is known as “de minimis” OID. In the case of a debt
instrument providing for more than one stated principal
payment (an installment obligation), the “de minimis” for-
mula described above is modified. See Regulations sec-
tion 1.1273-1(d)(3).
Example 1. You bought a 10-year bond with a stated
redemption price at maturity of $1,000, issued at $980
18 Chapter 1 Investment Income Publication 550 (2024)
with OID of $20. One-fourth of 1% of $1,000 (stated re-
demption price) times 10 (the number of full years from
the date of original issue to maturity) equals $25. Because
the $20 discount is less than $25, the OID is treated as
zero. (If you hold the bond at maturity, you will recognize
$20 ($1,000 − $980) of capital gain.)
Example 2. The facts are the same as in Example 1,
except that the bond was issued at $950. The OID is $50.
Because the $50 discount is more than the $25 figured in
Example 1, you must include the OID in income as it ac-
crues over the term of the bond.
Debt instrument bought after original issue. If you
buy a debt instrument with de minimis OID at a premium,
the discount is not includible in income. If you buy a debt
instrument with de minimis OID at a discount, the discount
is reported under the market discount rules. See Market
Discount Bonds, later in this chapter.
Exceptions to reporting OID as current income.
The OID rules discussed here do not apply to the fol-
lowing debt instruments.
1. Tax-exempt obligations. (However, see Stripped
tax-exempt obligations, later.)
2. U.S. savings bonds.
3. Short-term debt instruments (those with a fixed matur-
ity date of not more than 1 year from the date of is-
sue).
4. Loans between individuals, if all the following are true.
a. The loan is not made in the course of a trade or
business of the lender.
b. The amount of the loan, plus the amount of any
outstanding prior loans between the same individ-
uals, is $10,000 or less.
c. Avoiding any federal tax isn’t one of the principal
purposes of the loan.
5. A debt instrument purchased at a premium.
Form 1099-OID
You may receive a Form 1099-OID for a debt instrument
you own. If you receive a Form 1099-OID (Rev. 1-2024),
box 1 will show any “Original issue discount for the year”;
box 2 will show any “Other periodic interest”; and box 8
will show any “Original issue discount on U.S. Treasury
obligations.”
In most cases, you must report the entire amount in
Form 1099-OID, boxes 1, 2, and 8 as interest income. But
see Refiguring OID shown on Form 1099-OID, later in this
discussion, and also Original issue discount (OID) adjust-
ment, later in this chapter, for more information.
Form 1099-OID not received. If you had OID for the
year but did not receive a Form 1099-OID, you may have
to figure the correct amount of OID to report on your re-
turn. See Pub. 1212 for details on how to figure the correct
OID.
Nominee. If someone else is the record holder (the regis-
tered owner) of an OID instrument belonging to you and
receives a Form 1099-OID on your behalf, that person
must give you a Form 1099-OID.
If you receive a Form 1099-OID that includes amounts
belonging to another person, see Nominee distributions,
later.
Refiguring OID shown on Form 1099-OID. You may
need to refigure the OID shown in Form 1099-OID, box 1
or box 8 if either of the following apply.
• You bought the debt instrument after its original issue
and paid a premium or an acquisition premium.
• The debt instrument is a stripped bond or a stripped
coupon (including certain zero coupon instruments).
See Figuring OID, later in this chapter.
See Original issue discount (OID) adjustment, later in this
chapter, for information about reporting the correct
amount of OID.
Premium. You bought a debt instrument at a premium
if its adjusted basis immediately after purchase was
greater than the total of all amounts payable on the instru-
ment after the purchase date, other than qualified stated
interest.
If you bought an OID debt instrument at a premium, you
generally do not have to report any OID as ordinary in-
come.
Qualified stated interest. In general, this is stated in-
terest unconditionally payable in cash or property (other
than debt instruments of the issuer) at least annually at a
fixed rate.
Acquisition premium. You bought a debt instrument
at an acquisition premium if both the following are true.
• You did not pay a premium.
• The instrument's adjusted basis immediately after pur-
chase (including purchase at original issue) was
greater than its adjusted issue price. This is the issue
price plus the OID previously accrued, minus any pay-
ment previously made on the instrument other than
qualified stated interest.
Acquisition premium reduces the amount of OID includible
in your income. See Pub. 1212 for more information.
Refiguring periodic interest shown on Form
1099-OID. If you disposed of a debt instrument or ac-
quired it from another holder during the year, see Bonds
Sold Between Interest Dates, earlier, for information about
the treatment of periodic interest that may be shown in
Form 1099-OID, box 2 for that instrument.
Applying the OID Rules
The rules for reporting OID depend on the date the
long-term debt instrument was issued.
Debt instruments issued after May 27, 1969 (after
July 1, 1982, if a government instrument), and before
1985. If you hold these debt instruments as capital
Publication 550 (2024) Chapter 1 Investment Income 19
assets, you must include a part of the discount in your
gross income each year that you own the instruments.
Effect on basis. Your basis in the instrument is in-
creased by the amount of OID you include in your gross
income.
Debt instruments issued after 1984. For these debt in-
struments, you report the total OID that applies each year
regardless of whether you hold that debt instrument as a
capital asset.
Effect on basis. Your basis in the instrument is in-
creased by the amount of OID you include in your gross
income.
Certificates of Deposit (CDs)
A CD is a debt instrument.
If you buy a CD with a maturity of more than 1 year, you
must include in income each year a part of the total inter-
est due and report it in the same manner as other OID.
This also applies to similar deposit arrangements with
banks, building and loan associations, etc., including:
• Time deposits,
• Bonus plans,
• Savings certificates,
• Deferred income certificates,
• Bonus savings certificates, and
• Growth savings certificates.
Bearer CDs. CDs issued after 1982 generally must be in
registered form. Bearer CDs are CDs not in registered
form. They are not issued in the depositor's name and are
transferable from one individual to another.
Banks must provide the IRS and the person redeeming
a bearer CD with a Form 1099-INT.
Time deposit open account arrangement. This is an
arrangement with a fixed maturity date in which you make
deposits on a schedule arranged between you and your
bank. But there is no actual or constructive receipt of inter-
est until the fixed maturity date is reached. For instance,
you and your bank enter into an arrangement under which
you agree to deposit $100 each month for a period of 5
years. Interest will be compounded twice a year at 71/2%,
but payable only at the end of the 5-year period. You must
include a part of the interest in your income as OID each
year. Each year the bank must give you a Form 1099-OID
to show you the amount you must include in your income
for the year.
Redemption before maturity. If, before the maturity
date, you redeem a deferred interest account for less than
its stated redemption price at maturity, you can deduct
OID that you previously included in income but did not re-
ceive.
Renewable certificates. If you renew a CD at maturity, it
is treated as a redemption and a purchase of a new certifi-
cate. This is true regardless of the terms of renewal.
Face-Amount Certificates
These certificates are subject to the OID rules. They are a
form of endowment contracts issued by insurance or in-
vestment companies for either a lump-sum payment or pe-
riodic payments, with the face amount becoming payable
on the maturity date of the certificate.
In general, the difference between the face amount and
the amount you paid for the contract is OID. You must in-
clude a part of the OID in your income over the term of the
certificate.
The issuer must give you a statement on Form
1099-OID indicating the amount you must include in your
income each year.
Inflation-Indexed
Debt Instruments
If you hold an inflation-indexed debt instrument (other than
a Series I U.S. savings bond), you must report as OID any
increase in the inflation-adjusted principal amount of the
instrument that occurs while you held the instrument dur-
ing the year. In general, an inflation-indexed debt instru-
ment is a debt instrument on which the payments are ad-
justed for inflation and deflation (such as Treasury
Inflation-Protected Securities). You should receive Form
1099-OID from the payer showing the amount you must
report as OID and any qualified stated interest paid to you
during the year. For more information, see Pub. 1212.
Stripped Bonds and Coupons
If you strip one or more coupons from a bond and sell the
bond or the coupons, the bond and coupons are treated
as separate debt instruments issued with OID.
The holder of a stripped bond has the right to receive
the principal (redemption price) payment. The holder of a
stripped coupon has the right to receive interest on the
bond.
Stripped bonds and stripped coupons include:
• Zero coupon instruments available through the De-
partment of the Treasury's Separate Trading of Regis-
tered Interest and Principal of Securities (STRIPS)
program and government-sponsored enterprises such
as the Resolution Funding Corporation and the Fi-
nancing Corporation; and
• Instruments backed by U.S. Treasury securities that
represent ownership interests in those securities, such
as obligations backed by U.S. Treasury bonds offered
primarily by brokerage firms.
Seller. If you strip coupons from a bond and sell the bond
or coupons, include in income the interest that accrued
20 Chapter 1 Investment Income Publication 550 (2024)
while you held the bond before the date of sale, to the ex-
tent you did not previously include this interest in your in-
come. For an obligation acquired after October 22, 1986,
you also must include the market discount that accrued
before the date of sale of the stripped bond (or coupon) to
the extent you did not previously include this discount in
your income.
Add the interest and market discount that you include in
income to the basis of the bond and coupons. Allocate
this adjusted basis between the items you keep and the
items you sell, based on the fair market value of the items.
The difference between the sale price of the bond (or cou-
pon) and the allocated basis of the bond (or coupon) is
your gain or loss from the sale.
Treat any item you keep as an OID bond originally is-
sued and bought by you on the sale date of the other
items. If you keep the bond, treat the amount of the re-
demption price of the bond that is more than the basis of
the bond as OID. If you keep the coupons, treat the
amount payable on the coupons that is more than the ba-
sis of the coupons as OID.
Buyer. If you buy a stripped bond or stripped coupon,
treat it as if it were originally issued on the date you buy it.
If you buy a stripped bond, treat as OID any excess of the
stated redemption price at maturity over your purchase
price. If you buy a stripped coupon, treat as OID any ex-
cess of the amount payable on the due date of the coupon
over your purchase price.
Figuring OID. The rules for figuring OID on stripped
bonds and stripped coupons depend on the date the debt
instruments were purchased, not the date issued.
You must refigure OID shown on the Form 1099-OID
you receive for a stripped bond or coupon. See Pub. 1212
for information about figuring the correct amount of OID on
these instruments. Owners of stripped bonds and cou-
pons should not rely on the OID shown in Section II of the
OID tables (available by going to IRS.gov and searching
for “OID Tables”) because the amounts listed in Section II
for stripped bonds or coupons are figured without refer-
ence to the date or price at which you acquired them.
Stripped inflation-indexed debt instruments. OID
on stripped inflation-indexed debt instruments is figured
under the discount bond method. This method is descri-
bed in Regulations section 1.1275-7(e).
Stripped tax-exempt obligations. You do not have to
pay tax on OID on any stripped tax-exempt bond or cou-
pon you bought before June 11, 1987. However, if you ac-
quired it after October 22, 1986, you must accrue OID on
it to determine its basis when you dispose of it. See Origi-
nal issue discount (OID) on debt instruments, later.
You may have to pay tax on part of the OID on stripped
tax-exempt bonds or coupons that you bought after June
10, 1987. See Pub. 1212 for information on figuring the
taxable part.
Market Discount Bonds
A market discount bond is any bond having market dis-
count except:
• Short-term obligations (those with fixed maturity dates
of up to 1 year from the date of issue),
• Tax-exempt obligations you bought before May 1,
1993,
• U.S. savings bonds, and
• Certain installment obligations.
Market discount arises when the value of a debt obliga-
tion decreases after its issue date. Generally, this is due to
an increase in interest rates. If you buy a bond on the sec-
ondary market, it may have market discount.
When you buy a market discount bond, you can choose
to accrue the market discount over the period you own the
bond and include it in your income currently as interest in-
come. If you do not make this choice, the following rules
generally apply.
• You must treat any gain when you dispose of the bond
as ordinary interest income, up to the amount of the
accrued market discount. See Discounted Debt Instru-
ments, later.
• You must treat any partial payment of principal on the
bond as ordinary interest income, up to the amount of
the accrued market discount. See Partial principal
payments, later in this discussion.
• If you borrow money to buy or carry the bond, your de-
duction for interest paid on the debt is limited. See
Limit on interest deduction for market discount bonds,
later.
Market discount. Market discount is the amount of the
stated redemption price of a bond at maturity that is more
than your basis in the bond immediately after you acquire
it. You treat market discount as zero if it is less than
one-fourth of 1% (0.0025) of the stated redemption price
of the bond multiplied by the number of full years to matur-
ity (after you acquire the bond).
If a market discount bond also has OID, the market dis-
count is the sum of the bond's issue price and the total
OID includible in the gross income of all holders (for a
tax-exempt bond, the total OID that accrued) before you
acquired the bond, reduced by your basis in the bond im-
mediately after you acquired it.
Bonds acquired at original issue. Generally, a bond
you acquired at original issue is not a market discount
bond. If your adjusted basis in a bond is determined by
reference to the adjusted basis of another person who ac-
quired the bond at original issue, you also are considered
to have acquired it at original issue.
Exceptions. A bond you acquired at original issue can
be a market discount bond if either of the following is true.
• Your cost basis in the bond is less than the bond's is-
sue price.
Publication 550 (2024) Chapter 1 Investment Income 21
• The bond is issued in exchange for a market discount
bond under a plan of reorganization. (This does not
apply if the bond is issued in exchange for a market
discount bond issued before July 19, 1984, and the
terms and interest rates of both bonds are the same.)
Accrued market discount. The accrued market dis-
count is figured in one of two ways.
Ratable accrual method. Treat the market discount
as accruing in equal daily installments during the period
you hold the bond. Figure the daily installments by divid-
ing the market discount by the number of days after the
date you acquired the bond, up to and including its matur-
ity date. Multiply the daily installments by the number of
days you held the bond to figure your accrued market dis-
count.
Constant yield method. Instead of using the ratable
accrual method, you can choose to figure the accrued dis-
count using a constant interest rate (the constant yield
method). Make this choice by attaching to your timely filed
return a statement identifying the bond and stating that
you are making a constant interest rate election. The
choice takes effect on the date you acquired the bond. If
you choose to use this method for any bond, you cannot
change your choice for that bond.
See Pub. 1212 for information about using the constant
yield method. To use this method to figure market discount
(instead of OID), treat the bond as having been issued on
the date you acquired it. Treat the amount of your basis
(immediately after you acquired the bond) as the issue
price and apply the formula shown in Pub. 1212.
Choosing to include market discount in income cur-
rently. You can make this choice if you have not revoked
a prior choice to include market discount in income cur-
rently within the last 5 calendar years. Make the choice by
attaching to your timely filed return a statement in which
you:
• State that you have included market discount in your
gross income for the year under section 1278(b) of the
Internal Revenue Code, and
• Describe the method you used to figure the accrued
market discount for the year.
Once you make this choice, it will apply to all market
discount bonds you acquire during the tax year and in
later tax years. You cannot revoke your choice without the
consent of the IRS. See Rev. Proc. 2024-23, section 31,
for information on how to revoke your election.
Also, see Election To Report All Interest as OID, later. If
you make that election, you must use the constant yield
method.
Effect on basis. You increase the basis of your bonds
by the amount of market discount you include in your in-
come.
Partial principal payments. If you receive a partial pay-
ment of principal on a market discount bond you acquired
after October 22, 1986, and you did not choose to include
the discount in income currently, you must treat the pay-
ment as ordinary interest income up to the amount of the
bond's accrued market discount. Reduce the amount of
accrued market discount reportable as interest at disposi-
tion by that amount.
There are three methods you can use to figure accrued
market discount for this purpose.
1. On the basis of the constant yield method, described
earlier.
2. In proportion to the accrual of OID for any accrual pe-
riod, if the debt instrument has OID.
3. In proportion to the amount of stated interest paid in
the accrual period, if the debt instrument has no OID.
Under method (2) above, figure accrued market dis-
count for a period by multiplying the total remaining mar-
ket discount by a fraction. The numerator (top part) of the
fraction is the OID for the period, and the denominator
(bottom part) is the total remaining OID at the beginning of
the period.
Under method (3) above, figure accrued market dis-
count for a period by multiplying the total remaining mar-
ket discount by a fraction. The numerator is the stated in-
terest paid in the accrual period, and the denominator is
the total stated interest remaining to be paid at the begin-
ning of the accrual period.
Discount on
Short-Term Obligations
When you buy a short-term obligation (one with a fixed
maturity date of 1 year or less from the date of issue),
other than a tax-exempt obligation, you generally can
choose to include any discount and interest payable on
the obligation in income currently. If you do not make this
choice, the following rules generally apply.
• You must treat any gain when you sell, exchange, or
redeem the obligation as ordinary income, up to the
amount of the ratable share of the discount. See Dis-
counted Debt Instruments, later.
• If you borrow money to buy or carry the obligation,
your deduction for interest paid on the debt is limited.
See Limit on interest deduction for short-term obliga-
tions, later.
Short-term obligations for which no choice is availa-
ble. You must include any discount or interest in current
income as it accrues for any short-term obligation (other
than a tax-exempt obligation) that is:
• Held by an accrual-basis taxpayer;
• Held primarily for sale to customers in the ordinary
course of your trade or business;
• Held by a bank, regulated investment company, or
common trust fund;
• Held by certain pass-through entities;
• Identified as part of a hedging transaction; or
• A stripped bond or stripped coupon held by the per-
son who stripped the bond or coupon (or by any other
22 Chapter 1 Investment Income Publication 550 (2024)
person whose basis in the obligation is determined by
reference to the basis in the hands of the person who
stripped the bond or coupon).
Effect on basis. Increase the basis of your obligation by
the amount of discount you include in income currently.
Figuring the accrued discount. Figure the accrued dis-
count by using either the ratable accrual method or the
constant yield method discussed in Accrued market dis-
count, earlier.
Government obligations. For an obligation described
above that is a short-term government obligation, the
amount you include in your income for the current year is
the accrued acquisition discount, if any, plus any other ac-
crued interest payable on the obligation. The acquisition
discount is the stated redemption price at maturity minus
your basis.
If you choose to use the constant yield method to figure
accrued acquisition discount, treat the cost of acquiring
the obligation as the issue price. If you choose to use this
method, you cannot change your choice.
Nongovernment obligations. For an obligation listed
above that is not a government obligation, the amount you
include in your income for the current year is the accrued
OID, if any, plus any other accrued interest payable. If you
choose the constant yield method to figure accrued OID,
apply it by using the obligation's issue price.
Choosing to include accrued acquisition discount
instead of OID. You can choose to report accrued ac-
quisition discount (defined earlier under Government obli-
gations) rather than accrued OID on these short-term obli-
gations. Your choice will apply to the year for which it is
made and to all later years and cannot be changed with-
out the consent of the IRS.
You must make your choice by the due date of your re-
turn, including extensions, for the first year for which you
are making the choice. Attach a statement to your return
or amended return indicating:
• Your name, address, and social security number;
• The choice you are making and that it is being made
under section 1283(c)(2) of the Internal Revenue
Code;
• The period for which the choice is being made and the
obligation to which it applies; and
• Any other information necessary to show you are enti-
tled to make this choice.
Choosing to include accrued discount and other in-
terest in current income. If you acquire short-term dis-
count obligations that are not subject to the rules for cur-
rent inclusion in income of the accrued discount or other
interest, you can choose to have those rules apply. This
choice applies to all short-term obligations you acquire
during the year and in all later years. You cannot change
this choice without the consent of the IRS.
The procedures to use in making this choice are the
same as those described for choosing to include
acquisition discount instead of OID on nongovernment ob-
ligations in current income. However, you should indicate
that you are making the choice under section 1282(b)(2)
of the Internal Revenue Code.
Also, see the following discussion. If you make the elec-
tion to report all interest currently as OID, you must use
the constant yield method.
Election To Report
All Interest as OID
Generally, you can elect to treat all interest on a debt in-
strument acquired during the tax year as OID and include
it in income currently. For purposes of this election, inter-
est includes stated interest, acquisition discount, OID, de
minimis OID, market discount, de minimis market dis-
count, and unstated interest as adjusted by any amortiza-
ble bond premium or acquisition premium. See Regula-
tions section 1.1272-3.
When To Report
Interest Income
Terms you may need to know
(see Glossary):
Accrual method
Cash method
When to report your interest income depends on whether
you use the cash method or an accrual method to report
income.
Cash method. Most individual taxpayers use the cash
method. If you use this method, you generally report your
interest income in the year in which you actually or con-
structively receive it. However, there are special rules for
reporting the discount on certain debt instruments. See
U.S. Savings Bonds and Discount on Debt Instruments,
earlier.
Example. On September 1, 2022, you loaned another
individual $2,000 at 4% compounded annually. You are
not in the business of lending money. The note stated that
principal and interest would be due on August 31, 2024. In
2024, you received $2,163.20 ($2,000 principal and
$163.20 interest). If you use the cash method, you must
include in income on your 2024 return the $163.20 in inter-
est you received in that year.
Constructive receipt. You constructively receive in-
come when it is credited to your account or made availa-
ble to you. You do not need to have physical possession of
it. For example, you are considered to receive interest, div-
idends, or other earnings on any deposit or account in a
bank, savings and loan association, or similar financial in-
stitution, or interest on life insurance policy dividends left
Publication 550 (2024) Chapter 1 Investment Income 23
to accumulate, when they are credited to your account
and subject to your withdrawal.
You constructively receive income on the deposit or ac-
count even if you must:
• Make withdrawals in multiples of even amounts,
• Give a notice to withdraw before making the with-
drawal,
• Withdraw all or part of the account to withdraw the
earnings, or
• Pay a penalty on early withdrawals, unless the interest
you are to receive on an early withdrawal or redemp-
tion is substantially less than the interest payable at
maturity.
Accrual method. If you use an accrual method, you re-
port your interest income when you earn it, whether or not
you have received it. Interest is earned over the term of
the debt instrument.
Example. If, in the previous example, you use an ac-
crual method, you must include the interest in your income
as you earn it. You would report the interest as follows:
2022, $26.67; 2023, $81.06; and 2024, $55.47.
Coupon bonds. Generally, interest on coupon bonds is
taxable in the year the coupon becomes due and payable.
It does not matter when you mail the coupon for payment.
How To Report
Interest Income
Terms you may need to know
(see Glossary):
Nominee
Original issue discount (OID)
Generally, you report all your taxable interest income on
Form 1040 or 1040-SR, line 2b.
Schedule B (Form 1040). You must complete Sched-
ule B (Form 1040), Part I, if any of the following apply.
1. Your taxable interest income is more than $1,500.
2. You are claiming the interest exclusion under the Edu-
cation Savings Bond Program (discussed earlier).
3. You received interest from a seller-financed mortgage,
and the buyer used the property as a home.
4. You received a Form 1099-INT for U.S. savings bond
interest that includes amounts you reported in a previ-
ous tax year.
5. You received, as a nominee, interest that actually be-
longs to someone else.
6. You received a Form 1099-INT for interest on frozen
deposits.
7. You received a Form 1099-INT for interest on a bond
you bought between interest payment dates.
8. You are reporting OID in an amount less than the
amount shown on Form 1099-OID.
9. You are reporting interest income of less than the
amount shown on a Form 1099 due to amortizable
bond premium.
In Part I, line 1, list each payer's name and the amount re-
ceived from each. If you received a Form 1099-INT or
Form 1099-OID from a brokerage firm, list the brokerage
firm as the payer.
Reporting tax-exempt interest. Total your tax-exempt
interest (such as interest or accrued OID on certain state
and municipal bonds, including zero coupon municipal
bonds) reported on Form 1099-INT, box 8; Form
1099-OID, box 11; and exempt-interest dividends from a
mutual fund or other RIC reported on Form 1099-DIV,
box 12. Add these amounts to any other tax-exempt inter-
est you received. Report the total on Form 1040 or
1040-SR, line 2a.
Form 1099-INT, box 9, and Form 1099-DIV, box 13,
show the tax-exempt interest subject to the AMT on Form
6251. These amounts already are included in the amounts
on Form 1099-INT, box 8, and Form 1099-DIV, box 12. Do
not add the amounts in Form 1099-INT, box 9, and Form
1099-DIV, box 13, to, or subtract them from, the amounts
on Form 1099-INT, box 8, and Form 1099-DIV, box 12.
Do not report interest from an individual retire-
ment arrangement (IRA) as tax-exempt interest.
Form 1099-INT. Your taxable interest income, except for
interest from U.S. savings bonds and Treasury obligations,
is shown in Form 1099-INT, box 1. Add this amount to any
other taxable interest income you received. See the Form
1099-INT Instructions for Recipient if you have interest
from a security acquired at a premium. You must report all
your taxable interest income even if you do not receive a
Form 1099-INT. Contact your financial institution if you do
not receive a Form 1099-INT by February 15. Your identi-
fying number may be truncated on any paper Form
1099-INT you receive.
If you forfeited interest income because of the early
withdrawal of a time deposit, the deductible amount will be
shown on Form 1099-INT, box 2. See Penalty on early
withdrawal of savings, later.
Form 1099-INT, box 3 shows the interest income you
received from U.S. savings bonds, Treasury bills, Treasury
notes, and Treasury bonds. Generally, add the amount
shown in Form 1099-INT, box 3 to any other taxable inter-
est income you received. If part of the amount shown in
Form 1099-INT, box 3 was previously included in your in-
terest income, see U.S. savings bond interest previously
reported, later. If you redeemed U.S. savings bonds youCAUTION
!
24 Chapter 1 Investment Income Publication 550 (2024)
bought after 1989 and you paid qualified educational ex-
penses, see Interest excluded under the Education Sav-
ings Bond Program, later.
Form 1099-INT, box 4 will contain an amount if you
were subject to backup withholding. Include the amount
from box 4 on Form 1040 or 1040-SR, line 25b.
Form 1099-INT, box 5 shows your share of investment
expenses of a single-class REMIC. This amount is inclu-
ded in Form 1099-INT, box 1 and is not deductible.
Form 1099-INT, box 6 shows foreign tax paid. You may
be able to claim this tax as a deduction or a credit on your
Form 1040 or 1040-SR. See your tax return instructions.
Form 1099-INT, box 7 shows the country or U.S. territory
to which the foreign tax was paid.
For a covered security, if you made an election under
section 1278(b) to include market discount in income as it
accrues and you notified your payer of the election in writ-
ing in accordance with Regulations section 1.6045-1(n)
(5), Form 1099-INT, box 10 shows the market discount
that accrued on the debt instrument during the year while
held by you. Report this amount on your income tax return
as directed in the Instructions for Form 1040 or 1040-SR.
For a covered security, Form 1099-INT, box 11 shows
the amount of premium amortization for the year, unless
you notified the payer in writing in accordance with Regu-
lations section 1.6045-1(n)(5) that you did not want to am-
ortize bond premium under section 171. If an amount is
reported in this box, see the Instructions for Schedule B
(Form 1040). If an amount is not reported in this box for a
covered security acquired at a premium, the payer has re-
ported a net amount of interest in box 1, 3, 8, or 9, which-
ever is applicable. If the amount in this box is greater than
the amount of interest paid on the covered security, see
Regulations section 1.171-2(a)(4).
Form 1099-OID. The taxable OID on a discounted obli-
gation for the part of the year you owned it is shown in
Form 1099-OID, box 1. Include this amount in your total
taxable interest income. But see Refiguring OID shown on
Form 1099-OID, earlier. Your identifying number may be
truncated on any paper Form 1099-OID you receive.
You must report all taxable OID even if you do not re-
ceive a Form 1099-OID.
Form 1099-OID, box 2 shows any taxable interest on
the obligation other than OID. Add this amount to the OID
shown in Form 1099-OID, box 1 and include the result in
your total taxable income.
If you bought and/or sold an obligation during the year,
see Bonds Sold Between Interest Dates, earlier, for infor-
mation about the treatment of periodic interest that may be
shown in Form 1099-OID, box 2.
If you forfeited interest or principal on the obligation be-
cause of an early withdrawal, the deductible amount will
be shown in Form 1099-OID, box 3. See Penalty on early
withdrawal of savings, later.
Form 1099-OID, box 4 will contain an amount if you
were subject to backup withholding. Report the amount
from box 4 on Form 1040 or 1040-SR, line 25b.
Form 1099-OID, box 5 shows the market discount that
accrued on the debt instrument during the year while held
by you for a covered security acquired with OID, if you
made an election under section 1278(b) to include market
discount in income as it accrues and you notified your
payer of the election in writing in accordance with Regula-
tions section 1.6045-1(n)(5).
For a taxable covered security, Form 1099-OID, box 6
shows the amount of acquisition premium amortization for
the year that reduces the amount of OID that is included
as interest on your income tax return.
Form 1099-OID, box 9 shows your share of investment
expenses of a single-class REMIC. This amount is not de-
ductible.
U.S. savings bond interest previously reported. If you
received a Form 1099-INT for U.S. savings bond interest,
the form may show interest you do not have to report. See
Form 1099-INT for U.S. savings bond interest, earlier.
On Schedule B (Form 1040), Part I, line 1, report all the
interest shown on your Form 1099-INT. Then follow these
steps.
1. Several rows above Schedule B (Form 1040), Part I,
line 2, enter a subtotal of all interest listed on Sched-
ule B (Form 1040), Part I, line 1.
2. Below the subtotal, enter “U.S. Savings Bond Interest
Previously Reported” and enter amounts previously
reported or interest accrued before you received the
bond.
3. Subtract these amounts from the subtotal and enter
the result on Schedule B (Form 1040), Part I, line 2.
Example 1. Your parents bought U.S. savings bonds
for you when you were a child. The bonds were issued in
your name, and the interest on the bonds was reported
each year as it accrued. See Choice to report interest
each year, earlier.
In March 2024, you redeemed one of the bonds—a
$1,000 Series EE bond. The bond was originally issued in
March 2005 for $500.00. When you redeemed the bond,
you received $732.80 for it.
The Form 1099-INT you received shows interest in-
come of $232.80. However, since the interest on your sav-
ings bonds was reported yearly, you need only include the
$6.40 interest that accrued from January 2024 to March
2024.
On Schedule B (Form 1040), Part I, line 1, enter your in-
terest income as shown on Form 1099-INT—$232.80. If
you had other taxable interest income, you would enter it
next and then enter a subtotal, as described earlier, before
going to the next step. Several rows above Schedule B
(Form 1040), Part I, line 2, enter “U.S. Savings Bond Inter-
est Previously Reported” and enter $226.40 ($232.80 −
$6.40). Subtract $226.40 from $232.80 and include $6.40
on Schedule B (Form 1040), line 2. Add this amount to
your subtotal (if any) and in the total on Schedule B (Form
1040), line 4.
Example 2. Your uncle died and left you a $1,000 Ser-
ies EE bond. You redeem the bond for $1,000.
Your uncle paid $500 for the bond, so $500 of the
amount you receive upon redemption is interest income.
Your uncle's executor included in your uncle's final return
Publication 550 (2024) Chapter 1 Investment Income 25
$200 of the interest that had accrued at the time of your
uncle's death. You have to include only $300 in your in-
come.
The bank where you redeem the bond gives you a
Form 1099-INT showing interest income of $500. You also
receive a Form 1099-INT showing taxable interest income
of $300 from your savings account.
You file Form 1040 or 1040-SR and complete Sched-
ule B (Form 1040). On Schedule B (Form 1040), line 1,
you list the $500 and $300 interest amounts shown on
your Forms 1099. Several rows above Schedule B (Form
1040), line 2, you put a subtotal of $800. Below this subto-
tal, enter “U.S. Savings Bond Interest Previously Repor-
ted” and enter the $200 interest included in your uncle's fi-
nal return. Subtract the $200 from the subtotal and enter
$600 on Schedule B (Form 1040), line 2. You then com-
plete the rest of the form.
Worksheet for savings bonds distributed from a
retirement or profit-sharing plan. If you cashed a sav-
ings bond acquired in a taxable distribution from a retire-
ment or profit-sharing plan (as discussed under U.S. Sav-
ings Bonds, earlier), your interest income does not include
the interest accrued before the distribution and taxed as a
distribution from the plan.
Use the worksheet below to figure the amount you
subtract from the interest shown on Form
1099-INT.
A. Enter the amount of cash received upon redemption
of the bond . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Enter the value of the bond at the time of distribution
by the plan . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Subtract the amount on line B from the amount on
line A. This is the amount of interest accrued on the
bond since it was distributed by the plan . . . . . . . .
D. Enter the amount of interest shown on your Form
1099-INT . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E. Subtract the amount on line C from the amount on
line D. This is the amount you include in “U.S. Savings
Bond Interest Previously Reported” . . . . . . . . . . . .
Your employer should tell you the value of each bond
on the date it was distributed.
Example. You received a distribution of Series EE U.S.
savings bonds in December 2021 from your company's
profit-sharing plan.
In March 2024, you redeemed a $100 Series EE bond
that was part of the distribution you received in 2021. You
received $88.16 for the bond the company bought in May
2007. The value of the bond at the time of distribution in
2021 was $81.72. (This is the amount you included on
your 2021 return.) The bank gave you a Form 1099-INT
that shows $38.16 interest (the total interest from the date
the bond was purchased to the date of redemption). Since
a part of the interest was included in your income in 2021,
you need to include in your 2024 income only the interest
that accrued after the bond was distributed to you.
On Schedule B (Form 1040), line 1, include all the inter-
est shown on your Form 1099-INT as well as any other
taxable interest income you received. Several rows above
Schedule B (Form 1040), line 2, put a subtotal of all inter-
est listed on Schedule B (Form 1040), line 1. Below this
subtotal, enter “U.S. Savings Bond Interest Previously Re-
ported” and enter the amount figured on the worksheet
below.
A. Enter the amount of cash received upon
redemption of the bond . . . . . . . . . . . . . . . . . $88.16
B. Enter the value of the bond at the time of
distribution by the plan . . . . . . . . . . . . . . . . . . $81.72
C. Subtract the amount on line B from the amount on
line A. This is the amount of interest accrued on the
bond since it was distributed by the plan . . . . . . . $6.44
D. Enter the amount of interest shown on your Form
1099-INT . . . . . . . . . . . . . . . . . . . . . . . . . . $38.16
E. Subtract the amount on line C from the amount on
line D. This is the amount you include in “U.S.
Savings Bond Interest Previously Reported” . . . . . $31.72
Subtract $31.72 from the subtotal and enter the result on
Schedule B (Form 1040), line 2. You then complete the
rest of the form.
Interest excluded under the Education Savings Bond
Program. Use Form 8815 to figure your interest exclusion
when you redeem qualified savings bonds and pay quali-
fied higher education expenses during the same year.
For more information on the exclusion and qualified
higher education expenses, see the earlier discussion un-
der Education Savings Bond Program.
Interest on seller-financed mortgage. If an individual
buys his or her home from you in a sale that you finance,
you must report the amount of interest received on Sched-
ule B (Form 1040), line 1. Include on line 1 the buyer's
name, address, and SSN. If you do not, you may have to
pay a $50 penalty. The buyer may have to pay a $50 pen-
alty if he or she does not give you this information.
You also must give your name, address, and SSN (or
EIN) to the buyer. If you do not, you may have to pay a $50
penalty.
Frozen deposits. Even if you receive a Form 1099-INT
for interest on deposits that you could not withdraw at the
end of 2024, you must exclude these amounts from your
gross income. (See Interest income on frozen deposits,
earlier.) Do not include as income on your annual income
tax return. On Schedule B (Form 1040), Part I, include the
full amount of interest shown on your Form 1099-INT,
line 1. Several rows above Schedule B (Form 1040), Part I,
line 2, put a subtotal of all interest income. Below this sub-
total, enter “Frozen Deposits” and show the amount of in-
terest that you are excluding. Subtract this amount from
the subtotal and enter the result on Schedule B (Form
1040), Part I, line 2.
Accrued interest on bonds. If you received a Form
1099-INT that reflects accrued interest paid on a bond you
bought between interest payment dates, include the full
amount shown as interest on the Form 1099-INT on
Schedule B (Form 1040), Part I, line 1. Then, below a
26 Chapter 1 Investment Income Publication 550 (2024)
subtotal of all interest income listed, enter “Accrued Inter-
est” and the amount of accrued interest you paid to the
seller. That amount is taxable to the seller, not you. Sub-
tract that amount from the interest income subtotal. For
more information, see Bonds Sold Between Interest
Dates, earlier.
Nominee distributions. If you received a Form 1099-INT
that includes an amount you received as a nominee for the
real owner, report the full amount shown as interest on the
Form 1099-INT on Schedule B (Form 1040), Part I, line 1.
Then, below a subtotal of all interest income listed, enter
“Nominee Distribution” and the amount that actually be-
longs to someone else. Subtract that amount from the in-
terest income subtotal.
File Form 1099-INT with the IRS. If you received in-
terest as a nominee in 2024, you must file a Form
1099-INT for that interest with the IRS. Send Copy A of
Form 1099-INT with a Form 1096 to your Internal Revenue
Service Center by February 28, 2025 (March 31, 2025, if
you file Form 1099-INT electronically). Give the actual
owner of the interest Copy B of the Form 1099-INT by Jan-
uary 31, 2025. On Form 1099-INT, you should be listed as
the “Payer.” Prepare one Form 1099-INT for each other
owner and show that person as the “Recipient.” However,
you do not have to file Form 1099-INT to show payments
for your spouse. For more information about the reporting
requirements and the penalties for failure to file (or furnish)
certain information returns, see the General Instructions
for Certain Information Returns.
Similar rules apply to OID reported to you as a nominee
on Form 1099-OID. You must file a Form 1099-OID with
Form 1096 to show the proper distributions of the OID.
Example. You and your sibling have a joint savings ac-
count that paid $1,500 interest for 2024. Your sibling de-
posited 30% of the funds in this account, and you and
your sibling have agreed to share the yearly interest in-
come in proportion to the amount each of you has inves-
ted. Because your SSN was given to the bank, you re-
ceived a Form 1099-INT for 2024 that includes the interest
income earned belonging to your sibling. This amount is
$450, or 30% of the total interest of $1,500.
You must give your sibling a Form 1099-INT by January
31, 2025, showing $450 of interest income your sibling
earned for 2024. You also must send a copy of the nomi-
nee Form 1099-INT, along with Form 1096, to the Internal
Revenue Service Center by February 28, 2025 (March 31,
2025, if you file Form 1099-INT electronically). Show your
own name, address, and SSN as that of the “Payer” on the
Form 1099-INT. Show your sibling's name, address, and
SSN in the blocks provided for identification of the “Recipi-
ent.”
When you prepare your own federal income tax return,
report the total amount of interest income, $1,500, on
Schedule B (Form 1040), Part I, line 1, and identify the
name of the bank that paid this interest. Show the amount
belonging to your sibling, $450, as a subtraction from a
subtotal of all interest on Schedule B (Form 1040) and
identify this subtraction as a “Nominee Distribution.” (Your
sibling will report the $450 of interest income on any
income tax return your sibling files and identify you as the
payer of that amount.)
Original issue discount (OID) adjustment. If you are
reporting OID in an amount less than the amount shown
on Form 1099-OID or other written statement (such as for
a REMIC regular interest), include the full amount of OID
shown on your Form 1099-OID or other statement on
Schedule B (Form 1040), Part I, line 1. Show OID you do
not have to report below a subtotal of the interest and OID
listed. Identify the amount as “OID Adjustment” and sub-
tract it from the subtotal.
Penalty on early withdrawal of savings. If you with-
draw funds from a certificate of deposit or other deferred
interest account before maturity, you may be charged a
penalty. The Form 1099-INT or similar statement given to
you by the financial institution will show the total amount of
interest in box 1 and will show the penalty separately in
box 2. You must include in income all interest shown in
Form 1099-INT, box 1. You can deduct the penalty on
Schedule 1 (Form 1040), line 18.
Dividends and
Other Distributions
Dividends can be distributions of money, stock, or other
property paid to you by a corporation or by a mutual fund.
You also may receive dividends through a partnership, an
estate, a trust, or an association that is taxed as a corpo-
ration. However, some amounts you receive called divi-
dends actually are interest income. See Dividends that are
actually interest, earlier.
The most common kinds of distributions are:
• Ordinary dividends,
• Capital gain distributions, and
• Nondividend distributions.
Most distributions are paid in cash (check). However,
distributions can consist of more stock, stock rights, other
property, or services.
Form 1099-DIV. Most corporations use Form 1099-DIV
to show you the distributions you received from them dur-
ing the year. Keep this form with your records. You do not
have to attach it to your tax return. Your identifying number
may be truncated on any paper Form 1099-DIV you re-
ceive.
Dividends not reported on Form 1099-DIV. Even if
you do not receive a Form 1099-DIV, you must still report
all your taxable dividend income. For example, you may
receive distributive shares of dividends from partnerships
or S corporations. These dividends are reported to you on
Schedule K-1 (Form 1065) and Schedule K-1 (Form
1120-S).
Nominees. If someone receives distributions as a
nominee for you, that person will give you a Form
Publication 550 (2024) Chapter 1 Investment Income 27
1099-DIV which will show distributions received on your
behalf.
If you receive a Form 1099-DIV that includes amounts
belonging to another person, see Nominees under How
To Report Dividend Income, later, for more information.
Form 1099-MISC. Certain substitute payments in lieu of
dividends or tax-exempt interest received by a broker on
your behalf must be reported to you on Form 1099-MISC
or a similar statement. See also Reporting Substitute Pay-
ments, later.
Incorrect amount shown on a Form 1099. If you re-
ceive a Form 1099 that shows an incorrect amount (or
other incorrect information), you should ask the issuer for
a corrected form. The new Form 1099 you receive should
be denoted “Corrected.”
Dividends on stock sold. If stock is sold, exchanged, or
otherwise disposed of after a dividend is declared but be-
fore it is paid, the owner of record (usually the payee
shown on the dividend check) must include the dividend
in income.
Dividends received in January. If a mutual fund (or
other RIC) or real estate investment trust (REIT) declares
a dividend (including any exempt-interest dividend or capi-
tal gain distribution) in October, November, or December,
payable to shareholders of record on a date in one of
those months but actually pays the dividend during Janu-
ary of the next calendar year, the shareholder is consid-
ered to have received the dividend on December 31 and
must report the dividend in the year it was declared.
Ordinary Dividends
Ordinary dividends are the most common type of distribu-
tion from a corporation or a mutual fund. They are paid out
of earnings and profits and are ordinary income to you.
This means they are not capital gains. You can assume
that any dividend you receive on common or preferred
stock is an ordinary dividend unless the paying corpora-
tion or mutual fund tells you otherwise. Ordinary dividends
will be shown on Form 1099-DIV, box 1a.
Qualified Dividends
Qualified dividends are the ordinary dividends subject to
the same 0%, 15%, or 20% maximum tax rate that applies
to net capital gain. They should be shown in box 1b of the
Form 1099-DIV you receive.
See the instructions for Form 1040 to calculate the in-
come tax on net capital gain and qualified dividends.
The maximum rate on qualified dividends applies only if
all of the following requirements are met.
• The dividends must have been paid by a U.S. corpora-
tion or a qualified foreign corporation. (See Qualified
foreign corporation, later.)
• The dividends are not of the type listed later under
Dividends that are not qualified dividends.
• You meet the holding period (discussed next).
Holding period. You must have held the stock for more
than 60 days during the 121-day period that begins 60
days before the ex-dividend date. The ex-dividend date is
the first date following the declaration of a dividend on
which the buyer of a stock is not entitled to receive the
next dividend payment. When counting the number of
days you held the stock, include the day you disposed of
the stock, but not the day you acquired it. See the exam-
ples below.
Exception for preferred stock. In the case of prefer-
red stock, you must have held the stock more than 90
days during the 181-day period that begins 90 days before
the ex-dividend date if the dividends are due to periods to-
taling more than 366 days. If the preferred dividends are
due to periods totaling less than 367 days, the holding pe-
riod in the preceding paragraph applies.
Example 1. You bought 5,000 shares of XYZ Corp.
common stock on July 5, 2024. XYZ Corp. paid a cash
dividend of 10 cents per share. The ex-dividend date was
July 12, 2024. Your Form 1099-DIV from XYZ Corp. shows
$500 in box 1a (ordinary dividends) and in box 1b (quali-
fied dividends). However, you sold the 5,000 shares on
August 8, 2024. You held your shares of XYZ Corp. for
only 34 days of the 121-day period (from July 6, 2024,
through August 8, 2024). The 121-day period began on
May 13, 2024 (60 days before the ex-dividend date), and
ended on September 10, 2024. You have no qualified divi-
dends from XYZ Corp. because you held the XYZ stock
for less than 61 days.
Example 2. Assume the same facts as in Example 1
except that you bought the stock on July 11, 2024 (the day
before the ex-dividend date), and you sold the stock on
September 13, 2024. You held the stock for 63 days (from
July 12, 2024, through September 13, 2024). The $500 of
qualified dividends shown in box 1b of your Form
1099-DIV are all qualified dividends because you held the
stock for 61 days of the 121-day period (from July 12,
2024, through September 13, 2024).
Example 3. You bought 10,000 shares of ABC Mutual
Fund common stock on July 5, 2024. ABC Mutual Fund
paid a cash dividend of 10 cents per share. The ex-divi-
dend date was July 12, 2024. The ABC Mutual Fund advi-
ses you that the portion of the dividend eligible to be trea-
ted as qualified dividends equals 2 cents per share. Your
Form 1099-DIV from ABC Mutual Fund shows total ordi-
nary dividends of $1,000 and qualified dividends of $200.
However, you sold the 10,000 shares on August 8, 2024.
You have no qualified dividends from ABC Mutual Fund
because you held the ABC Mutual Fund stock for less
than 61 days.
Holding period reduced where risk of loss is di-
minished. When determining whether you met the mini-
mum holding period discussed earlier, you cannot count
any day during which you meet any of the following condi-
tions.
28 Chapter 1 Investment Income Publication 550 (2024)
1. You had an option to sell, were under a contractual
obligation to sell, or had made (and not closed) a
short sale of substantially identical stock or securities.
2. You were grantor (writer) of an option to buy substan-
tially identical stock or securities.
3. Your risk of loss is diminished by holding one or more
other positions in substantially similar or related prop-
erty.
For information about how to apply condition (3), see
Regulations section 1.246-5.
Qualified foreign corporation. A foreign corporation is
a qualified foreign corporation if it meets any of the follow-
ing conditions.
1. The corporation is incorporated in a U.S. territory.
2. The corporation is eligible for the benefits of a com-
prehensive income tax treaty with the United States
that the Department of the Treasury determines is sat-
isfactory for this purpose and that includes an ex-
change of information program. For a list of those
treaties, see Table 1-3.
3. The corporation does not meet (1) or (2) above, but
the stock for which the dividend is paid is readily trad-
able on an established securities market in the United
States. See Readily tradable stock, later.
Exception. A corporation is not a qualified foreign cor-
poration if it is a passive foreign investment company dur-
ing its tax year in which the dividends are paid or during its
previous tax year.
Controlled foreign corporation (CFC). Dividends
paid out of a CFC's earnings and profits that were not pre-
viously taxed are qualified dividends if the CFC is other-
wise a qualified foreign corporation and the other require-
ments in this discussion are met. Certain dividends paid
by a CFC that would be treated as a passive foreign in-
vestment company but for section 1297(d) of the Internal
Revenue Code may be treated as qualified dividends. For
more information, see Notice 2004-70, which can be
found at IRS.gov/irb/2004-44_IRB#NOT-2004-70.
Readily tradable stock. Any stock or American de-
positary receipt in respect of that stock is considered to
satisfy requirement (3) under Qualified foreign corporation
if it is listed on a national securities exchange that is regis-
tered under section 6 of the Securities Exchange Act of
1934 or on the Nasdaq Stock Market. For a list of the ex-
changes that meet these requirements, see National
Securities Exchange | Investor.gov.
Table 1-3. Income Tax Treaties
Income tax treaties that the United States has with the following
countries satisfy requirement (2) under Qualified foreign corporation.
Australia Indonesia Romania
Austria Ireland Slovak
Bangladesh Israel Republic
Bulgaria Italy Slovenia
Barbados Jamaica South Africa
Belgium Japan Spain
Canada Kazakhstan Sri Lanka
Chile Korea Sweden
China Latvia Switzerland
Cyprus Lithuania Thailand
Czech Luxembourg Trinidad
Republic Malta and
Denmark Mexico Tobago
Egypt Morocco Tunisia
Estonia Netherlands Turkey
Finland New Zealand Ukraine
France Norway United
Germany Pakistan Kingdom
Greece Philippines Venezuela
Iceland Poland
India Portugal
Note. For details and effective dates, see Notice
2024-11 in Internal Revenue Bulletin 2024-02, available at
IRS.gov/irb/2024-02_IRB#NOT-2024-11.
For the latest information about developments re-
lated to Pub. 550, such as tax treaties between
the United States and particular countries, go to
www.IRS.gov/Pub550.
Dividends that are not qualified dividends. The fol-
lowing dividends are not qualified dividends. They are not
qualified dividends even if they are shown on Form
1099-DIV, box 1b.
• Capital gain distributions.
• Dividends paid on deposits with mutual savings
banks, cooperative banks, credit unions, U.S. building
and loan associations, U.S. savings and loan associa-
tions, federal savings and loan associations, and simi-
lar financial institutions. Report these amounts as in-
terest income.
• Dividends from a corporation that is a tax-exempt or-
ganization or farmer's cooperative during the corpora-
tion's tax year in which the dividends were paid or dur-
ing the corporation's previous tax year.
• Dividends paid by a corporation on employer securi-
ties held on the date of record by an employee stock
ownership plan (ESOP) maintained by that corpora-
tion.
• Dividends on any share of stock to the extent you are
obligated (whether under a short sale or otherwise) to
make related payments for positions in substantially
similar or related property.
Publication 550 (2024) Chapter 1 Investment Income 29
• Payments in lieu of dividends, but only if you know or
have reason to know the payments are not qualified
dividends.
• Payments shown on Form 1099-DIV, box 1b, from a
foreign corporation to the extent you know or have rea-
son to know the payments are not qualified dividends.
Dividends Used To
Buy More Stock
The corporation in which you own stock may have a divi-
dend reinvestment plan. This plan lets you choose to use
your dividends to buy (through an agent) more shares of
stock in the corporation instead of receiving the dividends
in cash. Most mutual funds also permit shareholders to
automatically reinvest distributions in more shares in the
fund, instead of receiving cash. If you use your dividends
to buy more stock at a price equal to its fair market value,
you must still report the dividends as income.
If you are a member of a dividend reinvestment plan
that lets you buy more stock at a price less than its fair
market value, you must report as dividend income the fair
market value of the additional stock on the dividend pay-
ment date.
You also must report as dividend income any service
charge subtracted from your cash dividends before the
dividends are used to buy the additional stock. But you
may be able to deduct the service charge.
In some dividend reinvestment plans, you can invest
more cash to buy shares of stock at a price less than fair
market value. If you choose to do this, you must report as
dividend income the difference between the cash you in-
vest and the fair market value of the stock you buy. When
figuring this amount, use the fair market value of the stock
on the dividend payment date.
Money Market Funds
Report amounts you receive from money market funds as
dividend income. Money market funds are a type of mu-
tual fund and should not be confused with bank money
market accounts that pay interest.
Capital Gain Distributions
Capital gain distributions (also called capital gain divi-
dends) are paid to you or credited to your account by mu-
tual funds (or other regulated investment companies) and
real estate investment trusts (REITs). They will be shown
in Form 1099-DIV, box 2a you receive from the mutual
fund or REIT.
Report capital gain distributions as long-term capital
gains, regardless of how long you owned your shares in
the mutual fund or REIT. See Capital gain distributions un-
der How To Report Dividend Income, later in this chapter.
Qualified Opportunity Fund (QOF). Effective Decem-
ber 22, 2017, section 1400Z-2 provides a temporary de-
ferral of inclusion in gross income for capital gains inves-
ted in QOFs, and permanent exclusion of capital gains
from the sale or exchange of an investment in the QOF if
the investment is held for at least 10 years. See the Form
8949 instructions on how to report your election to defer
eligible gains invested in a QOF. For additional informa-
tion, please see Opportunity Zones Frequently Asked
Questions available at www.IRS.gov/Newsroom/
Opportunity-Zones-Frequently-Asked-Questions.
Qualified Opportunity Investment. If you held a quali-
fied investment in a qualified opportunity fund (QOF) at
any time during the year, you must file your return with
Form 8997, attached. See Form 8997 instructions.
Undistributed capital gains of mutual funds and RE-
ITs. Some mutual funds and REITs keep their long-term
capital gains and pay tax on them. You must treat your
share of these gains as distributions, even though you did
not actually receive them. However, they are not included
on Form 1099-DIV. Instead, they are reported to you in
Form 2439, box 1a.
Form 2439 also will show how much, if any, of the un-
distributed capital gains is:
• Unrecaptured section 1250 gain (box 1b),
• Gain from qualified small business stock (section
1202 gain, box 1c), or
• Collectibles (28%) gain (box 1d).
For information about these terms, see Capital Gain Tax
Rates in chapter 4.
The tax paid on these gains by the mutual fund or REIT
is shown in Form 2439, box 2.
Basis adjustment. Increase your basis in your mutual
fund, or your interest in a REIT, by the difference between
the gain you report and the credit you claim for the tax
paid.
Nondividend Distributions
A nondividend distribution is a distribution that is not paid
out of the earnings and profits of a corporation or a mutual
fund. You should receive a Form 1099-DIV or other state-
ment showing you the nondividend distribution. A nondivi-
dend distribution will be shown in Form 1099-DIV, box 3. If
you do not receive such a statement, you report the distri-
bution as an ordinary dividend.
Basis adjustment. A nondividend distribution reduces
the basis of your stock. It is not taxed until your basis in
the stock is fully recovered. This nontaxable portion also is
called a return of capital; it is a return of your investment in
the stock of the company. If you buy stock in a corporation
in different lots at different times, and you cannot definitely
identify the shares subject to the nondividend distribution,
reduce the basis of your earliest purchases first.
When the basis of your stock has been reduced to zero,
report any additional nondividend distribution you receive
as a capital gain. Whether you report it as a long-term or
short-term capital gain depends on how long you have
held the stock. See Holding Period in chapter 4.
30 Chapter 1 Investment Income Publication 550 (2024)
Example 1. You bought stock in 2011 for $100. In
2014, you received a nondividend distribution of $80. You
did not include this amount in your income, but you re-
duced the basis of your stock to $20. You received a non-
dividend distribution of $30 in 2024. The first $20 of this
amount reduced your basis to zero. You report the other
$10 as a long-term capital gain for 2024. You must report
as a long-term capital gain any nondividend distribution
you receive on this stock in later years.
Example 2. You bought shares in XYZ Mutual Fund in
2020 for $12 per share. In 2021, you received a nondivi-
dend distribution of $5 per share. You reduced your basis
in each share by $5 to an adjusted basis of $7. In 2022,
you received a nondividend distribution of $1 per share
and further reduced your basis in each share to $6. In
2023, you received a nondividend distribution of $2 per
share. Your basis was reduced to $4 per share. In 2024,
the nondividend distribution from the mutual fund was $5
per share. You reduce your basis in each share to zero
and report $1 of gain per share. See the Instructions for
Form 8949 for details and more information.
For more information on Form 8949 and Sched-
ule D (Form 1040), see Reporting Capital Gains
and Losses in chapter 4. Also, see the Instruc-
tions for Form 8949 and the Instructions for Schedule D
(Form 1040).
Liquidating Distributions
Liquidating distributions, sometimes called liquidating divi-
dends, are distributions you receive during a partial or
complete liquidation of a corporation. These distributions
are, at least in part, one form of a return of capital. They
may be paid in one or more installments. You will receive
Form 1099-DIV from the corporation showing you the
amount of the liquidating distribution in box 9 or 10.
Any liquidating distribution you receive is not taxable to
you until you have recovered the basis of your stock. After
the basis of your stock has been reduced to zero, you
must report the liquidating distribution as a capital gain.
Whether you report the gain as a long-term or short-term
capital gain depends on how long you have held the stock.
See Holding Period in chapter 4.
Stock acquired at different times. If you acquired
stock in the same corporation in more than one transac-
tion, you own more than one block of stock in the corpora-
tion. If you receive distributions from the corporation in
complete liquidation, you must divide the distribution
among the blocks of stock you own in the following pro-
portion: the number of shares in that block over the total
number of shares you own. Divide distributions in partial
liquidation among that part of the stock redeemed in the
partial liquidation. After the basis of a block of stock is re-
duced to zero, you must report the part of any later distri-
bution for that block as a capital gain.
Distributions less than basis. If the total liquidating
distributions you receive are less than the basis of your
stock, you may have a capital loss. You can report aTIP
capital loss only after you have received the final distribu-
tion in liquidation that results in the redemption or cancel-
lation of the stock. Whether you report the loss as a
long-term or short-term capital loss depends on how long
you held the stock. See Holding Period in chapter 4.
Distributions of Stock
and Stock Rights
Distributions by a corporation of its own stock are com-
monly known as stock dividends. Stock rights (also known
as “stock options”) are distributions by a corporation of
rights to acquire the corporation's stock. Generally, stock
dividends and stock rights are not taxable to you, and you
do not report them on your return.
Taxable stock dividends and stock rights. Distribu-
tions of stock dividends and stock rights are taxable to you
if any of the following apply.
1. You or any other shareholder have the choice to re-
ceive cash or other property instead of stock or stock
rights.
2. The distribution gives cash or other property to some
shareholders and an increase in the percentage inter-
est in the corporation's assets or earnings and profits
to other shareholders.
3. The distribution is in convertible preferred stock and
has the same result as in (2).
4. The distribution gives preferred stock to some com-
mon stock shareholders and common stock to other
common stock shareholders.
5. The distribution is on preferred stock. (The distribu-
tion, however, is not taxable if it is an increase in the
conversion ratio of convertible preferred stock made
solely to take into account a stock dividend, stock
split, or similar event that would otherwise result in re-
ducing the conversion right.)
The term “stock” includes rights to acquire stock, and
the term “shareholder” includes a holder of rights or con-
vertible securities.
If you receive taxable stock dividends or stock rights,
include their fair market value at the time of distribution in
your income.
Constructive distributions. You must treat certain
transactions that increase your proportionate interest in
the earnings and profits or assets of a corporation as if
they were distributions of stock or stock rights. These con-
structive distributions are taxable if they have the same re-
sult as a distribution described in (2), (3), (4), or (5) of the
above discussion.
This treatment applies to a change in your stock's con-
version ratio or redemption price, a difference between
your stock's redemption price and issue price, a redemp-
tion not treated as a sale or exchange of your stock, and
any other transaction having a similar effect on your inter-
est in the corporation.
Publication 550 (2024) Chapter 1 Investment Income 31
Preferred stock redeemable at a premium. If you
receive preferred stock having a redemption price higher
than its issue price, the difference (the redemption pre-
mium) generally is taxable as a constructive distribution of
additional stock on the preferred stock.
For stock issued before October 10, 1990, you include
the redemption premium in your income ratably over the
period during which the stock cannot be redeemed. For
stock issued after October 9, 1990, you include the re-
demption premium on the basis of its economic accrual
over the period during which the stock cannot be re-
deemed, as if it were original issue discount on a debt in-
strument. See Original Issue Discount (OID), earlier in this
chapter.
The redemption premium is not a constructive distribu-
tion, and is not taxable as a result, in the following situa-
tions.
1. The stock was issued before October 10, 1990 (be-
fore December 20, 1995, if redeemable solely at the
option of the issuer), and the redemption premium is
“reasonable.” (For stock issued before October 10,
1990, only the part of the redemption premium that is
not “reasonable” is a constructive distribution.) The re-
demption premium is reasonable if it is not more than
10% of the issue price on stock not redeemable for 5
years from the issue date or is in the nature of a pen-
alty for making a premature redemption.
2. The stock was issued after October 9, 1990 (after De-
cember 19, 1995, if redeemable solely at the option of
the issuer), and the redemption premium is de mini-
mis. The redemption premium is de minimis if it is less
than one-fourth of 1% (0.0025) of the redemption
price multiplied by the number of full years from the
date of issue to the date redeemable.
3. The stock was issued after October 9, 1990, and must
be redeemed at a specified time or is redeemable at
your option, but the redemption is unlikely because it
is subject to a contingency outside your control (not
including the possibility of default, insolvency, etc.).
4. The stock was issued after December 19, 1995, and
is redeemable solely at the option of the issuer, but
the redemption premium is in the nature of a penalty
for premature redemption or redemption is not more
likely than not to occur. The redemption will be treated
under a “safe harbor” as not more likely than not to oc-
cur if all of the following are true.
a. You and the issuer are not related under the rules
discussed in chapter 4 under Losses on Sales or
Trades of Property, substituting “20%” for “50%.”
b. There are no plans, arrangements, or agreements
that effectively require or are intended to compel
the issuer to redeem the stock.
c. The redemption would not reduce the stock's
yield.
Basis. Your basis in stock or stock rights received in a
taxable distribution is their fair market value when distrib-
uted. If you receive stock or stock rights that are not taxa-
ble to you, see Stocks and Bonds, later, for information on
how to figure their basis.
Fractional shares. You may not own enough stock in a
corporation to receive a full share of stock if the corpora-
tion declares a stock dividend. However, with the approval
of the shareholders, the corporation may set up a plan in
which fractional shares are not issued but instead are
sold, and the cash proceeds are given to the sharehold-
ers. Any cash you receive for fractional shares under such
a plan is treated as an amount realized on the sale of the
fractional shares. Report this transaction on Form 8949.
Enter your gain or loss, the difference between the cash
you receive and the basis of the fractional shares sold, in
column (h) of Schedule D (Form 1040) in Part I or Part II,
whichever is appropriate.
Report these transactions on Form 8949 with the
correct box checked.
For more information on Form 8949 and Schedule D
(Form 1040), see Reporting Capital Gains and Losses in
chapter 4. Also, see the Instructions for Form 8949 and
the Instructions for Schedule D (Form 1040).
Example. You own one share of common stock that
you bought on January 6, 2015, for $100. The corporation
declared a common stock dividend of 5% on July 1, 2024.
The fair market value of the stock at the time the stock div-
idend was declared was $200. You were paid $10 for the
fractional-share stock dividend under a plan described in
the discussion above. You figure your gain or loss as fol-
lows.
Fair market value of old stock . . . . . . . . . . . . . . . $200.00
Fair market value of stock dividend
(cash received) . . . . . . . . . . . . . . . . . . . . . . . . + 10.00
Fair market value of old stock and stock dividend . . . $210.00
Basis (cost) of old stock
after the stock dividend
(($200 ÷ $210) × $100) . . . . . . . . . . . . . . . . . . . $95.24
Basis (cost) of stock dividend
(($10 ÷ $210) × $100) . . . . . . . . . . . . . . . . . . . . + 4.76
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100.00
Cash received . . . . . . . . . . . . . . . . . . . . . . . . . $10.00
Basis (cost) of stock dividend . . . . . . . . . . . . . . . − 4.76
Gain $5.24
Because you had held the share of stock for more than
1 year at the time the stock dividend was declared, your
gain on the stock dividend is a long-term capital gain.
Scrip dividends. A corporation that declares a stock
dividend may issue you a scrip certificate that entitles you
to a fractional share. The certificate generally is nontaxa-
ble when you receive it. If you choose to have the corpora-
tion sell the certificate for you and give you the proceeds,
your gain or loss is the difference between the proceeds
and the part of your basis in the corporation's stock alloca-
ted to the certificate.
However, if you receive a scrip certificate that you can
choose to redeem for cash instead of stock, the certificateCAUTION
!
32 Chapter 1 Investment Income Publication 550 (2024)
is taxable when you receive it. You must include its fair
market value in income on the date you receive it.
Other Distributions
You may receive any of the following distributions during
the year.
Exempt-interest dividends. Exempt-interest dividends
you receive from a mutual fund or other RIC are not inclu-
ded in your taxable income. (However, see Information re-
porting requirement, next.) Exempt-interest dividends
should be shown in Form 1099-DIV, box 12.
Information reporting requirement. Although ex-
empt-interest dividends are not taxable, you must show
them on your tax return if you have to file a return. See Re-
porting tax-exempt interest, earlier.
Alternative minimum tax treatment. Exempt-interest
dividends paid from specified private activity bonds may
be subject to the AMT. The exempt-interest dividends sub-
ject to the AMT should be shown in Form 1099-DIV,
box 13. See Form 6251 and its instructions for more infor-
mation.
Dividends on insurance policies. Insurance policy divi-
dends the insurer keeps and uses to pay your premiums
are not taxable. However, you must report as taxable inter-
est income the interest that is paid or credited on divi-
dends left with the insurance company.
If dividends on an insurance contract (other than a
modified endowment contract) are distributed to you, they
are a partial return of the premiums you paid. Do not in-
clude them in your gross income until they are more than
the total of all net premiums you paid for the contract.
Dividends on veterans' insurance. Dividends you re-
ceive on veterans' insurance policies are not taxable. In
addition, interest on dividends left with the Department of
Veterans Affairs is not taxable.
Patronage dividends. Generally, patronage dividends
you receive in money from a cooperative organization are
included in your income. You should receive Form
1099-PATR.
Do not include in your income patronage dividends you
receive on:
• Property bought for your personal use, or
• Capital assets or depreciable property bought for use
in your business. But you must reduce the basis (cost)
of the items bought. If the dividend is more than the
adjusted basis of the assets, you must report the ex-
cess as income.
These rules are the same whether the cooperative pay-
ing the dividend is a taxable or tax-exempt cooperative.
Alaska Permanent Fund dividends. Do not report
these amounts as dividends. Instead, include these
amounts on Schedule 1 (Form 1040), line 8g.
How To Report
Dividend Income
Terms you may need to know
(see Glossary):
Nominee
Restricted stock
Report the total of your ordinary dividends on Form 1040
or 1040-SR, line 3b. Report qualified dividends on Form
1040 or 1040-SR, line 3a.
Form 1099-DIV. If you owned stock on which you re-
ceived $10 or more in dividends and other distributions,
you should receive a Form 1099-DIV. Even if you do not
receive a Form 1099-DIV, you must report all your divi-
dend income.
See Form 1099-DIV and its instructions for more infor-
mation on how to report dividend income.
Form 1040 or 1040-SR. You must complete Schedule B
(Form 1040), Part II, and attach it to your Form 1040 or
1040-SR, if:
• Your ordinary dividends (Form 1099-DIV, box 1a) are
more than $1,500, or
• You received, as a nominee, dividends that actually
belong to someone else.
See Instructions for Schedule B (Form 1040) for more in-
formation.
List on Schedule B (Form 1040), Part II, line 5, each
payer's name and the ordinary dividends you received. If
your securities are held by a brokerage firm (in “street
name”), list the name of the brokerage firm shown on
Form 1099-DIV as the payer. If your stock is held by a
nominee who is the owner of record, and the nominee
credited or paid you dividends on the stock, show the
name of the nominee and the dividends you received or
for which you were credited.
Enter on Schedule B (Form 1040), Part II, line 6 the to-
tal of the amounts listed on Schedule B (Form 1040), Part
II, line 5. (However, if you hold stock as a nominee, see
Nominees, later.).
Dividends received on restricted stock. Restricted
stock is stock you get from your employer for services you
perform and that is nontransferable and subject to a sub-
stantial risk of forfeiture. You do not have to include the
value of the stock in your income when you receive it.
However, if you get dividends on restricted stock, you
must include them in your income as wages, not divi-
dends. See Restricted Property in Pub. 525 for information
on restricted stock dividends.
Your employer should include these dividends in the
wages shown on your Form W-2. If you also get a Form
1099-DIV for these dividends, list them on Schedule B
Publication 550 (2024) Chapter 1 Investment Income 33
(Form 1040), Part II, line 5, with the other dividends you
received. Enter a subtotal of all your dividend income sev-
eral rows above Schedule B (Form 1040), Part II, line 6.
Below the subtotal, enter “Dividends on restricted stock
reported as wages on Form 1040 or 1040-SR, line 1,” and
include the dividends included in your wages on Form
1040 or 1040-SR, line 1. Subtract this amount from the
subtotal and enter the result on Schedule B (Form 1040),
Part II, line 6.
Election. You can choose to include the value of re-
stricted stock in gross income as pay for services. If you
made this choice, report the dividends on the stock like
any other dividends. If you receive both a Form 1099-DIV
and a Form W-2 showing these dividends, do not include
the dividends in your wages reported on Form 1040 or
1040-SR, line 1. Attach a statement to your Form 1040 or
1040-SR explaining why the amount shown on your Form
1040 or 1040-SR, line 1 is different from the amount
shown on your Form W-2.
Independent contractor. If you received restricted
stock for services as an independent contractor, the rules
in the previous discussion apply. Generally, you must treat
dividends you receive on the stock as income from
self-employment.
Qualified dividends. Report qualified dividends (Form
1099-DIV, box 1b) on Form 1040 or 1040-SR, line 3a. The
amount in Form 1099-DIV, box 1b is already included in
box 1a. Do not add the amount in box 1b to, or subtract it
from, the amount in box 1a. Do not include any of the fol-
lowing on Form 1040 or 1040-SR, line 3a.
• Qualified dividends you received as a nominee. See
Nominees, later.
• Dividends on stock for which you did not meet the
holding period. See Holding period, earlier, under
Qualified Dividends.
• Dividends on any share of stock to the extent you are
obligated (whether under a short sale or otherwise) to
make related payments for positions in substantially
similar or related property.
• Payments in lieu of dividends, but only if you know or
have reason to know the payments are not qualified
dividends.
• Payments shown on Form 1099-DIV, box 1b, from a
foreign corporation to the extent you know or have rea-
son to know the payments are not qualified dividends.
If you have qualified dividends, you must figure your tax
by completing the Qualified Dividends and Capital Gain
Tax Worksheet in the Form 1040 or 1040-SR instructions
or the Schedule D Tax Worksheet in the Schedule D
(Form 1040) instructions, whichever applies.
Investment interest deducted. If you claim a deduc-
tion for investment interest, you may have to reduce the
amount of your qualified dividends that are eligible for the
0%, 15%, or 20% tax rate. Reduce it by the qualified divi-
dends you choose to include in investment income when
figuring the limit on your investment interest deduction.
This is done on the Qualified Dividends and Capital Gain
Tax Worksheet or the Schedule D Tax Worksheet. For
more information about the limit on investment interest,
see Interest Expenses in chapter 3.
Capital gain distributions. If you received capital gain
distributions, you report them directly on Form 1040 or
1040-SR, line 7; or on Schedule D (Form 1040), line 13,
depending on your situation. If you received capital gain
distributions from a mutual fund or real estate investment
trust (REIT), the distributions of net realized short-term
capital gains are not treated as capital gains. Instead, they
are included on Form 1099-DIV as ordinary dividends. Re-
port them on your tax return as ordinary dividends.
Exceptions to filing Form 8949 and Schedule D (Form
1040). There are certain situations where you may not
have to file Form 8949 and/or Schedule D (Form 1040).
See Instructions for Form 1040, Line 7, for those excep-
tions.
Undistributed capital gains. Follow the Instructions
for the Shareholder on Form 2439 to report undistributed
capital gains and the tax paid by the mutual fund on those
gains.
Nondividend distributions. Report nondividend distri-
butions (Form 1099-DIV, box 3) only after your basis in the
stock has been reduced to zero. After the basis of your
stock has been reduced to zero, you must show this ex-
cess amount on Form 8949, Part I, if you held the stock 1
year or less. Show it on Form 8949, Part II, if you held the
stock for more than 1 year. See Form 8949 and instruc-
tions.
Report these transactions on Form 8949 with the
correct box checked.
For more information on Form 8949 and Schedule D
(Form 1040), see Reporting Capital Gains and Losses in
chapter 4. Also, see the Instructions for Form 8949 and
the Instructions for Schedule D (Form 1040).
Nominees. If you received ordinary dividends as a nomi-
nee (that is, the dividends are in your name but actually
belong to someone else), include them on Schedule B
(Form 1040), Part II, line 5. Several rows above Sched-
ule B (Form 1040), Part II, line 6, put a subtotal of all divi-
dend income listed on Schedule B (Form 1040), Part II,
line 5. Below this subtotal, enter “Nominee Distribution”
and show the amount received as a nominee. Subtract the
total of your nominee distributions from the subtotal. Enter
the result on Schedule B (Form 1040), Part II, line 6.
If you received a capital gain distribution or were alloca-
ted an undistributed capital gain as a nominee, report only
the amount that belongs to you on Form 1040 or 1040-SR,
line 7; or Schedule D (Form 1040), line 13, whichever is
appropriate. Attach a statement to your return showing the
full amount you received or were allocated and the
amount you received or were allocated as a nominee.
File Form 1099-DIV with the IRS. If you received divi-
dends as a nominee in 2024, you must file a FormCAUTION
!
34 Chapter 1 Investment Income Publication 550 (2024)
1099-DIV (or Form 2439) for those dividends with the IRS.
Send the Form 1099-DIV with a Form 1096 to your Internal
Revenue Service Center by February 28, 2025 (March 31,
2025, if you file Form 1099-DIV electronically). Give the
actual owner of the dividends Copy B of the Form
1099-DIV by January 31, 2025. On Form 1099-DIV, you
should be listed as the “Payer.” The other owner should be
listed as the “Recipient.” You do not, however, have to file
a Form 1099-DIV to show payments for your spouse. For
more information about the reporting requirements and
the penalties for failure to file (or furnish) certain informa-
tion returns, see the General Instructions for Certain Infor-
mation Returns and the Instructions for Form 2439.
Stripped
Preferred Stock
If the dividend rights are stripped from certain preferred
stock, the holder of the stripped preferred stock may have
to include amounts in income equal to the amounts that
would have been included if the stock were a bond with
OID.
Stripped preferred stock defined. Stripped preferred
stock is any stock that meets both of the following tests.
1. There has been a separation in ownership between
the stock and any dividend on the stock that has not
become payable.
2. The stock:
a. Is limited and preferred as to dividends,
b. Does not participate in corporate growth to any
significant extent, and
c. Has a fixed redemption price.
Treatment of buyer. If you buy stripped preferred stock
after April 30, 1993, you must include certain amounts in
your gross income while you hold the stock. These
amounts are ordinary income. They are equal to the
amounts you would have included in gross income if the
stock were a bond that:
1. Was issued on the purchase date of the stock, and
2. Has OID equal to:
a. The redemption price for the stock, minus
b. The price at which you bought the stock.
Include these amounts on Schedule 1 (Form 1040),
line 8z.
This treatment also applies to you if you acquire the
stock in such a way (for example, by gift) that your basis in
the stock is determined by using a buyer's basis.
Treatment of person stripping stock. If you strip the
rights to one or more dividends from preferred stock, you
are treated as having purchased the stock. You are treated
as making the purchase on the date you disposed of the
dividend rights. Your adjusted basis in the preferred stock
is treated as your purchase price. The rules described in
Treatment of buyer, earlier, apply to you.
REMICs, FASITs,
and Other CDOs
Holders of interests in real estate mortgage investment
conduits (REMICs), financial asset securitization invest-
ment trusts (FASITs), and other collateralized debt obliga-
tions (CDOs) must follow special rules for reporting in-
come and any expenses from these investment products.
REMICs
A REMIC is an entity formed for the purpose of holding a
fixed pool of mortgages secured by interests in real prop-
erty. A REMIC issues regular and residual interests to in-
vestors. A REMIC generally is not treated as a corpora-
tion, partnership, or trust. For purposes of subtitle F of the
Internal Revenue Code (Procedure and Administration), a
REMIC generally is treated as a partnership with the resid-
ual interest holders treated as the partners. The regular in-
terests are treated as debt instruments.
REMIC income or loss is not income or loss from a pas-
sive activity.
For more information about the qualifications and tax
treatment that apply to a REMIC and the interests of in-
vestors in a REMIC, see sections 860A through 860G of
the Internal Revenue Code, and the regulations under
those sections.
Regular Interest
A REMIC can have several classes (also known as
“tranches”) of regular interests. A regular interest uncondi-
tionally entitles the holder to receive a specified principal
amount (or other similar amount).
A REMIC regular interest is treated as a debt instru-
ment for income tax purposes. Accordingly, the OID, mar-
ket discount, and income reporting rules that apply to
bonds and other debt instruments as described earlier in
this publication under Discount on Debt Instruments apply,
with certain modifications discussed below.
Generally, you report your income from a regular inter-
est on Form 1040 or 1040-SR, line 2b. For more informa-
tion on how to report interest and OID, see How To Report
Interest Income, earlier.
Holders must use accrual method. Holders of regular
interests must use an accrual method of accounting to re-
port OID and interest income. Because income under an
accrual method is not determined by the receipt of cash,
you may have to include OID or interest income in your
taxable income even if you have not received any cash
payments.
Publication 550 (2024) Chapter 1 Investment Income 35
Forms 1099-INT and 1099-OID. You should receive a
copy of Form 1099-INT or Form 1099-OID from the RE-
MIC. See the General Instructions for Certain Information
Returns for information on when you should receive your
copy of Form 1099-INT or Form 1099-OID and a written
statement providing additional information. The statement
should contain enough information to enable you to figure
your accrual of market discount or amortizable bond pre-
mium.
Form 1099-INT shows interest income that accrued to
you for the period you held the regular interest.
Form 1099-OID shows OID and interest, if any, that ac-
crued to you for the period you held the regular interest.
You will not need to make any adjustments to the amounts
reported even if you held the regular interest for only a part
of the calendar year. However, if you bought the regular in-
terest at a premium or acquisition premium, see Refigur-
ing OID shown on Form 1099-OID, earlier.
You may not get a Form 1099. Corporations and
other persons specified in Regulations section
1.6049-7(c) will not receive Forms 1099. These persons
and fiscal year taxpayers may obtain tax information by
contacting the REMIC or the issuer of the CDO, if they
hold their interest directly from the REMIC or issuer of the
CDO. Pub 938 explains how to request this information.
Pub. 938 is available at IRS.gov/pub938.
If you hold a regular interest or CDO through a nominee
(rather than directly), you can request the information from
the nominee.
Allocated investment expenses. A single-class REMIC
will report your share of its investment expenses in Form
1099-INT, box 5 or Form 1099-OID, box 9. This amount is
not deductible. A single-class REMIC is one that generally
would be classified as a trust for tax purposes if it had not
elected REMIC status.
Redemption of regular interests at maturity. Redemp-
tion of debt instruments at their maturity is treated as a
sale or exchange. You must report redemptions on your
tax return whether or not you realize gain or loss on the
transaction. Your basis is your adjusted issue price, which
includes any OID you previously reported in income.
Any amount you receive on the retirement of a debt in-
strument is treated as if you had sold or exchanged that
instrument. A debt instrument is retired when it is reac-
quired or redeemed by the issuer and canceled.
Sale or exchange of a regular interest. Some of
your gain on the sale or exchange of a REMIC regular in-
terest may be ordinary income. The ordinary income part,
if any, is:
• The amount that would have been included in your in-
come if the yield to maturity on the regular interest had
been 110% of the applicable federal rate at the begin-
ning of your holding period, minus
• The amount you included in your income.
Residual Interest
A residual interest is an interest in a REMIC that is not a
regular interest. It is designated as a residual interest by
the REMIC.
If you acquire a residual interest in a REMIC, you must
take into account on a quarterly basis your daily portion of
the taxable income or net loss of the REMIC for each day
during the tax year you hold the residual interest. You must
report these amounts as ordinary income or loss.
Basis in the residual interest. Your basis in the residual
interest is increased by taxable income you take into ac-
count. Your basis is decreased (but not below zero) by the
cash or the fair market value of any property distributed to
you, and by any net loss you have taken into account. If
you sell or transfer your residual interest, you must adjust
your basis to reflect your share of the REMIC's taxable in-
come or net loss immediately before the sale or transfer.
See Wash Sales, in chapter 4, for more information about
selling a residual interest.
Treatment of distributions. You must include in your
gross income the part of any distribution that is more than
your adjusted basis. Treat the distribution as a gain from
the sale or exchange of your residual interest.
Schedule Q (Form 1066). If you hold a REMIC residual
interest, you should receive Schedule Q (Form 1066) and
instructions from the REMIC each quarter. Schedule Q
(Form 1066) will indicate your share of the REMIC's quar-
terly taxable income (or loss).
Use Schedule E (Form 1040), Part IV, to report your to-
tal share of the REMIC's taxable income (or loss) for each
quarter included in your tax year.
For more information about reporting your income (or
loss) from a residual interest in a REMIC, follow the In-
structions for Schedule Q (Form 1066) and Schedule E
(Form 1040).
Collateralized Debt Obligations
(CDOs)
A CDO is a debt instrument, other than a REMIC regular
interest, that is secured by a pool of mortgages or other
evidence of debt and that has principal payments subject
to acceleration. (Note: While REMIC regular interests are
collateralized debt obligations, they have unique rules that
do not apply to CDOs issued before 1987.) CDOs, also
known as “pay-through bonds,” are commonly divided into
different classes (also called “tranches”).
CDOs can be secured by a pool of mortgages, automo-
bile loans, equipment leases, or credit card receivables.
For more information about the qualifications and the
tax treatment that apply to an issuer of a CDO, see section
1272(a)(6) of the Internal Revenue Code and the regula-
tions under that section.
The OID, market discount, and income-reporting rules
that apply to bonds and other debt instruments, as
36 Chapter 1 Investment Income Publication 550 (2024)
described earlier in this chapter under Discount on Debt
Instruments, also apply to a CDO.
You must include interest income from your CDO in
your gross income under your regular method of account-
ing. Also, include any OID accrued on your CDO during
the tax year.
Generally, you report your income from a CDO on Form
1040 or 1040-SR, line 2b. For more information about re-
porting these amounts on your return, see How To Report
Interest Income, earlier.
Forms 1099-INT and 1099-OID. You should receive a
copy of Form 1099-INT or Form 1099-OID generally by
January 31, 2025. See the General Instructions for Certain
Information Returns for information on when you should
receive your copy of Form 1099-INT or Form 1099-OID
and a written statement providing additional information.
The statement should contain enough information about
the CDO to enable you to figure your accrual of market
discount or amortizable bond premium.
Form 1099-INT shows the interest income paid to you
for the period you held the CDO.
Form 1099-OID shows the OID accrued to you and the
interest, if any, paid to you for the period you held the
CDO. You should not need to make any adjustments to
the amounts reported even if you held the CDO for only a
part of the calendar year. However, if you bought the CDO
at a premium or acquisition premium, see Refiguring OID
shown on Form 1099-OID, earlier.
If you did not receive a Form 1099, see You may not get
a Form 1099, earlier.
FASITs
A financial asset securitization investment trust (FASIT) is
an entity that securitizes debt obligations such as credit
card receivables, home equity loans, and automobile
loans.
A regular interest in a FASIT is treated as a debt instru-
ment. The rules described under Collateralized Debt Obli-
gations (CDOs), earlier, apply to a regular interest in a FA-
SIT, except that a holder of a regular interest in a FASIT
must use an accrual method of accounting to report OID
and interest income.
See Internal Revenue Code sections 860H, 860I, 860J,
860K, 860L, before repeal by PL 108–357, October 22,
2004, for more information on FASITs.
Beginning January 1, 2005, the special rules for
FASITs are repealed. However, the special rules
still apply to any FASIT in existence on October
22, 2004, to the extent that regular interests issued by the
FASIT before that date continue to remain outstanding in
accordance with the original terms of issuance.
S Corporations
In general, an S corporation does not pay a tax on its in-
come. Instead, its income and expenses are passedCAUTION
!
through to the shareholders, who then report these items
on their own income tax returns.
If you are an S corporation shareholder, your share of
the corporation's current year income or loss and other tax
items are taxed to you whether or not you receive any
amount. Generally, those items increase or decrease the
basis of your S corporation stock, as appropriate.
Generally, S corporation distributions, except dividend
distributions, are considered a return of capital and reduce
your basis in the stock of the corporation. The part of any
distribution that is more than your basis is treated as a
gain from the sale or exchange of property. The corpora-
tion's distributions may be in the form of cash or property.
S corporation distributions are not treated as dividends
except in certain cases in which the corporation has accu-
mulated earnings and profits from years before it became
an S corporation.
Reporting S corporation income, deductions, and
credits. The S corporation should send you a copy of
Schedule K-1 (Form 1120-S) showing your share of the S
corporation's income, credits, and deductions for the tax
year. You must report your distributive share of the S cor-
poration's income, gain, loss, deductions, or credits on the
appropriate lines and schedules of your Form 1040 or
1040-SR.
For more information about your treatment of S corpo-
ration tax items, see Shareholder's Instructions for Sched-
ule K-1 (Form 1120-S).
Limit on losses and deductions. The deduction for
your share of losses and deductions shown on Sched-
ule K-1 (Form 1120-S) is limited to the adjusted basis of
your stock and any debt the corporation owes you. Any
loss or deduction not allowed because of this limit is car-
ried over and treated as a loss or deduction in the next tax
year.
Passive activity losses. Rules apply that limit losses
from passive activities. Your copy of Schedule K-1 (Form
1120-S) and its instructions will explain the limits and tell
you where on your return to report your share of S corpo-
ration items from passive activities.
Form 8582. If you have a passive activity loss from an
S corporation, you must complete Form 8582 to figure the
allowable loss to enter on your return. See Pub. 925 for
more information.
Investment Clubs
An investment club is formed when a group of friends,
neighbors, business associates, or others pool their
money to invest in stock or other securities. The club may
or may not have a written agreement, a charter, or bylaws.
Usually, the group operates informally with members
pledging to pay a monthly regular amount into the club.
Some clubs have a committee that gathers information on
securities, selects the most promising securities, and
Publication 550 (2024) Chapter 1 Investment Income 37
recommends that the club invest in them. Other clubs ro-
tate these responsibilities among all their members. Most
clubs require all members to vote for or against all invest-
ments, sales, trades, and other transactions.
Identifying number. Each club must have an EIN to use
when filing its return. The club's EIN also may have to be
given to the payer of dividends or other income from in-
vestments recorded in the club's name. To obtain an EIN,
apply online at IRS.gov/Businesses/Small-Businesses-&-
Self-Employed/Apply-for-an-Employer-Identification-
Number-(EIN)-Online or file Form SS-4. See chapter 5,
How To Get Tax Help, for more information about how to
get this form.
Investments in name of member. When an invest-
ment is recorded in the name of one club member, this
member must give its SSN to the payer of investment in-
come. (When an investment is held in the names of two or
more club members, the SSN of only one member must
be given to the payer.) This member is considered the re-
cord owner for the actual owner, the investment club. This
member is a “nominee” and must file an information return
with the IRS. For example, the nominee member must file
Form 1099-DIV for dividend income, showing the club as
the owner of the dividend, its SSN, and the EIN of the
club.
Tax Treatment of the Club
Generally, an investment club is treated as a partnership
for federal tax purposes unless it chooses otherwise. In
some situations, however, it is taxed as a corporation or a
trust.
Clubs formed before 1997. Before 1997, the rules for
determining how an investment club is treated were differ-
ent from those explained in the following discussions. An
investment club that existed before 1997 is treated for
later years the same way it was treated before 1997, un-
less it chooses to be treated a different way under the new
rules. To make that choice, the club must file Form 8832.
Club as a Partnership
If your club is not taxed as a corporation or a trust, it will be
treated as a partnership.
Filing requirement. If your investment club is treated as
a partnership, it must file Form 1065. However, as a part-
ner in the club, you must report on your individual return
your share of the club's income, gains, losses, deductions,
and credits for the club's tax year. (Its tax year generally
must be the same tax year as that of the partners owning
a majority interest.) You must report these items whether
or not you actually receive any distribution from the part-
nership.
Schedule K-1 (Form 1065). You should receive a copy
of Schedule K-1 (Form 1065) from the partnership. The
amounts shown on Schedule K-1 (Form 1065) are your
share of the partnership's income, deductions, and cred-
its. Report each amount on the appropriate lines and
schedules of your income tax return.
The club's expenses for producing or collecting in-
come, for managing investment property, or for determin-
ing any tax are listed separately on Schedule K-1 (Form
1065).
For more information about reporting your income from
a partnership, see the Schedule K-1 (Form 1065) instruc-
tions. Also, see Pub. 541.
Passive activity losses. Rules apply that limit losses
from passive activities. Your copy of Schedule K-1 (Form
1065) and its instructions will tell you where on your return
to report your share of partnership items from passive ac-
tivities. If you have a passive activity loss from a partner-
ship, you must complete Form 8582 to figure the amount
of the allowable loss to enter on your tax return.
No social security coverage for investment club earn-
ings. If an investment club partnership's activities are
limited to investing in savings certificates, stock, or securi-
ties, and collecting interest or dividends for its members'
accounts, a member's share of income is not earnings
from self-employment. You cannot voluntarily pay the
self-employment tax to increase your social security cov-
erage and ultimate benefits.
Club as a Corporation
An investment club formed after 1996 is taxed as a corpo-
ration if:
• It is formed under a federal or state law that refers to it
as incorporated or as a corporation, body corporate,
or body politic;
• It is formed under a state law that refers to it as a
joint-stock company or joint-stock association; or
• It chooses to be taxed as a corporation.
Choosing to be taxed as a corporation. To choose to
be taxed as a corporation, the club cannot be a trust (see
Club as a Trust, later) or otherwise subject to special treat-
ment under the tax law. The club must file Form 8832 to
make the choice.
Filing requirement. If your club is taxed as a corpora-
tion, it must file Form 1120. In that case, you do not report
any of its income or expenses on your individual return. All
ordinary income and expenses and capital gains and los-
ses must be reported on the Form 1120. Any distribution
the club makes that qualifies as a dividend must be repor-
ted on Form 1099-DIV if total distributions to the share-
holder are $10 or more for the year.
You must report any distributions you receive from the
club on your individual return. You should receive a copy
of Form 1099-DIV from the club showing the distributions
you received.
Some corporations can choose not to be taxed and
have earnings taxed to the shareholders. See S Corpora-
tions, earlier.
For more information about corporations, see Pub. 542.
38 Chapter 1 Investment Income Publication 550 (2024)
Club as a Trust
In a few cases, an investment club is taxed as a trust. In
general, a trust is an arrangement through which trustees
take title to property for the purpose of protecting or con-
serving it for the beneficiaries under the ordinary rules ap-
plied in chancery or probate courts. An arrangement is
treated as a trust for tax purposes if its purpose is to vest
in trustees responsibility for protecting and conserving
property for beneficiaries who cannot share in that respon-
sibility and so are not associates in a joint enterprise for
the conduct of business for profit. If you need more infor-
mation about trusts, see Regulations section 301.7701-4.
Filing requirement. If your club is taxed as a trust, it
must file Form 1041. You should receive a copy of Sched-
ule K-1 (Form 1041) from the trust. Report the amounts
shown on Schedule K-1 (Form 1041) on the appropriate
lines and schedules of your income tax return.
2.
Tax Shelters and Other
Reportable
Transactions
Introduction
Investments that yield tax benefits are sometimes called
“tax shelters.” In some cases, Congress has concluded
that the loss of revenue is an acceptable side effect of
special tax provisions designed to encourage taxpayers to
make certain types of investments. In many cases, how-
ever, losses from tax shelters produce little or no benefit to
society, or the tax benefits are exaggerated beyond those
intended. Those cases are called “abusive tax shelters.”
An investment that is considered a tax shelter is subject to
restrictions, including the requirement that it be disclosed.
See Disclosure of reportable transactions, later.
Topics
This chapter discusses:
• Abusive Tax Shelters,
• Rules To Curb Abusive Tax Shelters,
• Investor Reporting,
• Penalties, and
• Whether To Invest.
Useful Items
You may want to see:
Publication
538 Accounting Periods and Methods
561 Determining the Value of Donated Property
925 Passive Activity and At-Risk Rules
Form (and Instructions)
8275 Disclosure Statement
8275-R Regulation Disclosure Statement
8283 Noncash Charitable Contributions
8865 Return of U.S. Persons With Respect to
Certain Foreign Partnerships
8886 Reportable Transaction Disclosure Statement
8918 Material Advisor Disclosure Statement
8938 Statement of Specified Foreign Financial
Assets
See chapter 5, How To Get Tax Help, for information about
getting these publications and forms.
Abusive Tax Shelters
Abusive tax shelters are marketing schemes involving arti-
ficial transactions with little or no economic reality. They
often make use of unrealistic allocations, inflated apprais-
als, losses in connection with nonrecourse loans, mis-
matching of income and deductions, financing techniques
that do not conform to standard commercial business
practices, or mischaracterization of the substance of the
transaction. Despite appearances to the contrary, the tax-
payer generally takes little risk.
Abusive tax shelters commonly involve package deals
designed from the start to generate losses, deductions, or
credits that will be far more than the present or future in-
vestment. For example, abusive tax shelters may promise
investors from the start that future inflated appraisals will
enable them to deduct charitable contribution deductions
based on those appraisals. (But see the appraisal require-
ments discussed under Rules To Curb Abusive Tax Shel-
ters, later.) They are commonly marketed in terms of the
ratio of tax deductions allegedly available to each dollar
invested. This ratio (or “write-off”) is frequently said to be
several times greater than one-to-one.
Because there are many types of abusive tax shelters,
it is not possible to list all the factors you should consider
in determining whether an offering is an abusive tax shel-
ter. However, you should ask the following questions,
which might provide a clue to the abusive nature of the
plan.
• Do the tax benefits far outweigh the economic bene-
fits? Are the tax benefits the primary reason for the
transaction?
8275
8275-R
8283
8865
8886
8918
8938
Publication 550 (2024) Chapter 2 Tax Shelters and Other Reportable
Transactions
• Is this a transaction you would seriously consider if
you hoped to make a profit?
• Do shelter assets really exist and, if so, are they in-
sured for less than their purchase price?
• Is there a nontax justification for the way profits and
losses are allocated to partners?
• Do the facts and supporting documents make eco-
nomic sense? For example, are there sales and re-
sales of the tax shelter property at ever increasing pri-
ces?
• Does the investment plan involve a gimmick, device,
or sham to hide the economic reality of the transac-
tion?
• Does the promoter offer to backdate documents? Are
you instructed to backdate checks covering your in-
vestment?
• Is your debt a real debt or are you assured by the pro-
moter that you will never have to pay it?
• Does this transaction involve laundering U.S. source
income through foreign corporations incorporated in a
tax haven and owned by U.S. shareholders?
Rules To Curb
Abusive Tax Shelters
Congress has enacted a series of income tax laws de-
signed to halt the growth of abusive tax shelters. These
provisions include the following.
Disclosure of reportable transactions. You must
disclose information for each reportable transaction in
which you participate. See Reportable Transaction Disclo-
sure Statement, later.
Material advisors with respect to any reportable trans-
action must disclose information about the transaction on
Form 8918, Material Advisor Disclosure Statement. To de-
termine whether you are a material advisor to a transac-
tion, see the Instructions for Form 8918.
Material advisors will receive a reportable transaction
number for the disclosed reportable transaction. They
must provide this number to all persons to whom they ac-
ted as a material advisor. They must provide the number
at the time the transaction is entered into. If they do not
have the number at that time, they must provide it within
60 calendar days from the date the number is mailed to
them. For information on penalties for failure to disclose
and failure to maintain lists, see sections 6707, 6707A,
and 6708.
Requirement to maintain list. Material advisors
must maintain a list of persons to whom they provide ma-
terial aid, assistance, or advice on any reportable transac-
tion. The list must be available for inspection by the IRS,
and the information required to be included on the list
must generally be kept for 7 years. See Regulations sec-
tion 301.6112-1 for more information (including what infor-
mation is required to be included on the list).
Confidentiality privilege. The confidentiality privilege
between you and a federally authorized tax practitioner
does not apply to written communications made after Oc-
tober 21, 2004, regarding the promotion of your direct or
indirect participation in any tax shelter.
Appraisal requirement for donated property. If you
claim a deduction of more than $5,000 for an item or
group of similar items of donated property, you must gen-
erally get a qualified appraisal. See section 170 and Form
8283 for more information. If you claim a deduction of
more than $500,000 for the donated property, you must
generally attach the qualified appraisal to your return. If
you file electronically, see Form 8453, U.S. Individual In-
come Tax Transmittal for an IRS e-file Return, and its in-
structions. See Pub. 561 for information about appraisals.
Conservation easements. The IRS issued final Regula-
tions section 1.6011-9 to identify certain syndicated con-
servation easement transactions and substantially similar
transactions as listed transactions. These transactions re-
quire additional disclosures by advisors and certain partic-
ipants as a reportable transaction. The definition of the
term “conservation easement” is modified to include a re-
striction (granted in perpetuity) on the use that may be
made of the real property, within the meaning of section
170(h)(2)(C), exclusively for conservation purposes, within
the meaning of section 170(h)(1)(C) and (h)(4). The pres-
ervation of a certified historic structure is included in the
definition of real property for purposes of identifying a
transaction as a listed transaction. See Regulations sec-
tion 1.6011-9, effective October 8, 2024, for details and
examples.
Limits on deductions for donations of conserva-
tion contributions by pass-through entities. A deduc-
tion for a donation of a qualified conservation contribution
by a partnership or S corporation is limited to 2.5 times the
sum of each partner’s relevant basis. Any contribution in
excess of that amount is disallowed and not treated as a
qualified conservation contribution. For more information,
see section 170(h).
Passive activity loss and credit limits. The passive
activity loss and credit rules limit the amount of losses and
credits that can be claimed from passive activities and
limit the amount that can offset nonpassive income, such
as certain portfolio income from investments. See Pub.
925 for information about income, losses, and credits from
passive activities.
Interest on penalties. If you are assessed an accu-
racy-related or civil fraud penalty (as discussed under
Penalties, later), interest will be imposed on the amount of
the penalty from the due date of the return (including any
extensions) to the date you pay the penalty.
Accounting method restriction. Tax shelters gener-
ally cannot use the cash method of accounting.
Uniform capitalization rules. The uniform capitaliza-
tion rules generally apply to producing property or acquir-
ing it for resale. Under those rules, the direct cost and part
of the indirect cost of the property must be capitalized or
40 Chapter 2 Tax Shelters and Other Reportable
Transactions
Publication 550 (2024)
included in inventory. See Pub. 538 for uniform capitaliza-
tion rules.
Denial of deduction for interest on an underpay-
ment due to a reportable transaction. You cannot de-
duct any interest you paid or accrued on any part of an un-
derpayment of tax due to an understatement arising from
a reportable transaction if the relevant facts affecting the
tax treatment of the item are not adequately disclosed.
See Reportable transaction, later. This rule applies to re-
portable transactions entered into in tax years beginning
after October 22, 2004.
Authority for Disallowance of Tax Benefits
The IRS has published guidance concluding that the
claimed tax benefits of various abusive tax shelters should
be disallowed. The guidance is the IRS’s conclusion on
how the law is applied to a particular set of facts. Guid-
ance is published in the Internal Revenue Bulletin for tax-
payers' information and also for use by IRS officials. So, if
your return is examined and an abusive tax shelter is iden-
tified and challenged, published guidance dealing with
that type of shelter, which disallows certain claimed tax
shelter benefits, could serve as the basis for the examin-
ing official's challenge of the tax benefits you claimed. In
such a case, the examiner will not compromise even if you
or your representative believe you have authority for the
positions taken on your tax return. In addition, the exam-
iner can also assess penalties based on the facts and cir-
cumstances.
The courts are generally unsympathetic to taxpay-
ers involved in abusive tax shelter schemes and
have ruled in favor of the IRS in the majority of the
cases in which these shelters have been challenged.
Investor Reporting
You may be required to file a reportable transaction disclo-
sure statement.
Reportable Transaction Disclosure
Statement
Use Form 8886 to disclose information for each reportable
transaction in which you participated. See Reportable
transaction, later. Generally, you must attach Form 8886 to
your return for each tax year in which you participated in
the transaction. Under certain circumstances, a transac-
tion must be disclosed within 90 days of the transaction
being identified as a listed transaction or a transaction of
interest. See Listed transaction, later. In addition, for the
first year Form 8886 is attached to your return, you must
send a copy of the form to:
Internal Revenue Service
OTSA Mail Stop 4915
1973 Rulon White Blvd.
Ogden, UT 84201CAUTION
!
If you file your return electronically, the copy sent to The
Office of Tax Shelter Analysis (OTSA) must show exactly
the same information, word for word, provided with the
electronically filed return and it must be provided on the
official IRS Form 8886 or an exact copy of the form. If you
use a computer-generated or substitute Form 8886, it
must be an exact copy of the official IRS form.
If you fail to file Form 8886 as required or fail to include
any required information on the form, you may have to pay
a penalty. See Penalty for failure to disclose a reportable
transaction, later.
The following discussion briefly describes reportable
transactions. For more details, see the Instructions for
Form 8886.
Reportable transaction. A reportable transaction is any
of the following.
• A listed transaction.
• A confidential transaction.
• A transaction with contractual protection.
• A loss transaction.
• A transaction of interest entered into after November
1, 2006.
Note. Transactions with a brief asset holding period
were removed from the definition of reportable transaction
for transactions entered into after August 2, 2007.
Listed transaction. A listed transaction is the same
as, or substantially similar to, one of the types of transac-
tions the IRS has determined to be a tax-avoidance trans-
action. These transactions have been identified in notices,
regulations, and other published guidance issued by the
IRS.
For more information, go to Abusive Tax Shelters and
Transactions, where you will find a link to a list of listed
transactions.
Confidential transaction. A confidential transaction
is offered to you under conditions of confidentiality and for
which you have paid an advisor a minimum fee. A transac-
tion is offered under conditions of confidentiality if the ad-
visor who is paid the fee places a limit on your disclosure
of the tax treatment or tax structure of the transaction and
the limit protects the confidentiality of the advisor's tax
strategies. The transaction is treated as confidential even
if the conditions of confidentiality are not legally binding on
you.
Transaction with contractual protection. Generally,
a transaction with contractual protection is one in which
you or a related party has the right to a full or partial refund
of fees if all or part of the intended tax consequences of
the transaction are not sustained, or a transaction for
which the fees are contingent on realizing the tax benefits
from the transaction. For information on exceptions, see
Revenue Procedure 2007-20, 2007-7 I.R.B. 517, available
at IRS.gov/irb/2007-07_IRB#RP-2007-20.
Publication 550 (2024) Chapter 2 Tax Shelters and Other Reportable
Transactions
Loss transaction. For individuals, a loss transaction
is one that results in a deductible loss if the gross amount
of the loss is at least $2 million in a single tax year or $4
million in any combination of tax years. A loss from a for-
eign currency transaction under section 988 is a loss
transaction if the gross amount of the loss is at least
$50,000 in a single tax year, whether or not the loss flows
through from an S corporation or partnership.
Certain losses (such as losses from casualties, thefts,
and condemnations) are excepted from this category and
do not have to be reported on Form 8886. For information
on other exceptions, see Revenue Procedure 2013-11,
2013-2 I.R.B. 269, available at IRS.gov/irb/
2013-02_IRB#RP-2013-11. See Updates on reportable
transactions, later, for updates on loss transactions.
Transaction of interest. A transaction of interest is a
transaction entered into after November 1, 2006, that is
the same as, or substantially similar to, one of the types of
transactions that the IRS has identified by notice, regula-
tion, or other published guidance as a transaction of inter-
est. For more information, go to Abusive Tax Shelters and
Transactions, where you will find a link to a list of transac-
tions of interest.
Updates on reportable transactions. For updates
on all reportable transactions, go to Abusive Tax Shelters
and Transactions.
Penalties
Investing in an abusive tax shelter may lead to substantial
expenses. First, the promoter generally charges a sub-
stantial fee. If your return is examined by the IRS and a tax
deficiency is determined, you will have to pay more taxes
and interest on the underpayment, possibly a 20%, 30%,
or even 40% accuracy-related penalty, or a 75% civil fraud
penalty. You may also be subject to the penalty for failure
to pay tax. These penalties are explained in the following
paragraphs.
Accuracy-related penalties. An accuracy-related pen-
alty of 20% can be imposed for underpayments of tax due
to:
• Negligence or disregard of rules or regulations,
• Substantial understatement of tax,
• Substantial valuation misstatements (increased to
40% for gross valuation misstatements),
• Transactions lacking economic substance. Economic
substance means that the transaction makes business
sense, without the tax benefits. (Penalty increased to
40% for nondisclosed noneconomic substance trans-
actions),
• Undisclosed foreign financial asset understatements
(40% for tax years beginning after March 18, 2010), or
• Disallowance of a deduction for a qualified conserva-
tion contribution by a pass-through entity under sec-
tion
170(h)(7).
If you are charged an accuracy-related penalty, interest
will be imposed on the amount of the penalty from the due
date of the return (including extensions) to the date you
pay the penalty.
The 20% penalties do not apply to any underpayment
attributable to a reportable transaction understatement
subject to an accuracy-related penalty (discussed later).
Negligence or disregard of rules or regulations.
The penalty for negligence or disregard of rules or regula-
tions is imposed only on the part of the underpayment due
to negligence or disregard of rules or regulations. Gener-
ally, the penalty will not be charged if you can show you
had reasonable cause for understating your tax and that
you acted in good faith.
Negligence includes any failure to make a reasonable
attempt to comply with the provisions of the Internal Reve-
nue Code. It also includes any failure to keep adequate
books and records. A return position that has a reasona-
ble basis is not negligence. See Regulations section
1.6662-3(b)(1).
Disregard includes any careless, reckless, or inten-
tional disregard of rules or regulations.
The penalty for disregard of rules and regulations can
be avoided if all the following are true.
• You keep adequate books and records.
• You have a reasonable basis for your position on the
tax issue.
• You make an adequate disclosure of your position.
Use Form 8275 to make your disclosure and attach it to
your return. To disclose a position contrary to a regulation,
use Form 8275-R. Use Form 8886 to disclose a reportable
transaction. See Reportable transaction, earlier.
Substantial understatement of tax. An understate-
ment is considered to be substantial if it is more than the
greater of:
• 10% of the tax required to be shown on the return, or
• $5,000.
For tax years 2018 through 2025, if you claim any deduc-
tion allowed under section 199A, an understatement is
considered to be substantial if it is more than the greater
of:
• 5% of the tax required to be shown on the return, or
• $5,000.
In general, “understatement” means the excess of:
1. The amount of the tax required to be shown on the re-
turn for the tax year; over
2. The amount of the tax imposed which is shown on the
return, reduced by any rebate (within the meaning of
section 6211(b)(2)).
For items other than tax shelters, you can file Form
8275 or Form 8275-R to disclose items that could cause a
substantial understatement of income tax. In that way, you
can avoid the substantial understatement penalty if you
have a reasonable basis for your position on the tax issue.
42 Chapter 2 Tax Shelters and Other Reportable
Transactions
Publication 550 (2024)
Disclosure of the tax shelter item on a tax return does not
reduce the amount of the understatement.
Also, the understatement penalty will not be imposed if
you can show there was reasonable cause for the under-
payment caused by the understatement and that you ac-
ted in good faith. An important factor in establishing rea-
sonable cause and good faith will be the extent of your
effort to determine your proper tax liability under the law.
Substantial valuation misstatement. In general, you
are liable for a 20% penalty for a substantial valuation mis-
statement if any the following are true.
• The value or adjusted basis of any property claimed
on the return is 150% or more of the correct amount.
• You underpaid your tax by more than $5,000 because
of the misstatement.
• You cannot establish that you had reasonable cause
for the underpayment and that you acted in good faith.
You may be assessed a penalty of 40% for a gross val-
uation misstatement. If you misstate the value or the ad-
justed basis of property by 200% or more of the amount
determined to be correct, you will be assessed a penalty
of 40%, instead of 20%, of the amount you underpaid be-
cause of the gross valuation misstatement. The penalty
rate is also 40% if the property's correct value or adjusted
basis is zero.
Transaction lacking economic substance. The eco-
nomic substance doctrine only applies to an individual
that entered into a transaction in connection with a trade
or business or an activity engaged in for the production of
income. A transaction has economic substance for you as
an individual taxpayer only if:
• The transaction changes your economic position in a
meaningful way (apart from federal income tax ef-
fects), and
• You have a substantial purpose (apart from federal in-
come tax effects) for entering into the transaction.
For purposes of determining whether economic sub-
stance exists, a transaction's profit potential will only be
taken into account if the present value of the reasonably
expected pre-tax profit from the transaction is substantial
compared to the present value of the expected net tax
benefits that would be allowed if the transaction were re-
spected.
If any part of your underpayment is due to any disallow-
ance of claimed tax benefits by reason of a transaction
lacking economic substance or failing to meet the require-
ments of any similar rule of law, that part of your underpay-
ment will be subject to the 20% accuracy-related penalty
even if you had a reasonable cause and acted in good
faith concerning that part.
Additionally, the penalty increases to 40% if you do not
adequately disclose, on your return or in a statement at-
tached to your return, the relevant facts affecting the tax
treatment of a transaction that lacks economic substance.
Relevant facts include any facts affecting the tax treatment
of the transaction.
For the understatement of tax related to reportable
transactions, no penalty is imposed to any portion of an
understatement if you can demonstrate the understate-
ment was due to reasonable cause. The reasonable
cause exception does not apply if the underpayment is
due to a transaction that lacks economic substance.
For underpayments, no penalty will be assessed if a
reasonable cause exception applies. A reasonable cause
exception is generally not available for an underpayment
attributable to a transaction lacking economic substance,
or for an underpayment associated with a disallowed de-
duction for a conservation easement.
You may be subject to a 20% penalty based on
the excessive amount of an erroneous claim for
an income tax refund or credit. If that excessive
amount results from a transaction found to be lacking eco-
nomic substance, it will NOT be treated as due to reason-
able cause.
Undisclosed foreign financial asset understate-
ment. For tax years beginning after March 18, 2010, you
may be liable for a 40% penalty for an understatement of
your tax liability due to an undisclosed foreign financial as-
set. An undisclosed foreign financial asset is any asset for
which an information return, required to be provided under
sections 6038, 6038B, 6038D, 6046A, or 6048 for any tax
year, is not provided. The penalty applies to any part of an
underpayment related to the following undisclosed foreign
financial assets.
• Any foreign business you control, reportable on Form
5471, Information Return of U.S. Persons With Re-
spect To Certain Foreign Corporations, or Form 8865,
Return of U.S. Persons With Respect to Certain For-
eign Partnerships.
• Certain transfers of property to a foreign corporation or
partnership, reportable on Form 926, Return by a U.S.
Transferor of Property to a Foreign Corporation, or cer-
tain distributions to a foreign person, reportable on
Form 8865.
• Your ownership interest in an otherwise undisclosed
foreign financial asset, reportable on Form 8275 or
8275-R. See the Instructions for Form 8275 or Form
8275-R.
Instead of, or in addition to, Form 8275 or 8275-R,
you may have to file Form 8938, Statement of
Specified Foreign Financial Assets, with your tax
return. See the Instructions for Form 8938 for details.
• Your acquisition, disposition, or substantial change in
ownership interest in a foreign partnership, reportable
on Form 8865.
• Creation or transfer of money or property to certain
foreign trusts, reportable on Form 3520, Annual Re-
turn To Report Transactions With Foreign Trusts and
Receipt of Certain Foreign Gifts.CAUTION
!CAUTION
!
Publication 550 (2024) Chapter 2 Tax Shelters and Other Reportable
Transactions
Penalty for incorrect appraisals. The person who pre-
pares an appraisal of the value of property may have to
pay a penalty if:
• He or she knows, or reasonably should have known,
that the appraisal would be used in connection with a
return or claim for refund; and
• The claimed value of the property on a return or claim
for refund based on that appraisal results in a substan-
tial valuation misstatement or a gross valuation mis-
statement. See Substantial valuation misstatement,
earlier.
For details on the penalty amount and exceptions, see
Pub. 561.
Penalty for failure to disclose a reportable transac-
tion. If you fail to include any required information regard-
ing a reportable transaction on a return or statement, you
may have to pay a penalty of 75% of the decrease in tax
shown on your return as a result of such transaction (or
that would have resulted if the transaction were respected
for federal tax purposes). See Reportable transaction, ear-
lier. For an individual, the minimum penalty is $5,000 and
the maximum is $10,000 (or $100,000 for a listed transac-
tion). This penalty is in addition to any other penalty that
may be imposed.
The IRS may rescind or abate the penalty for failing to
disclose a reportable transaction under certain limited cir-
cumstances but cannot rescind the penalty for failing to
disclose a listed transaction. See Revenue Procedure
2007-21, as updated by Treasury Decision 9686 and An-
nouncement 2016-1, for information on rescission.
Accuracy-related penalty for a reportable transaction
understatement. If you have a reportable transaction un-
derstatement, you may have to pay a penalty equal to
20% of the amount of that understatement. This applies to
any item due to a listed transaction or other reportable
transaction with a significant purpose of avoiding or evad-
ing federal income tax. The penalty is 30% rather than
20% for the part of any reportable transaction understate-
ment if the transaction was not properly disclosed.
This penalty does not apply to the part of an under-
statement on which the fraud penalty, gross valuation mis-
statement penalty, or penalty for nondisclosure of noneco-
nomic substance transactions is imposed.
Civil fraud penalty. If any underpayment of tax on your
return is due to fraud, a penalty of 75% of the underpay-
ment will be added to your tax.
Joint return. The fraud penalty on a joint return ap-
plies to a spouse only if some part of the underpayment is
due to the fraud of that spouse.
Failure to pay tax. If a deficiency is assessed and is not
paid within 10 days of the demand for payment, you may
be penalized with up to a 25% addition to tax if the failure
to pay continues.
Whether To Invest
Take into account the risks, benefits, and the source of ev-
ery financial transaction before investing. You may wish to
consider professional legal and financial advice for help in
evaluating the transaction.
3.
Investment Expenses
Terms you may need to know
(see Glossary):
At-risk rules
Passive activity
Portfolio income
Topics
This chapter discusses:
• Limits on Deductions,
• Interest Expenses,
• Bond Premium Amortization,
• Nondeductible Interest Expenses,
• How To Report Investment Interest Expenses, and
• When To Report Investment Expenses.
Useful Items
You may want to see:
Publication
925 Passive Activity and At-Risk Rules
Form (and Instructions)
Schedule A (Form 1040) Itemized Deductions
4952 Investment Interest Expense Deduction
8615 Tax for Certain Children Who Have Unearned
Income
8814 Parents’ Election To Report Child's Interest and
Dividends
See chapter 5, How To Get Tax Help, for information about
getting these publications and forms.
Schedule A (Form 1040)
4952
8615
8814
44 Chapter 3 Investment Expenses Publication 550 (2024)
Limits on Deductions
Your deductions for investment expenses may be limited
by:
• The at-risk rules,
• The passive activity loss limits, or
• The limit on investment expenses.
The at-risk rules and passive activity rules are ex-
plained briefly in this section. The limit on investment inter-
est is explained later in this chapter under Interest Expen-
ses.
At-risk rules. Special at-risk rules apply to most in-
come-producing activities. These rules limit the amount of
loss you can deduct to the amount you risk losing in the
activity. Generally, this is the cash and the adjusted basis
of property you contribute to the activity. It also includes
money you borrow for use in the activity if you are person-
ally liable for repayment or if you use property not used in
the activity as security for the loan. For more information,
see Pub. 925.
Passive activity losses and credits. The amount of los-
ses and tax credits you can claim from passive activities is
limited. Generally, you are allowed to deduct passive ac-
tivity losses only up to the amount of your passive activity
income. Also, you can use credits from passive activities
only against tax on the income from passive activities.
There are exceptions for certain activities, such as rental
real estate activities.
Passive activity. A passive activity is generally any
activity involving the conduct of any trade or business in
which you do not materially participate and any rental ac-
tivity. However, if you are involved in renting real estate,
the activity is not a passive activity if both of the following
are true.
• More than one-half of the personal services you per-
form during the year in all trades or businesses are
performed in real property trades or businesses in
which you materially participate.
• You perform more than 750 hours of services during
the year in real property trades or businesses in which
you materially participate.
The term “trade or business” generally means any activity
that involves the conduct of a trade or business, is con-
ducted in anticipation of starting a trade or business, or in-
volves certain research or experimental expenditures.
However, it does not include rental activities or certain ac-
tivities treated as incidental to holding property for invest-
ment.
You are considered to materially participate in an activ-
ity if you are involved on a regular, continuous, and sub-
stantial basis in the operations of the activity.
Other income (nonpassive income). Generally, you
can use losses from passive activities only to offset in-
come from passive activities. You cannot use passive
activity losses to offset your other income, such as your
wages or your portfolio income. Portfolio income includes
gross income from interest, dividends, annuities, or royal-
ties that is not derived in the ordinary course of a trade or
business. It also includes gains or losses (not derived in
the ordinary course of a trade or business) from the sale
or trade of property (other than an interest in a passive ac-
tivity) producing portfolio income or held for investment.
This includes capital gain distributions from mutual funds
(and other regulated investment companies (RICs)) and
real estate investment trusts (REITs).
You cannot use passive activity losses to offset Alaska
Permanent Fund dividends.
Expenses. Do not include in the computation of your
passive activity income or loss:
• Expenses (other than interest) that are clearly and di-
rectly allocable to your portfolio income, or
• Interest expense properly allocable to portfolio in-
come.
However, this interest and other expenses may be subject
to other limits. These limits are explained in the rest of this
chapter.
Additional information. For more information about
determining and reporting income and losses from pas-
sive activities, see Pub. 925.
Interest Expenses
This section discusses interest expenses you may be able
to deduct as an investor.
For information on business interest, see chapter 8 of
Pub. 334, Tax Guide for Small Business.
You generally cannot deduct personal interest. How-
ever, you can deduct qualified home mortgage interest, as
explained in Pub. 936, Home Mortgage Interest Deduc-
tion. You may be able to deduct interest on certain student
loans. See Pub. 970, Tax Benefits for Education.
Investment Interest
If you borrow money to buy property you hold for invest-
ment, the interest you pay is investment interest. You can
deduct investment interest subject to the limit discussed
later. However, you cannot deduct interest you incurred to
produce tax-exempt income. See Tax-exempt income,
later. You also cannot deduct interest expenses on strad-
dles discussed under Interest expense and carrying
charges on straddles, later.
Investment interest does not include any qualified
home mortgage interest or any interest taken into account
in computing income or loss from a passive activity.
Investment property. Property held for investment in-
cludes property that produces interest, dividends, annui-
ties, or royalties not derived in the ordinary course of a
trade or business. It also includes property that produces
Publication 550 (2024) Chapter 3 Investment Expenses 45
gain or loss (not derived in the ordinary course of a trade
or business) from the sale or trade of property producing
these types of income or held for investment (other than
an interest in a passive activity). Investment property also
includes an interest in a trade or business activity in which
you did not materially participate (other than a passive ac-
tivity).
Partners, shareholders, and beneficiaries. To de-
termine your investment interest, combine your share of
investment interest from a partnership, S corporation, es-
tate, or trust with your other investment interest.
Allocation of Interest Expense
If you borrow money for business, personal purposes, or
investment, you must allocate the debt among those pur-
poses. Only the interest expense on the part of the debt
used for investment purposes is treated as investment ex-
pense. The allocation is not affected by the use of prop-
erty that secures the debt.
Example 1. You borrow $10,000 and use $8,000 to
buy stock. You use the other $2,000 to buy items for your
home. Because 80% of the debt is used for, and allocated
to, investment purposes, 80% of the interest on that debt
is investment interest. The other 20% is nondeductible
personal interest.
Debt proceeds received in cash. If you receive debt
proceeds in cash, the proceeds are generally not treated
as investment property.
Debt proceeds deposited in account. If you deposit
debt proceeds in an account, that deposit is treated as in-
vestment property, regardless of whether the account
bears interest. But, if you withdraw the funds and use
them for another purpose, you must reallocate the debt to
determine the amount considered to be for investment
purposes.
Example 2. Assume in Example 1 that you borrowed
the money on March 1 and immediately bought the stock
for $8,000. You did not buy the household items until June
1. You had deposited the $2,000 in the bank. You had no
other transactions on the bank account until June. You did
not sell the stock, and you made no principal payments on
the debt. You paid interest from another account. The
$8,000 is treated as being used for an investment pur-
pose. The $2,000 is treated as being used for an invest-
ment purpose for the 3-month period. Your total interest
expense for 3 months on this debt is investment interest.
In June, when you spend the $2,000 for household items,
you must begin to allocate 80% of the debt and the inter-
est expense to investment purposes and 20% to personal
purposes.
Amounts paid within 30 days. If you receive loan
proceeds in cash or if the loan proceeds are deposited in
an account, you can treat any payment (up to the amount
of the proceeds) made from any account you own, or from
cash, as made from those proceeds. This applies to any
payment made within 30 days before or after the proceeds
are received in cash or deposited in your account.
If you received the loan proceeds in cash, you can treat
the payment as made on the date you received the cash
instead of the date you actually made the payment.
Payments on debt may require new allocation. As
you repay a debt used for more than one purpose, you
must reallocate the balance. You must first reduce the
amount allocated to personal purposes by the repayment.
You then reallocate the rest of the debt to find what part is
for investment purposes.
Example 3. If, in Example 2, you repay $500 on No-
vember 1, the entire repayment is applied against the
amount allocated to personal purposes. The debt balance
is now allocated as $8,000 for investment purposes and
$1,500 for personal purposes. Until the next reallocation is
necessary, 84% ($8,000 ÷ $9,500) of the debt and the in-
terest expense is allocated to investment.
Pass-through entities. If you use borrowed funds to buy
an interest in a partnership or S corporation, then the in-
terest on those funds must be allocated based on the as-
sets of the entity. If you contribute to the capital of the en-
tity, you can make the allocation using any reasonable
method.
Additional allocation rules. For more information about
allocating interest expense, see chapter 8 of Pub. 334.
When To Deduct Investment Interest
If you use the cash method of accounting, you must pay
the interest expense before you can deduct it.
If you use an accrual method of accounting, you can
deduct interest over the period it accrues, regardless of
when you pay it. For an exception, see Unpaid expenses
owed to related party, later in this chapter.
Example. You borrowed $1,000 on August 19, 2024,
payable in 90 days at 4% interest. On November 18, 2024,
you paid this with a new note for $1,010, due on February
17, 2025. If you use the cash method of accounting, you
cannot deduct any part of the $10 interest on your return
for 2024 because you did not actually pay it in that year. If
you use an accrual method, you may be able to deduct a
portion of the interest on the loans through December 31,
2024, on your return for 2024.
Interest paid in advance. Generally, if you pay interest
in advance for a period that goes beyond the end of the
tax year, you must spread the interest over the tax years to
which it belongs under the OID rules discussed in chap-
ter 1. You can deduct in each year only the interest for that
year.
Interest on margin accounts. If you are a cash method
taxpayer, you can deduct interest on margin accounts to
buy taxable securities as investment interest in the year
you paid it. You are considered to have paid interest on
these accounts only when you actually pay the broker or
46 Chapter 3 Investment Expenses Publication 550 (2024)
when payment becomes available to the broker through
your account. Payment may become available to the
broker through your account when the broker collects divi-
dends or interest for your account, or sells securities held
for you or received from you.
Limit on interest deduction for market discount
bonds. The amount you can deduct for interest expense
you paid or accrued during the year to buy or carry a mar-
ket discount bond may be limited. This limit does not apply
if you accrue the market discount and include it in your in-
come currently.
Under this limit, the interest is deductible only to the ex-
tent it is more than:
1. The total interest and OID includible in gross income
for the bond for the year, plus
2. The market discount for the number of days you held
the bond during the year.
Figure the amount in (2) above using the rules for figuring
accrued market discount in chapter 1 under Market Dis-
count Bonds.
Interest not deducted due to limit. In the year you
dispose of the bond, you can deduct any interest expense
you were not allowed to deduct in earlier years because of
the limit.
Choosing to deduct disallowed interest expense
before the year of disposition. You can choose to de-
duct disallowed interest expense in any year before the
year you dispose of the bond, up to your net interest in-
come from the bond during the year. The rest of the disal-
lowed interest expense remains deductible in the year you
dispose of the bond.
Net interest income. This is the interest income (in-
cluding OID) from the bond that you include in income for
the year, minus the interest expense paid or accrued dur-
ing the year to purchase or carry the bond.
Limit on interest deduction for short-term obliga-
tions. If the current income inclusion rules discussed in
chapter 1 under Discount on Short-Term Obligations do
not apply to you, the amount you can deduct for interest
expense you paid or accrued during the year to buy or
carry a short-term obligation is limited.
The interest is deductible only to the extent it is more
than:
• The amount of acquisition discount or OID on the obli-
gation for the tax year, plus
• The amount of any interest payable on the obligation
for the year that is not included in income because of
your accounting method (other than interest taken into
account in determining the amount of acquisition dis-
count or OID).
The method of determining acquisition discount and OID
for short-term obligations is discussed in chapter 1 under
Discount on Short-Term Obligations.
Interest not deducted due to limit. In the year you
dispose of the obligation, or, if you choose, in another year
in which you have net interest income from the obligation,
you can deduct any interest expense you were not allowed
to deduct for an earlier year because of the limit. Follow
the same rules provided in the earlier discussion under
Limit on interest deduction for market discount bonds.
Limit on Deduction
Generally, your deduction for investment interest expense
is limited to your net investment income.
You can carry over the amount of investment interest
you could not deduct because of this limit to the next tax
year. The interest carried over is treated as investment in-
terest paid or accrued in that next year.
You can carry over disallowed investment interest to the
next tax year even if it is more than your taxable income in
the year the interest was paid or accrued.
Net Investment Income
Determine the amount of your net investment income by
subtracting your investment expenses (other than interest
expense) from your investment income.
Investment income. Generally, investment income in-
cludes your gross income from property held for invest-
ment such as interest, dividends, annuities, and royalties.
Investment income does not include Alaska Permanent
Fund dividends. It also does not include qualified divi-
dends or net capital gain unless you choose to include
them.
Choosing to include qualified dividends. Invest-
ment income generally does not include qualified divi-
dends, discussed in chapter 1. However, you can choose
to include all or part of your qualified dividends in invest-
ment income.
You make this choice by completing Form 4952,
line 4g, according to its instructions.
If you choose to include any of your qualified dividends
in investment income, you must reduce your qualified divi-
dends that are eligible for the lower capital gains tax rates
by the same amount.
Choosing to include net capital gain. Investment in-
come generally does not include net capital gain from dis-
posing of investment property (including capital gain distri-
butions from mutual funds). However, you can choose to
include all or part of your net capital gain in investment in-
come.
You make this choice by completing Form 4952,
line 4g, according to its instructions.
If you choose to include any of your net capital gain in
investment income, you must reduce your net capital gain
that is eligible for the lower capital gains tax rates by the
same amount.
For more information about the capital gains rates, see
Capital Gain Tax Rates in chapter 4.
Publication 550 (2024) Chapter 3 Investment Expenses 47
Before making either choice, consider the overall
effect on your tax liability. Compare your tax if you
make one or both of these choices with your tax if
you do not.
Investment income of child reported on parent's re-
turn. Investment income includes the part of your child's
interest and dividend income you choose to report on your
return. If the child does not have qualified dividends,
Alaska Permanent Fund dividends, or capital gain distribu-
tions, this is the amount on line 6 of Form 8814. Include it
on line 4a of Form 4952.
Example. Your 8-year-old child has interest income of
$2,700, which you choose to report on your own return.
You enter $2,700 on Form 8814, lines 1a and 4, and $100
on lines 6 and 12, and complete Part II. You also enter
$100 on Schedule 1 (Form 1040), line 8z. Your investment
income includes this $100.
Child's qualified dividends. If part of the amount you
report is your child's qualified dividends, that part (which is
reported on Form 1040, line 3a) generally does not count
as investment income. However, you can choose to in-
clude all or part of it in investment income, as explained
under Choosing to include qualified dividends, earlier.
Your investment income also includes the amount on
Form 8814, line 12 (or, if applicable, the reduced amount
figured next under Child's Alaska Permanent Fund divi-
dends).
Child's Alaska Permanent Fund dividends. If part of
the amount you report is your child's Alaska Permanent
Fund dividends, that part does not count as investment in-
come. To figure the amount of your child's income that you
can consider your investment income, start with the
amount on Form 8814, line 6. Multiply that amount by a
percentage that is equal to the Alaska Permanent Fund
dividends divided by the total amount on Form 8814,
line 4. Subtract the result from the amount on Form 8814,
line 12.
Example. Your 10-year-old child has taxable interest
income of $4,000 and Alaska Permanent Fund dividends
of $2,000. You choose to report this on your return. You
enter $4,000 on Form 8814, line 1a; $2,000 on line 2a;
and $6,000 on line 4. You then enter $3,400 on Form
8814, lines 6 and 12; and Schedule 1 (Form 1040),
line 8z. You figure the amount of your child's income that
you can consider your investment income as follows.
$3,400 − ($3,400 × ($2,000 ÷ $6,000)) = $2,267
You include the result, $2,267, on Form 4952, line 4a.
Child's capital gain distributions. If part of the
amount you report is your child's capital gain distributions,
that part (which is reported on Schedule D (Form 1040),
line 13; or Form 1040, line 7) generally does not count as
investment income. However, you can choose to include
all or part of it in investment income, as explained under
Choosing to include net capital gain, earlier.TIP
Your investment income also includes the amount on
Form 8814, line 12 (or, if applicable, the reduced amount
figured under Child's Alaska Permanent Fund dividends,
earlier).
Investment expenses. Investment expenses are your al-
lowed deductions (other than interest expense) directly
connected with the production of investment income.
Losses from passive activities. Income or expenses
that you used in computing income or loss from a passive
activity are not included in determining your investment in-
come or investment expenses (including investment inter-
est expense). See Pub. 925 for information about passive
activities.
Example. Ted is a partner in a partnership that oper-
ates a business. However, he does not materially partici-
pate in the partnership's business. Ted's interest in the
partnership is considered a passive activity.
Ted's investment income from interest and dividends
(other than qualified dividends) is $10,000. His investment
expenses (other than interest) are $3,200. His investment
interest expense is $8,000. Ted also has income from the
partnership of $2,000.
Ted figures his net investment income and the limit on
his investment interest expense deduction in the following
way.
Total investment income . . . . . . . . . . . . . . . . . . . . $10,000
Minus: Investment expenses (other than interest) . . . . 3,200
Net investment income . . . . . . . . . . . . . . . . . . . . . $6,800
Deductible investment interest expense for the year . . . $6,800
The $2,000 of income from the passive activity is not
used in determining Ted's net investment income. His in-
vestment interest deduction for the year is limited to
$6,800, the amount of his net investment income.
Form 4952
Use Form 4952 to figure your deduction for investment in-
terest. See Form 4952 for more information.
Exception to use of Form 4952. You do not have to
complete Form 4952 or attach it to your return if you meet
all of the following tests.
• Your investment income from interest and ordinary div-
idends minus any qualified dividends is more than
your investment interest expense.
• You do not have any other deductible investment ex-
penses.
• You have no carryover of investment interest expense
from 2023.
If you meet all of these tests, you can deduct all of your
investment interest.
48 Chapter 3 Investment Expenses Publication 550 (2024)
Bond Premium Amortization
If you pay a premium to buy a bond, the premium is part of
your basis in the bond. If the bond yields taxable interest,
you can choose to amortize the premium. This generally
means that each year, over the life of the bond, you use a
part of the premium to reduce the amount of interest in-
cludible in your income. If you make this choice, you must
reduce your basis in the bond by the amortization for the
year.
If the bond yields tax-exempt interest, you must amor-
tize the premium. This amortized amount is not deductible
in determining taxable income. However, each year, you
must reduce your basis in the bond (and tax-exempt inter-
est otherwise reportable on your tax return) by the amorti-
zation for the year.
If you acquire a security, such as a bond, at a premium,
you may receive a Form 1099-INT or Form 1099-OID. See
the instructions on those forms to determine if the
amounts of interest reported to you have been reduced by
amortizable bond premium for the period.
Bond premium. Bond premium is the amount by which
your basis in the bond right after you get it is more than the
total of all amounts payable on the bond after you get it
(other than payments of qualified stated interest). For ex-
ample, a bond with a maturity value of $1,000 generally
would have a $50 premium if you buy it for $1,050.
Special rules to determine amounts payable on a
bond. For special rules that apply to determine the
amounts payable on a variable rate bond, an inflation-in-
dexed debt instrument, a bond that provides for certain al-
ternative payment schedules (for example, a bond callable
prior to the stated maturity date of the bond), or a bond
that provides for remote or incidental contingencies, see
Regulations section 1.171-3.
Basis. In general, your basis for figuring bond premium
amortization is the same as your basis for figuring any loss
on the sale of the bond. However, you may need to use a
different basis for:
• Convertible bonds,
• Bonds you got in a trade, and
• Bonds whose basis has to be determined using the
basis of the person who transferred the bond to you.
See Regulations section 1.171-1(e).
Dealers. A dealer in taxable bonds (or anyone who holds
them mainly for sale to customers in the ordinary course
of a trade or business, or who would properly include
bonds in inventory at the close of the tax year) cannot
claim a deduction for amortizable bond premium.
See section 75 of the Internal Revenue Code for the
treatment of bond premium by a dealer in tax-exempt
bonds.
How To Figure Amortization
For bonds issued after September 27, 1985, you must am-
ortize bond premium using a constant yield method on the
basis of the bond's yield to maturity, determined by using
the bond's basis and compounding at the close of each
accrual period.
Constant yield method. Figure the bond premium amor-
tization for each accrual period as follows.
Step 1: Determine your yield. Your yield is the dis-
count rate that, when used in figuring the present value of
all remaining payments to be made on the bond (including
payments of qualified stated interest), produces an
amount equal to your basis in the bond. Figure the yield as
of the date you got the bond. It must be constant over the
term of the bond and must be figured to at least two deci-
mal places when expressed as a percentage.
If you do not know the yield, consult your broker or tax
advisor. Databases available to them are likely to show the
yield at the date of purchase.
Step 2: Determine the accrual periods. You can
choose the accrual periods to use. They may be of any
length and may vary in length over the term of the bond,
but each accrual period can be no longer than 1 year, and
each scheduled payment of principal or interest must oc-
cur either on the first or the final day of an accrual period.
The computation is simplest if accrual periods are the
same as the intervals between interest payment dates.
Step 3: Determine the bond premium for the ac-
crual period. To do this, multiply your adjusted acquisi-
tion price at the beginning of the accrual period by your
yield. Then, subtract the result from the qualified stated in-
terest for the period.
Your adjusted acquisition price at the beginning of the
first accrual period is the same as your basis. After that, it
is your basis decreased by the amount of bond premium
amortized for earlier periods, and the amount of any pay-
ment previously made on the bond other than a payment
of qualified stated interest.
Example. On February 1, 2023, you bought a taxable
bond for $110,000. The bond has a stated principal
amount of $100,000, payable at maturity on February 1,
2030, making your premium $10,000 ($110,000 −
$100,000). The bond pays qualified stated interest of
$10,000 on February 1 of each year. Your yield is
8.07439% compounded annually. You choose to use an-
nual accrual periods ending on February 1 of each year.
To find your bond premium amortization for the accrual pe-
riod ending on February 1, 2024, you multiply the adjusted
acquisition price at the beginning of the period ($110,000)
by your yield. When you subtract the result ($8,881.83)
from the qualified stated interest for the period ($10,000),
you find that your bond premium amortization for the pe-
riod is $1,118.17.
Special rules to figure amortization. For special
rules to figure the bond premium amortization on a varia-
ble rate bond, an inflation-indexed debt instrument, a
Publication 550 (2024) Chapter 3 Investment Expenses 49
bond that provides for certain alternative payment sched-
ules (for example, a bond callable prior to the stated ma-
turity date of the bond), or a bond that provides for remote
or incidental contingencies, see Regulations section
1.171-3.
Choosing To Amortize
You choose to amortize the premium on taxable bonds by
reporting the amortization for the year on your income tax
return for the first tax year you want the choice to apply.
You should attach a statement to your return that you are
making this choice under section 171. See How To Report
Amortization next.
This choice is binding for the year you make it and for
later tax years. It applies to all taxable bonds you own in
the year you make the choice and also to those you ac-
quire in later years.
You can change your decision to amortize bond pre-
mium only with the written approval of the IRS. To request
approval, use Form 3115. For more information on re-
questing approval, see section 5 of Revenue Procedure
2024-23 in Internal Revenue Bulletin 2024-23. You can
find Revenue Procedure 2024-23 at IRS.gov/irb/
2024-23_IRB#REVPROC-2024-23.
How To Report Amortization
(Taxable Bonds)
Subtract the bond premium amortization from your interest
income from these bonds.
Report the bond's interest on Schedule B (Form 1040),
line 1. Under your last entry on line 1, put a subtotal of all
interest listed on line 1. Below this subtotal, enter the am-
ortizable bond premium allocable to the interest payments
for the year and label this amount “ABP Adjustment.” Sub-
tract this amount from the subtotal, and enter the result on
line 2.
Bond premium amortization more than interest. If the
amount of your bond premium amortization for an accrual
period is more than the qualified stated interest for the pe-
riod, you can include the difference in Other Itemized De-
ductions on Schedule A (Form 1040), line 16.
But your deduction is limited to the amount by which
your total interest inclusions on the bond in prior accrual
periods is more than your total bond premium deductions
on the bond in prior periods. Any amount you cannot de-
duct because of this limit can be carried forward to the
next accrual period.
Pre-1998 election to amortize bond premium. Gener-
ally, if you first elected to amortize bond premium before
1998, the above treatment of the premium does not apply
to bonds you acquired before 1988.
Bonds acquired before October 23, 1986. The amorti-
zation of the premium on these bonds is a miscellaneous
itemized deduction not subject to the 2%-of-adjus-
ted-gross-income limit.
Bonds acquired after October 22, 1986, but before
1988. The amortization of the premium on these bonds is
investment interest expense subject to the investment in-
terest limit, unless you choose to treat it as an offset to in-
terest income on the bond.
Nondeductible Interest
Expenses
Some interest expenses that you incur as an investor are
not deductible.
Single-premium life insurance, endowment, and an-
nuity contracts. You cannot deduct interest on money
you borrow to buy or carry a single-premium life insur-
ance, endowment, or annuity contract.
Used as collateral. If you use a single-premium annu-
ity contract as collateral to obtain or continue a mortgage
loan, you cannot deduct any interest on the loan that is
collateralized by the annuity contract. Figure the amount
of interest expense disallowed by multiplying the current
interest rate on the mortgage loan by the lesser of the
amount of the annuity contract used as collateral or the
amount of the loan.
Borrowing on insurance. Generally, you cannot deduct
interest on money you borrow to buy or carry a life insur-
ance, endowment, or annuity contract if you plan to sys-
tematically borrow part or all of the increases in the cash
value of the contract. This rule applies to the interest on
the total amount borrowed to buy or carry the contract, not
just the interest on the borrowed increases in the cash
value.
Tax-exempt income. You cannot deduct interest expen-
ses you incur to produce tax-exempt income, such as in-
terest on money you borrow to buy tax-exempt securities
or shares in a mutual fund or other regulated investment
company that distributes only exempt-interest dividends.
Short-sale expenses. The rule disallowing a deduc-
tion for interest expenses on debt proceeds used to pur-
chase tax-exempt securities applies to amounts you pay in
connection with personal property used in a short sale or
amounts paid by others for the use of any collateral in con-
nection with the short sale. However, it does not apply to
the expenses you incur if you deposit cash as collateral for
the property used in the short sale and the cash does not
earn a material return during the period of the sale. Short
sales are discussed under Short Sales in chapter 4.
Expenses for both tax-exempt and taxable income.
You may have expenses that are for both tax-exempt and
taxable income. If you cannot specifically identify what
part of the expenses is for each type of income, you can
divide the expenses, using reasonable proportions based
on facts and circumstances. You must attach a statement
to your return showing how you divided the expenses and
stating that each deduction claimed is not based on
tax-exempt income.
50 Chapter 3 Investment Expenses Publication 550 (2024)
One accepted method for dividing expenses is to do it
in the same proportion that each type of income is to the
total income. If the expenses relate in part to capital gains
and losses, include the gains, but not the losses, in figur-
ing this proportion. To find the part of the expenses that is
for the tax-exempt income, divide your tax-exempt income
by the total income and multiply your expenses by the re-
sult.
Example. You received $6,000 in interest income;
$4,800 was tax exempt and $1,200 was taxable. In earn-
ing this income, you had $500 of expenses. You cannot
specifically identify the amount of each expense item that
is for each income item, so you must divide your expen-
ses. 80% ($4,800 tax-exempt interest divided by $6,000
total interest) of your expenses is for the tax-exempt in-
come. You cannot deduct $400 (80% of $500) of the ex-
penses. You can deduct $100 (the rest of the expenses)
because they are for the taxable interest.
State income taxes. If you itemize your deductions,
you can deduct, as taxes, state income taxes on interest
income that is exempt from federal income tax. But you
cannot deduct, as either taxes or investment expenses,
state income taxes on other exempt income.
Interest expense and carrying charges on straddles.
You cannot deduct interest and carrying charges allocable
to personal property that is part of a straddle. The nonde-
ductible interest and carrying charges are added to the
basis of the straddle property. However, this treatment
does not apply if:
• All the offsetting positions making up the straddle ei-
ther consist of one or more qualified covered call op-
tions and the optioned stock, or consist of section
1256 contracts (and the straddle is not part of a larger
straddle); or
• The straddle is a hedging transaction.
For information about straddles, including definitions of
the terms used in this discussion, see Straddles in chap-
ter 4.
Interest includes any amount you pay or incur in con-
nection with personal property used in a short sale. How-
ever, you must first apply the rules discussed under Pay-
ments in lieu of dividends in chapter 4.
To determine the interest on market discount bonds
and short-term obligations that are part of a straddle, you
must first apply the rules discussed under Limit on interest
deduction for market discount bonds and Limit on interest
deduction for short-term obligations, earlier.
Nondeductible amount. Figure the nondeductible in-
terest and carrying charges on straddle property as fol-
lows.
1. Add:
a. Interest on indebtedness incurred or continued to
buy or carry the personal property, and
b. All other amounts (including charges to insure,
store, or transport the personal property) paid or
incurred to carry the personal property.
2. Subtract from the amount in (1):
a. Interest (including OID) includible in gross income
for the year on the personal property,
b. Any income from the personal property treated as
ordinary income on the disposition of short-term
government obligations or as ordinary income un-
der the market discount and short-term bond pro-
visions—see Discount on Debt Instruments in
chapter 1,
c. The dividends includible in gross income for the
year from the personal property, and
d. Any payment on a loan of the personal property for
use in a short sale that is includible in gross in-
come.
Basis adjustment. Add the nondeductible amount to
the basis of your straddle property.
How To Report
Investment Interest Expenses
To deduct your investment interest expenses, you must
itemize deductions on Schedule A (Form 1040). Enter
your deductible investment interest expense on Sched-
ule A (Form 1040), line 9. Include any deductible short
sale expenses. (See Short Sales in chapter 4 for informa-
tion on these expenses.) Also attach a completed Form
4952 if you used that form to figure your investment inter-
est expense.
Investment expenses from nonpublicly offered mu-
tual fund or real estate mortgage investment conduit
(REMIC). If you hold an interest in a nonpublicly offered
mutual fund, your investment expenses will be shown in
box 6 of Form 1099-DIV. Publicly offered mutual funds are
discussed later.
If you hold an interest in a REMIC, any expenses relat-
ing to your residual interest investment will be shown on
Schedule Q (Form 1066), line 3b. Any expenses relating
to your regular interest investment will appear in box 5 of
Form 1099-INT or box 9 of Form 1099-OID.
Including mutual fund or REMIC expenses in in-
come. Your share of the investment expenses of a RE-
MIC or a nonpublicly offered mutual fund, as described
above, is considered to be an indirect deduction through
that pass-through entity. You must include in your gross in-
come an amount equal to the expenses allocated to you,
whether or not you are able to claim a deduction for those
expenses. If you are a shareholder in a nonpublicly offered
mutual fund, you must include on your return the full
amount of ordinary dividends or other distributions of
stock, as shown in box 1a of Form 1099-DIV. If you are a
residual interest holder in a REMIC, you must report as or-
dinary income on Schedule E (Form 1040) the total
amounts shown on Schedule Q (Form 1066), lines 1b and
Publication 550 (2024) Chapter 3 Investment Expenses 51
3b. If you are a REMIC regular interest holder, you must in-
clude the amount of any expense allocation you received
on Form 1040 or 1040-SR, line 2b.
Publicly offered mutual funds. Most mutual funds are
publicly offered. These mutual funds, generally, are traded
on an established securities exchange. These funds do
not pass investment expenses through to you. Instead, the
dividend income they report to you in box 1a of Form
1099-DIV is already reduced by your share of investment
expenses. As a result, you cannot deduct the expenses on
your return.
Include the amount from box 1a of Form 1099-DIV in
your income.
A publicly offered mutual fund is one that:
1. Is continuously offered pursuant to a public offering,
2. Is regularly traded on an established securities mar-
ket, and
3. Is held by or for no fewer than 500 persons at any time
during the year.
Contact your mutual fund if you are not sure whether it is
publicly offered.
For information on how to report amortizable bond pre-
mium, see Bond Premium Amortization, earlier in this
chapter.
When To Report Investment
Expenses
If you use the cash method to report income and expen-
ses, you generally deduct your expenses, except for cer-
tain prepaid interest, in the year you pay them.
If you use an accrual method, you generally deduct
your expenses when you incur a liability for them, rather
than when you pay them.
See also When To Deduct Investment Interest, earlier in
this chapter.
Unpaid expenses owed to related party. If you use an
accrual method, you cannot deduct interest and other ex-
penses owed to a related cash-basis person until payment
is made and the amount is includible in the gross income
of that person. The relationship, for purposes of this rule,
is determined as of the end of the tax year for which the
interest or expense would otherwise be deductible. If a de-
duction is denied under this rule, this rule will continue to
apply even if your relationship with the person ceases to
exist before the amount is includible in the gross income
of that person.
This rule generally applies to those relationships listed
in chapter 4 under Related Party Transactions. It also ap-
plies to accruals by partnerships to partners, partners to
partnerships, shareholders to S corporations, and S
corporations to shareholders.TIP
The postponement of deductions for unpaid expenses
and interest under the related party rule does not apply to
OID, regardless of when payment is made. This rule also
does not apply to loans with below-market interest rates or
to certain payments for the use of property and services
when the lender or recipient has to include payments peri-
odically in income, even if a payment has not been made.
4.
Sales and Trades of
Investment Property
Introduction
This chapter explains the tax treatment of sales and
trades of investment property.
Investment property. This is property that produces in-
vestment income. Examples include stocks, bonds, and
Treasury bills and notes. Property used in a trade or busi-
ness is not investment property.
Digital assets. A digital asset is a digital representation
of value that is recorded on a cryptographically secured
distributed ledger or any similar technology. A digital asset
is treated as property, and general tax principles that ap-
ply to property transactions apply to transactions using
digital assets, including how to figure your holding period
for short-term and long-term capital gains and losses ex-
plained earlier under Long-term or Short-term. Digital as-
sets include property that has been referred to as “conver-
tible virtual currency,” “cryptocurrency,” and “non-fungible
tokens.” If a particular asset has the characteristics of a
digital asset, it will be treated as a digital asset for federal
income tax purposes. For more information on the tax
treatment of digital assets, see Notice 2014-21, 2014-16
I.R.B. 938, available at IRS.gov/irb/2014-16
IRB#NOT-2014-21, (as modified by Notice 2023-34,
2023-19 I.R.B. 837, available at IRS.gov/irb/2023-19
IRB#NOT-2023-34), Rev. Rul. 2019-24, 2019-44 I.R.B.
1004, available at IRS.gov/irb/2019-44 IRB#REV-
RUL-2019-24, Rev. Rul. 2023-14, 2023-33 I.R.B. 484,
available at IRS.gov/irb/2023-33 IRB#REV-RUL-2023-14,
Rev. Proc. 2024-28, 2024-31 I.R.B. 326, available at
IRS.gov/irb/2024-31 IRB#REV-PROC-2024–28, and
IRS.gov/VirtualCurrencyFAQs. For more information on
the tax treatment of property transactions and on
short-term and long-term capital gains and losses, see
Pub. 544, Sales and Other Dispositions of Assets.
Form 1099-B. If you sold property such as stocks, bonds,
mutual funds, or certain commodities through a broker
during the year, the broker should send you a Form
52 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
1099-B, Proceeds From Broker and Barter Exchange
Transactions, for each sale. You should receive the Form
1099-B for 2024 by February 17, 2025. It will show the
gross proceeds from the sale. The IRS will also get a copy
of Form 1099-B from the broker.
Use the Form 1099-B received from your broker to
complete Form 8949, Sales and Other Dispositions of
Capital Assets. If you sold a covered security in 2024, your
broker will send you a Form 1099-B that shows your basis.
This will help you complete Form 8949. Generally, a cov-
ered security is a security you acquired after 2010, with
certain exceptions explained in the Instructions for Form
8949.
For more information on Form 8949 and Sched-
ule D (Form 1040), see Reporting Capital Gains
and Losses in this chapter. Also see the Instruc-
tions for Form 8949 and the Instructions for Schedule D
(Form 1040).
Nominees. If someone receives gross proceeds as a
nominee, that person will give you a Form 1099-B, which
will show gross proceeds received on your behalf.
If you receive a Form 1099-B that includes gross pro-
ceeds belonging to another person, see Nominees, later,
under Reporting Capital Gains and Losses for more infor-
mation.
Other property transactions. Certain transfers of prop-
erty are discussed in other IRS publications. These in-
clude:
• Sale of your main home, discussed in Pub. 523, Sell-
ing Your Home;
• Installment sales, covered in Pub. 537, Installment
Sales;
• Various types of transactions involving business prop-
erty, and digital assets, discussed in Pub. 544;
• Transfers of property at death, covered in Pub. 559,
Survivors, Executors and Administrators; and
• Disposition of an interest in a passive activity, dis-
cussed in Pub. 925, Passive Activity and At-Risk
Rules.
Topics
This chapter discusses:
• What Is a Sale or Trade,
• Basis of Investment Property,
• Adjusted Basis,
• How To Figure Gain or Loss,
• Nontaxable Trades,
• Transfers Between Spouses,
• Related Party Transactions,
• Capital Gains and Losses,
• Reporting Capital Gains and Losses, andTIP
• Special Rules for Traders in Securities or
Commodities.
Useful Items
You may want to see:
Publication
544 Sales and Other Dispositions of Assets
551 Basis of Assets
Form (and Instructions)
Schedule D (Form 1040) Capital Gains and Losses
6781 Gains and Losses From Section 1256
Contracts and Straddles
8582 Passive Activity Loss Limitations
8824 Like-Kind Exchanges
8949 Sales and Other Dispositions of Capital Assets
See chapter 5, How To Get Tax Help, for information about
getting these publications and forms.
What Is a Sale or Trade?
Terms you may need to know
(see Glossary):
Equity option
Futures contract
Mark-to-market rule
Nonequity option
Options dealer
Regulated futures contract
Section 1256 contract
Short sale
This section explains what is a sale or trade. It also ex-
plains certain transactions and events that are treated as
sales or trades.
A sale is generally a transfer of property for money or a
mortgage, note, or other promise to pay money.
A trade is a transfer of property for other property or
services, and may be taxed in the same way as a sale.
Sale or trade of digital assets. For U.S. tax purposes,
digital assets are considered property, not currency. A dig-
ital asset is stored electronically and it can be bought,
sold, owned, transferred or traded. If a particular asset has
the characteristics of a digital asset, it will be treated as a
digital asset for federal income tax purposes.
Digital assets are any digital representations of value
that are recorded on a cryptographically secured
Schedule D (Form 1040)
6781
8582
8824
8949
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 53
distributed ledger or any similar technology. For example,
digital assets include non-fungible tokens (NFTs) and vir-
tual currencies, such as cryptocurrencies and sta-
ble-coins. If a particular asset has the characteristics of a
digital asset, it will be treated as a digital asset for federal
income tax purposes. The general tax principles that ap-
ply to property transactions apply to transactions using
digital assets. Transactions involving digital assets in-
clude, but are not limited to:
• The receipt of digital assets as payment for goods or
services provided;
• The receipt or transfer of digital asset for free (without
providing any consideration) that does not qualify as a
bona fide gift;
• The receipt of new digital assets as a result of mining
and staking activities;
• The receipt of digital assets as a result of a hard fork;
• An exchange of digital assets for property, goods, or
services;
• An exchange or trade of digital assets for other digital
assets;
• A sale of digital assets; and
• Any other disposition of a financial interest in digital
assets.
If, in 2024, you engaged in any transaction involving
digital assets, check "Yes" next to the question on digital
assets on page 1 of Form 1040 or 1040-SR. On the left
side of Form 1040 or 1040-SR, you will see the heading
"Digital Assets." See the Instructions for Form 1040. Also,
if you disposed of any digital assets in 2024 that were held
as a capital asset through a sale, exchange, or transfer,
use Form 8949 to figure your capital gain or loss and re-
port it on Schedule D (Form 1040). See the Instructions
for Form 8949.
If you received digital assets as compensation for your
services, you must report the income as wages on Form
1040 or 1040-SR, line 1a. If you received digital assets for
sales to customers in a trade or business, you must gener-
ally report the income on Schedule C (Form 1040) for a
sole proprietorship. You should report income from digital
assets the same way as you would report similar income.
For additional information on digital assets, see the In-
structions for Form 1040 or go to IRS.gov/DigitalAsset.
Sale and purchase. Ordinarily, a transaction is not a
trade when you voluntarily sell property for cash and im-
mediately buy similar property to replace it. The sale and
purchase are two separate transactions. But see
Like-Kind Exchanges under Nontaxable Trades, later.
Redemption of stock. A redemption of stock is treated
as a sale or trade and is subject to the capital gain or loss
provisions unless the redemption is a dividend or other
distribution on stock.
Dividend versus sale or trade. Whether a redemp-
tion is treated as a sale, trade, dividend, or other
distribution depends on the circumstances in each case.
Both direct and indirect ownership of stock will be consid-
ered. The redemption is treated as a sale or trade of stock
if:
• The redemption is not essentially equivalent to a divi-
dend—see Dividends and Other Distributions in chap-
ter 1,
• There is a substantially disproportionate redemption
of stock,
• There is a complete redemption of all the stock of the
corporation owned by the shareholder, or
• The redemption is a distribution in partial liquidation of
a corporation.
Redemption or retirement of bonds. A redemption or
retirement of bonds or notes at their maturity is generally
treated as a sale or trade. See Stocks, stock rights, and
bonds and Discounted Debt Instruments, later.
In addition, a significant modification of a bond is trea-
ted as a trade of the original bond for a new bond. For de-
tails, see Regulations section 1.1001-3.
Surrender of stock. A surrender of stock by a dominant
shareholder who retains ownership of more than half of
the corporation's voting shares is treated as a contribution
to capital rather than as an immediate loss deductible
from taxable income. The surrendering shareholder must
reallocate his or her basis in the surrendered shares to the
shares he or she retains.
Trade of investment property for an annuity. The
transfer of investment property to a corporation, trust,
fund, foundation, or other organization, in exchange for a
fixed annuity contract that will make guaranteed annual
payments to you for life, is a taxable trade. If the present
value of the annuity is more than your basis in the property
traded, you have a taxable gain in the year of the trade.
Figure the present value of the annuity according to fac-
tors used by commercial insurance companies issuing an-
nuities.
Transfer by inheritance. The transfer of property of a
decedent to the executor or administrator of the estate, or
to the heirs or beneficiaries, is not a sale or other disposi-
tion. No taxable gain or deductible loss results from the
transfer.
Termination of certain rights and obligations. The
cancellation, lapse, expiration, or other termination of a
right or obligation (other than a securities futures contract)
with respect to property that is a capital asset (or that
would be a capital asset if you acquired it) is treated as a
sale. Any gain or loss is treated as a capital gain or loss.
This rule does not apply to the retirement of a debt in-
strument. See Redemption or retirement of bonds, earlier.
Worthless Securities
Stocks, stock rights, and bonds (other than those held for
sale by a securities dealer) that became completely worth-
less during the tax year are treated as though they were
54 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
sold on the last day of the tax year. This affects whether
your capital loss is long term or short term. See Holding
Period, later.
Worthless securities also include securities that you
abandon after March 12, 2008. To abandon a security, you
must permanently surrender and relinquish all rights in the
security and receive no consideration in exchange for it.
All the facts and circumstances determine whether the
transaction is properly characterized as an abandonment
or other type of transaction, such as an actual sale or ex-
change, contribution to capital, dividend, or gift.
If you are a cash basis taxpayer and make payments on
a negotiable promissory note that you issued for stock that
became worthless, you can deduct these payments as
losses in the years you actually make the payments. Do
not deduct them in the year the stock became worthless.
How to report loss. Report worthless securities on Form
8949, Part I or Part II, whichever applies.
Report your worthless securities transactions on
Form 8949 with the correct box checked for these
transactions. See Form 8949 and the Instructions
for Form 8949.
Filing a claim for refund. If you do not claim a loss for a
worthless security on your original return for the year it be-
comes worthless, you can file a claim for a credit or refund
due to the loss. You must use Form 1040-X, Amended
U.S. Individual Income Tax Return, to amend your return
for the year the security became worthless. You must file it
within 7 years from the date your original return for that
year had to be filed, or 2 years from the date you paid the
tax, whichever is later. (Claims not due to worthless secur-
ities or bad debts must generally be filed within 3 years
from the date a return is filed, or 2 years from the date the
tax is paid, whichever is later.) For more information about
filing a claim, see Pub. 556, Examination of Returns, Ap-
peals Rights, and Claims for Refund.
Constructive Sales
of Appreciated
Financial Positions
You are treated as having made a constructive sale when
you enter into certain transactions involving an appreci-
ated financial position (defined later) in stock, a partner-
ship interest, or certain debt instruments. You must recog-
nize a gain as if the position were disposed of at its fair
market value on the date of the constructive sale. This
gives you a new holding period for the position that begins
on the date of the constructive sale. Then, when you close
the transaction, you reduce your gain (or increase your
loss) by the gain recognized on the constructive sale.
Constructive sale. You are treated as having made a
constructive sale of an appreciated financial position if
you:
• Enter into a short sale of the same or substantially
identical property,CAUTION
!
• Enter into an offsetting notional principal contract re-
lating to the same or substantially identical property,
• Enter into a futures or forward contract to deliver the
same or substantially identical property (including a
forward contract that provides for cash settlement), or
• Acquire the same or substantially identical property (if
the appreciated financial position is a short sale, an
offsetting notional principal contract, or a futures or
forward contract).
You are also treated as having made a constructive
sale of an appreciated financial position if a person related
to you enters into a transaction described above with a
view toward avoiding the constructive sale treatment. For
this purpose, a related person is any related party descri-
bed under Related Party Transactions, later in this chap-
ter.
Exception for nonmarketable securities. You are
not treated as having made a constructive sale solely be-
cause you entered into a contract for sale of any stock,
debt instrument, or partnership interest that is not a mar-
ketable security if it settles within 1 year of the date you
enter into it.
Exception for certain closed transactions. Do not
treat a transaction as a constructive sale if all of the follow-
ing are true.
1. You closed the transaction on or before the 30th day
after the end of your tax year;
2. You held the appreciated financial position throughout
the 60-day period beginning on the date you closed
the transaction; and
3. Your risk of loss was not reduced at any time during
that 60-day period by holding certain other positions.
If a closed transaction is reestablished in a substantially
similar position during the 60-day period beginning on the
date the first transaction was closed, this exception still
applies if the reestablished position is closed before the
30th day after the end of your tax year in which the first
transaction was closed and, after that closing, (2) and (3)
above are true.
This exception also applies to successive short sales of
an entire appreciated financial position. For more informa-
tion, see Revenue Ruling 2003-1 in Internal Revenue Bul-
letin 2003-3. This bulletin is available at IRS.gov/pub/irs-
irbs/irb03-03.pdf.
Appreciated financial position. This is any interest in
stock, a partnership interest, or a debt instrument (includ-
ing a futures or forward contract, a short sale, or an op-
tion) if disposing of the interest would result in a gain.
Exceptions. An appreciated financial position does
not include the following.
1. Any position from which all of the appreciation is ac-
counted for under the mark-to-market rule, including
section 1256 contracts (described later under Section
1256 Contracts Marked to Market).
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 55
2. Any position in a debt instrument if:
a. The position unconditionally entitles the holder to
receive a specified principal amount;
b. The interest payments (or other similar amounts)
with respect to the position are payable at a fixed
rate or a variable rate described in Regulations
section 1.860G-1(a)(3); and
c. The position is not convertible, either directly or in-
directly, into stock of the issuer (or any related per-
son).
3. Any hedge with respect to a position described in (2).
Certain trust instruments treated as stock. For the
constructive sale rules, an interest in an actively traded
trust is treated as stock unless substantially all of the value
of the property held by the trust is debt that qualifies for
the exception to the definition of an appreciated financial
position (explained in (2) above).
Sale of appreciated financial position. A transaction
treated as a constructive sale of an appreciated financial
position is not treated as a constructive sale of any other
appreciated financial position, as long as you continue to
hold the original position. However, if you hold another ap-
preciated financial position and dispose of the original po-
sition before closing the transaction that resulted in the
constructive sale, you are treated as if, at the same time,
you constructively sold the other appreciated financial po-
sition.
Section 1256 Contracts
Marked to Market
If you hold a section 1256 contract at the end of the tax
year, you must generally treat it as sold at its fair market
value on the last business day of the tax year.
Section 1256 Contract
A section 1256 contract is any:
• Regulated futures contract,
• Foreign currency contract,
• Nonequity option,
• Dealer equity option, or
• Dealer securities futures contract.
Exceptions. A section 1256 contract does not in-
clude:
• Interest rate swaps,
• Currency swaps,
• Basis swaps,
• Interest rate caps,
• Interest rate floors,
• Commodity swaps,
• Equity swaps,
• Equity index swaps,
• Credit default swaps, or
• Similar agreements.
For more details, including definitions of these terms, see
section 1256.
Regulated futures contract. This is a contract that:
• Provides that amounts which must be deposited to, or
can be withdrawn from, your margin account depend
on daily market conditions (a system of mark to mar-
ket); and
• Is traded on, or subject to the rules of, a qualified
board of exchange. A qualified board of exchange is a
domestic board of trade designated as a contract mar-
ket by the Commodity Futures Trading Commission,
any board of trade or exchange approved by the Sec-
retary of the Treasury, or a national securities ex-
change registered with the Securities and Exchange
Commission (SEC).
Foreign currency contract. This is a contract that:
• Requires delivery of a foreign currency that has posi-
tions traded through regulated futures contracts (or
settlement of which depends on the value of that type
of foreign currency),
• Is traded in the interbank market, and
• Is entered into at arm's length at a price determined by
reference to the price in the interbank market.
Bank forward contracts with maturity dates longer than
the maturities ordinarily available for regulated futures
contracts are considered to meet the definition of a foreign
currency contract if the above three conditions are satis-
fied.
Special rules apply to certain foreign currency transac-
tions. These transactions may result in ordinary gain or
loss treatment. For details, see Internal Revenue Code
section 988 and Regulations sections 1.988-1(a)(7) and
1.988-3.
Nonequity option. This is any listed option (defined
later) that is not an equity option. Nonequity options in-
clude debt options, commodity futures options, currency
options, and broad-based stock index options. A
broad-based stock index is based on the value of a group
of diversified stocks or securities (such as the Standard
and Poor's 500 index).
Warrants based on a stock index that are economically
substantially identical in all material respects to options
based on a stock index are treated as options based on a
stock index.
Cash-settled options. Cash-settled options based on
a stock index and either traded on or subject to the rules
of a qualified board of exchange are nonequity options if
the SEC determines that the stock index is broad based.
This rule does not apply to options established before
the SEC determines that the stock index is broad based.
56 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Listed option. This is any option traded on, or subject
to the rules of, a qualified board or exchange (as dis-
cussed earlier under Regulated futures contract). A listed
option, however, does not include an option that is a right
to acquire stock from the issuer.
Dealer equity option. This is any listed option that, for
an options dealer:
• Is an equity option,
• Is bought or granted by that dealer in the normal
course of the dealer's business activity of dealing in
options, and
• Is listed on the qualified board of exchange where that
dealer is registered.
An “options dealer” is any person registered with an ap-
propriate national securities exchange as a market maker
or specialist in listed options.
Equity option. This is any option:
• To buy or sell stock, or
• That is valued directly or indirectly by reference to any
stock or narrow-based security index.
Equity options include options on a group of stocks only if
the group is a narrow-based stock index.
Dealer securities futures contract. For any dealer in
securities futures contracts or options on those contracts,
this is a securities futures contract (or option on such a
contract) that:
• Is entered into by the dealer (or, in the case of an op-
tion, is purchased or granted by the dealer) in the nor-
mal course of the dealer's activity of dealing in this
type of contract (or option); and
• Is traded on a qualified board or exchange (as defined
under Regulated futures contract, earlier).
A securities futures contract that is not a dealer securities
futures contract is treated as described later under Securi-
ties Futures Contracts.
Mark-to-Market Rule
A section 1256 contract that you hold at the end of the tax
year will generally be treated as sold at its fair market
value on the last business day of the tax year, and you
must recognize any gain or loss that results. That gain or
loss is taken into account in figuring your gain or loss
when you later dispose of the contract, as shown in the
Example under 60/40 rule below.
Hedging exception. The mark-to-market rule does not
apply to hedging transactions. See Hedging Transactions,
later.
60/40 rule. Under the mark-to-market system, 60% of
your capital gain or loss will be treated as a long-term cap-
ital gain or loss, and 40% will be treated as a short-term
capital gain or loss. This is true regardless of how long you
actually held the property.
Example. On June 1, 2023, you bought a regulated fu-
tures contract for $50,000. On December 29, 2023 (the
last business day of your tax year), the fair market value of
the contract was $57,000. You recognized a $7,000 gain
on your 2023 tax return. You treated 60% of the gain as
long-term capital gain and 40% as short-term capital gain.
On February 1, 2024, you sold the contract for $56,000.
Because you recognized a $7,000 gain on your 2023 re-
turn, you recognize a $1,000 loss ($57,000 − $56,000) on
your 2024 tax return, treated as 60% long-term and 40%
short-term capital loss.
Limited partners or entrepreneurs. The 60/40 rule
does not apply to dealer equity options or dealer securi-
ties futures contracts that result in capital gain or loss allo-
cable to limited partners or limited entrepreneurs (defined
later under Hedging Transactions). Instead, these gains or
losses are treated as short term.
Terminations and transfers. The mark-to-market rule
also applies if your obligation or rights under section 1256
contracts is terminated or transferred during the tax year.
In this case, use the fair market value of each section
1256 contract at the time of termination or transfer to de-
termine the gain or loss. Terminations or transfers may re-
sult from any offsetting, delivery, exercise, assignment, or
lapse of your obligation or rights under section 1256 con-
tracts.
Loss carryback election. An individual having a net
section 1256 contracts loss (defined later) can generally
elect to carry this loss back 3 years instead of carrying it
over to the next year. See How To Report, later, for infor-
mation about reporting this election on your return.
The loss carried back to any year under this election
cannot be more than the net section 1256 contracts gain
in that year. In addition, the amount of loss carried back to
an earlier tax year cannot increase or produce a net oper-
ating loss for that year.
The loss is carried to the earliest carryback year first,
and any unabsorbed loss amount can then be carried to
each of the next 2 tax years. In each carryback year, treat
60% of the carryback amount as a long-term capital loss
and 40% as a short-term capital loss from section 1256
contracts.
If only a portion of the net section 1256 contracts loss is
absorbed by carrying the loss back, the unabsorbed por-
tion can be carried forward, under the capital loss carry-
over rules, to the year following the loss. For more informa-
tion, see Capital Losses, later. Figure your capital loss
carryover as if, for the loss year, you had an additional
short-term capital gain of 40% of the amount of net sec-
tion 1256 contracts loss absorbed in the carryback years
and an additional long-term capital gain of 60% of the ab-
sorbed loss. In the carryover year, treat any capital loss
carryover from losses on section 1256 contracts as if it
were a loss from section 1256 contracts for that year.
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 57
Net section 1256 contracts loss. This loss is the
lesser of:
• The net capital loss for your tax year determined by
taking into account only the gains and losses from
section 1256 contracts, or
• The capital loss carryover to the next tax year deter-
mined without this election.
Net section 1256 contracts gain. This gain is the
lesser of:
• The capital gain net income for the carryback year de-
termined by taking into account only gains and losses
from section 1256 contracts, or
• The capital gain net income for that year.
Figure your net section 1256 contracts gain for any carry-
back year without regard to the net section 1256 contracts
loss for the loss year or any later tax year.
Traders in section 1256 contracts. Gain or loss from
the trading of section 1256 contracts is capital gain or loss
subject to the mark-to-market rule. However, this does not
apply to contracts held for purposes of hedging property if
any loss from the property would be an ordinary loss.
Treatment of underlying property. The determina-
tion of whether an individual's gain or loss from any prop-
erty is ordinary or capital gain or loss is made without re-
gard to the fact that the individual is actively engaged in
dealing in or trading section 1256 contracts related to that
property.
Deferral of net gain from section 1256 contracts due
to investment in Qualified Opportunity Fund. For
special rules relating to the deferral of net gain from sec-
tion 1256 contracts, see section 1400Z-2. See the Form
8949 instructions for how to report.
How To Report
If you disposed of regulated futures or foreign currency
contracts in 2024 (or had unrealized profit or loss on these
contracts that were open at the end of 2023 or 2024), you
should receive Form 1099-B from your broker.
Form 6781. Use Part I of Form 6781 to report your gains
and losses from all section 1256 contracts that are open
at the end of the year or that were closed out during the
year. This includes the amount shown in box 11 of Form
1099-B. Then enter the net amount of these gains and los-
ses on Schedule D (Form 1040), line 4 or line 11, as ap-
propriate. Include a copy of Form 6781 with your income
tax return.
If the Form 1099-B you receive includes a straddle or
hedging transaction, defined later, it may be necessary to
show certain adjustments on Form 6781. Follow the Form
6781 instructions for completing Part I.
Loss carryback election. To carry back your loss under
the election procedures described earlier, file Form
1040-X or Form 1045, Application for Tentative Refund, for
the year to which you are carrying the loss with an amen-
ded Form 6781 and an amended Schedule D (Form 1040)
attached. Follow the instructions for completing Form
6781 for the loss year to make this election.
Hedging Transactions
The mark-to-market rule, described earlier, does not apply
to hedging transactions. A transaction is a hedging trans-
action if both of the following conditions are met.
1. You entered into the transaction in the normal course
of your trade or business primarily to manage the risk
of:
a. Price changes or currency fluctuations on ordinary
property you hold (or will hold); or
b. Interest rate or price changes, or currency fluctua-
tions, on your current or future borrowings or ordi-
nary obligations.
2. You clearly identified the transaction as being a hedg-
ing transaction before the close of the day on which
you entered
into it.
This hedging transaction exception does not apply to
transactions entered into by or for any syndicate. A syndi-
cate is a partnership, S corporation, or other entity (other
than a regular corporation) that allocates more than 35%
of its losses to limited partners or limited entrepreneurs. A
limited entrepreneur is a person who has an interest in an
enterprise (but not as a limited partner) and who does not
actively participate in its management. However, an inter-
est is not considered held by a limited partner or entrepre-
neur if the interest holder actively participates (or did so
for at least 5 full years) in the management of the entity, or
is the spouse, child (including a legally adopted child),
grandchild, or parent of an individual who actively partici-
pates in the management of the entity.
Hedging loss limit. If you are a limited partner or entre-
preneur in a syndicate, the amount of a hedging loss you
can claim is limited. A “hedging loss” is the amount by
which the allowable deductions in a tax year that resulted
from a hedging transaction (determined without regard to
the limit) are more than the income received or accrued
during the tax year from this transaction.
Any hedging loss allocated to you for the tax year is
limited to your taxable income for that year from the trade
or business in which the hedging transaction occurred. Ig-
nore any hedging transaction items in determining this
taxable income. If you have a hedging loss that is disal-
lowed because of this limit, you can carry it over to the
next tax year as a deduction resulting from a hedging
transaction.
If the hedging transaction relates to property other than
stock or securities, the limit on hedging losses applies if
the limited partner or entrepreneur is an individual.
The limit on hedging losses does not apply to any
hedging loss to the extent that it is more than all your un-
recognized gains from hedging transactions at the end of
the tax year that are from the trade or business in which
the hedging transaction occurred. The term “unrecognized
58 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
gain” has the same meaning as defined under Loss Defer-
ral Rules, later.
Sale of property used in a hedge. Once you identify
personal property as being part of a hedging transaction,
you must treat gain from its sale or exchange as ordinary
income, not capital gain.
Self-Employment Income
Gains and losses derived in the ordinary course of a com-
modity or option dealer's trading in section 1256 contracts
and property related to these contracts are included in net
earnings from self-employment. See the Instructions for
Schedule SE (Form 1040). In addition, the rules relating to
contributions to self-employment retirement plans apply.
For information on retirement plan contributions, see Pub.
560, Retirement Plans for Small Business (SEP, SIMPLE
and Qualified Plans) and Pub. 590-A, Contributions to In-
dividual Retirement Arrangements (IRAs).
Generally, self-employment income includes all
gross income derived by an individual from any
trade or business carried on by the individual as
other than an employee. Consequently, the fair market
value of virtual currency received for services performed
as an independent contractor, measured in U.S. dollars as
of the date of receipt, constitutes self-employment income
and is subject to the self-employment tax.
Basis of Investment Property
Terms you may need to know
(see Glossary):
Basis
Fair market value
Original issue discount (OID)
Basis is a way of measuring your investment in property
for tax purposes. You must know the basis of your prop-
erty to determine whether you have a gain or loss on its
sale or other disposition.
Investment property you buy normally has an original
basis equal to its cost. If you get property in some way
other than buying it, such as by gift or inheritance, its fair
market value may be important in figuring the basis.
Cost Basis
The basis of property you buy is usually its cost. The cost
is the amount you pay in cash, debt obligations, or other
property or services.
Cost basis and digital assets. The basis of property is
its cost. Generally, the basis of a digital asset is the cost in
U.S. dollars. How you determine your basis for digital as-TIP
sets depends on the type of transaction you had. Find
how to determine the basis for your specific situation in
FAQs on virtual currency transactions. To determine your
basis, you’ll need this information:
• Type of digital asset you acquired (for example Bit-
coin);
• Date and time you acquired the digital asset;
• Number of units of the digital asset acquired, and
• Fair market value of the digital asset when acquired
(as measured in U.S. dollars).
Find additional details on Pub. 551.
Unstated interest. If you buy property on a time-pay-
ment plan that charges little or no interest, the basis of
your property is your stated purchase price, minus the
amount considered to be unstated interest. You generally
have unstated interest if your interest rate is less than the
applicable federal rate. For more information, see Unsta-
ted Interest and Original Issue Discount (OID) in Pub. 537.
Basis Other Than Cost
There are times when you must use a basis other than
cost. In these cases, you may need to know the property's
fair market value or the adjusted basis of the previous
owner.
Fair market value. This is the price at which the property
would change hands between a buyer and a seller, neither
being forced to buy or sell and both having reasonable
knowledge of all the relevant facts. Sales of similar prop-
erty, around the same date, may be helpful in figuring fair
market value.
Property Received for Services
If you receive investment property for services, you must
include the property's fair market value in income. The
amount you include in income then becomes your basis in
the property. If the services were performed for a price that
was agreed to beforehand, this price will be accepted as
the fair market value of the property if there is no evidence
to the contrary.
Digital assets for services. If your employer gives you
digital assets (such as Bitcoin) as payment for your serv-
ices, you must include the FMV of the digital assets as of
the date(s) of receipt in your income. The FMV of digital
assets paid as wages is subject to federal income tax
withholding, FICA tax, and FUTA tax and must be reported
on Form W-2. Notice 2014-21, 2014-16 I.R.B. 938, de-
scribes how digital assets are treated for federal tax pur-
poses and is available at IRS.gov/irb/
2014-16_IRB#NOT-2014-21.
If you received digital assets as compensation for your
services, you must report the income as wages on Form
1040 or 1040-SR, line 1a. If you received digital assets for
sales to customers in a trade or business, you must gener-
ally report the income on Schedule C (Form 1040) for a
sole proprietorship. You should report income from digital
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 59
assets the same way as you would report similar income.
For additional information on digital assets, see the
Instructions for Form 1040 or go to IRS.gov/DigitalAssets.
Restricted property. If you receive, as payment for serv-
ices, property that is subject to certain restrictions, your
basis in the property is generally its fair market value when
it becomes substantially vested. Property becomes sub-
stantially vested when it is transferable or is no longer sub-
ject to substantial risk of forfeiture, whichever happens
first. See Restricted Property in Pub. 525, Taxable and
Nontaxable Income, for more information.
Bargain purchases. If you buy investment property at
less than fair market value, as payment for services, you
must include the difference in income. Your basis in the
property is the price you pay plus the amount you include
in income.
Property Received in Taxable Trades
If you received investment property in trade for other prop-
erty, the basis of the new property is its fair market value at
the time of the trade unless you received the property in a
nontaxable trade.
Example. You trade A Company stock for B Company
stock having a fair market value of $1,200. If the adjusted
basis of the A Company stock is less than $1,200, you
have a taxable gain on the trade. If the adjusted basis of
the A Company stock is more than $1,200, you have a de-
ductible loss on the trade. The basis of your B Company
stock is $1,200. If you later sell the B Company stock for
$1,300, you will have a gain of $100.
Property Received in Nontaxable Trades
If you have a nontaxable trade, you do not recognize gain
or loss until you dispose of the real property you received
in the trade. See Nontaxable Trades, later.
The basis of property you received in a nontaxable or
partly nontaxable trade is generally the same as the adjus-
ted basis of the property you gave up. Increase this
amount by any cash you paid, additional costs you had,
and any gain recognized. Reduce this amount by any
cash or unlike property you received, any loss recognized,
and any liability of yours that was assumed or treated as
assumed.
Property Received From Your Spouse
If property is transferred to you from your spouse (or for-
mer spouse, if the transfer is incident to your divorce), your
basis is the same as your spouse's or former spouse's ad-
justed basis just before the transfer. See Transfers Be-
tween Spouses, later.
Recordkeeping. The transferor must give you the
records necessary to determine the adjusted ba-
sis and holding period of the property as of the
date of the transfer.RECORDS
Property Received as a Gift
If you receive virtual currency as a bona fide gift,
you will not recognize income until you sell, ex-
change, or otherwise dispose of that virtual cur-
rency. For more information about gifts, see Pub. 559.
To figure your basis in property that you received as a
gift, you must know its adjusted basis to the donor just be-
fore it was given to you, its fair market value at the time it
was given to you, the amount of any gift tax paid on it, and
the date it was given to you.
Digital assets received as a gift. The gift tax applies to
transfers of digital assets. Digital assets are any digital
representations of value that are recorded on a crypto-
graphically secured distributed ledger or any similar tech-
nology. For example, digital assets include non-fungible
tokens (NFTs) and virtual currencies, such as cryptocur-
rencies and stablecoins. If a particular asset has the char-
acteristics of a digital asset, it will be treated as a digital
asset for federal transfer tax purposes. For more informa-
tion, see Form 709 Instructions.
Basis of digital assets received as a gift. Your basis in
virtual currency received as a bona fide gift differs de-
pending on whether you will have a gain or a loss when
you sell or dispose of it. For purposes of determining
whether you have a gain, your basis is equal to the donor's
basis, plus any gift tax the donor paid on the gift. For pur-
poses of determining whether you have a loss, your basis
is equal to the lesser of the donor's basis or the fair market
value of the virtual currency at the time you received the
gift. If you do not have any documentation to substantiate
the donor's basis, then your basis is zero. For more infor-
mation on basis of property received as a gift, see Pub.
551.
Fair market value less than donor's adjusted basis. If
the fair market value of the property at the time of the gift
was less than the donor's adjusted basis just before the
gift, your basis for gain on its sale or other disposition is
the same as the donor's adjusted basis plus or minus any
required adjustments to basis during the period you hold
the property. Your basis for loss is its fair market value at
the time of the gift plus or minus any required adjustments
to basis during the period you hold the property.
No gain or loss. If you use the basis for figuring a
gain and the result is a loss, and then use the basis for fig-
uring a loss and the result is a gain, you will have neither a
gain nor a loss.
Example. You receive a gift of investment property
having an adjusted basis of $10,000 at the time of the gift.
The fair market value at the time of the gift is $9,000. You
later sell the property for $9,500. Your basis for figuring
gain is $10,000, and $9,500 minus $10,000 results in a
$500 loss. Your basis for figuring loss is $9,000, and
$9,500 minus $9,000 results in a $500 gain. You have nei-
ther gain nor loss.TIP
60 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Fair market value equal to or more than donor's ad-
justed basis. If the fair market value of the property at
the time of the gift was equal to or more than the donor's
adjusted basis just before the gift, your basis for gain or
loss on its sale or other disposition is the donor's adjusted
basis plus or minus any required adjustments to basis dur-
ing the period you hold the property. Also, you may be al-
lowed to add to the donor's adjusted basis all or part of
any gift tax paid, depending on the date of the gift.
Gift received after 1976. If you received property as
a gift after 1976, your basis is the donor's adjusted basis
increased by the part of the gift tax paid that was for the
net increase in value of the gift. You figure this part by mul-
tiplying the gift tax paid on the gift by a fraction. The nu-
merator (top part) is the net increase in value of the gift
and the denominator (bottom part) is the amount of the
gift.
The net increase in value of the gift is the fair market
value of the gift minus the donor's adjusted basis. The
amount of the gift is its value for gift tax purposes after re-
duction by any annual exclusion and marital or charitable
deduction that applies to the gift.
Example. In 2024, you received a gift of property from
your mother. At the time of the gift, the property had a fair
market value of $101,000 and an adjusted basis to her of
$40,000. The amount of the gift for gift tax purposes was
$83,000 ($101,000 minus the $18,000 annual exclusion),
and your mother paid a gift tax of $19,040. You figure your
basis in the following way:
Fair market value . . . . . . . . . . . . . . . . . . . . . . . $101,000
Minus: Adjusted basis . . . . . . . . . . . . . . . . . . . . 40,000
Net increase in value of gift . . . . . . . . . . . . . . . . . $ 61,000
Gift tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,040
Multiplied by 0.735 ($61,000 ÷ $83,000) . . . . . . . . . 0.735
Gift tax due to net increase in value . . . . . . . . . . . . $ 13,994
Plus: Adjusted basis of property to
your mother . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Your basis in the property. . . . . . . . . . . . . . . . . $ 53,994
Part sale, part gift. If you get property in a transfer that
is partly a sale and partly a gift, your basis is the larger of
the amount you paid for the property or the transferor's ad-
justed basis in the property at the time of the transfer. Add
to that amount the amount of any gift tax paid on the gift,
as described in the preceding discussion. For figuring
loss, your basis is limited to the property's fair market
value at the time of the transfer.
Gift tax information. For information on gift tax, see
Pub. 559. For information on figuring the amount of gift tax
to add to your basis, see Property Received as a Gift in
Pub. 551.
Property Received as Inheritance
If you sell or dispose of inherited property that is a
capital asset, the gain or loss is considered long
term, regardless of how long you held the prop-
erty. For more information on inherited property, see Pub.
559.
Before or after 2010. If you inherited property from a
decedent who died before or after 2010, or who died in
2010 and the executor of the decedent's estate elected
not to file Form 8939, Allocation of Increase in Basis for
Property Acquired From a Decedent, your basis in that
property is generally its fair market value (its appraised
value on Form 706, United States Estate (and Genera-
tion-Skipping Transfer) Tax Return) on:
• The date of the decedent's death; or
• The later alternate valuation date if the estate qualifies
for, and elects to use, alternate valuation.
In certain circumstances, the executor of an estate (or
other person) required to file Form 706 after July 15, 2015,
will be required to provide a Schedule A (Form 8971) to
you as a beneficiary who receives or is to receive property
from the estate. If you receive Schedule A (Form 8971),
use the final estate tax value of the property reported on
the Schedule A to determine your basis in the property.
If no Form 706 was filed, or the executor was not re-
quired to provide you Schedule A (Form 8971), use the
appraised value on the date of death for state inheritance
or transmission taxes. For stocks and bonds, if no Form
706 was filed and there are no state inheritance or trans-
mission taxes, see the Form 706 instructions for figuring
the fair market value of the stocks and bonds on the date
of the decedent's death.
Appreciated property you gave the decedent. Your
basis in certain appreciated property that you inherited is
the decedent's adjusted basis in the property immediately
before death rather than its fair market value. This applies
to appreciated property that you or your spouse gave the
decedent as a gift during the 1-year period ending on the
date of death. Appreciated property is any property whose
fair market value on the day you gave it to the decedent
was more than its adjusted basis.
More information. See Pub. 551 for more information
on the basis of inherited property, including community
property, property held by a surviving tenant in a joint ten-
ancy or tenancy by the entirety, a qualified joint interest,
and a farm or closely held business.
Inherited in 2010 and executor elected to file Form
8939. If you inherited property from a decedent who died
in 2010 and the executor made the election to file Form
8939, see Revenue Procedure 2011-41 to figure your ba-
sis. Revenue Procedure 2011-41 is available at
IRS.gov/rb/2011-35_IRB#RP-2011-41.
For additional information on an executor making the
election, see also Notice 2011-66, 2011-35 I.R.B. 184,
available at IRS.gov/irb/2011-35_IRB#NOT-2011-66.TIP
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 61
Adjusted Basis
Before you can figure any gain or loss on a sale, ex-
change, or other disposition of property or figure allowable
depreciation, depletion, or amortization, you must usually
make certain adjustments (increases and decreases) to
the basis of the property. The result of these adjustments
to the basis is the adjusted basis.
Adjustments to the basis of stocks and bonds are ex-
plained in the following discussion. For information about
other adjustments to basis, see Pub. 551.
Stocks and Bonds
The basis of stocks or bonds you own is generally the pur-
chase price plus the costs of purchase, such as commis-
sions and recording or transfer fees. If you acquired stock
or bonds other than by purchase, your basis is usually de-
termined by fair market value or the previous owner's ad-
justed basis as discussed earlier under Basis Other Than
Cost.
The basis of stock must be adjusted for certain events
that occur after purchase. For example, if you receive
more stock from nontaxable stock dividends or stock
splits, you must reduce the basis of your original stock.
You must also reduce your basis when you receive nondi-
vidend distributions (discussed in chapter 1). These distri-
butions, up to the amount of your basis, are a nontaxable
return of capital.
The IRS partners with companies that offer Form
8949 and Schedule D (Form 1040) software that
can import trades from many brokerage firms and
accounting software to help you keep track of your adjus-
ted basis in securities. To find out more, go to IRS.gov/
Filing .
Identifying stock or bonds sold. If you can adequately
identify the shares of stock or the bonds you sold, their ba-
sis is the cost or other basis of the particular shares of
stock or bonds.
Identifying digital assets. You may identify a specific
unit of virtual currency either by documenting the specific
unit’s unique digital identifier such as a private key, public
key, and address, or by records showing the transaction
information for all units of a specific virtual currency, such
as Bitcoin, held in a single account, wallet, or address.
This information must show:
1. The date and time each unit was acquired;
2. Your basis and the fair market value of each unit at the
time it was acquired;
3. The date and time each unit was sold, exchanged, or
otherwise disposed of, and
4. The fair market value of each unit when sold, ex-
changed, or disposed of, and the amount of money or
the value of property received for each unit.TIP
Adequate identification. You will make an adequate
identification if you show that certificates representing
shares of stock from a lot that you bought on a certain
date or for a certain price were delivered to your broker or
other agent.
Broker holds stock. If you have left the stock certifi-
cates with your broker or other agent, you will make an ad-
equate identification if you:
• Tell your broker or other agent the particular stock to
be sold or transferred at the time of the sale or trans-
fer, and
• Receive a written confirmation of this from your broker
or other agent within a reasonable time.
Stock identified this way is the stock sold or transferred
even if stock certificates from a different lot are delivered
to the broker or other agent.
Single stock certificate. If you bought stock in differ-
ent lots at different times and you hold a single stock cer-
tificate for this stock, you will make an adequate identifica-
tion if you:
• Tell your broker or other agent the particular stock to
be sold or transferred when you deliver the certificate
to your broker or other agent, and
• Receive a written confirmation of this from your broker
or other agent within a reasonable time.
If you sell part of the stock represented by a single cer-
tificate directly to the buyer instead of through a broker,
you will make an adequate identification if you keep a writ-
ten record of the particular stock that you intend to sell.
Bonds. These methods of identification also apply to
bonds sold or transferred.
Identification not possible. If you buy and sell se-
curities at various times in varying quantities and you can-
not adequately identify the shares you sell, the basis of
the securities you sell is the basis of the securities you ac-
quired first. Except for certain mutual fund shares, dis-
cussed later, you cannot use the average price per share
to figure gain or loss on the sale of the shares.
Example. You bought 100 shares of stock of XYZ
Corporation in 2009 for $10 per share. In January 2010,
you bought another 200 shares for $11 per share. In July
2010, you gave your son 50 shares. In December 2012,
you bought 100 shares for $9 per share. In April 2024, you
sold 130 shares. You cannot identify the shares you dis-
posed of, so you must use the stock you acquired first to
figure the basis. The shares of stock you gave your son
had a basis of $500 (50 × $10). You figure the basis of the
130 shares of stock you sold in April 2024 as follows:
50 shares (50 × $10) balance of stock bought in
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500
80 shares (80 × $11) stock bought in January 2010 . . 880
Total basis of stock sold in 2024 . . . . . . . . . . . . . $1,380
Shares in a mutual fund or real estate investment
trust (REIT). The basis of shares in a mutual fund (or
62 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
other regulated investment company) or a REIT is gener-
ally figured in the same way as the basis of other stock
and usually includes any commissions or load charges
paid for the purchase.
Example. You bought 100 shares of Fund A for $10
per share. You paid a $50 commission to the broker for the
purchase. Your cost basis for each share is $10.50
($1,050 ÷ 100).
Commissions and load charges. The fees and
charges you pay to acquire or redeem shares of a mutual
fund are not deductible. You can usually add acquisition
fees and charges to your cost of the shares and thereby
increase your basis. A fee paid to redeem the shares is
usually a reduction in the redemption price (sales price).
You cannot add your entire acquisition fee or load
charge to the cost of the mutual fund shares acquired if all
of the following conditions apply.
1. You get a reinvestment right because of the purchase
of the shares or the payment of the fee or charge.
2. You dispose of the shares within 90 days of the pur-
chase date.
3. You acquire new shares in the same mutual fund or
another mutual fund, for which the fee or charge is re-
duced or waived because of the reinvestment right
you got when you acquired the original shares.
The amount of the original fee or charge in excess of
the reduction in (3) is added to the cost of the original
shares. The rest of the original fee or charge is added to
the cost basis of the new shares (unless all three condi-
tions above also apply to the purchase of the new shares).
Choosing average basis for mutual fund shares.
You can choose to use the average basis of mutual fund
shares if you acquired the identical shares at various times
and prices, or you acquired the shares after 2011 in con-
nection with a dividend reinvestment plan (DRIP), and left
them on deposit in an account kept by a custodian or
agent. The methods you can use to figure average basis
are explained later.
Undistributed capital gains. If you had to include in
your income any undistributed capital gains of the mutual
fund or REIT, increase your basis in the stock by the differ-
ence between the amount you included and the amount of
tax paid for you by the fund or REIT. See Undistributed
capital gains of mutual funds and REITs in chapter 1.
Reinvestment right. This is the right to acquire mu-
tual fund shares in the same or another mutual fund with-
out paying a fee or load charge, or by paying a reduced
fee or load charge.
The original cost basis of mutual fund shares you ac-
quire by reinvesting your distributions is the amount of the
distributions used to purchase each full or fractional share.
This rule applies even if the distribution is an exempt-inter-
est dividend that you do not report as income.
Table 4-1. This is a worksheet you can use to
keep track of the adjusted basis of your mutual
fund shares. Enter the cost per share when you
acquire new shares and any adjustments to their basis
when the adjustment occurs. This worksheet will help you
figure the adjusted basis when you sell or redeem shares.
Automatic investment service. If you participate in an
automatic investment service, your basis for each share of
stock, including fractional shares, bought by the bank or
other agent is the purchase price plus a share of the brok-
er's commission.
Dividend Reinvestment Plans (DRIPs). If you partici-
pate in a DRIP and receive stock from the corporation at a
discount, your basis is the full fair market value of the
stock on the dividend payment date. You must include the
amount of the discount in your income.
Public utilities. If, before 1986, you excluded from in-
come the value of stock you had received under a quali-
fied public utility reinvestment plan, your basis in that
stock is zero.
Stock dividends. Stock dividends are distributions made
by a corporation of its own stock. Generally, stock divi-
dends are not taxable to you. However, see Distributions
of Stock and Stock Rights in chapter 1 for some excep-
tions. If the stock dividends are not taxable, you must di-
vide your basis for the old stock between the old and new
stock.
New and old stock identical. If the new stock you re-
ceived as a nontaxable dividend is identical to the old
stock on which the dividend was declared, divide the ad-
justed basis of the old stock by the number of shares of
old and new stock. The result is your basis for each share
of stock.
Example 1. You owned one share of common stock
that you bought for $45. The corporation distributed two
new shares of common stock for each share held. You
then had three shares of common stock. Your basis in
each share is $15 ($45 ÷ 3).
Example 2. You owned two shares of common stock.
You bought one for $30 and the other for $45. The corpo-
ration distributed two new shares of common stock for
each share held. You had six shares after the distribu-
tion—three with a basis of $10 each ($30 ÷ 3) and three
with a basis of $15 each ($45 ÷ 3).
New and old stock not identical. If the new stock
you received as a nontaxable dividend is not identical to
the old stock on which it was declared, the basis of the
new stock is figured differently. Divide the adjusted basis
of the old stock between the old and the new stock in the
ratio of the fair market value of each lot of stock to the total
fair market value of both lots on the date of distribution of
the new stock.
Example. You bought a share of common stock for
$100. Later, the corporation distributed a share ofRECORDS
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 63
preferred stock for each share of common stock held. At
the date of distribution, your common stock had a fair mar-
ket value of $150 and the preferred stock had a fair market
value of $50. You figure the basis of the old and new stock
by dividing your $100 basis between them. The basis of
your common stock is $75 (($150 ÷ $200) × $100), and
the basis of the new preferred stock is $25 (($50 ÷ $200) ×
$100).
Stock bought at various times. Figure the basis of
stock dividends received on stock you bought at various
times and at different prices by allocating to each lot of
stock the share of the stock dividends due to it.
Taxable stock dividends. If your stock dividend is
taxable when you receive it, the basis of your new stock is
its fair market value on the date of distribution. The basis
of your old stock does not change.
Stock splits. Figure the basis of stock splits in the same
way as stock dividends if identical stock is distributed on
the stock held.
Stock rights. A stock right is a right to acquire a corpora-
tion's stock. It may be exercised, it may be sold if it has a
market value, or it may expire. Stock rights are rarely taxa-
ble when you receive them. See Distributions of Stock and
Stock Rights in chapter 1.
Taxable stock rights. If you receive stock rights that
are taxable, the basis of the rights is their fair market value
at the time of distribution. The basis of the old stock does
not change.
Nontaxable stock rights. If you receive nontaxable
stock rights and allow them to expire, they have no basis.
If you exercise or sell the nontaxable stock rights and if,
at the time of distribution, the stock rights had a fair market
value of 15% or more of the fair market value of the old
stock, you must divide the adjusted basis of the old stock
between the old stock and the stock rights. Use a ratio of
the fair market value of each to the total fair market value
of both at the time of distribution.
If the fair market value of the stock rights was less than
15%, their basis is zero. However, you can choose to di-
vide the basis of the old stock between the old stock and
the stock rights. To make the choice, attach a statement to
your return for the year in which you received the rights,
stating that you choose to divide the basis of the stock.
Table 4-1. Mutual Fund Record
Mutual Fund
Acquired 1
Adjustment to Basis per Share
Adjusted
2 Basis
per Share
Sold or Redeemed
Date
Number
of
Shares
Cost
per
Share
Date
Number
of
Shares
1 Include share received from reinvestment of distributions.
2 Cost plus or minus adjustments.
64 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Basis of new stock. If you exercise the stock rights,
the basis of the new stock is its cost plus the basis of the
stock rights exercised.
Example. You own 100 shares of ABC Company
stock, which cost you $22 per share. The ABC Company
gave you 10 nontaxable stock rights that would allow you
to buy 10 more shares at $26 per share. At the time the
stock rights were distributed, the stock had a market value
of $30, not including the stock rights. Each stock right had
a market value of $3. The market value of the stock rights
was less than 15% of the market value of the stock, but
you chose to divide the basis of your stock between the
stock and the rights. You figure the basis of the rights and
the basis of the old stock as follows:
100 shares × $22 = $2,200, basis of old stock
100 shares × $30 = $3,000, market value of old stock
10 rights × $3 = $30, market value of rights
($3,000 ÷ $3,030) × $2,200 = $2,178.22, new basis of old stock
($30 ÷ $3,030) × $2,200 = $21.78, basis of rights
If you sell the rights, the basis for figuring gain or loss is
$2.18 ($21.78 ÷ 10) per right. If you exercise the rights, the
basis of the stock you acquire is the price you pay ($26)
plus the basis of the right exercised ($2.18), or $28.18 per
share. The remaining basis of the old stock is $21.78 per
share.
Investment property received in liquidation. In gen-
eral, if you receive investment property as a distribution in
partial or complete liquidation of a corporation and if you
recognize gain or loss when you acquire the property, your
basis in the property is its fair market value at the time of
the distribution.
S corporation stock. You must increase your basis in
stock of an S corporation by your pro rata share of the fol-
lowing items.
• All income items of the S corporation, including tax-ex-
empt income, that are separately stated and passed
through to you as a shareholder.
• The nonseparately stated income of the S corporation.
• The amount of the deduction for depletion (other than
oil and gas depletion) that is more than the basis of
the property being depleted.
You must decrease your basis in stock of an S corpora-
tion by your pro rata share of the following items.
• Distributions by the S corporation that were not inclu-
ded in your income.
• All loss and deduction items of the S corporation that
are separately stated and passed through to you.
• Any nonseparately stated loss of the S corporation.
• Any expense of the S corporation that is not deducti-
ble in figuring its taxable income and not properly
chargeable to a capital account.
• The amount of your deduction for depletion of oil and
gas wells to the extent the deduction is not more than
your share of the adjusted basis of the wells.
However, your basis in the stock cannot be reduced below
zero.
Qualified small business stock. If you bought this
stock as replacement property for other qualified small
business stock you sold at a gain, you must reduce the
basis of this replacement stock by the amount of any post-
poned gain on the earlier sale. See Gains on Qualified
Small Business Stock, later.
Short sales. If you cannot deduct payments you make to
a lender in lieu of dividends on stock used in a short sale,
the amount you pay to the lender is a capital expense, and
you must add it to the basis of the stock used to close the
short sale.
See Payments in lieu of dividends, later, for information
about deducting payments in lieu of dividends.
Premiums on bonds. If you buy a bond at a premium,
the premium is treated as part of your basis in the bond. If
you choose to amortize the premium paid on a taxable
bond, you must reduce the basis of the bond by the amor-
tized part of the premium each year over the life of the
bond.
For a taxable bond acquired at a premium that is a cov-
ered security, unless you instruct your broker that you do
not want to amortize the premium, your broker will report
income on the bond and your basis in the bond by amor-
tizing the premium. Your broker may report the amount of
premium amortization for a tax year separately from the
amount of gross interest income in boxes 11 and 12 of
Form 1099-INT or box 10 of Form 1099-OID, or may report
net interest in boxes 1 and 3 of Form 1099-INT or box 2 of
Form 1099-OID.
Although you cannot deduct the premium on a tax-ex-
empt bond, you must amortize it to determine your adjus-
ted basis in the bond. You must reduce the basis of the
bond by the premium you amortized for the period you
held the bond. For a tax-exempt covered security acquired
at a premium, box 13 of Form 1099-INT or box 10 of Form
1099-OID shows the amount of bond premium amortiza-
tion allocable to the interest paid during the tax year. If a
net amount of interest appears in box 8 or 9 of Form
1099-INT, whichever is applicable, box 13 of Form
1099-INT should be blank. If a net amount of interest ap-
pears in box 2 of Form 1099-OID, box 10 of Form
1099-OID should be blank.
See Bond Premium Amortization in chapter 3 for more
information.
Market discount on bonds. If you include market dis-
count on a bond in income currently, increase the basis of
your bond by the amount of market discount you include in
your income. See Market Discount Bonds in chapter 1 for
more information.
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 65
Bonds purchased at par value. A bond purchased at
par value (face amount) has no premium or discount.
When you sell or otherwise dispose of the bond, you fig-
ure the gain or loss by comparing the bond proceeds to
the purchase price of the bond.
Example. You purchased a bond several years ago for
its par value of $10,000. You sold the bond this year for
$10,100. You have a gain of $100. However, if you had
sold the bond for $9,900, you would have a loss of $100.
Acquisition discount on short-term obligations. If you
include acquisition discount on a short-term obligation in
your income currently, increase the basis of the obligation
by the amount of acquisition discount you include in your
income. See Discount on Short-Term Obligations in chap-
ter 1 for more information.
Original issue discount (OID) on debt instruments.
Increase the basis of a debt instrument by the OID you in-
clude in your income. See Original Issue Discount (OID) in
chapter 1.
If your debt instrument is a covered security, your
broker will report a basis amount that is adjusted for OID
included in income.
Discounted tax-exempt obligations. OID on tax-ex-
empt obligations is generally not taxable. However, when
you dispose of a tax-exempt obligation issued after Sep-
tember 3, 1982, that you acquired after March 1, 1984,
you must accrue OID on the obligation to determine its ad-
justed basis. The accrued OID is added to the basis of the
obligation to determine your gain or loss. If your tax-ex-
empt obligation is a covered security, your broker will re-
port a basis amount that is adjusted for tax-exempt OID.
For information on determining OID on a long-term obli-
gation, see Debt Instruments Issued After July 1, 1982,
and Before 1985 or Debt Instruments Issued After 1984,
whichever applies, in Pub. 1212, Guide to Original Issue
Discount (OID) Instruments, under Figuring OID on
Long-Term Debt Instruments.
If the tax-exempt obligation has a maturity of 1 year or
less, accrue OID under the rules for acquisition discount
on short-term obligations. See Discount on Short-Term
Obligations in chapter 1.
Stripped tax-exempt obligation. If you acquired a
stripped tax-exempt bond or coupon after October 22,
1986, you must accrue OID on it to determine its adjusted
basis when you dispose of it. For stripped tax-exempt
bonds or coupons acquired after June 10, 1987, part of
this OID may be taxable. You accrue the OID on these ob-
ligations in the manner described in chapter 1 under Strip-
ped Bonds and Coupons.
Increase your basis in the stripped tax-exempt bond or
coupon by the taxable and nontaxable accrued OID. Also
increase your basis by the interest that accrued (but was
not paid and was not previously reflected in your basis)
before the date you sold the bond or coupon. In addition,
for bonds acquired after June 10, 1987, add to your basis
any accrued market discount not previously reflected in
basis.
How To Figure Gain or Loss
You figure gain or loss on a sale or trade of property by
subtracting the adjusted basis of the property from the
amount you realize on the sale or trade.
If you own and use a digital asset for personal or
investment purposes, the income would be taxed
as a capital gain or loss when you sell or dispose
it. To calculate the capital gain or loss of a digital asset
that you sold or disposed of in a transaction, you'll need
this information:
• Type of digital asset;
• Date and time of transaction;
• Number of units;
• Fair Market value at time of transaction (as measured
in U.S. dollars), and
• Basis of digital asset sold or disposed of.
Find how to calculate gain or loss, identify the units sold or
disposed, and determine fair market value for your situa-
tion in FAQs on virtual currency transactions.
Gain. If the amount you realize from a sale or trade is
more than the adjusted basis of the property you transfer,
the difference is a gain.
Loss. If the adjusted basis of the property you transfer is
more than the amount you realize, the difference is a loss.
Amount realized. The amount you realize from a sale or
trade of property is everything you receive for the property
minus your expenses related to the sale (such as redemp-
tion fees, sales commissions, sales charges, or exit fees).
Amount realized includes the money you receive plus the
fair market value of any property or services you receive.
If you finance the buyer's purchase of your property and
the debt instrument does not provide for adequate stated
interest, the unstated interest that you must report as ordi-
nary income will reduce the amount realized from the sale.
For more information, see Pub. 537.
If a buyer of property issues a debt instrument to the
seller of the property, the amount realized is determined
by reference to the issue price of the debt instrument,
which may or may not be the fair market value of the debt
instrument. See Regulations section 1.1001-1(g). How-
ever, if the debt instrument was previously issued by a
third party (one not part of the sale transaction), the fair
market value of the debt instrument is used to determine
the amount realized.
Fair market value. Fair market value is the price at
which property would change hands between a buyer and
a seller, neither being forced to buy or sell and both having
reasonable knowledge of all the relevant facts.
Example. You trade A Company stock with an adjus-
ted basis of $7,000 for B Company stock with a fair market
value of $10,000, which is your amount realized. Your gainTIP
66 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
is $3,000 ($10,000 – $7,000). If you also receive a note for
$6,000 that has an issue price of $6,000, your gain is
$9,000 ($10,000 + $6,000 – $7,000).
Debt paid off. A debt against the property, or against
you, that is paid off as a part of the transaction or that is
assumed by the buyer must be included in the amount re-
alized. This is true even if neither you nor the buyer is per-
sonally liable for the debt. For example, if you sell or trade
property that is subject to a nonrecourse loan, the amount
you realize generally includes the full amount of the note
assumed by the buyer even if the amount of the note is
more than the fair market value of the property.
Example. You sell stock that you had pledged as se-
curity for a bank loan of $8,000. Your basis in the stock is
$6,000. The buyer pays off your bank loan and pays you
$20,000 in cash. The amount realized is $28,000
($20,000 + $8,000). Your gain is $22,000 ($28,000 –
$6,000).
Payment of cash. If you trade property and cash for
other property, the amount you realize is the fair market
value of the property you receive. Determine your gain or
loss by subtracting the cash you pay and the adjusted ba-
sis of the property you trade in from the amount you real-
ize. If the result is a positive number, it is a gain. If the re-
sult is a negative number, it is a loss.
No gain or loss. You may have to use a basis for figur-
ing gain that is different from the basis used for figuring
loss. In this case, you may have neither a gain nor a loss.
See No gain or loss in the discussion on the basis of prop-
erty you received as a gift under Basis Other Than Cost,
earlier.
Special Rules for Mutual Funds
To figure your gain or loss when you dispose of mutual
fund shares, you need to determine which shares were
sold and the basis of those shares. If your shares in a mu-
tual fund were acquired all on the same day and for the
same price, figuring their basis is not difficult. However,
shares are generally acquired at various times, in various
quantities, and at various prices. Therefore, figuring your
basis can be more difficult. You can choose to use either a
cost basis or an average basis to figure your gain or loss.
Cost Basis
You can figure your gain or loss using a cost basis only if
you did not previously use an average basis for a sale, ex-
change, or redemption of other shares in the same mutual
fund.
To figure cost basis, you can choose one of the follow-
ing methods.
• Specific share identification.
• First-in first-out (FIFO).
Specific share identification. If you adequately identify
the shares you sold, you can use the adjusted basis of
those particular shares to figure your gain or loss.
You will adequately identify your mutual fund shares,
even if you bought the shares in different lots at various
prices and times, if you:
1. Specify to your broker or other agent the particular
shares to be sold or transferred at the time of the sale
or transfer, and
2. Receive confirmation in writing from your broker or
other agent within a reasonable time of your specifica-
tion of the particular shares sold or transferred.
You continue to have the burden of proving your basis
in the specified shares at the time of sale or transfer.
FIFO. If your shares were acquired at different times or at
different prices and you cannot identify which shares you
sold, use the basis of the shares you acquired first as the
basis of the shares sold. In other words, the oldest shares
you own are considered sold first. You should keep a sep-
arate record of each purchase and any dispositions of the
shares until all shares purchased at the same time have
been disposed of completely.
Table 4-2 illustrates the use of the FIFO method to fig-
ure the cost basis of shares sold, compared with the use
of the average basis method (discussed next).
Average Basis
You can use the average basis method to determine the
basis of shares of stock if the shares are identical to each
other, you acquired them at different times and different
prices and left them in an account with a custodian or
agent, and either:
• They are shares in a mutual fund (or other regulated
investment company);
• They are shares you hold in connection with a DRIP,
and all the shares you hold in connection with the
DRIP are treated as covered securities (defined later);
or
• You acquired them after 2011 in connection with a
DRIP.
Average basis is determined by averaging the basis of
all shares of identical stock in an account regardless of
how long you have held the stock. However, shares of
stock in a DRIP are not identical to shares of stock with
the same CUSIP number that are not in a DRIP. The basis
of each share of identical stock in the account is the ag-
gregate basis of all shares of that stock in the account
divided by the aggregate number of shares.
Transition rule from double-category method. You
may no longer use the double-category method for figur-
ing your average basis. If you were using the double-cate-
gory method for stock you acquired before April 1, 2011,
and you sell, exchange, or otherwise dispose of that stock
on or after April 1, 2011, you must figure the average basis
of this stock by averaging together all identical shares of
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 67
stock in the account on April 1, 2011, regardless of the
holding period.
Election of average basis method for covered securi-
ties. To make the election to use the average basis
method for your covered securities, you must send written
notice to the custodian or agent who keeps the account.
The written notice can be made electronically. You must
also notify your broker that you have made the election.
Generally, a covered security is a security you acquired af-
ter 2010, with certain exceptions explained in the Instruc-
tions for Form 8949.
You can make the election to use the average basis
method at any time. The election will be effective for sales
or other dispositions of stocks that occur after you notify
the custodian or agent of your election. Your election must
identify each account with that custodian or agent and
each stock in that account to which the election applies.
The election can also indicate that it applies to all ac-
counts with a custodian or agent, including accounts you
later establish with the custodian or agent.
Election of average basis method for noncovered se-
curities. For noncovered securities, you elect to use the
average basis method on your income tax return for the
first tax year that the election applies. You make the elec-
tion by showing on your return that you used the average
basis method in reporting gain or loss on the sale or other
disposition.
Revoking the average basis method election. You
can revoke an election to use the average basis method
for your covered securities by sending written notice to the
custodian or agent holding the stock for which you want to
revoke the election. The election must generally be re-
voked by the earlier of 1 year after you make the election
or the date of the first sale, transfer, or disposition of the
stock following the election. The revocation applies to all
the stock you hold in an account that is identical to the
shares of stock for which you are revoking the election. Af-
ter revoking your election, your basis in the shares of stock
to which the revocation applies is the basis before averag-
ing.
You may be able to find the average basis of your
shares from information provided by the fund.
Average basis method illustrated. Table 4-2 illustrates
the average basis method of shares sold, compared with
the use of the FIFO method to figure cost basis (dis-
cussed earlier).
Even though you include all unsold shares of identical
stock in an account to figure average basis, you may have
both short-term and long-term gains or losses when you
sell these shares. To determine your holding period, the
shares disposed of are considered to be those acquired
first.
Example. You bought 400 identical shares in the LJO
Mutual Fund: 200 shares on May 11, 2023, and 200
shares on May 16, 2024. On November 18, 2024, you
sold 300 shares. The basis of all 300 shares sold is theTIP
same, but you held 200 shares for more than 1 year, so
your gain or loss on those shares is long term. You held
100 shares for 1 year or less, so your gain or loss on those
shares is short term.
How to figure the basis of shares sold. To figure the
basis of shares you sell, use the steps in the following
worksheet.
1. Enter the total adjusted basis of all the shares you
owned in the fund just before the sale. (If you made
an earlier sale of shares in this fund, add the
adjusted basis of any shares you still owned after
the last sale and the adjusted basis of any shares
you acquired after that sale.) . . . . . . . . . . . . . . . $
2. Enter the total number of shares you owned in the
fund just before the sale . . . . . . . . . . . . . . . . . .
3. Divide the amount on line 1 by the amount on line 2.
This is your average basis per share . . . . . . . . . $
4. Enter the number of shares you sold . . . . . . . . . .
5. Multiply the amount on line 3 by the amount on
line 4. This is the basis of the shares you sold . . $
Example 1. You bought 300 identical shares in the
LJP Mutual Fund: 100 shares in 2020 for $1,000 ($10 per
share); 100 shares in 2021 for $1,200 ($12 per share);
and 100 shares in 2022 for $2,600 ($26 per share). Thus,
the total cost of your shares was $4,800 ($1,000 + $1,200
+ $2,600). On May 6, 2024, you sold 150 shares. The ba-
sis of the shares you sold is $2,400 ($16 per share), fig-
ured as follows.
1. Enter the total adjusted basis of all the shares you
owned in the fund just before the sale. (If you made
an earlier sale of shares in this fund, add the
adjusted basis of any shares you still owned after
the last sale and the adjusted basis of any shares
you acquired after that sale.) . . . . . . . . . . . . . . $4,800
2. Enter the total number of shares you owned in the
fund just before the sale . . . . . . . . . . . . . . . . . 300
3. Divide the amount on line 1 by the amount on line 2.
This is your average basis per share . . . . . . . . $ 16
4. Enter the number of shares you sold . . . . . . . . . 150
5. Multiply the amount on line 3 by the amount on
line 4. This is the basis of the shares you sold . . $2,400
Remaining shares. The average basis of the shares
you still hold after a sale of some of your shares is the
same as the average basis of the shares sold. The next
time you make a sale, your average basis will still be the
same, unless you have acquired additional shares (or
have made a subsequent adjustment to basis).
Example 2. The facts are the same as in Example 1,
except that you sold an additional 50 shares on December
9, 2024. You do not need to refigure the average basis of
the 150 shares you owned at that time because you ac-
quired or sold no shares, and had no other adjustments to
basis, since the last sale. Your basis is the $16 per share
figured earlier.
68 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Example 3. The facts are the same as in Example 1,
except that you bought an additional 150 identical shares
at $14 per share on September 9, 2024, and then sold 50
shares on December 9, 2024. The total adjusted basis of
all the shares you owned just before the sale is $4,500,
figured as follows.
1. Basis of remaining shares ($16 x 150) . . . . . . . . $2,400
2. Cost of shares acquired on 9/9/2024 ($14 x
150) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,100
3. Total adjusted basis of all shares owned ($2,400 +
$2,100) . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,500
The basis of the shares sold is $750 ($15 per share), fig-
ured as follows.
1. Enter the total adjusted basis of all the shares you
owned in the fund just before the sale. (If you made
an earlier sale of shares in this fund, add the
adjusted basis of any shares you still owned after
the last sale and the adjusted basis of any shares
you acquired after that sale.) . . . . . . . . . . . . . . $4,500
2. Enter the total number of shares you owned in the
fund just before the sale . . . . . . . . . . . . . . . . . 300
3. Divide the amount on line 1 by the amount on line 2.
This is your average basis per share . . . . . . . . $ 15
4. Enter the number of shares you sold . . . . . . . . . 50
5. Multiply the amount on line 3 by the amount on
line 4. This is the basis of the shares you sold . . $ 750
Shares received as gift. If your account includes
shares that you received by gift, and the fair market value
of the shares at the time of the gift was not more than the
donor's basis, special rules apply. You cannot choose to
use the average basis for the account unless you state in
writing that you will treat the basis of the gift shares as the
fair market value at the time you acquire the shares. You
must provide this written statement when you make the
election to use the average basis method, as described
under Election of average basis method for covered se-
curities and Election for average basis method for noncov-
ered securities, earlier, or when you transfer the gift
shares to an account for which you have made the aver-
age basis method election, whichever is later. The state-
ment must be effective for any gift shares identical to the
Table 4-2. Example of How To Figure Basis of Shares Sold
This is an example showing two different ways to figure basis. It compares the cost basis using the FIFO method with the average basis method.
Date Action Share Price No. of Shares Total Shares Owned
2/10/2022 Invest $4,000 $25 160 160
8/11/2022 Invest $4,800 $20 240 400
12/15/2022 Reinvest $300 dividend $30 10 410
10/2/2024 Sell 210 shares for
$6,720
$32 210 200
COST BASIS
(FIFO)
To figure the basis of the 210 shares sold on 10/2/2024, use the share price of the first 210 shares you
bought, namely the 160 shares you purchased on 2/10/2022 and 50 of those purchased on 8/11/2022.
$4,000 (cost of 160 shares on 2/10/2022)
+ $1,000 (cost of 50 shares on 8/11/2022)
Basis = $5,000
AVERAGE BASIS To figure the basis of the 210 shares sold on 10/2/2024, use the average basis of all 410 shares owned on
10/2/2024.
$9,100 (cost of 410 shares)
÷ 410 (number of shares)
$22.20 (average basis per share)
$22.20
× 210
Basis = $4,662
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 69
gift shares to which the average basis method election ap-
plies that you acquire at any time and must remain in ef-
fect as long as the election remains in effect.
Your basis in virtual currency received as a bona
fide gift differs depending on whether you will
have a gain or a loss when you sell or dispose of
it. For purposes of determining whether you have a gain,
your basis is equal to the donor’s basis, plus any gift tax
the donor paid on the gift. For more information on basis
of property received as a gift, see Publication 551, or go to
IRS.gov/DigitalAssets.
When there is a sale, exchange, or redemption of
your shares in a fund, keep the confirmation state-
ment you receive. The statement shows the price
you received for the shares and other information you
need to report gain or loss on your return. Additionally, if
you had digital asset transactions, keep records that docu-
ment:
• Your purchase, receipt, sale, exchange or any other
disposition of the digital assets, and
• The fair market value as measured in U.S. dollars of all
digital assets received as income or as payment in the
ordinary course of a trade or business.
Nontaxable Trades
This section discusses trades that generally do not result
in a taxable gain or a deductible loss. For more informa-
tion on nontaxable trades, see chapter 1 of Pub. 544.
Like-Kind Exchanges
If you trade business or investment real property solely for
other business or investment real property of a like kind,
you do not pay tax on any gain or deduct any loss from the
trade. To be nontaxable, a trade must meet all six of the
following conditions.
1. The property must be business or investment prop-
erty. You must hold both the property you trade and
the property you receive for productive use in your
trade or business or for investment. Neither property
may be property used for personal purposes, such as
your home or family car.
2. The property you trade and the property you receive
must be real property.
3. There must be a trade of like-kind property. The trade
of real estate for real estate is a trade of like-kind
property. The trade of an apartment house for a store
building is a trade of like-kind property. Real property
located in the United States and real property located
outside the United States are not like-kind property.
4. The property must not be held primarily for sale. The
property you trade and the property you receive must
not be property you sell to customers, such as mer-
chandise.TIPRECORDS
5. The property to be received must be identified in writ-
ing within 45 days after the date you transfer the prop-
erty given up in the trade. If you received the replace-
ment property before the end of the 45-day period,
you are automatically treated as having met the
45-day written notice requirement.
6. The property to be received must be received by the
earlier of:
a. The 180th day after the date on which you transfer
the property given up in the trade; or
b. The due date, including extensions, for your tax re-
turn for the year in which the transfer of the prop-
erty given up occurs.
If you trade property with a related party in a like-kind
exchange, a special rule may apply. See Related Party
Transactions, later, in this chapter. Also, see chapter 1 of
Pub. 544 for more information on exchanges of business
property and special rules for exchanges using qualified
intermediaries or involving multiple properties.
Transition rule for exchanges of personal or intangi-
ble property. Under the Tax Cuts and Jobs Act, section
1031 only applies to exchanges of real property, other
than real property held primarily for sale. Before enact-
ment of the new tax law, section 1031 also applied to cer-
tain exchanges of personal or intangible property. A transi-
tion rule in the new law provides that section 1031 will still
apply to a qualifying exchange of personal or intangible
property if the taxpayer disposed of the exchanged prop-
erty on or before December 31, 2017, or received replace-
ment property on or before December 31, 2017.
Partly nontaxable exchange. If you receive money or
property that is not like-kind property in addition to the
like-kind property, and the preceding six conditions are
met, you have a partly nontaxable trade. You are taxed on
any gain you realize, but only up to the amount of the
money and the fair market value of the property that is not
like-kind you receive. You cannot deduct a loss.
Like-kind property and unlike property transferred.
If you give up unlike property in addition to the like-kind
property, you must recognize gain or loss on the unlike
property you give up. The gain or loss is the difference be-
tween the adjusted basis of the unlike property and its fair
market value.
Like-kind property and money transferred. If condi-
tions (1)–(6) above are met, you have a nontaxable trade
even if you pay money in addition to the like-kind property.
Basis of property received. You figure your basis in
property received in a nontaxable or partly nontaxable
trade as explained under Basis Other Than Cost, earlier.
How to report. You must report the trade of like-kind
property on Form 8824. If you figure a recognized gain or
loss on Form 8824, report it on Schedule D (Form 1040)
or on Form 4797, whichever applies.
For information on using Form 4797, see chapter 4 of
Pub. 544.
70 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Corporate Stocks
The following trades of corporate stocks generally do not
result in a taxable gain or a deductible loss.
Corporate reorganizations. In some instances, a com-
pany will give you common stock for preferred stock, pre-
ferred stock for common stock, or stock in one corporation
for stock in another corporation. If this is a result of a
merger, recapitalization, transfer to a controlled corpora-
tion, bankruptcy, corporate division, corporate acquisition,
or other corporate reorganization, you do not recognize
gain or loss.
Example 1. On April 11, 2024, KP1 Corporation was
acquired by KP2 Corporation. You held 100 shares of KP1
stock with a basis of $3,500. As a result of the acquisition,
you received 70 shares of KP2 stock in exchange for your
KP1 stock. You do not recognize gain or loss on the trans-
action. Your basis in the 70 shares of the new stock is still
$3,500.
Example 2. On July 18, 2024, RGB Corporation di-
vests itself of SFH Corporation. You hold 75 shares of
RGB stock with a basis of $5,400. You receive 25 shares
of SFH stock as a result of the spin-off. You do not recog-
nize any gain or loss on the transaction. You receive infor-
mation from RGB Corporation that your basis in SFH
stock is equal to 10.9624% of your basis in RGB stock
($5,400). Thus, your basis in SFH stock is $592. Your ba-
sis in RGB stock (after the spin-off) is $4,808 ($5,400 –
$592).
Note. In the case of a distribution, the divesting corpo-
ration should send you information that includes details on
how to allocate basis between the old and new stock.
Keep this information until the period of limitations expires
for the year in which you dispose of the stock in a taxable
disposition. Usually, this is 3 years from the date the return
was due or filed, or 2 years from the date the tax was paid,
whichever is later.
Stock for stock of the same corporation. You can ex-
change common stock for common stock or preferred
stock for preferred stock in the same corporation without
having a recognized gain or loss. This is true for a trade
between two stockholders as well as a trade between a
stockholder and the corporation.
Money or other property received. If in an other-
wise nontaxable trade you receive money or other prop-
erty in addition to stock, then your gain on the trade, if any,
is taxed, but only up to the amount of the money or other
property. Any loss is not recognized.
If you received cash for fractional shares, see Fractional
shares in chapter 1.
Nonqualified preferred stock. Nonqualified preferred
stock is generally treated as property other than stock.
Generally, this applies to preferred stock with one or more
of the following features.
• The holder has the right to require the issuer or a rela-
ted person to redeem or purchase the stock.
• The issuer or a related person is required to redeem or
purchase the stock.
• The issuer or a related person has the right to redeem
the stock, and on the issue date, it is more likely than
not that the right will be exercised.
• The dividend rate on the stock varies with reference to
interest rates, commodity prices, or similar indices.
For a detailed definition of nonqualified preferred stock,
see section 351(g)(2) of the Internal Revenue Code.
Convertible stocks and bonds. You will generally not
have a recognized gain or loss if you convert bonds into
stock or preferred stock into common stock of the same
corporation according to a conversion privilege in the
terms of the bond or the preferred stock certificate.
Example. In November, you bought for $1 a right is-
sued by XYZ Corporation entitling you, on payment of
$99, to subscribe to a bond issued by that corporation.
On December 5, you subscribed to the bond, which
was issued on December 12. The bond contained a
clause stating that you would receive one share of XYZ
Corporation common stock on surrender of one bond and
the payment of $50.
Later, you presented the bond and $50 and received
one share of XYZ Corporation common stock. You did not
have a recognized gain or loss. This is true whether the
fair market value of the stock was more or less than $150
on the date of the conversion.
The basis of your share of stock is $150 ($1 + $99 +
$50). Your holding period is split. Your holding period for
the part based on your ownership of the bond ($100 ba-
sis) begins on December 5. Your holding period for the
part based on your cash investment ($50 basis) begins on
the day after you acquired the share of stock.
Bonds for stock of another corporation. Generally, if
you convert the bonds of one corporation into common
stock of another corporation, according to the terms of the
bond issue, you must recognize gain or loss up to the dif-
ference between the fair market value of the stock re-
ceived and the adjusted basis of the bonds exchanged. In
some instances, however, such as trades that are part of
mergers or other corporate reorganizations, you will have
no recognized gain or loss if certain requirements are met.
For more information about the tax consequences of con-
verting securities of one corporation into common stock of
another corporation, under circumstances such as those
just described, consult the respective corporations and
the terms of the bond issue. This information is also avail-
able on the prospectus of the bond issue.
Property for stock of a controlled corporation. If you
transfer property to a corporation solely in exchange for
stock in that corporation, and immediately after the trade
you are in control of the corporation, you will ordinarily not
recognize a gain or loss. This rule applies both to individu-
als and to groups who transfer property to a corporation. It
does not apply if the corporation is an investment com-
pany.
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 71
If you are in a bankruptcy or a similar proceeding and
you transfer property to a controlled corporation under a
plan, other than a reorganization, you must recognize gain
to the extent the stock you receive in the exchange is used
to pay off your debts.
For this purpose, to be in control of a corporation, you
or your group of transferors must own, immediately after
the exchange, at least 80% of the total combined voting
power of all classes of stock entitled to vote and at least
80% of the outstanding shares of each class of nonvoting
stock of the corporation.
If this provision applies to you, you may have to attach
to your return a complete statement of all facts pertinent to
the exchange. For details, see Regulations section
1.351-3.
Money or other property received. If, in an other-
wise nontaxable trade of property for corporate stock, you
also receive money or property other than stock, you may
have a taxable gain. However, you are taxed only up to the
amount of money plus the fair market value of the other
property you receive. The rules for figuring taxable gain in
this situation generally follow those for a partly nontaxable
exchange discussed earlier under Like-Kind Exchanges. If
the property you give up includes depreciable property,
the taxable gain may have to be reported as ordinary in-
come because of depreciation. (See chapter 3 of Pub.
544.) No loss is recognized.
Nonqualified preferred stock (described earlier under
Stock for stock of the same corporation) received is gen-
erally treated as property other than stock.
Basis of stock or other property received. The ba-
sis of the stock you receive is generally the adjusted basis
of the property you transfer. Increase this amount by any
amount that was treated as a dividend, plus any gain rec-
ognized on the trade. Decrease this amount by any cash
you received and the fair market value of any other prop-
erty you received.
The basis of any other property you receive is its fair
market value on the date of the trade.
Exchange of Shares in One Mutual
Fund For Shares in Another Mutual
Fund
Any exchange of shares in one fund for shares in another
fund is a taxable exchange. This is true even if you ex-
change shares in one fund for shares in another fund
within the same family of funds. Report any gain or loss on
the shares you gave up as a capital gain or loss in the year
in which the exchange occurs. Usually, you can add any
service charge or fee paid in connection with an exchange
to the cost of the shares acquired. For an exception, see
Commissions and load charges, earlier.
Insurance Policies and Annuities
You will not have a recognized gain or loss if the insured or
annuitant is the same under both contracts and you trade:
• A life insurance contract for another life insurance con-
tract or for an endowment or an annuity contract or for
a qualified long-term care insurance contract,
• An endowment contract for another endowment con-
tract that provides for regular payments beginning at a
date no later than the beginning date under the old
contract or for an annuity contract or for a qualified
long-term insurance contract,
• An annuity contract for an annuity contract or for a
qualified long-term care insurance contract, or
• A qualified long-term care insurance contract for a
qualified long-term care insurance contract.
You may also not have to recognize gain or loss from an
exchange of a portion of an annuity contract for another
annuity contract. For transfers completed before October
24, 2011, see Revenue Ruling 2003-76 and Revenue Pro-
cedure 2008-24 in Internal Revenue Bulletin 2008-13.
Revenue Ruling 2003-76 is available at IRS.gov/irb/
2003-33_IRB#RR-2003-76. Revenue Procedure 2008-24
is available at IRS.gov/irb/2008-13_IRB#RP-2008-24. For
transfers completed on or after October 24, 2011, see
Revenue Ruling 2003-76, above, and Revenue Procedure
2011-38 in Internal Revenue Bulletin 2011-30. Revenue
Procedure 2011-38 is available at IRS.gov/irb/
2011-30_IRB#RP-2011-38. For tax years beginning after
2010, amounts received as an annuity for a period of 10
years or more, or for the lives of one or more individuals,
under any portion of an annuity, endowment, or life insur-
ance contract, are treated as a separate contract and are
considered partial annuities. A portion of an annuity, en-
dowment, or life insurance contract may be annuitized,
provided that the annuitization period is for 10 years or
more or for the lives of one or more individuals. The invest-
ment in the contract is allocated between the part of the
contract from which amounts are received as an annuity
and the part of the contract from which amounts are not
received as an annuity.
Exchanges of contracts not included in this list, such as
an annuity contract for an endowment contract, or an an-
nuity or endowment contract for a life insurance contract,
are taxable.
Demutualization of Life
Insurance Companies
A life insurance company may change from a mutual com-
pany to a stock company. This is commonly called demu-
tualization. If you were a policyholder or annuitant of the
mutual company, you may have received either stock in
the stock company or cash in exchange for your equity in-
terest in the mutual company.
72 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
If the demutualization transaction qualifies as a tax-free
reorganization under section 368(a)(1) of the Internal Rev-
enue Code, no gain or loss is recognized on the ex-
change. Your holding period for the new stock includes the
period you held an equity interest in the mutual company
as a policyholder or annuitant.
If the demutualization transaction does not qualify as a
tax-free reorganization under section 368(a)(1) of the In-
ternal Revenue Code, you must recognize a capital gain
or loss. Your holding period for the stock does not include
the period you held an equity interest in the mutual com-
pany.
If you received cash in exchange for your equity inter-
est, you must recognize a capital gain. If you held an
equity interest for more than 1 year, your gain is long term.
U.S. Treasury Notes or Bonds
You can trade certain issues of U.S. Treasury obligations
for other issues, designated by the Secretary of the Treas-
ury, with no gain or loss recognized on the trade.
See the discussion in chapter 1 under U.S. Treasury
Bills, Notes, and Bonds for information about income from
these investments.
Transfers Between Spouses
Generally, no gain or loss is recognized on a transfer of
property from an individual to (or in trust for the benefit of)
a spouse or, if incident to a divorce, a former spouse. This
nonrecognition rule does not apply in the following situa-
tions.
• The recipient spouse or former spouse is a nonresi-
dent alien.
• Property is transferred in trust and liability exceeds ba-
sis. Gain must be recognized to the extent the amount
of the liabilities assumed by the trust, plus any liabili-
ties on the property, exceed the adjusted basis of the
property.
• An installment obligation is transferred in trust. For in-
formation on the disposition of an installment obliga-
tion, see Pub. 537.
• Certain stock redemptions, which are taxable to a
spouse under the tax law, a divorce or separation in-
strument, or a valid written agreement, discussed in
Regulations section 1.1041-2.
Any transfer of property to a spouse or former spouse
on which gain or loss is not recognized is treated by the
recipient as a gift and is not considered a sale or ex-
change. The recipient's basis in the property will be the
same as the adjusted basis of the giver immediately be-
fore the transfer. This carryover basis rule applies whether
the adjusted basis of the transferred property is less than,
equal to, or greater than either its fair market value at the
time of transfer or any consideration paid by the recipient.
This rule applies for purposes of determining loss as well
as gain. Any gain recognized on a transfer in trust increa-
ses the basis.
A transfer of property is incident to a divorce if the
transfer occurs within 1 year after the date on which the
marriage ends, or if the transfer is related to the ending of
the marriage. For more information, see Property Settle-
ments in Pub. 504, Divorced or Separated Individuals.
Related Party Transactions
Special rules apply to the sale or trade of property be-
tween related parties.
Gain on Sale or Trade
of Depreciable Property
Your gain from the sale or trade of property to a related
party may be ordinary income, rather than capital gain, if
the property can be depreciated by the party receiving it.
See chapter 2 in Pub. 544 for more information.
Like-Kind Exchanges
Generally, if you trade business or investment real prop-
erty for other business or investment real property of a like
kind, no gain or loss is recognized. See Like-Kind Ex-
changes under Nontaxable Trades, earlier.
This rule also applies to trades of real property between
related parties, defined next under Losses on Sales or
Trades of Property. However, if either you or the related
party disposes of the like-kind property within 2 years after
the trade, you both must report any gain or loss not recog-
nized on the original trade on your return for the year in
which the later disposition occurs.
This rule generally does not apply to:
• Dispositions due to the death of either related party,
• Involuntary conversions (see chapter 1 of Pub. 544),
or
• Trades and later dispositions whose main purpose is
not the avoidance of federal income tax.
If a property holder's risk of loss on the property is sub-
stantially diminished during any period, that period is not
counted in determining whether the property was dis-
posed of within 2 years. The property holder's risk of loss
is substantially diminished by:
• The holding of a put on the property,
• The holding by another person of a right to acquire the
property, or
• A short sale or any other transaction.
Losses on Sales or Trades of Property
You cannot deduct a loss on the sale or trade of property,
other than a distribution in complete liquidation of a
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 73
corporation, if the transaction is directly or indirectly be-
tween you and the following related parties.
• Members of your family. This includes only your broth-
ers and sisters, half-brothers and half-sisters, spouse,
ancestors (parents, grandparents, etc.), and lineal de-
scendants (children, grandchildren, etc.).
• A partnership in which you directly or indirectly own
more than 50% of the capital interest or the profits in-
terest.
• A corporation in which you directly or indirectly own
more than 50% in value of the outstanding stock (see
Constructive ownership of stock, later).
• A tax-exempt charitable or educational organization
directly or indirectly controlled, in any manner or by
any method, by you or by a member of your family,
whether or not this control is legally enforceable.
In addition, a loss on the sale or trade of property is not
deductible if the transaction is directly or indirectly be-
tween the following related parties.
• A grantor and fiduciary, or the fiduciary and benefi-
ciary, of any trust.
• Fiduciaries of two different trusts, or the fiduciary and
beneficiary of two different trusts, if the same person is
the grantor of both trusts.
• A trust fiduciary and a corporation of which more than
50% in value of the outstanding stock is directly or in-
directly owned by or for the trust, or by or for the gran-
tor of the trust.
• A corporation and a partnership if the same persons
own more than 50% in value of the outstanding stock
of the corporation and more than 50% of the capital in-
terest or the profits interest in the partnership.
• Two S corporations if the same persons own more
than 50% in value of the outstanding stock of each
corporation.
• Two corporations, one of which is an S corporation, if
the same persons own more than 50% in value of the
outstanding stock of each corporation.
• An executor and a beneficiary of an estate (except in
the case of a sale or trade to satisfy a monetary be-
quest).
• Two corporations that are members of the same con-
trolled group (under certain conditions, however, these
losses are not disallowed but must be deferred).
• Two partnerships if the same persons own, directly or
indirectly, more than 50% of the capital interests or the
profit interests in both partnerships.
Multiple property sales or trades. If you sell or trade to
a related party a number of blocks of stock or pieces of
property in a lump sum, you must figure the gain or loss
separately for each block of stock or piece of property.
The gain on each item may be taxable. However, you can-
not deduct the loss on any item. Also, you cannot reduce
gains from the sales of any of these items by losses on the
sales of any of the other items.
Indirect transactions. You cannot deduct your loss on
the sale of stock through your broker if, under a prear-
ranged plan, a related party buys the same stock you had
owned. This does not apply to a trade between related
parties through an exchange that is purely coincidental
and is not prearranged.
Constructive ownership of stock. In determining
whether a person directly or indirectly owns any of the out-
standing stock of a corporation, the following rules apply.
Rule 1. Stock directly or indirectly owned by or for a
corporation, partnership, estate, or trust is considered
owned proportionately by or for its shareholders, partners,
or beneficiaries.
Rule 2. An individual is considered to own the stock
directly or indirectly owned by or for his or her family. Fam-
ily includes only brothers and sisters, half-brothers and
half-sisters, spouse, ancestors, and lineal descendants.
Rule 3. An individual owning, other than by applying
rule 2, any stock in a corporation is considered to own the
stock directly or indirectly owned by or for his or her part-
ner.
Rule 4. When applying rule 1, 2, or 3, stock construc-
tively owned by a person under rule 1 is treated as ac-
tually owned by that person. But stock constructively
owned by an individual under rule 2 or rule 3 is not again
treated as owned by that individual for applying either rule
2 or rule 3 to make another person the constructive owner
of the stock.
Property received from a related party. If you sell or
trade at a gain property you acquired from a related party,
you recognize the gain only to the extent that it is more
than the loss previously disallowed to the related party.
This rule applies only if you are the original transferee and
you acquired the property by purchase or exchange. This
rule does not apply if the related party's loss was disal-
lowed because of the wash sale rules, described later un-
der Wash Sales.
If you sell or trade at a loss property you acquired from
a related party, you cannot recognize the loss that was not
allowed to the related party.
Example 1. Your sibling sells you stock for $7,600.
Your sibling’s cost basis is $10,000. Your sibling cannot
deduct the loss of $2,400. Later, you sell the same stock
to an unrelated party for $10,500, realizing a gain of
$2,900. Your reportable gain is $500 (the $2,900 gain mi-
nus the $2,400 loss not allowed to your sibling).
Example 2. If, in Example 1, you sold the stock for
$6,900 instead of $10,500, your recognized loss is only
$700 (your $7,600 basis minus $6,900). You cannot de-
duct the loss that was not allowed to your sibling.
74 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Capital Gains and Losses
Terms you may need to know
(see Glossary):
Call
Commodity future
Conversion transaction
Forward contract
Limited partner
Listed option
Nonequity option
Options dealer
Put
Regulated futures contract
Section 1256 contract
Straddle
Wash sale
This section discusses the tax treatment of gains and los-
ses from different types of investment transactions.
Character of gain or loss. You need to classify your
gains and losses as either ordinary or capital gains or los-
ses. You then need to classify your capital gains and los-
ses as either short term or long term. If you have long-term
gains and losses, you must identify your 28% rate gains
and losses. If you have a net capital gain, you must also
identify any unrecaptured section 1250 gain.
The correct classification and identification helps you
figure the limit on capital losses and the correct tax on
capital gains. For information about determining whether
your capital gain or loss is short term or long term, see
Holding Period, later. For information about 28% rate gain
or loss and unrecaptured section 1250 gain, see Capital
Gain Tax Rates, later.
Capital or Ordinary Gain or Loss
If you have a taxable gain or a deductible loss from a
transaction, it may be either a capital gain or loss or an or-
dinary gain or loss, depending on the circumstances.
Generally, a sale or trade of a capital asset (defined next)
results in a capital gain or loss. A sale or trade of a nonca-
pital asset generally results in ordinary gain or loss. De-
pending on the circumstances, a gain or loss on a sale or
trade of property used in a trade or business may be trea-
ted as either capital or ordinary, as explained in Pub. 544.
In some situations, part of your gain or loss may be a capi-
tal gain or loss, and part may be an ordinary gain or loss.
If you own and use a digital asset for personal or
investment purposes, the income would be taxed
as a capital gain or loss when you sell or dispose
of it.
Capital Assets and
Noncapital Assets
For the most part, everything you own and use for per-
sonal purposes, pleasure, or investment is a capital asset.
Some examples are:
• Stocks or bonds held in your personal account;
• Digital assets that include: convertible virtual curren-
cies, cryptocurrencies such as Bitcoin, Stablecoins,
and Nonfungible tokens (NFTs);
• A house owned and used by you and your family;
• Household furnishings;
• A car used for pleasure or commuting;
• Coin or stamp collections;
• Gems and jewelry; and
• Gold, silver, or any other metal.
Any property you own is a capital asset, except the fol-
lowing noncapital assets.
1. Property held mainly for sale to customers or property
that will physically become a part of the merchandise
for sale to customers. For an exception, see Capital
asset treatment for self-created musical works, later.
2. Depreciable property used in your trade or business,
even if fully depreciated.
3. Real property used in your trade or business.
4. A patent; invention, model, or design (whether or not
patented); a secret formula or process; a copyright; a
literary, musical, or artistic composition; a letter or
memorandum; or similar property, held by:
a. A person whose personal efforts created such
property;
b. In the case of a letter, memorandum, or similar
property, a person for whom such property was
prepared or produced; or
c. Acquired under circumstances (for example, by
gift) entitling you to the basis of the person who
created the property or for whom it was prepared
or produced.
For an exception to this rule, see Capital asset
treatment for self-created musical works, later.
5. Accounts or notes receivable acquired in the ordinary
course of a trade or business for services rendered or
from the sale of property described in (1).
6. U.S. Government publications, including the Congres-
sional Record, that you received:TIP
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 75
a. From the U.S. Government (or any governmental
agency) for an amount other than the normal sales
price, or
b. Under circumstances (such as by gift) that entitle
you to the basis of someone who received the
publication for an amount other than the normal
sales price.
7. Certain commodities derivative financial instruments
held by commodities derivatives dealers. For more in-
formation, see section 1221 of the Internal Revenue
Code.
8. Hedging transactions, but only if the transaction is
clearly identified as a hedging transaction before the
close of the day on which it was acquired, originated,
or entered into. For more information, see the defini-
tion of hedging transaction, earlier, and the discussion
of hedging transactions under Commodity Futures,
later.
9. Supplies of a type you regularly use or consume in the
ordinary course of your trade or business.
Investment property. Investment property is a capital
asset. Any gain or loss from its sale or trade is generally a
capital gain or loss.
Gold, silver, stamps, coins, gems, etc. These are
capital assets except when they are held for sale by a
dealer. Any gain or loss from their sale or trade is gener-
ally a capital gain or loss.
Stocks, stock rights, and bonds. All of these, includ-
ing stock received as a dividend, are capital assets except
when they are held for sale by a securities dealer. How-
ever, see Losses on Section 1244 (Small Business) Stock
and Losses on Small Business Investment Company
Stock, later.
Personal use property. Property held for personal use
only, rather than for investment, is a capital asset, and you
must report a gain from its sale as a capital gain. However,
you cannot deduct a loss from selling personal use prop-
erty.
Capital asset treatment for self-created musical
works. You can elect to treat musical compositions and
copyrights in musical works as capital assets when you
sell or exchange them if:
• Your personal efforts created the property, or
• You acquired the property under circumstances (for
example, by gift) entitling you to the basis of the per-
son who created the property or for whom it was pre-
pared or produced.
You must make a separate election for each musical
composition (or copyright in a musical work) sold or ex-
changed during the tax year. Make the election by the due
date (including extensions) of the income tax return for the
tax year of the sale or exchange. Make the election on
Form 8949 and Schedule D (Form 1040) by treating the
sale or exchange as the sale or exchange of a capital
asset, according to Form 8949 and Schedule D (Form
1040) and their separate instructions.
You can revoke the election if you have IRS approval.
To get IRS approval, you must submit a request for a letter
ruling under the appropriate IRS revenue procedure. See,
for example, Revenue Procedure 2020-1, available at
IRS.gov/irb/2020-01_IRB#REV-PROC-2020-1. Alterna-
tively, you are granted an automatic 6-month extension
from the due date of your income tax return (excluding ex-
tensions) to revoke the election, provided you timely file
your income tax return, and within this 6-month extension
period, you file Form 1040-X that treats the sale or ex-
change as the sale or exchange of property that is not a
capital asset.
Discounted Debt Instruments
Treat your gain or loss on the sale, redemption, or retire-
ment of a bond or other debt instrument originally issued
at a discount or bought at a discount as capital gain or
loss, except as explained in the following discussions.
Short-term government obligations. Treat gains on
short-term federal, state, or local government obligations
(other than tax-exempt obligations) as ordinary income up
to your ratable share of the acquisition discount. This
treatment applies to obligations with a fixed maturity date
of not more than 1 year from the date of issue. Acquisition
discount is the stated redemption price at maturity minus
your basis in the obligation.
However, do not treat these gains as income to the ex-
tent you previously included the discount in income. See
Discount on Short-Term Obligations in chapter 1 for more
information.
Short-term nongovernment obligations. Treat gains
on short-term nongovernment obligations as ordinary in-
come up to your ratable share of OID. This treatment ap-
plies to obligations with a fixed maturity date of not more
than 1 year from the date of issue.
However, to the extent you previously included the dis-
count in income, you do not have to include it in income
again. See Discount on Short-Term Obligations in chap-
ter 1 for more information.
Tax-exempt state and local government bonds. If
these bonds were originally issued at a discount before
September 4, 1982, or you acquired them before March 2,
1984, treat your part of OID as tax-exempt interest. To fig-
ure your gain or loss on the sale or trade of these bonds,
reduce the amount realized by your part of OID.
If the bonds were issued after September 3, 1982, and
acquired after March 1, 1984, increase the adjusted basis
by your part of OID to figure gain or loss. For more infor-
mation on the basis of these bonds, see Discounted
tax-exempt obligations, earlier in this chapter.
Any gain from market discount is usually taxable on dis-
position or redemption of tax-exempt bonds. If you bought
the bonds before May 1, 1993, the gain from market dis-
count is capital gain. If you bought the bonds after April
30, 1993, the gain from market discount is ordinary in-
come.
76 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
You figure market discount by subtracting the price you
paid for the bond from the sum of the original issue price
of the bond and the amount of accumulated OID from the
date of issue that represented interest to any earlier hold-
ers. For more information, see Market Discount Bonds in
chapter 1.
A loss on the sale or other disposition of a tax-exempt
state or local government bond is deductible as a capital
loss.
Redeemed before maturity. If a state or local bond
issued before June 9, 1980, is redeemed before it ma-
tures, the OID is not taxable to you.
If a state or local bond issued after June 8, 1980, is re-
deemed before it matures, the part of OID earned while
you hold the bond is not taxable to you. However, you
must report the unearned part of OID as a capital gain.
Example. On July 2, 2013, the date of issue, you
bought a 20-year, 6% municipal bond for $800. The face
amount of the bond was $1,000. The $200 discount was
OID. At the time the bond was issued, the issuer had no
intention of redeeming it before it matured. The bond was
callable at its face amount beginning 10 years after the is-
sue date.
The issuer redeemed the bond at the end of 11 years
(July 2, 2024) for its face amount of $1,000 plus accrued
annual interest of $60. The OID earned during the time
you held the bond, $73, is not taxable. The $60 accrued
annual interest is also not taxable. However, you must re-
port the unearned part of OID, $127 ($200 − $73), as a
capital gain.
Long-term debt instruments issued after May 27,
1969 (or after July 1, 1982, if a government instru-
ment). If you hold one of these debt instruments, you
must include a part of OID in your gross income each year
you own the instrument. Your basis in that debt instrument
is increased by the amount of OID that you have included
in your gross income. See Original Issue Discount (OID) in
chapter 1.
If you sell or trade the debt instrument before maturity,
your gain is a capital gain. However, if at the time the in-
strument was originally issued there was an intention to
call it before its maturity, your gain is generally ordinary in-
come to the extent of the entire OID reduced by any
amounts of OID previously includible in your income. In
this case, the rest of the gain is capital gain.
An intention to call a debt instrument before maturity
means there is a written or oral agreement or understand-
ing not provided for in the debt instrument between the is-
suer and original holder that the issuer will redeem the
debt instrument before maturity. In the case of debt instru-
ments that are part of an issue, the agreement or under-
standing must be between the issuer and the original
holders of a substantial amount of the debt instruments in
the issue.
Example 1. On February 9, 2023, you bought at origi-
nal issue for $7,600, Jones Corporation's 10-year, 5%
bond which has a stated redemption price at maturity of
$10,000. On February 13, 2024, you sold the bond for
$9,040. Assume you have included $334 of OID in your
gross income (including the amount accrued for 2024)
and increased your basis in the bond by that amount. Your
basis is now $7,934. If at the time of the original issue
there was no intention to call the bond before maturity,
your gain of $1,106 ($9,040 amount realized minus
$7,934 adjusted basis) is capital gain.
Example 2. If, in Example 1, at the time of original is-
sue there was an intention to call the bond before maturity,
your entire gain is ordinary income. You figure this as fol-
lows:
1. Entire OID ($10,000 stated redemption price at
maturity minus $7,600 issue price) . . . . . . . . . . $2,400
2. Minus: Amount previously included
in income . . . . . . . . . . . . . . . . . . . . . . . . . . 334
3. Maximum amount of ordinary income . . . . . . . . . $2,066
Because the amount in (3) is more than your gain of
$1,106, your entire gain is ordinary income.
Market discount bonds. If the debt instrument has mar-
ket discount and you chose to include the discount in in-
come as it accrued, increase your basis in the debt instru-
ment by the accrued discount to figure capital gain or loss
on its disposition. If you did not choose to include the dis-
count in income as it accrued, you must report gain as or-
dinary interest income up to the instrument's accrued mar-
ket discount. See Market Discount Bonds in chapter 1.
The rest of the gain is capital gain.
However, a different rule applies if you dispose of a
market discount bond that was:
• Issued before July 19, 1984; and
• Purchased by you before May 1, 1993.
In that case, any gain is treated as interest income up to
the amount of your deferred interest deduction for the year
you dispose of the bond. The rest of the gain is capital
gain. (The limit on the interest deduction for market dis-
count bonds is discussed in chapter 3 under When To De-
duct Investment Interest.)
Report the sale or trade of a market discount bond in
Form 8949, Part I or Part II, whichever is appropriate. Use
the table How To Complete Form 8949, Columns (f) and
(g) in the Instructions for Form 8949 to help you figure the
amounts to report for a sale or trade of a market discount
bond. Also report the amount of accrued market discount
in column (g) as interest income on Schedule B (Form
1040), line 1, and identify it as “Accrued Market Discount.”
Report your sales or trades of a market discount
bond on Form 8949 with the correct box checked
for these transactions. See Form 8949 and the In-
structions for Form 8949.
Retirement of debt instrument. Any amount you re-
ceive on the retirement of a debt instrument is treated in
the same way as if you had sold or traded that instrument.
Notes of individuals. If you hold an obligation of an indi-
vidual issued with OID after March 1, 1984, you mustTIP
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 77
generally include the OID in your income currently, and
your gain or loss on its sale or retirement is generally capi-
tal gain or loss. An exception to this treatment applies if
the obligation is a loan between individuals and all the fol-
lowing requirements are met.
• The lender is not in the business of lending money.
• The amount of the loan, plus the amount of any out-
standing prior loans, is $10,000 or less.
• Avoiding federal tax is not one of the principal purpo-
ses of the loan.
If the exception applies, or the obligation was issued
before March 2, 1984, you do not include the OID in your
income currently. When you sell or redeem the obligation,
the part of your gain that is not more than your accrued
share of OID at that time is ordinary income. The rest of
the gain, if any, is capital gain. Any loss on the sale or re-
demption is capital loss.
Bearer Obligations
You cannot deduct any loss on an obligation required to
be in registered form that is instead held in bearer form. In
addition, any gain on the sale or other disposition of the
obligation is ordinary income. However, if the issuer was
subject to a tax when the obligation was issued, then you
can deduct any loss, and any gain may qualify for capital
gain treatment.
Obligations required to be in registered form. Any
obligation must be in registered form unless:
• It is issued by a natural person,
• It is not of a type offered to the public,
• It has a maturity at the date of issue of not more than 1
year, or
• It was issued before 1983.
Deposit in Insolvent or
Bankrupt Financial Institution
If you lose money you have on deposit in a bank, credit
union, or other financial institution that becomes insolvent
or bankrupt, you may be able to deduct your loss in one of
two ways.
• Casualty loss.
• Nonbusiness bad debt (short-term capital loss).
You can no longer claim any miscellaneous item-
ized deductions, including the deduction for an or-
dinary loss on deposits in insolvent or bankrupt fi-
nancial institutions.
Casualty loss. If you can reasonably estimate your loss,
you can treat the estimated loss as a casualty loss in the
current year.
If you claim a casualty loss, attach Form 4684 to your
return. Each loss must be reduced by $100. The amountCAUTION
!
of your casualty loss may be limited. See Pub. 547, Casu-
alties, Disasters, and Thefts.
You cannot choose this method if:
• You own at least 1% of the financial institution,
• You are an officer of the institution, or
• You are related to such an owner or officer. You are re-
lated if you and the owner or officer are “related par-
ties,” as defined earlier under Related Party Transac-
tions, or if you are the aunt, uncle, nephew, or niece of
the owner or officer.
If the actual loss that is finally determined is more than
the amount you deducted as an estimated loss, you can
claim the excess loss as a nonbusiness bad debt. If the
actual loss is less than the amount deducted as an esti-
mated loss, you must include in income (in the final deter-
mination year) the excess loss claimed. See Recoveries in
Pub. 525.
Nonbusiness bad debt. If you do not choose to deduct
your estimated loss as a casualty loss or an ordinary loss,
you wait until the year the amount of the actual loss is de-
termined and deduct it as a nonbusiness bad debt in that
year. Report it as a short-term capital loss on Form 8949,
Part I, line 1, as explained under How to report bad debts,
later.
Sale of Annuity
The part of any gain on the sale of an annuity contract be-
fore its maturity date that is based on interest accumulated
on the contract is ordinary income.
Conversion Transactions
Generally, all or part of a gain on a conversion transaction
is treated as ordinary income. This applies to gain on the
disposition or other termination of any position you held as
part of a conversion transaction you entered into after
April 30, 1993.
A conversion transaction is any transaction that meets
both of these tests.
1. Substantially all of your expected return from the
transaction is due to the time value of your net invest-
ment. In other words, the return on your investment is,
in substance, like interest on a loan.
2. The transaction is one of the following.
a. A straddle as defined under Straddles, later, but
including any set of offsetting positions on stock
established before October 22, 2004.
b. Any transaction in which you acquire property
(whether or not actively traded) at substantially the
same time that you contract to sell the same prop-
erty, or substantially identical property, at a price
set in the contract.
c. Any other transaction that is marketed or sold as
producing capital gains from a transaction
described in (1).
78 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Amount treated as ordinary income. The amount of
gain treated as ordinary income is the smaller of:
• The gain recognized on the disposition or other termi-
nation of the position, or
• The “applicable imputed income amount.”
Applicable imputed income amount. Figure this
amount as follows.
1. Figure the amount of interest that would have accrued
on your net investment in the conversion transaction
for the period ending on the earlier of:
a. The date you dispose of the position, or
b. The date the transaction stops being a conversion
transaction.
To figure this amount, use an interest rate equal to
120% of the “applicable rate,” defined later.
2. Subtract from (1) the amount treated as ordinary in-
come from any earlier disposition or other termination
of a position held as part of the same conversion
transaction.
Applicable rate. If the term of the conversion transac-
tion is indefinite, the applicable rate is the federal
short-term rate in effect under section 6621(b) during the
period of the conversion transaction, compounded daily.
In all other cases, the applicable rate is the “applicable
federal rate” determined as if the conversion transaction
were a debt instrument and compounded semiannually.
The rates discussed above are published by the IRS in
the Internal Revenue Bulletin. The Internal Revenue Bulle-
tin is available through IRS.gov. You can also find applica-
ble federal rates in the Index of Applicable Federal Rates
(AFRs) Rulings at https://apps.IRS.gov/app/picklist/list/
federalRates.html.
See chapter 5, How To Get Tax Help, for information on
contacting the IRS.
Net investment. To determine your net investment in a
conversion transaction, include the fair market value of
any position at the time it becomes part of the transaction.
This means your net investment will generally be the total
amount you invested, less any amount you received for
entering into the position (for example, a premium you re-
ceived for writing a call).
Position with built-in loss. A special rule applies when
a position with a built-in loss becomes part of a conversion
transaction. A built-in loss is any loss you would have real-
ized if you had disposed of or otherwise terminated the
position at its fair market value at the time it became part
of the conversion transaction.
When applying the conversion transaction rules to a
position with a built-in loss, use the position's fair market
value at the time it became part of the transaction. But,
when you dispose of or otherwise terminate the position in
a transaction in which you recognize gain or loss, you
must recognize the built-in loss. The conversion transac-
tion rules do not affect whether the built-in loss is treated
as an ordinary or capital loss.
Netting rule for certain conversion transactions. Be-
fore determining the amount of gain treated as ordinary in-
come, you can net certain gains and losses from positions
of the same conversion transaction. To do this, you have
to dispose of all the positions within a 14-day period that is
within a single tax year. You cannot net the built-in loss
against the gain.
You can net gains and losses only if you identify
the conversion transaction as an identified netting
transaction on your books and records. Each po-
sition of the conversion transaction must be identified be-
fore the end of the day on which the position becomes
part of the conversion transaction. For conversion transac-
tions entered into before February 20, 1996, this require-
ment is met if the identification was made by that date.
Options dealers and commodities traders. These
rules do not apply to options dealers and commodities
traders.
How to report. Use Form 6781 to report conversion
transactions. See the instructions for lines 11 and 13 of
Form 6781.
Commodity Futures
A commodity futures contract is a standardized, ex-
change-traded contract for the sale or purchase of a fixed
amount of a commodity at a future date for a fixed price.
If the contract is a regulated futures contract, the rules
described earlier under Section 1256 Contracts Marked to
Market apply to it.
The termination of a commodity futures contract gener-
ally results in capital gain or loss unless the contract is a
hedging transaction.
Hedging transaction. A futures contract that is a hedg-
ing transaction generally produces ordinary gain or loss. A
futures contract is a hedging transaction if you enter into
the contract in the ordinary course of your business pri-
marily to manage the risk of interest rate or price changes
or currency fluctuations on borrowings, ordinary property,
or ordinary obligations. (Generally, ordinary property or
obligations are those that cannot produce capital gain or
loss under any circumstances.) For example, the offset or
exercise of a futures contract that protects against price
changes in your business inventory results in an ordinary
gain or loss.
For more information about hedging transactions, see
Regulations section 1.1221-2. Also, see Hedging Transac-
tions under Section 1256 Contracts Marked to Market,
earlier.
If you have multiple transactions in the commodity
futures market during the year, the burden of proof
is on you to show which transactions are hedging
transactions. Clearly identify any hedging transactions on
your books and records before the end of the day you en-
tered into the transaction. It may be helpful to have sepa-
rate brokerage accounts for your hedging and nonhedgingRECORDSRECORDS
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 79
transactions. For specific requirements concerning identi-
fication of hedging transactions and the underlying item,
items, or aggregate risk being hedged, see Regulations
section 1.1221-2(f).
Gains From Certain Constructive Ownership
Transactions
If you have a gain from a constructive ownership transac-
tion entered into after July 11, 1999, involving a financial
asset (discussed later) and the gain would normally be
treated as long-term capital gain, all or part of the gain
may be treated instead as ordinary income. In addition, if
any gain is treated as ordinary income, your tax is in-
creased by an interest charge.
Constructive ownership transactions. The following
are constructive ownership transactions.
• A notional principal contract in which you have the
right to receive all or substantially all of the investment
yield on a financial asset and you are obligated to re-
imburse all or substantially all of any decline in value
of the financial asset.
• A forward or futures contract to acquire a financial as-
set.
• The holding of a call option and writing of a put option
on a financial asset at substantially the same strike
price and maturity date.
This provision does not apply if all the positions are
marked to market. Mark-to-market rule for section 1256
contracts is discussed in detail under Section 1256 Con-
tracts Marked to Market, earlier.
Financial asset. A financial asset, for this purpose, is
any equity interest in a pass-through entity. Pass-through
entities include partnerships, S corporations, trusts, regu-
lated investment companies, and REITs.
Amount of ordinary income. Long-term capital gain is
treated as ordinary income to the extent it is more than the
net underlying long-term capital gain. The net underlying
long-term capital gain is the net capital gain you would
have realized if you acquired the asset for its fair market
value on the date the constructive ownership transaction
was opened and sold the asset for its fair market value on
the date the transaction was closed. If you do not estab-
lish the amount of net underlying long-term capital gain by
clear and convincing evidence, it is treated as zero.
More information. For more information about construc-
tive ownership transactions, see section 1260 of the Inter-
nal Revenue Code.
Losses on Section 1244 (Small Business)
Stock
Subject to the limitations discussed under Ordinary loss
limit, later, you can deduct as an ordinary loss, rather than
as a capital loss, a loss on the sale, trade, or worthless-
ness of section 1244 stock. Report the loss on Form 4797,
line 10. Any loss in excess of the amounts described in
Ordinary loss limit, later, should be reported on Form
8949.
Any gain on section 1244 stock is a capital gain if the
stock is a capital asset in your hands. Do not offset gains
against losses that are within the ordinary loss limit, ex-
plained later in this discussion, even if the transactions are
in stock of the same company. Report the gain on Form
8949.
If you must figure a net operating loss, any ordinary loss
from the sale of section 1244 stock is a business loss.
Ordinary loss limit. The amount you can deduct as an
ordinary loss is limited to $50,000 each year. On a joint re-
turn, the limit is $100,000, even if only one spouse has this
type of loss. If your loss is $110,000 and your spouse has
no loss, you can deduct $100,000 as an ordinary loss on a
joint return. The remaining $10,000 is a capital loss.
Section 1244 (small business) stock. This is stock is-
sued for money or property (other than stock and securi-
ties) in a domestic small business corporation. During its 5
most recent tax years before the loss, this corporation
must have derived more than 50% of its gross receipts
from other than royalties, rents, dividends, interest, annui-
ties, and gains from sales and trades of stocks or securi-
ties. If the corporation was in existence for at least 1 year,
but less than 5 years, the 50% test applies to the tax years
ending before the loss. If the corporation was in existence
less than 1 year, the 50% test applies to the entire period
the corporation was in existence before the day of the
loss. However, if the corporation's deductions (other than
the net operating loss and dividends received deductions)
were more than its gross income during this period, this
50% test does not apply.
The corporation must have been largely an operating
company for ordinary loss treatment to apply.
If the stock was issued before July 19, 1984, the stock
must be common stock. If issued after July 18, 1984, the
stock may be either common or preferred. For more infor-
mation about the requirements of a small business corpo-
ration or the qualifications of section 1244 stock, see sec-
tion 1244 of the Internal Revenue Code and its
regulations.
The stock must be issued to the person taking the
loss. You must be the original owner of the stock to be
allowed ordinary loss treatment. To claim a deductible loss
on stock issued to your partnership, you must have been a
partner when the stock was issued and have remained so
until the time of the loss. You add your distributive share of
the partnership loss to any individual section 1244 stock
loss you may have before applying the ordinary loss limit.
Stock distributed by partnership. If your partner-
ship distributes the stock to you, you cannot treat any later
loss on that stock as an ordinary loss.
Stock sold through underwriter. Stock sold through
an underwriter is not section 1244 stock unless the under-
writer only acted as a selling agent for the corporation.
80 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Stock dividends and reorganizations. Stock you re-
ceive as a stock dividend qualifies as section 1244 stock
if:
• You receive it from a small business corporation in
which you own stock, and
• The stock you own meets the requirements when the
stock dividend is distributed.
If you trade your section 1244 stock for new stock in the
same corporation in a reorganization that qualifies as a re-
capitalization or that is only a change in identity, form, or
place of organization, the new stock is section 1244 stock
if the stock you trade meets the requirements when the
trade occurs.
If you hold section 1244 stock and other stock in the
same corporation, not all of the stock you receive as a
stock dividend or in a reorganization will qualify as section
1244 stock. Only that part based on the section 1244
stock you hold will qualify.
Example. Your basis for 100 shares of X common
stock is $1,000. These shares qualify as section 1244
stock. If, as a nontaxable stock dividend, you receive 50
more shares of common stock, the basis of which is deter-
mined from the 100 shares you own, the 50 shares are
also section 1244 stock.
If you also own stock in the corporation that is not sec-
tion 1244 stock when you receive the stock dividend, you
must divide the shares you receive as a dividend between
the section 1244 stock and the other stock. Only the
shares from the former can be section 1244 stock.
Contributed property. To determine ordinary loss on
section 1244 stock you receive in a trade for property, you
have to reduce the basis of the stock if:
• The adjusted basis (for figuring loss) of the property,
immediately before the trade, was more than its fair
market value; and
• The basis of the stock is determined by the basis of
the property.
Reduce the basis of the stock by the difference between
the adjusted basis of the property and its fair market value
at the time of the trade. You reduce the basis only to figure
the ordinary loss. Do not reduce the basis of the stock for
any other purpose.
Example. You transfer property with an adjusted basis
of $1,000 and a fair market value of $250 to a corporation
for its section 1244 stock. The basis of your stock is
$1,000, but to figure the ordinary loss under these rules,
the basis of your stock is $250 ($1,000 − $750). If you
later sell the section 1244 stock for $200, your $800 loss
is an ordinary loss of $50 and a capital loss of $750.
Contributions to capital. If the basis of your section
1244 stock has increased, through contributions to capital
or otherwise, you must treat this increase as applying to
stock that is not section 1244 stock when you figure an or-
dinary loss on its sale.
Example. You buy 100 shares of section 1244 stock
for $10,000. You are the original owner. You later make a
$2,000 contribution to capital that increases the total basis
of the 100 shares to $12,000. You then sell the 100 shares
for $9,000 and have a loss of $3,000. You can deduct only
$2,500 ($3,000 × $10,000/$12,000) as an ordinary loss
under these rules. The remaining $500 is a capital loss.
Recordkeeping. You must keep records suffi-
cient to show that your stock qualifies as section
1244 stock. Your records must also distinguish
your section 1244 stock from any other stock you own in
the corporation.
Losses on Small Business Investment
Company Stock
A small business investment company (SBIC) is one that
is licensed and operated under the Small Business Invest-
ment Act of 1958.
If you are an investor in SBIC stock, you can deduct as
an ordinary loss, rather than a capital loss, a loss from the
sale, trade, or worthlessness of that stock. A gain from the
sale or trade of that stock is a capital gain. Do not offset
your gains and losses, even if they are on stock of the
same company.
How to report. You report this type of ordinary loss on
Form 4797, Part II, line 10. In addition to the information
required by the form, you must include the name and ad-
dress of the company that issued the stock. If applicable,
also include the reason the stock is worthless and the ap-
proximate date it became worthless. Report a capital gain
from the sale of SBIC stock on Form 8949.
Short sale. If you close a short sale of SBIC stock with
other SBIC stock you bought only for that purpose, any
loss you have on the sale is a capital loss. See Short
Sales, later in this chapter, for more information.
Holding Period
If you sold or traded investment property, you must deter-
mine your holding period for the property. Your holding pe-
riod determines whether any capital gain or loss was a
short-term or a long-term capital gain or loss.
Long-term or Short-term. If you hold investment prop-
erty more than 1 year, any capital gain or loss is a
long-term capital gain or loss. If you hold the property 1
year or less, any capital gain or loss is a short-term capital
gain or loss.
To determine how long you held the investment prop-
erty, begin counting on the date after the day you acquired
the property. The day you disposed of the property is part
of your holding period.
Example. If you bought investment property on Janu-
ary 31, 2023, and sold it on January 29, 2024, your hold-
ing period is not more than 1 year and you have a
short-term capital gain or loss. If you sold it on February 6,RECORDS
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 81
2024, your holding period is more than 1 year and you
have a long-term capital gain or loss.
Holding period and digital assets. A digital asset is
treated as property, and general tax principles that apply
to property transactions apply to transactions using digital
assets, including how to figure your holding period for
short-term and long-term capital gains and losses ex-
plained earlier under Long-Term or Short-Term. Digital as-
sets include property that has been referred to as "conver-
tible virtual currency," "cryptocurrency," and "non-fungible
tokens."
If a particular asset has the characteristics of a digital
asset, it will be treated as a digital asset for federal income
tax purposes. For more information on the tax treatment of
digital assets, see Notice 2014-21, 2014-16 I.R.B. 938,
available at IRS.gov/irb/ 2014-16 IRB#NOT-2014-21, (as
modified by Notice 2023-34, 2023-19 I.R.B. 837, available
at IRS.gov/irb/2023-19 IRB#NOT-2023-34). For more in-
formation on virtual currency transactions, see IRS.gov/
VirtualCurrencyFAQs, Instructions for Form 1040 or go to
IRS.gov/DigitalAsset.
Securities traded on an established market. For se-
curities traded on an established securities market, your
holding period begins the day after the trade date you
bought the securities, and ends on the trade date you sold
them.
Do not confuse the trade date with the settlement
date, which is the date by which the stock must be
delivered and payment must be made.
Example. You are a cash method, calendar year tax-
payer. You sold stock on December 31, 2024. According
to the rules of the stock exchange, the sale was closed by
delivery of the stock and payment of the sale price in Jan-
uary 2025. You received payment of the sale price on that
same day. Report your gain or loss on your 2024 return,
even though you received the payment in 2025. The gain
or loss is long term or short term depending on whether
you held the stock more than 1 year. Your holding period
ended on December 31.
U.S. Treasury notes and bonds. The holding period of
U.S. Treasury notes and bonds sold at auction on the ba-
sis of yield starts the day after the Secretary of the Treas-
ury, through news releases, gives notification of accept-
ance to successful bidders. The holding period of U.S.
Treasury notes and bonds sold through an offering on a
subscription basis at a specified yield starts the day after
the subscription is submitted.
Automatic investment service. In determining your
holding period for shares bought by the bank or other
agent, full shares are considered bought first and any frac-
tional shares are considered bought last. Your holding pe-
riod starts on the day after the bank's purchase date. If a
share was bought over more than one purchase date, your
holding period for that share is a split holding period. A
part of the share is considered to have been bought onCAUTION
!
each date that stock was bought by the bank with the pro-
ceeds of available funds.
Nontaxable trades. If you acquire investment property in
a trade for other investment property and your basis for
the new property is determined, in whole or in part, by
your basis in the old property, your holding period for the
new property begins on the day following the date you ac-
quired the old property.
Property received as a gift. If you receive a gift of prop-
erty and your basis is determined by the donor's adjusted
basis, your holding period is considered to have started on
the same day the donor's holding period started.
If your basis is determined by the fair market value of
the property, your holding period starts on the day after
the date of the gift.
Digital assets received as a gift. Your basis in virtual
currency received as a bona fide gift differs depending on
whether you will have a gain or a loss when you sell or dis-
pose of it. For purposes of determining whether you have
a gain, your basis is equal to the donor's basis, plus any
gift tax the donor paid on the gift. For purposes of deter-
mining whether you have a loss, your basis is equal to the
lesser of the donor's basis or the fair market value of the
virtual currency at the time you received the gift. If you do
not have any documentation to substantiate the donor's
basis, then your basis is zero. For more information on ba-
sis of property received as a gift, see Pub. 551.
Holding period of digital assets received as a gift.
Your holding period in virtual currency received as a gift in-
cludes the time that the virtual currency was held by the
person from whom you received the gift. However, if you
do not have documentation substantiating that person's
holding period, then your holding period begins the day af-
ter you receive the gift. For more information on holding
periods, see Pub. 544.
Inherited property. If you inherited property from some-
one who died before or after 2010, or from someone who
died in 2010 and the executor of the decedent’s estate did
not elect to file Form 8939, your capital gain or loss on any
later disposition of that property is treated as long-term
gain or loss, regardless of how long you held the property.
If you acquired the property from someone who died in
2010 and the executor made the election to file Form
8939, see Revenue Procedure 2011-41 to determine your
holding period. Revenue Procedure 2011-41 is available
at IRS.gov/irb/2011-35_IRB#RP-2011-41. For additional
information on the executor making the election see also
Notice 2011-66, 2011-35 I.R.B. 184, available at
IRS.gov/irb/2011-35_IRB#NOT-2011-66.
Real property bought. To figure how long you have
held real property bought under an unconditional contract,
begin counting on the day after you received title to it or on
the day after you took possession of it and assumed the
burdens and privileges of ownership, whichever happened
first. However, taking delivery or possession of real prop-
erty under an option agreement is not enough to start the
82 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
holding period. The holding period cannot start until there
is an actual contract of sale. The holding period of the
seller cannot end before that time.
Real property repossessed. If you sell real property but
keep a security interest in it, and then later repossess the
property under the terms of the sales contract, your hold-
ing period for a later sale includes the period you held the
property before the original sale and the period after the
repossession. Your holding period does not include the
time between the original sale and the repossession. That
is, it does not include the period during which the first
buyer held the property. However, the holding period for
any improvements made by the first buyer begins at the
time of repossession.
Stock dividends. The holding period for stock you re-
ceived as a taxable stock dividend begins on the date of
distribution.
The holding period for new stock you received as a
nontaxable stock dividend begins on the same day as the
holding period of the old stock. This rule also applies to
stock acquired in a spin-off, which is a distribution of stock
or securities in a controlled corporation.
Nontaxable stock rights. Your holding period for non-
taxable stock rights includes the holding period of the un-
derlying stock. The holding period for stock acquired
through the exercise of stock rights begins on the date the
right was exercised.
Section 1256 contracts. Gains or losses on section
1256 contracts open at the end of the year, or terminated
during the year, are treated as 60% long term and 40%
short term, regardless of how long the contracts were
held. See Section 1256 Contracts Marked to Market, ear-
lier.
Option exercised. Your holding period for property you
acquire when you exercise an option begins the day after
you exercise the option.
Wash sales. Your holding period for substantially identi-
cal stock or securities you acquire in a wash sale includes
the period you held the old stock or securities.
Qualified small business stock. Your holding period for
stock you acquired in a tax-free rollover of gain from a sale
of qualified small business stock, described later under
Gains on Qualified Small Business Stock, includes the pe-
riod you held the old stock.
Commodity futures. Your holding period for a commod-
ity received in satisfaction of a commodity futures con-
tract, other than a regulated futures contract subject to In-
ternal Revenue Code section 1256, includes your holding
period for the futures contract if you held the contract as a
capital asset.
Securities futures contract. Your holding period for a
security received in satisfaction of a securities futures con-
tract, other than one that is a section 1256 contract, in-
cludes your holding period for the futures contract if you
held the contract as a capital asset.
Your holding period for a security received in satisfac-
tion of a securities futures contract to sell, other than one
that is a section 1256 contract, is determined by the rules
that apply to short sales, discussed later under Short
Sales.
Loss on mutual fund or REIT stock held 6 months or
less. If you hold stock in a mutual fund (or other regulated
investment company) or REIT for 6 months or less and
then sell it at a loss (other than under a periodic liquidation
plan), special rules may apply.
Capital gain distributions received. The loss (after
reduction for any exempt-interest dividends you received,
as explained later) is treated as a long-term capital loss up
to the total of any capital gain distributions you received
and your share of any undistributed capital gains. Any re-
maining loss is short-term capital loss.
Reinvested distributions. If your dividends and capital
gain distributions are reinvested in new shares, the hold-
ing period of each new share begins the day after that
share was purchased. Therefore, if you sell both the new
shares and the original shares, you might have both
short-term and long-term gains and losses.
Example. On April 3, 2024, you bought a mutual fund
share for $20. On June 17, 2024, the mutual fund paid a
capital gain distribution of $2 per share, which is taxed as
a long-term capital gain. On July 15, 2024, you sold the
share for $17.50. If it were not for the capital gain distribu-
tion, your loss would be a short-term loss of $2.50 ($20 −
$17.50). However, the part of the loss that is not more
than the capital gain distribution ($2) must be reported as
a long-term capital loss. The remaining $0.50 of the loss
can be reported as a short-term capital loss.
Exempt-interest dividends on mutual fund stock. If
you received exempt-interest dividends on the stock, at
least part of your loss is disallowed. You can deduct only
the amount of loss that is more than the exempt-interest
dividends. Report the loss as a short-term capital loss. On
Form 8949, Part I, line 1, column (d), increase the sales
price by the amount of exempt-interest dividends, but do
not increase it to more than the cost or other basis shown
in column (e).
For more information on Form 8949 and Sched-
ule D (Form 1040), see the Instructions for Form
8949 and the Instructions for Schedule D (Form
1040).
Example. On January 10, 2024, you bought a mutual
fund share for $40. On February 7, 2024, the mutual fund
paid a $5 dividend from tax-exempt interest, which is not
taxable to you. On February 14, 2024, you sold the share
for $34. If it were not for the tax-exempt dividend, your loss
would be $6 ($40 − $34). However, you must increase the
sales price from $34 to $39 (to account for the $5 portion
of the loss that is not deductible). You can deduct only $1
as a short-term capital loss.TIP
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 83
Loss on stock that paid qualified dividends. Any loss
on the sale or trade of stock must be treated as a
long-term capital loss to the extent you received, from that
stock, qualified dividends (defined in chapter 1) that are
extraordinary dividends. This is true regardless of how
long you actually held the stock. Generally, an extraordi-
nary dividend is a dividend that equals or exceeds 10%
(5% in the case of preferred stock) of your adjusted basis
in the stock.
Nonbusiness Bad Debts
If someone owes you money that you cannot collect, you
have a bad debt. You may be able to deduct the amount
owed to you when you figure your tax for the year the debt
becomes worthless.
There are two kinds of bad debts—business and non-
business. A business bad debt, generally, is one that
comes from operating your trade or business and is de-
ductible as a business loss. All other bad debts are non-
business bad debts and are deductible as short-term cap-
ital losses.
Example. An architect made personal loans to sev-
eral friends who were not clients. The architect could not
collect on some of these loans. They are deductible only
as nonbusiness bad debts because the architect was not
in the business of lending money and the loans do not
have any relationship to the architect’s business.
Business bad debts. For information on business bad
debts of an employee, see Pub. 334, Tax Guide For Small
Business (For Individuals Who Use Schedule C).
Deductible nonbusiness bad debts. To be deductible,
nonbusiness bad debts must be totally worthless. You
cannot deduct a partly worthless nonbusiness debt.
Genuine debt required. A debt must be genuine for
you to deduct a loss. A debt is genuine if it arises from a
debtor-creditor relationship based on a valid and enforce-
able obligation to repay a fixed or determinable sum of
money.
Loan or gift. For a bad debt, you must show there
was an intention at the time of the transaction to make a
loan and not a gift. If you lend money to a relative or friend
with the understanding that it may not be repaid, it is con-
sidered a gift and not a loan. You cannot take a bad debt
deduction for a gift. There cannot be a bad debt unless
there is a true creditor-debtor relationship between you
and the person or organization that owes you the money.
When minor children borrow from their parents to pay
for their basic needs, there is no genuine debt. A bad debt
cannot be deducted for such a loan.
Basis in bad debt required. To deduct a bad debt,
you must have a basis in it—that is, you must have already
included the amount in your income or loaned out your
cash. For example, you cannot claim a bad debt deduc-
tion for court-ordered child support not paid to you by your
former spouse. If you are a cash method taxpayer (most
individuals are), you generally cannot take a bad debt
deduction for unpaid salaries, wages, rents, fees, interest,
dividends, and similar items.
When deductible. You can take a bad debt deduction
only in the year the debt becomes worthless. You do not
have to wait until a debt is due to determine whether it is
worthless. A debt becomes worthless when there is no
longer any chance that the amount owed will be paid.
It is not necessary to go to court if you can show that a
judgment from the court would be uncollectible. You must
only show that you have taken reasonable steps to collect
the debt. Bankruptcy of your debtor is generally good evi-
dence of the worthlessness of at least a part of an unse-
cured and unpreferred debt.
If your bad debt is the loss of a deposit in a financial in-
stitution, see Deposit in Insolvent or Bankrupt Financial In-
stitution, earlier.
Filing a claim for refund. If you do not deduct a bad
debt on your original return for the year it becomes worth-
less, you can file a claim for a credit or refund due to the
bad debt. To do this, use Form 1040-X to amend your re-
turn for the year the debt became worthless. You must file
it within 7 years from the date your original return for that
year had to be filed, or 2 years from the date you paid the
tax, whichever is later. (Claims not due to bad debts or
worthless securities must generally be filed within 3 years
from the date a return is filed, or 2 years from the date the
tax is paid, whichever is later.) For more information about
filing a claim, see Pub. 556.
Loan guarantees. If you guarantee a debt that becomes
worthless, you cannot take a bad debt deduction for your
payments on the debt unless you can show either that
your reason for making the guarantee was to protect your
investment or that you entered the guarantee transaction
with a profit motive. If you make the guarantee as a favor
to friends and do not receive any consideration in return,
your payments are considered a gift and you cannot take
a deduction.
Example 1. Henry Lloyd, an officer and principal
shareholder of the Spruce Corporation, guaranteed pay-
ment of a bank loan the corporation received. The corpo-
ration defaulted on the loan and Henry made full payment.
Because Henry guaranteed the loan to protect his invest-
ment in the corporation, Henry can take a nonbusiness
bad debt deduction.
Example 2. Milt and Pat are co-workers. Milt, as a fa-
vor to Pat, guarantees a note at their local credit union. Pat
does not pay the note and declares bankruptcy. Milt pays
off the note. However, since Milt did not enter into the
guarantee agreement to protect an investment or to make
a profit, Milt cannot take a bad debt deduction.
Deductible in year paid. Unless you have rights
against the borrower, discussed next, a payment you
make on a loan you guaranteed is deductible in the year
you make the payment.
Rights against the borrower. When you make pay-
ment on a loan you guaranteed, you may have the right to
84 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
take the place of the lender (the right of subrogation). The
debt is then owed to you. If you have this right or some
other right to demand payment from the borrower, you
cannot take a bad debt deduction until these rights be-
come totally worthless.
Debts owed by political parties. You cannot take a
nonbusiness bad debt deduction for any worthless debt
owed to you by:
• A political party;
• A national, state, or local committee of a political
party; or
• A committee, association, or organization that either
accepts contributions or spends money to influence
elections.
Mechanics' and suppliers' liens. Workers and material
suppliers may file liens against property because of debts
owed by a builder or contractor. If you pay off the lien to
avoid foreclosure and loss of your property, you are enti-
tled to repayment from the builder or contractor. If the debt
is uncollectible, you can take a bad debt deduction.
Insolvency of contractor. You can take a bad debt de-
duction for the amount you deposit with a contractor if the
contractor becomes insolvent and you are unable to re-
cover your deposit. If the deposit is for work unrelated to
your trade or business, it is a nonbusiness bad debt de-
duction.
Secondary liability on home mortgage. If the buyer of
your home assumes your mortgage, you may remain sec-
ondarily liable for repayment of the mortgage loan. If the
buyer defaults on the loan and the house is then sold for
less than the amount outstanding on the mortgage, you
may have to make up the difference. You can take a bad
debt deduction for the amount you pay to satisfy the mort-
gage if you cannot collect it from the buyer.
Worthless securities. If you own securities that become
totally worthless, you can take a deduction for a loss, but
not for a bad debt. See Worthless Securities under What
Is a Sale or Trade, earlier in this chapter.
Recovery of a bad debt. If you deducted a bad debt
and in a later tax year you recover (collect) all or part of it,
you may have to include the amount you recover in your
gross income. However, you can exclude from gross in-
come the amount recovered up to the amount of the de-
duction that did not reduce your tax in the year deducted.
See Recoveries in Pub. 525.
How to report bad debts. Deduct nonbusiness bad
debts as short-term capital losses on Form 8949.
On Form 8949, Part I, line 1, enter the name of the
debtor and “bad debt statement attached” in column (a).
Enter your basis in the bad debt in column (e) and enter
zero in column (d). Use a separate line for each bad debt.
Make sure you report your bad debt(s) (and any
other short-term transactions for which you did
not receive a Form 1099-B) on Form 8949 with
box C checked.
For each bad debt, attach a statement to your return
that contains:
• A description of the debt, including the amount, and
the date it became due;
• The name of the debtor, and any business or family re-
lationship between you and the debtor;
• The efforts you made to collect the debt; and
• Why you decided the debt was worthless. For exam-
ple, you could show that the borrower has declared
bankruptcy, or that legal action to collect would proba-
bly not result in payment of any part of the debt.
Short Sales
A short sale occurs when you agree to sell property you
do not own (or own but do not wish to sell). You make this
type of sale in two steps.
• You sell short. You borrow property and deliver it to a
buyer.
• You close the sale. At a later date, you either buy sub-
stantially identical property and deliver it to the lender
or make delivery out of property you held at the time of
the sale. Delivery of property borrowed from another
lender does not satisfy this requirement.
You do not realize gain or loss until delivery of property to
close the short sale. You will have a capital gain or loss if
the property used to close the short sale is a capital asset.
The Instructions for Form 1099-B discuss when you
should receive a Form 1099-B for short sales. For more in-
formation, see the Instructions for Form 1099-B.
Reporting a short sale. Report any short sale on Form
8949 in the year it closes. If a short sale closed in 2024
but you did not get a Form 1099-B for it because you en-
tered into it before 2011, report it on a Form 8949 in Part I
or Part II (whichever applies). In column (a), enter (for ex-
ample) “100 sh. XYZ Co. — 2010 short sale closed.” Fill in
the other columns according to their instructions. Report
the short sale the same way if you received a 2024 Form
1099-B that does not show proceeds (sales price).
Exception if property becomes worthless. A different
rule applies if the property sold short becomes substan-
tially worthless. In that case, you must recognize gain as if
the short sale were closed when the property became
substantially worthless.
Exception for constructive sales. Entering into a short
sale may cause you to be treated as having made a con-
structive sale of property. In that case, you will have to rec-
ognize gain on the date of the constructive sale. For de-
tails, see Constructive Sales of Appreciated Financial
Positions, earlier.CAUTION
!
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 85
Example. On May 6, 2024, you bought 100 shares of
Baker Corporation stock for $1,000. On September 9,
2024, you sold short 100 shares of similar Baker stock for
$1,600. You made no other transactions involving Baker
stock for the rest of 2024 and the first 30 days of 2025.
Your short sale is treated as a constructive sale of an ap-
preciated financial position because a sale of your Baker
stock on the date of the short sale would have resulted in
a gain. You recognize a $600 short-term capital gain from
the constructive sale and your new holding period in the
Baker stock begins on September 8.
Short-Term or Long-Term Capital Gain or
Loss
As a general rule, you determine whether you have
short-term or long-term capital gain or loss on a short sale
by the amount of time you actually hold the property even-
tually delivered to the lender to close the short sale.
Example. Even though you do not own any stock of
Ace Corporation, you contract to sell 100 shares of it,
which you borrow from your broker. After 13 months, when
the price of the stock has risen, you buy 100 shares of Ace
Corporation stock and immediately deliver them to your
broker to close out the short sale. Your loss is a short-term
capital loss because your holding period for the delivered
property is less than 1 day.
Special rules. Special rules may apply to gains and los-
ses from short sales of stocks, securities, and commodity
and securities futures (other than certain straddles) if you
held or acquired property substantially identical to prop-
erty that sold short. But if the amount of property you sold
short is more than the amount of that substantially identi-
cal property, the special rules do not apply to the gain or
loss on the excess.
Gains and holding period. If you held the substan-
tially identical property for 1 year or less on the date of the
short sale, or if you acquired the substantially identical
property after the short sale and by the date of closing the
short sale, then:
Rule 1. Your gain, if any, when you close the short sale
is a short-term capital gain; and
Rule 2. The holding period of the substantially identi-
cal property begins on the date of the closing of the
short sale or on the date of the sale of this property,
whichever comes first.
Losses. If, on the date of the short sale, you held sub-
stantially identical property for more than 1 year, any loss
you realize on the short sale is a long-term capital loss,
even if you held the property used to close the sale for 1
year or less. Certain losses on short sales of stock or se-
curities are also subject to wash sale treatment. For infor-
mation, see Wash Sales, later.
Mixed straddles. Under certain elections, you can
avoid the treatment of loss from a short sale as long term
under the special rule. These elections are for positions
that are part of a mixed straddle. See Other elections,
later, for more information about these elections.
Reporting Substitute Payments
If any broker transferred your securities for use in a short
sale or similar transaction and received certain substitute
dividend payments on your behalf while the short sale was
open, that broker must give you a Form 1099-MISC or a
similar statement reporting the amount of these payments.
Form 1099-MISC must be used for those substitute pay-
ments totaling $10 or more that are known on the pay-
ment's record date to be in lieu of an exempt-interest divi-
dend, a capital gain dividend, a return of capital
distribution, or a dividend subject to a foreign tax credit, or
that are in lieu of tax-exempt interest. Do not treat these
substitute payments as dividends or interest. Instead, re-
port the substitute payments shown on Form 1099-MISC
as “Other income” on Schedule 1 (Form 1040), line 8z.
Substitute payment. A substitute payment means a
payment in lieu of:
• Tax-exempt interest (including OID) accrued while the
short sale was open; and
• A dividend, if the ex-dividend date is after the transfer
of stock for use in a short sale and before the closing
of the short sale.
Payments in lieu of dividends. If you borrow stock to
make a short sale, you may have to remit to the lender
payments in lieu of the dividends distributed while you
maintain your short position. You can deduct these pay-
ments only if you hold the short sale open at least 46 days
(more than 1 year in the case of an extraordinary dividend,
as defined later) and you itemize your deductions.
You deduct these payments as investment interest on
Schedule A (Form 1040). See Interest Expenses in chap-
ter 3 for more information.
If you close the short sale by the 45th day after the date
of the short sale (1 year or less in the case of an extraordi-
nary dividend), you cannot deduct the payment in lieu of
the dividend you make to the lender. Instead, you must in-
crease the basis of the stock used to close the short sale
by that amount.
To determine how long a short sale is kept open, do not
include any period during which you hold, have an option
to buy, or are under a contractual obligation to buy sub-
stantially identical stock or securities.
If your payment is made for a liquidating distribution or
nontaxable stock distribution, or if you buy more shares
equal to a stock distribution issued on the borrowed stock
during your short position, you have a capital expense.
You must add the payment to the cost of the stock sold
short.
Exception. If you close the short sale within 45 days,
the deduction for amounts you pay in lieu of dividends will
be disallowed only to the extent the payments are more
than the amount you receive as ordinary income from the
lender of the stock for the use of collateral with the short
86 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
sale. This exception does not apply to payments in place
of extraordinary dividends.
Extraordinary dividends. If the amount of any dividend
you receive on a share of preferred stock equals or ex-
ceeds 5% (10% in the case of other stock) of the amount
realized on the short sale, the dividend you receive is an
extraordinary dividend.
Wash Sales
You cannot deduct losses from sales or trades of stock or
securities in a wash sale unless the loss was incurred in
the ordinary course of your business as a dealer in stock
or securities.
A wash sale occurs when you sell or trade stock or se-
curities at a loss and within 30 days before or after the
sale you:
1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a
fully taxable trade,
3. Acquire a contract or option to buy substantially iden-
tical stock or securities, or
4. Acquire substantially identical stock for your individual
retirement arrangement (IRA) or Roth IRA.
If you sell stock and your spouse or a corporation you con-
trol buys substantially identical stock, you also have a
wash sale.
If your loss was disallowed because of the wash sale
rules, add the disallowed loss to the cost of the new stock
or securities (except in (4) above). The result is your basis
in the new stock or securities. This adjustment postpones
the loss deduction until the disposition of the new stock or
securities. Your holding period for the new stock or securi-
ties includes the holding period of the stock or securities
sold.
Example 1. You buy 100 shares of X stock for $1,000.
You sell these shares for $750 and within 30 days from the
sale you buy 100 shares of the same stock for $800. Be-
cause you bought substantially identical stock, you cannot
deduct your loss of $250 on the sale. However, you add
the disallowed loss of $250 to the cost of the new stock,
$800, to obtain your basis in the new stock, which is
$1,050.
Example 2. You are an employee of a corporation
with an incentive pay plan. Under this plan, you are given
10 shares of the corporation's stock as a bonus award.
You include the fair market value of the stock in your gross
income as additional pay. You later sell these shares at a
loss. If you receive another bonus award of substantially
identical stock within 30 days of the sale, you cannot de-
duct your loss on the sale.
Options and futures contracts. The wash sale rules ap-
ply to losses from sales or trades of contracts and options
to acquire or sell stock or securities. They do not apply to
losses from sales or trades of commodity futures con-
tracts and foreign currencies. See Coordination of Loss
Deferral Rules and Wash Sale Rules, later, for information
about the tax treatment of losses on the disposition of po-
sitions in a straddle.
Securities futures contract to sell. Losses from the
sale, exchange, or termination of a securities futures con-
tract to sell are generally treated in the same manner as
losses from the closing of a short sale, discussed later in
this section under Short sales.
Warrants. The wash sale rules apply if you sell com-
mon stock at a loss and, at the same time, buy warrants
for common stock of the same corporation. But if you sell
warrants at a loss and, at the same time, buy common
stock in the same corporation, the wash sale rules apply
only if the warrants and stock are considered substantially
identical, as discussed next.
Substantially identical. In determining whether stock or
securities are substantially identical, you must consider all
the facts and circumstances in your particular case. Ordi-
narily, stocks or securities of one corporation are not con-
sidered substantially identical to stocks or securities of an-
other corporation. However, they may be substantially
identical in some cases. For example, in a reorganization,
the stocks and securities of the predecessor and succes-
sor corporations may be substantially identical.
Similarly, bonds or preferred stock of a corporation are
not ordinarily considered substantially identical to the
common stock of the same corporation. However, where
the bonds or preferred stock are convertible into common
stock of the same corporation, the relative values, price
changes, and other circumstances may make these
bonds or preferred stock and the common stock substan-
tially identical. For example, preferred stock is substan-
tially identical to the common stock if the preferred stock:
• Is convertible into common stock,
• Has the same voting rights as the common stock,
• Is subject to the same dividend restrictions,
• Trades at prices that do not vary significantly from the
conversion ratio, and
• Is unrestricted as to convertibility.
More or less stock bought than sold. If the number of
shares of substantially identical stock or securities you
buy within 30 days before or after the sale is either more or
less than the number of shares you sold, you must deter-
mine the particular shares to which the wash sale rules
apply. You do this by matching the shares bought with an
equal number of the shares sold. Match the shares bought
in the same order that you bought them, beginning with
the first shares bought. The shares or securities so
matched are subject to the wash sale rules.
Example 1. You bought 100 shares of M stock on
September 20, 2023, for $5,000. On December 13, 2023,
you bought 50 shares of substantially identical stock for
$2,750. On December 20, 2023, you bought 25 shares of
substantially identical stock for $1,125. On January 3,
2024, you sold for $4,000 the 100 shares you bought in
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 87
September. You have a $1,000 loss on the sale. However,
because you bought 75 shares of substantially identical
stock within 30 days before the sale, you cannot deduct
the loss ($750) on 75 shares. You can deduct the loss
($250) on the other 25 shares. The basis of the 50 shares
bought on December 13, 2023, is increased by two-thirds
(50 ÷ 75) of the $750 disallowed loss. The new basis of
those shares is $3,250 ($2,750 + $500). The basis of the
25 shares bought on December 20, 2023, is increased by
the rest of the loss to $1,375 ($1,125 + $250).
Example 2. You bought 100 shares of M stock on
September 15, 2023. On January 29, 2024, you sold
those shares at a $1,000 loss. On each of the 4 days from
February 1, 2024, to February 6, 2024, you bought 50
shares of substantially identical stock. You cannot deduct
your $1,000 loss. You must add half the disallowed loss
($500) to the basis of the 50 shares bought on February 1.
Add the other half ($500) to the basis of the shares bought
on February 2.
Loss and gain on same day. Loss from a wash sale of
one block of stock or securities cannot be used to reduce
any gains on identical blocks sold the same day.
Example. During 2018, you bought 100 shares of X
stock on each of three occasions. You paid $158 per
share for the first block of 100 shares, $100 per share for
the second block, and $95 per share for the third block.
On December 27, 2023, you sold 300 shares of X stock
for $125 per share. On January 10, 2024, you bought 250
shares of identical X stock. You cannot deduct the loss of
$33 per share on the first block because within 30 days af-
ter the date of sale you bought 250 identical shares of X
stock. In addition, you cannot reduce the gain realized on
the sale of the second and third blocks of stock by this
loss.
Dealers. The wash sale rules do not apply to a dealer in
stock or securities if the loss is from a transaction made in
the ordinary course of business.
Short sales. The wash sale rules apply to a loss realized
on a short sale if you sell, or enter into another short sale
of, substantially identical stock or securities within a pe-
riod beginning 30 days before the date the short sale is
complete and ending 30 days after that date.
For purposes of the wash sale rules, a short sale is con-
sidered complete on the date the short sale is entered into
if:
• On that date, you own stock or securities identical to
those sold short (or by that date you enter into a con-
tract or option to acquire that stock or those securi-
ties); and
• You later deliver the stock or securities to close the
short sale.
Otherwise, a short sale is not considered complete until
the property is delivered to close the sale.
This treatment also applies to losses from the sale, ex-
change, or termination of a securities futures contract to
sell.
Example. On June 4, you buy 100 shares of stock for
$1,000. You sell short 100 shares of the stock for $750 on
October 15. On October 16, you buy 100 shares of the
same stock for $750. You close the short sale on Novem-
ber 19 by delivering the shares bought on June 4. You
cannot deduct the $250 loss ($1,000 − $750) because the
date of entering into the short sale (October 15) is consid-
ered the date the sale is complete for wash sale purposes
and you bought substantially identical stock within 30 days
from that date.
Residual interests in a real estate mortgage invest-
ment conduit (REMIC). The wash sale rules will gener-
ally apply to the sale of your residual interest in a REMIC
if, during the period beginning 6 months before the sale of
the interest and ending 6 months after that sale, you ac-
quire any residual interest in any REMIC or any interest in
a taxable mortgage pool that is comparable to a residual
interest. REMICs are discussed in chapter 1.
Nondeductible wash sale loss. If you received a Form
1099-B, box 1g will show the amount of wash sale loss
disallowed if:
• The stock or securities sold were covered securities,
and
• The substantially identical stock or securities you
bought had the same CUSIP numbers as the stock or
securities you sold and were bought in the same ac-
count as the stock or securities you sold.
However, you cannot deduct a loss from a wash sale
even if it is not reported on Form 1099-B.
How to report. Report a wash sale transaction in Part I
or Part II of Form 8949 with the appropriate box checked.
Complete all columns. Enter “W” in column (f). Enter as a
positive number in column (g) the amount of the loss not
allowed. See the Instructions for Form 8949.
Securities Futures Contracts
A securities futures contract is a contract of sale for future
delivery of a single security or of a narrow-based security
index.
Gain or loss from the contract will generally be treated
in a manner similar to gain or loss from transactions in the
underlying security. This means gain or loss from the sale,
exchange, or termination of the contract will generally
have the same character as gain or loss from transactions
in the property to which the contract relates. Any capital
gain or loss on a sale, exchange, or termination of a con-
tract to sell property will be considered short term, regard-
less of how long you hold the contract. These contracts
are not section 1256 contracts (unless they are dealer se-
curities futures contracts).
Options
Options are generally subject to the rules described in this
section. If the option is part of a straddle, the Loss Deferral
Rules covered later under Straddles may also apply. For
88 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
special rules that apply to nonequity options and dealer
equity options, see Section 1256 Contracts Marked to
Market, earlier.
Gain or loss from the sale or trade of an option to buy or
sell property that is a capital asset in your hands, or would
be if you acquired it, is capital gain or loss. If the property
is not or would not be a capital asset, the gain or loss is
ordinary gain or loss.
Example 1. You purchased an option to buy 100
shares of XYZ Company stock. The stock increases in
value, and you sell the option for more than you paid for it.
Your gain is capital gain because the stock underlying the
option would have been a capital asset in your hands.
Example 2. The facts are the same as in Example 1,
except the stock decreases in value and you sell the op-
tion for less than you paid for it. Your loss is a capital loss.
Option not exercised. If you have a loss because you
did not exercise an option to buy or sell, you are consid-
ered to have sold or traded the option on the date it ex-
pired.
Writer of option. If you write (grant) an option, how you
report your gain or loss depends on whether it was exer-
cised.
If you are not in the business of writing options and an
option you write on stocks, securities, commodities, or
commodity futures is not exercised (or repurchased), the
amount you receive is a short-term capital gain.
If an option requiring you to buy or sell property is exer-
cised, see Writers of puts and calls, later.
Section 1256 contract options. Gain or loss is recog-
nized on the exercise of an option on a section 1256 con-
tract. Section 1256 contracts are defined under Section
1256 Contracts Marked to Market, earlier.
Cash settlement option. A cash settlement option is
treated as an option to buy or sell property. A cash settle-
ment option is any option that on exercise is settled in, or
could be settled in, cash or property other than the under-
lying property.
How to report. Report on Form 8949 gain or loss from
the closing or expiration of an option that is not a section
1256 contract but is a capital asset in your hands. If an op-
tion you purchased expired, enter the expiration date in
column (c) and enter “Expired” in column (d). If an option
that was granted (written) expired, enter the expiration
date in column (b) and enter “Expired” in column (e). Fill in
the other columns as appropriate.
If a call option you sold was exercised and the option
premium you received was not reflected in the sales price
shown on the Form 1099-B you received, enter the pre-
mium as a positive number in column (g) of Form 8949
and enter “E” in column (f).
Puts and Calls
Puts and calls are options on securities and are covered
by the rules just discussed for options. The following are
specific applications of these rules to holders and writers
of options that are bought, sold, or “closed out” in transac-
tions on a national securities exchange, such as the Chi-
cago Board Options Exchange. (But see Section 1256
Contracts Marked to Market, earlier, for special rules that
may apply to nonequity options and dealer equity op-
tions.) These rules are also presented in Table 4-3.
Puts and calls are issued by writers (grantors) to hold-
ers for cash premiums. They are ended by exercise, clos-
ing transaction, or lapse.
A “put option” is the right to sell to the writer, at any time
before a specified future date, a stated number of shares
at a specified price. Conversely, a “call option” is the right
to buy from the writer of the option, at any time before a
specified future date, a stated number of shares of stock
at a specified price.
Holders of puts and calls. If you buy a put or a call, you
may not deduct its cost. It is a capital expenditure.
If you sell the put or the call before you exercise it, the
difference between its cost and the amount you receive for
it is either a long-term or short-term capital gain or loss,
depending on how long you held it.
If the option expires, its cost is either a long-term or
short-term capital loss, depending on your holding period,
which ends on the expiration date.
If you exercise a call, add its cost to the basis of the
stock you bought. If you exercise a put, reduce your
amount realized on the sale of the underlying stock by the
cost of the put when figuring your gain or loss. Any gain or
loss on the sale of the underlying stock is long term or
short term depending on your holding period for the un-
derlying stock.
Put option as short sale. Buying a put option is gen-
erally treated as a short sale, and the exercise, sale, or ex-
piration of the put is a closing of the short sale. See Short
Sales, earlier. If you have held the underlying stock for 1
year or less at the time you buy the put, any gain on the
exercise, sale, or expiration of the put is a short-term capi-
tal gain. The same is true if you buy the underlying stock
after you buy the put but before its exercise, sale, or expi-
ration. Your holding period for the underlying stock begins
on the earliest of:
• The date you dispose of the stock,
• The date you exercise the put,
• The date you sell the put, or
• The date the put expires.
Writers of puts and calls. If you write (grant) a put or a
call, do not include the amount you receive for writing it in
your income at the time of receipt. Carry it in a deferred
account until:
• Your obligation expires;
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 89
• You buy, in the case of a put, or sell, in the case of a
call, the underlying stock when the option is exercised;
or
• You engage in a closing transaction.
If your obligation expires, the amount you received for
writing the call or put is short-term capital gain.
If a put you write is exercised and you buy the underly-
ing stock, decrease your basis in the stock by the amount
you received for the put. Your holding period for the stock
begins on the date you buy it, not on the date you wrote
the put.
If a call you write is exercised and you sell the underly-
ing stock, increase your amount realized on the sale of the
stock by the amount you received for the call when figur-
ing your gain or loss. The gain or loss is long term or short
term depending on your holding period of the stock.
If you enter into a closing transaction by paying an
amount equal to the value of the put or call at the time of
the payment, the difference between the amount you pay
and the amount you receive for the put or call is a
short-term capital gain or loss.
Examples of nondealer transactions.
1. Expiration. Ten JJJ call options were issued on April
8, 2024, for $4,000. These equity options expired in
December 2024 without being exercised. If you were
a holder (buyer) of the options, you would recognize a
short-term capital loss of $4,000. If you were a writer
of the options, you would recognize a short-term capi-
tal gain of $4,000.
2. Closing transaction. The facts are the same as in
(1), except that on May 6, 2024, the options were sold
for $6,000. If you were the holder of the options who
sold them, you would recognize a short-term capital
gain of $2,000. If you were the writer of the options
and you bought them back, you would recognize a
short-term capital loss of $2,000.
3. Exercise. The facts are the same as in (1), except
that the options were exercised on May 20, 2024. The
buyer adds the cost of the options to the basis of the
stock bought through the exercise of the options. The
writer adds the amount received from writing the op-
tions to the amount realized from selling the stock to
figure gain or loss. The gain or loss is short term or
long term depending upon the holding period of the
stock.
4. Section 1256 contracts. The facts are the same as
in (1), except the options were nonequity options, sub-
ject to the rules for section 1256 contracts. If you were
a buyer of the options, you would recognize a
short-term capital loss of $1,600, and a long-term
capital loss of $2,400. If you were a writer of the op-
tions, you would recognize a short-term capital gain of
$1,600, and a long-term capital gain of $2,400. See
Section 1256 Contracts Marked to Market, earlier, for
more information.
Straddles
This section discusses the loss deferral rules that apply to
the sale or other disposition of positions in a straddle.
These rules do not apply to the straddles described under
Exceptions, later.
Puts and Calls
Puts
When a put: If you are the holder: If you are the writer:
Is exercised Reduce your amount realized from the sale of the
underlying stock by the cost of the put.
Reduce your basis in the stock you buy by the amount
you received for the put.
Expires Report the cost of the put as a capital loss on the date it
expires.*
Report the amount you received for the put as a
short-term capital gain.
Is sold by the holder Report the difference between the cost of the put and the
amount you receive for it as a capital gain or loss.*
This does not affect you. (But if you buy back the put,
report the difference between the amount you pay and
the amount you received for the put as a short-term
capital gain or loss.)
Calls
When a call: If you are the holder: If you are the writer:
Is exercised Add the cost of the call to your basis in the stock
purchased.
Increase your amount realized on the sale of the stock by
the amount you received for the call.
Expires Report the cost of the call as a capital loss on the date it
expires.*
Report the amount you received for the call as a
short-term capital gain.
Is sold by the holder Report the difference between the cost of the call and the
amount you receive for it as a capital gain or loss.*
This does not affect you. (But if you buy back the call,
report the difference between the amount you pay and
the amount you received for the call as a short-term
capital gain or loss.)
* See Holders of puts and calls and Writers of puts and calls in the accompanying text to find whether your gain or loss is short term or long term.
Table 4-3.
90 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
A straddle is any set of offsetting positions on personal
property. For example, a straddle may consist of a pur-
chased option to buy and a purchased option to sell on
the same number of shares of the security, with the same
exercise price and period.
Personal property. This is any actively traded property.
It includes stock options and contracts to buy stock but
generally does not include stock.
Straddle rules for stock. Although stock is generally
excluded from the definition of personal property when ap-
plying the straddle rules, it is included in the following two
situations.
1. The stock is of a type that is actively traded, and at
least one of the offsetting positions is a position on
that stock or substantially similar or related property.
2. The stock is in a corporation formed or availed of to
take positions in personal property that offset posi-
tions taken by any shareholder.
Note. For positions established before October 22,
2004, condition 1 above does not apply. Instead, personal
property includes stock if condition 2 above applies or the
stock was part of a straddle in which at least one of the
offsetting positions was:
• An option to buy or sell the stock or substantially iden-
tical stock or securities,
• A securities futures contract on the stock or substan-
tially identical stock or securities, or
• A position on substantially similar or related property
(other than stock).
Position. A position is an interest in personal property. A
position can be a forward or futures contract or an option.
An interest in a loan denominated in a foreign currency
is treated as a position in that currency. For the straddle
rules, foreign currency for which there is an active inter-
bank market is considered to be actively traded personal
property. See also Foreign currency contract, earlier.
Offsetting position. This is a position that substantially
reduces any risk of loss you may have from holding an-
other position. However, if a position is part of a straddle
that is not an identified straddle (described later), do not
treat it as offsetting to a position that is part of an identified
straddle.
Presumed offsetting positions. Two or more posi-
tions will be presumed to be offsetting if:
• The positions are established in the same personal
property (or in a contract for this property), and the
value of one or more positions varies inversely with the
value of one or more of the other positions;
• The positions are in the same personal property, even
if this property is in a substantially changed form, and
the positions' values vary inversely as described in the
first condition;
• The positions are in debt instruments with a similar
maturity, and the positions' values vary inversely as
described in the first condition;
• The positions are sold or marketed as offsetting posi-
tions, whether or not the positions are called a strad-
dle, spread, butterfly, or any similar name; or
• The aggregate margin requirement for the positions is
lower than the sum of the margin requirements for
each position if held separately.
Related persons. To determine if two or more posi-
tions are offsetting, you will be treated as holding any po-
sition your spouse holds during the same period. If you
take into account part or all of the gain or loss for a posi-
tion held by a flow-through entity, such as a partnership or
trust, you are also considered to hold that position.
Loss Deferral Rules
Generally, you can deduct a loss on the disposition of one
or more positions only to the extent the loss is more than
any unrecognized gain you have on offsetting positions.
Unused losses are treated as sustained in the next tax
year.
Unrecognized gain. This is:
• The amount of gain you would have had on an open
position if you had sold it on the last business day of
the tax year at its fair market value; and
• The amount of gain realized on a position if, as of the
end of the tax year, gain has been realized but not rec-
ognized.
Example. On July 8, 2024, you entered into a strad-
dle. On December 11, 2024, you closed one position of
the straddle at a loss of $15,000. On December 30, 2024,
the end of your tax year, you have an unrecognized gain of
$12,750 in the offsetting open position. On your 2024 re-
turn, your deductible loss on the position you closed is
limited to $2,250 ($15,000 − $12,750). You must carry for-
ward the unused loss of $12,750.
Note. If you physically settle a position established af-
ter October 21, 2004, that is part of a straddle by deliver-
ing property to which the position relates (and you would
realize a loss on that position if you terminated it), you are
treated as having terminated the position for its fair market
value immediately before the settlement and as having
sold the property used to physically settle the position at
its fair market value.
Exceptions. The loss deferral rules do not apply to:
1. Positions established after October 21, 2004, com-
prising an identified straddle;
2. Certain straddles consisting of qualified covered call
options and the stock to be purchased under the op-
tions;
3. Hedging transactions, described earlier under Section
1256 Contracts Marked to Market; and
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 91
4. Straddles consisting entirely of section 1256 con-
tracts, as described earlier under Section 1256 Con-
tracts Marked to Market (but see Identified straddle,
later).
Note. For positions established before October 22,
2004, the loss deferral rules also do not apply to a strad-
dle that is an identified straddle at the end of the tax year.
Identified straddle. Any straddle (other than a strad-
dle described in (2) or (3) above) is an identified straddle if
all the following conditions exist.
• You clearly identified the straddle on your records be-
fore the close of the day on which you acquired it.
• For straddles acquired after December 29, 2007, you
identified the positions in the straddle that are offset-
ting with respect to one another (for example, position
A offsets position D, and position B offsets position C).
• The straddle is not part of a larger straddle.
If there is a loss from any position in an identified strad-
dle, you must increase the basis of each of the positions
that offset the loss position in the identified straddle. The
increase is the loss multiplied by the following fraction:
Unrecognized gain (if any) on the offsetting position
The total unrecognized gain on all positions that offset
the loss position in the identified straddle
For this purpose, your unrecognized gain is the excess
of the fair market value of the position that is part of an
identified straddle at the time you incur a loss on another
position in the identified straddle, over the fair market
value of that position when you identified it as a position in
the straddle.
If the application of the above rule does not result in the
increase in basis of any offsetting position in the identified
straddle, you must increase the basis of each of the offset-
ting positions in the straddle in a manner that:
• Is reasonable,
• Is consistently applied by you,
• Is consistent with the purposes of the identified strad-
dle rules, and
• Results in a total increase in the basis of those offset-
ting positions equal to the loss.
If you adopt an allocation method under this rule, you
must describe that method in your books and records.
The identified straddle rules also apply to positions that
are or have been a liability or obligation to you (for exam-
ple, a debt obligation you issued, a written option, or a no-
tional principal contract you entered into).
Neither you nor anyone else can take into account any
loss on a position that is part of an identified straddle to
the extent the loss increases the basis of any positions
that offset the loss position in the identified straddle.
Note. For positions established before October 22,
2004, identified straddles have to meet two additional con-
ditions.
1. All the original positions that you identify were ac-
quired on the same day.
2. All the positions included in condition 1 were dis-
posed of on the same day during the tax year, or none
of the positions were disposed of by the end of the tax
year.
Also, the losses from positions are deferred until you dis-
pose of all the positions in the straddle. The rule dis-
cussed above for increasing the basis of each of the posi-
tions does not apply.
Qualified covered call options and optioned stock.
A straddle is not subject to the loss deferral rules for strad-
dles if both of the following are true.
• All the offsetting positions consist of one or more
qualified covered call options and the stock to be pur-
chased from you under the options.
• The straddle is not part of a larger straddle.
But see Special year-end rule, later, for an exception.
A qualified covered call option is any option you grant to
purchase stock you hold (or stock you acquire in connec-
tion with granting the option), but only if all the following
are true.
• The option is traded on a national securities exchange
or other market approved by the Secretary of the
Treasury.
• The option is granted more than 30 days before its ex-
piration date.
For covered call options entered into after July 28,
2002, the option is granted not more than 12 months
before its expiration date or satisfies term limitation
and qualified benchmark requirements published in
the Internal Revenue Bulletin.
• The option is not a deep-in-the-money option.
• You are not an options dealer who granted the option
in connection with your activity of dealing in options.
• Gain or loss on the option is capital gain or loss.
A deep-in-the-money option is an option with a strike
price lower than the lowest qualified benchmark (LQB).
The strike price is the price at which the option is to be ex-
ercised. Strike prices are listed in the financial sections of
many newspapers. The LQB is the highest available strike
price that is less than the applicable stock price. However,
the LQB for an option with a term of more than 90 days
and a strike price of more than $50 is the second-highest
available strike price that is less than the applicable stock
price.
The availability of strike prices for equity options with
flexible terms does not affect the determination of the LQB
for an option that is not an equity option with flexible
terms.
The applicable stock price for any stock for which an
option has been granted is:
1. The closing price of the stock on the most recent day
on which that stock was traded before the date on
which the option was granted; or
92 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
2. The opening price of the stock on the day on which
the option was granted, but only if that price is greater
than 110% of the price determined in (1).
If the applicable stock price is $25 or less, the LQB will
be treated as not less than 85% of the applicable stock
price. If the applicable stock price is $150 or less, the LQB
will be treated as not less than an amount that is $10 be-
low the applicable stock price.
Example. On May 10, 2024, you held XYZ stock and
you wrote an XYZ/September call option with a strike price
of $120. The closing price of one share of XYZ stock on
May 9, 2024, was $130.25. The strike prices of all XYZ/
September call options offered on May 10, 2024, were as
follows: $110, $115, $120, $125, $130, and $135. Be-
cause the option has a term of more than 90 days, the
LQB is $125, the second-highest strike price that is less
than $130.25, the applicable stock price. The call option is
a deep-in-the-money option because its strike price is
lower than the LQB. As a result, the option is not a quali-
fied covered call option, and the loss deferral rules apply if
you closed out the option or the stock at a loss during the
year.
Capital loss on qualified covered call options. If
you hold stock and you write a qualified covered call op-
tion on that stock with a strike price less than the applica-
ble stock price, treat any loss from the option as long-term
capital loss if, at the time the loss was realized, gain on the
sale or exchange of the stock would be treated as
long-term capital gain. The holding period of the stock
does not include any period during which you are the
writer of the option.
Special year-end rule. The loss deferral rules for
straddles apply if all the following are true.
• The qualified covered call options are closed, or the
stock is disposed of at a loss during any tax year.
• Gain on disposition of the stock or gain on the options
is includible in gross income in a later tax year.
• The stock or options were held less than 30 days after
the closing of the options or the disposition of the
stock.
How To Report Gains and Losses (Form
6781)
As a general rule, report each position (whether or not it is
part of a straddle) on which you have unrecognized gain at
the end of the tax year and the amount of this unrecog-
nized gain in Part III of Form 6781. Use Part II of Form
6781 to figure your gains and losses on straddles. See the
Form 6781 instructions for how to report these gains and
losses.
Coordination of Loss Deferral Rules and
Wash Sale Rules
Rules similar to the wash sale rules apply to any disposi-
tion of a position or positions of a straddle. First apply
Rule 1, explained next, then apply Rule 2. However, Rule
1 applies only if stocks or securities make up a position
that is part of the straddle. If a position in the straddle
does not include stock or securities, use Rule 2.
Rule 1. You cannot deduct a loss on the disposition of
shares of stock or securities that make up the positions of
a straddle if, within a period beginning 30 days before the
date of that disposition and ending 30 days after that date,
you acquired substantially identical stock or securities. In-
stead, the loss will be carried over to the following tax
year, subject to any further application of Rule 1 in that
year. This rule will also apply if you entered into a contract
or option to acquire the stock or securities within the time
period described above. See Loss carryover, later, for
more information about how to treat the loss in the follow-
ing tax year.
Dealers. If you are a dealer in stock or securities, this
loss treatment will not apply to any losses you sustained in
the ordinary course of your business.
Example. You are not a dealer in stock or securities.
On December 2, 2024, you bought stock in XX Corpora-
tion (XX stock) and an offsetting put option. On December
9, 2024, there was $20 of unrealized gain in the put option
and you sold the XX stock at a $20 loss. By December 16,
2024, the value of the put option had declined, eliminating
all unrealized gain in the position. On December 16, you
bought a second XX stock position that is substantially
identical to the XX stock you sold on December 9. At the
end of the year, there is no unrecognized gain in the put
option or in the XX stock. Under these circumstances, the
$20 loss will be disallowed for 2024 under Rule 1 be-
cause, within a period beginning 30 days before Decem-
ber 9 and ending 30 days after that date, you bought stock
substantially identical to the XX stock you sold.
Rule 2. You cannot deduct a loss on the disposition of
less than all the positions of a straddle (your loss position)
to the extent that any unrecognized gain at the close of the
tax year in one or more of the following positions is more
than any loss disallowed under Rule 1.
• Successor positions.
• Offsetting positions to the loss position.
• Offsetting positions to any successor position.
Successor position. A successor position is a posi-
tion that is or was at any time offsetting to a second posi-
tion if both the following conditions are met.
• The second position was offsetting to the loss position
that was sold.
• The successor position is entered into during a period
beginning 30 days before and ending 30 days after the
sale of the loss position.
Example 1. On November 4, 2024, you entered into
offsetting long and short positions in non-section 1256
contracts. On November 11, 2024, you disposed of the
long position at a $10 loss. On November 18, 2024, you
entered into a new long position (successor position) that
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 93
is offsetting to the retained short position, but not substan-
tially identical to the long position disposed of on Novem-
ber 11. You held both positions through year end, at which
time there was $10 of unrecognized gain in the successor
long position and no unrecognized gain in the offsetting
short position. Under these circumstances, the entire $10
loss will be disallowed for 2024 because there is $10 of
unrecognized gain in the successor long position.
Example 2. The facts are the same as in Example 1,
except that at year end you have $4 of unrecognized gain
in the successor long position and $6 of unrecognized
gain in the offsetting short position. Under these circum-
stances, the entire $10 loss will be disallowed for 2024 be-
cause there is a total of $10 of unrecognized gain in the
successor long position and offsetting short position.
Example 3. The facts are the same as in Example 1,
except that at year end you have $8 of unrecognized gain
in the successor long position and $8 of unrecognized
loss in the offsetting short position. Under these circum-
stances, $8 of the total $10 realized loss will be disallowed
for 2024 because there is $8 of unrecognized gain in the
successor long position.
Loss carryover. If you have a disallowed loss that resul-
ted from applying Rule 1 and Rule 2, you must carry it
over to the next tax year and apply Rule 1 and Rule 2 to
that carryover loss. For example, a loss disallowed in 2023
under Rule 1 will not be allowed in 2024, unless the sub-
stantially identical stock or securities (which caused the
loss to be disallowed in 2023) were disposed of during
2024. In addition, the carryover loss will not be allowed in
2024 if Rule 1 or Rule 2 disallows it.
Example. The facts are the same as in the example
under Rule 1. On December 29, 2025, you sell the second
XX stock at a $20 loss and there is $40 of unrecognized
gain in the put option. Under these circumstances, you
cannot deduct in 2025 either the $20 loss disallowed in
2024 or the $20 loss you incurred for the December 29,
2025, sale of XX stock. Rule 1 does not apply because
the substantially identical XX stock was sold during the
year and no substantially identical stock or securities were
bought within the 61-day period. However, Rule 2 does
apply because there is $40 of unrecognized gain in the put
option, an offsetting position to the loss positions.
Capital loss carryover. If the sale of a loss position
would have resulted in a capital loss, you treat the carry-
over loss as a capital loss on the date it is allowed, even if
you would treat the gain or loss on any successor posi-
tions as ordinary income or loss. Likewise, if the sale of a
loss position (in the case of section 1256 contracts) would
have resulted in a 60% long-term capital loss and a 40%
short-term capital loss, you treat the carryover loss under
the 60/40 rule, even if you would treat any gain or loss on
any successor positions as 100% long-term or short-term
capital gain or loss.
Exceptions. The rules for coordinating straddle losses
and wash sales do not apply to the following loss situa-
tions.
• Loss on the sale of one or more positions in a hedging
transaction. (Hedging transactions are described un-
der Section 1256 Contracts Marked to Market, earlier.)
• Loss on the sale of a loss position in a mixed straddle
account. (See Mixed straddle account (Election C),
later.)
• Loss on the sale of a position that is part of a straddle
consisting only of section 1256 contracts.
Holding Period and Loss Treatment Rules
The holding period of a position in a straddle generally be-
gins no earlier than the date on which the straddle ends
(the date you no longer hold an offsetting position). This
rule does not apply to any position you held more than 1
year before you established the straddle. But see Excep-
tions, later.
Example. On March 10, 2023, you acquired gold. On
January 10, 2024, you entered into an offsetting short gold
forward contract (nonregulated futures contract). On April
3, 2024, you disposed of the short gold forward contract at
no gain or loss. On April 12, 2024, you sold the gold at a
gain. Because the gold had been held for 1 year or less
before the offsetting short position was entered into, the
holding period for the gold begins on April 3, 2024, the
date the straddle ended. Gain recognized on the sale of
the gold will be treated as short-term capital gain.
Loss treatment. Treat the loss on the sale of one or
more positions (the loss position) of a straddle as a
long-term capital loss if both the following are true.
• You held (directly or indirectly) one or more offsetting
positions to the loss position on the date you entered
into the loss position.
• You would have treated all gain or loss on one or more
of the straddle positions as long-term capital gain or
loss if you had sold these positions on the day you en-
tered into the loss position.
Mixed straddles. Special rules apply to a loss position
that is part of a mixed straddle and that is a non-section
1256 position. A mixed straddle is a straddle:
• That is not part of a larger straddle,
• In which all positions are held as capital assets,
• In which at least one (but not all) of the positions is a
section 1256 contract, and
• For which the mixed straddle election (Election A, dis-
cussed later) has not been made.
Treat the loss as 60% long-term capital loss and 40%
short-term capital loss if all the following conditions apply.
• Gain or loss from the sale of one or more of the strad-
dle positions that are section 1256 contracts would be
considered gain or loss from the sale or exchange of a
capital asset.
94 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
• The sale of no position in the straddle, other than a
section 1256 contract, would result in a long-term cap-
ital gain or loss.
• You have not made a straddle-by-straddle identifica-
tion election (Election B) or mixed straddle account
election (Election C), both discussed later.
Example. On March 4, 2024, you entered into a long
gold forward contract. On July 15, 2024, you entered into
an offsetting short gold regulated futures contract. You did
not make an election to offset gains and losses from posi-
tions in a mixed straddle. On August 5, 2024, you dis-
posed of the long forward contract at a loss. Because the
gold forward contract was part of a mixed straddle and the
disposition of this non-section 1256 position would not re-
sult in long-term capital loss, the loss recognized on the
termination of the gold forward contract will be treated as
a 60% long-term and 40% short-term capital loss.
Exceptions. The special holding period and loss treat-
ment for straddle positions do not apply to positions that:
• Constitute part of a hedging transaction;
• Are included in a straddle consisting only of section
1256 contracts; or
• Are included in a mixed straddle account (Election C),
discussed later.
Mixed Straddle Elections
If you disposed of a position in a mixed straddle and make
one of the elections described in the following discus-
sions, report your gain or loss as indicated in those dis-
cussions. If you do not make any of the elections, report
your gain or loss in Part II of Form 6781. If you disposed of
the section 1256 component of the straddle, enter the rec-
ognized loss (line 10, column (h)) or your gain (line 12,
column (f)) in Part I of Form 6781, on line 1. Do not include
it on line 11 or 13 (Part II).
Mixed straddle election (Election A). You can elect out
of the mark-to-market rule, discussed under Section 1256
Contracts Marked to Market, earlier, for all section 1256
contracts that are part of a mixed straddle. Instead, the
gain and loss rules for straddles will apply to these con-
tracts. However, if you make this election for an option on
a section 1256 contract, the gain or loss treatment dis-
cussed earlier under Options will apply, subject to the gain
and loss rules for straddles.
You can make this election if:
• At least one (but not all) of the positions is a section
1256 contract, and
• Each position forming part of the straddle is clearly
identified as being part of that straddle on the day the
first section 1256 contract forming part of the straddle
is acquired.
If you make this election, it will apply for all later years
as well. It cannot be revoked without the consent of the
IRS. If you made this election, check box A of Form 6781.
Do not report the section 1256 component in Part I.
Other elections. You can avoid the 60% long-term capi-
tal loss treatment required for a non-section 1256 loss po-
sition that is part of a mixed straddle, described earlier, if
you choose either of the two following elections to offset
gains and losses for these positions.
• Election B. Make a separate identification of the posi-
tions of each mixed straddle for which you are electing
this treatment (the straddle-by-straddle identification
method).
• Election C. Establish a mixed straddle account for a
class of activities for which gains and losses will be
recognized and offset on a periodic basis.
These two elections are alternatives to the mixed straddle
election. You can choose only one of the three elections.
Use Form 6781 to indicate your election choice by check-
ing box A, B, or C, whichever applies.
Straddle-by-straddle identification election (Elec-
tion B). Under this election, you must clearly identify
each position that is part of the identified mixed straddle
by the earlier of:
• The close of the day the identified mixed straddle is
established, or
• The time the position is disposed of.
If you dispose of a position in the mixed straddle before
the end of the day on which the straddle is established,
this identification must be made by the time you dispose
of the position. You are presumed to have properly identi-
fied a mixed straddle if independent verification is used.
If you make this election, any positions you held on the
day before the election are deemed sold for their fair mar-
ket value at the close of the last business day before the
day of the election. For elections made on or before Au-
gust 18, 2014, take this gain or loss into account when fig-
uring taxable income for the year in which the election was
made. For elections made after August 18, 2014, take this
gain or loss into account in the year you would have repor-
ted the gain or loss if the identified mixed straddle had not
been established. In addition, when the gain or loss that
accrued prior to the time the identified mixed straddle was
established is taken into account, it will have the same
character it would have had if the identified mixed straddle
had not been established. See Regulations section
1.1092(b)-6 for details.
The basic tax treatment of gain or loss under this elec-
tion depends on which side of the straddle produced the
total net gain or loss. If the net gain or loss from the strad-
dle is due to the section 1256 contracts, gain or loss is
treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. Enter the net gain or loss in
Part I of Form 6781 and identify the election by checking
box B.
If the net gain or loss is due to the non-section 1256 po-
sitions, gain or loss is short-term capital gain or loss. See
the Form 6781 instructions for how to report the net gain
or loss.
For the specific application of the rules of this election,
see Regulations sections 1.1092(b)-3T and 1.1092(b)-6.
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 95
Example 1. Straddle established on or before August
18, 2014. On April 2, 2014, you entered into a non-section
1256 position and an offsetting section 1256 contract. You
also made a valid election to treat this straddle as an iden-
tified mixed straddle. On April 9, 2014, you disposed of
the non-section 1256 position at a $600 loss and the sec-
tion 1256 contract at an $800 gain. Under these circum-
stances, the $600 loss on the non-section 1256 position
was offset against the $800 gain on the section 1256 con-
tract. The net gain of $200 from the straddle was treated
as 60% long-term capital gain and 40% short-term capital
gain because it was due to the section 1256 contract.
Example 2. Straddle established after August 18,
2014. On December 1, 2023, you entered into a non-sec-
tion 1256 position for $100. At the end of the day on Janu-
ary 24, 2024, the position had a value of $500. On Janu-
ary 25, 2024, you entered into an offsetting section 1256
position. You elected to treat the straddle as an identified
mixed straddle.
On February 12, 2024, you closed out the section 1256
contract at a $500 loss and disposed of the non-section
1256 position for $975. Prior to entering into the identified
mixed straddle, you had a $400 unrealized short-term
capital gain on the non-section 1256 position. When you
disposed of the non-section 1256 position on February
12, 2024, you recognized the $400 gain. This gain is fig-
ured as though you had disposed of the position on the
day prior to establishing the identified mixed straddle.
You also realized a gain of $475 ($975 proceeds – $500
value before entering into the identified mixed straddle).
This gain is offset by the $500 loss on the section 1256
contract for a net loss of $25. This net loss is recognized
and treated as 60% long-term capital loss and 40%
short-term capital loss attributable to the section 1256
contract.
Mixed straddle account (Election C). You may elect
to establish one or more accounts for determining gains
and losses from all positions in a mixed straddle. You must
establish a separate mixed straddle account for each sep-
arate designated class of activities.
Generally, you must determine gain or loss for each po-
sition in a mixed straddle account as of the close of each
business day of the tax year. You offset the net section
1256 contracts against the net non-section 1256 positions
to determine the “daily account net gain or loss.”
If the daily account amount is due to non-section 1256
positions, the amount is treated as short-term capital gain
or loss. If the daily account amount is due to section 1256
contracts, the amount is treated as 60% long-term and
40% short-term capital gain or loss.
On the last business day of the tax year, you determine
the “annual account net gain or loss” for each account by
netting the daily account amounts for that account for the
tax year. The “total annual account net gain or loss” is de-
termined by netting the annual account amounts for all
mixed straddle accounts that you had established.
The net amounts keep their long-term or short-term
classification. However, no more than 50% of the total an-
nual account net gain for the tax year can be treated as
long-term capital gain. Any remaining gain is treated as
short-term capital gain. Also, no more than 40% of the to-
tal annual account net loss can be treated as short-term
capital loss. Any remaining loss is treated as long-term
capital loss.
The election to establish one or more mixed straddle
accounts for each tax year must be made by the due date
(without extensions) of your income tax return for the im-
mediately preceding tax year. If you begin trading in a new
class of activities during a tax year, you must make the
election for the new class of activities by the later of either:
• The due date of your return for the immediately pre-
ceding tax year (without extensions), or
• 60 days after you entered into the first mixed straddle
in the new class of activities.
You make the election on Form 6781 by checking box
C. Attach Form 6781 to your income tax return for the im-
mediately preceding tax year, or file it within 60 days, if
that applies. Report the annual account net gain or loss
from a mixed straddle account in Part II of Form 6781. In
addition, you must attach a statement to Form 6781 spe-
cifically designating the class of activities for which a
mixed straddle account is established.
For the specific application of the rules of this election,
see Regulations section 1.1092(b)-4T.
Interest expense and carrying charges relating to
mixed straddle account positions. You cannot deduct
interest and carrying charges that are allocable to any po-
sitions held in a mixed straddle account. Treat these
charges as an adjustment to the annual account net gain
or loss and allocate them proportionately between the net
short-term and the net long-term capital gains or losses.
To find the amount of interest and carrying charges that
is not deductible and that must be added to the annual ac-
count net gain or loss, apply the rules described earlier to
the positions held in the mixed straddle account. See In-
terest expense and carrying charges on straddles in chap-
ter 3.
For special rules on the deferral of gain related to a
straddle where the gain is invested in a Qualified Opportu-
nity Fund, see section 1400Z-2 for more details.
Sales of Stock to Employee Stock
Ownership Plans (ESOPs) or Certain
Cooperatives
If you sold qualified securities held for at least 3 years to
an ESOP or eligible worker-owned cooperative, you may
be able to elect to postpone all or part of the gain on the
sale if you bought qualified replacement property (certain
securities) within the period that began 3 months before
the sale and ended 12 months after the sale. If you make
the election, you must recognize gain on the sale only to
the extent the proceeds from the sale exceed the cost of
the qualified replacement property.
You must reduce the basis of the replacement property
by any postponed gain. If you dispose of any replacement
property, you may have to recognize all of the postponed
gain.
96 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Generally, to qualify for the election, the ESOP or coop-
erative must own at least 30% of the outstanding stock of
the corporation that issued the qualified securities. Also,
the qualified replacement property must have been issued
by a domestic operating corporation.
How to make the election. You must make the election
no later than the due date (including extensions) for filing
your tax return for the year in which you sold the stock. If
your original return was filed on time, you may make the
election on an amended return filed no later than 6 months
after the due date of your return (excluding extensions).
Enter “Filed pursuant to section 301.9100-2” at the top of
the amended return and file it at the same address you
used for your original return.
How to report and postpone gain. Report the sale
in Part II of Form 8949 as you would if you were not mak-
ing the election. Then enter “R” in column (f). Enter the
amount of the postponed gain as a negative number in
column (g). Put it in parentheses to show it is negative.
Complete all remaining columns. If the actual postponed
gain is different from the amount you report, file an amen-
ded return.
Report your sales of stock to ESOPs or certain
cooperatives on Form 8949 with the correct box
checked for these transactions. See Form 8949
and the Instructions for Form 8949.
Also attach the following statements.
1. A “statement of election” that indicates you are mak-
ing an election under section 1042(a) of the Internal
Revenue Code and that includes the following infor-
mation.
a. A description of the securities sold, including the
type and number of shares, the date of the sale,
the amount realized on the sale, and the adjusted
basis of the securities.
b. The name of the ESOP or cooperative to which
the qualified securities were sold.
c. For a sale that was part of a single interrelated
transaction under a prearranged agreement be-
tween taxpayers involving other sales of qualified
securities, the names and identifying numbers of
the other taxpayers under the agreement and the
number of shares sold by the other taxpayers.
2. A notarized “statement of purchase” describing the
qualified replacement property, date of purchase, and
the cost of the property and declaring the property to
be qualified replacement property for the qualified
stock you sold. The statement must have been nota-
rized no later than 30 days after the purchase. If you
have not yet purchased the qualified replacement
property, you must attach the notarized “statement of
purchase” to your income tax return for the year fol-
lowing the election year (or the election will not be
valid).
3. A verified written statement of the domestic corpora-
tion whose employees are covered by the ESOPCAUTION
!
acquiring the securities, or of any authorized officer of
the cooperative, consenting to the taxes under sec-
tions 4978 and 4979A of the Internal Revenue Code
on certain dispositions, and prohibited allocations of
the stock purchased by the ESOP or cooperative.
More information. For details, see section 1042 of the
Internal Revenue Code and Regulations section
1.1042-1T.
Gains on Qualified Small Business
Stock
This section discusses two provisions of the law that may
apply to gain from the sale or trade of qualified small busi-
ness stock. You may qualify for a tax-free rollover of all or
part of the gain. You may be able to exclude gain from
your income.
Qualified small business stock. This is stock that
meets all the following tests.
1. It must be stock in a C corporation.
2. It must have been originally issued after August 10,
1993.
3. The corporation must have total gross assets of $50
million or less at all times after August 9, 1993, and
before it issued the stock. Its total gross assets imme-
diately after it issued the stock must also be $50 mil-
lion or less.
When figuring the corporation's total gross assets,
you must also count the assets of any predecessor of
the corporation. In addition, you must treat all corpora-
tions that are members of the same parent-subsidiary
controlled group as one corporation.
4. You must have acquired the stock at its original issue,
directly or through an underwriter, in exchange for
money or other property (not including stock), or as
pay for services provided to the corporation (other
than services performed as an underwriter of the
stock). In certain cases, your stock may also meet this
test if you acquired it from another person who met
this test, or through a conversion or trade of qualified
small business stock that you held.
5. The corporation must have met the active business
test, defined next, and must have been a C corpora-
tion during substantially all the time you held the
stock.
6. Within the period beginning 2 years before and end-
ing 2 years after the stock was issued, the corporation
cannot have bought more than a de minimis amount
of its stock from you or a related party.
7. Within the period beginning 1 year before and ending
1 year after the stock was issued, the corporation can-
not have bought more than a de minimis amount of its
stock from anyone, unless the total value of the stock
it bought is 5% or less of the total value of all its stock.
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 97
For more information about tests 6 and 7, see the regula-
tions under section 1202 of the Internal Revenue Code.
Active business test. A corporation meets this test for
any period of time if, during that period, both the following
are true.
• It was an eligible corporation, defined below.
• It used at least 80% (by value) of its assets in the ac-
tive conduct of at least one qualified trade or business,
defined below.
Exception for Specialized Small Business Invest-
ment Company (SSBIC). Any SSBIC is treated as meet-
ing the active business test. An SSBIC is an eligible cor-
poration licensed to operate under section 301(d) of the
Small Business Investment Act of 1958, as in effect on
May 13, 1993.
Eligible corporation. This is any U.S. corporation
other than:
• A Domestic International Sales Corporation (DISC) or
a former DISC;
• A corporation that has made, or whose subsidiary has
made, an election under section 936 of the Internal
Revenue Code;
• A regulated investment company;
• A REIT;
• A REMIC;
• Certain financial asset securitization investment trusts
(FASITs); or
• A cooperative.
Qualified trade or business. This is any trade or
business other than:
• One involving services performed in the fields of
health, law, engineering, architecture, accounting, ac-
tuarial science, performing arts, consulting, athletics,
financial services, or brokerage services;
• One whose principal asset is the reputation or skill of
one or more employees;
• Any banking, insurance, financing, leasing, investing,
or similar business;
• Any farming business (including the business of rais-
ing or harvesting trees);
• Any business involving the production or extraction of
products for which percentage depletion can be
claimed; or
• Any business of operating a hotel, motel, restaurant,
or similar business.
Rollover of Gain
You may qualify for a tax-free rollover of capital gain from
the sale of qualified small business stock held more than 6
months. This means that, if you buy certain replacement
stock and make the choice described in this section, you
postpone part or all of your gain.
You postpone the gain by adjusting the basis of the re-
placement stock as described in Basis of replacement
stock, later. This postpones your gain until the year you
dispose of the replacement stock.
You can make this choice if you meet all the following
tests.
• You buy replacement stock during the 60-day period
beginning on the date of the sale.
• The replacement stock is qualified small business
stock.
• The replacement stock continues to meet the active
business requirement for small business stock for at
least the first 6 months after you buy it.
Amount of gain recognized. If you make the choice de-
scribed in this section, you must recognize the capital gain
only up to the following amount.
• The amount realized on the sale, minus
• The cost of any qualified small business stock you
bought during the 60-day period beginning on the date
of sale (and did not previously take into account on an
earlier sale of qualified small business stock).
If this amount is less than the amount of your capital gain,
you can postpone the rest of that gain. If this amount
equals or is more than the amount of your capital gain, you
must recognize the full amount of your gain.
Basis of replacement stock. You must subtract the
amount of postponed gain from the basis of your replace-
ment stock.
Holding period of replacement stock. Your holding pe-
riod for the replacement stock includes your holding pe-
riod for the stock sold, except for the purpose of applying
the 6-month holding period requirement for choosing to
roll over the gain on its sale.
Pass-through entity. A pass-through entity (a partner-
ship, S corporation, or mutual fund or other regulated in-
vestment company) may also make the choice to post-
pone gain. The benefit of the postponed gain applies to
your share of the entity's postponed gain if you held an in-
terest in the entity for the entire period the entity held the
stock.
If a pass-through entity sold qualified small business
stock held for more than 6 months and you held an inter-
est in the entity for the entire period the entity held the
stock, you may also choose to postpone gain if you, rather
than the pass-through entity, buy the replacement stock
within the 60-day period.
How to report gain. Report the entire gain realized from
the sale in Part I or Part II of Form 8949. To make the elec-
tion to postpone gain, report the gain as you would if you
were not making the election. Enter “R” in column (f). En-
ter the amount of the postponed gain as a negative num-
ber in column (g). Put it in parentheses to show it is nega-
tive. Complete all remaining columns.
98 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Report these transactions on Form 8949 with the
correct box checked. See Form 8949 and the In-
structions for Form 8949.
You must make the choice to postpone gain no later
than the due date (including extensions) for filing your tax
return for the year in which you sold the stock. If your origi-
nal return was filed on time, you may make the choice on
an amended return filed no later than 6 months after the
due date of your return (excluding extensions). Enter
“Filed pursuant to section 301.9100-2” at the top of the
amended return and file it at the same address you used
for your original return.
Section 1202 Exclusion
You can generally exclude from your income up to 50% of
your gain from the sale or trade of qualified small business
stock held by you for more than 5 years. The exclusion
can be up to 75% for stock acquired after February 17,
2009, and no later than September 27, 2010, and up to
100% for stock acquired after September 27, 2010. The
exclusion can be up to 60% for certain empowerment
zone business stock for gain attributable to periods on or
before December 31, 2018. The 60% exclusion doesn't
apply to gain attributable to periods after December 31,
2018. See Empowerment zone business stock, later. The
eligible gain minus your section 1202 exclusion is a 28%
rate gain. See Capital Gain Tax Rates, later.
Specialized Small Business Investment Company
(SSBIC) stock. If the stock is SSBIC stock you bought as
replacement property for publicly traded securities you
sold at a gain before 2018, you must reduce the basis of
the stock by the amount of any postponed gain on that
earlier sale. But do not reduce your basis by that amount
when figuring your section 1202 exclusion.
Limit on eligible gain. The amount of your gain from
the stock of any one issuer that is eligible for the exclusion
in 2022 is limited to the greater of:
• Ten times your basis in all qualified stock of the issuer
you sold or exchanged during the year; or
• $10 million ($5 million for married individuals filing
separately), minus the amount of gain from the stock
of the same issuer you used to figure your exclusion in
earlier years.
How to report gain. Report the sale or exchange on
Form 8949, Part II, with the appropriate box checked, as
you would if you were not taking the exclusion. Then enter
“Q” in column (f) and enter the amount of the excluded
gain as a negative number in column (g). Put it in paren-
theses to show it is negative. Complete all remaining col-
umns. If you are completing line 18 of Schedule D (Form
1040), enter as a positive number the amount of the exclu-
sion on line 2 of the 28% Rate Gain Worksheet in the
Schedule D (Form 1040) instructions. But if you exclude
60% of the gain, enter 2/3 of the exclusion. If you exclude
75% of the gain, enter 1/3 of the exclusion. If you exclude
100% of the gain, do not enter an amount.CAUTION
!
Report these transactions on Form 8949 with the
correct box checked. See Form 8949 and the In-
structions for Form 8949.
More information. For information about additional re-
quirements that may apply, see section 1202 of the Inter-
nal Revenue Code.
Empowerment zone business stock. You can exclude
up to 60% of your gain if you meet all the following addi-
tional requirements.
1. You sell or trade stock in a corporation that qualifies
as an empowerment zone business during substan-
tially all of the time you held the stock.
2. You acquired the stock after December 21, 2000, and
before February 18, 2009.
3. The gain from the sale or exchange of the stock is at-
tributable to periods on or before December 31, 2018.
Condition 1 will still be met if the corporation ceased to
qualify after the 5-year period that begins on the date you
acquired the stock. However, the gain that qualifies for the
60% exclusion cannot be more than the gain you would
have had if you had sold the stock on the date the corpo-
ration ceased to qualify.
Note. If either the 75% or 100% exclusion applies,
then the 60% exclusion does not apply.
Exclusion of Gain From DC Zone
Assets
If you sold or exchanged a District of Columbia Enterprise
Zone (DC Zone) asset that you acquired after 1997 and
before 2012 and held for more than 5 years, you may be
able to exclude the amount of qualified capital gain that
you would otherwise include in income. The exclusion ap-
plies to an interest in, or property of, certain businesses
operating in the District of Columbia.
How to report. Report the sale or exchange on Form
8949, Part II, as you would if you were not taking the exclu-
sion. Enter “X” in column (f) and enter the amount of the
exclusion as a negative number in column (g). Put the
amount in parentheses to show it is negative. See the in-
structions for Form 8949, columns (f), (g), and (h). Com-
plete all remaining columns.
Rollover of Gain From Empowerment
Zone Assets
The election to roll over gain from the sale of empower-
ment zone assets doesn’t apply to sales in tax years be-
ginning after 2020. See section 1397B.CAUTION
!
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 99
Reporting Capital Gains and
Losses
If, in 2024, you disposed of any digital asset,
which you held as a capital asset, through a sale,
trade, exchange, payment, or other transfer,
check "Yes" and use Form 8949 to calculate your capital
gain or loss and report that gain or loss on Schedule D
(Form 1040). For more information on how to report Digital
Asset Transactions, see Form1040 Instructions.
Generally, report capital gains and losses on Form
8949. Complete Form 8949 before you complete line 1b,
2, 3, 8b, 9, or 10 of Schedule D (Form 1040).
Use Form 8949 to report:
• The sale or exchange of a capital asset not reported
on another form or schedule,
• Gains from involuntary conversions (other than from
casualty or theft) of capital assets not held for busi-
ness or profit,
• Nonbusiness bad debts, and
• Worthlessness of a security.
Use Schedule D (Form 1040) to report:
• Overall gain or loss from transactions reported on
Form 8949;
• Certain transactions you do not have to report on
Form 8949;
• Gain from Form 2439 or 6252 or Part I of Form 4797;
• Gain or loss from Form 4684, 6781, or 8824;
• Gain or loss from a partnership, S corporation, estate,
or trust;
• Capital gain distributions not reported directly on your
Form 1040; and
• Capital loss carryover from the previous year to the
current year.
On Form 8949, enter all sales and exchanges of capital
assets, including stocks, bonds, etc., and real estate (if
not reported on Form 4684, 4797, 6252, 6781, 8824, or
line 1a or 8a of Schedule D (Form 1040). Include these
transactions even if you did not receive a Form 1099-B or
Form 1099-S, Proceeds From Real Estate Transactions,
for the transaction. Report short-term gains or losses in
Part I. Report long-term gains or losses in Part II. Use as
many Forms 8949 as you need.
Exceptions to filing Form 8949 and Schedule D (Form
1040). There are certain situations where you may not
have to file Form 8949 and/or Schedule D (Form 1040).
Exception 1. You do not have to file Form 8949 or
Schedule D (Form 1040) if you have no capital losses and
your only capital gains are capital gain distributions from
box 2a of Form(s) 1099-DIV. If any Form 1099-DIV you
receive has an amount in box 2b (unrecaptured sectionTIP
1250 gain), box 2c (section 1202 gain), or box 2d (collecti-
bles (28%) gain), you do not qualify for this exception.
If you qualify for this exception, report your capital gain
distributions directly on Form 1040, line 7, and check the
box on that line. Also use the Qualified Dividends and
Capital Gain Tax Worksheet in the Instructions for Forms
1040 to figure your tax.
Exception 2. You must file Schedule D (Form 1040),
but generally do not have to file Form 8949, if Exception 1
above does not apply and your only capital gains and los-
ses are:
• Capital gain distributions;
• A capital loss carryover;
• A gain from Form 2439 or 6252 or Part I of Form 4797;
• A gain or loss from Form 4684, 6781, or 8824;
• A gain or loss from a partnership, S corporation, es-
tate, or trust; or
• Gains and losses from transactions for which you re-
ceived a Form 1099-B that shows basis was reported
to the IRS, for which the Ordinary box in box 2 is not
checked, and for which you do not need to make any
adjustments in column (g) of Form 8949 or enter any
codes in column (f) of Form 8949.
Installment sales. You cannot use the installment
method to report a gain from the sale of stock or securities
traded on an established securities market. You must re-
port the entire gain in the year of sale (the year in which
the trade date occurs).
At-risk rules. Special at-risk rules apply to most in-
come-producing activities. These rules limit the amount of
loss you can deduct to the amount you risk losing in the
activity. The at-risk rules also apply to a loss from the sale
or trade of an asset used in an activity to which the at-risk
rules apply. For more information, see Pub. 925. Use Form
6198, At-Risk Limitations, to figure the amount of loss you
can deduct.
Passive activity gains and losses. If you have gains or
losses from a passive activity, you may also have to report
them on Form 8582. In some cases, the loss may be limi-
ted under the passive activity rules. Refer to Form 8582
and its instructions for more information about reporting
capital gains and losses from a passive activity.
Form 1099-B transactions. If you sold property, such as
stocks, bonds, or certain commodities, through a broker,
you should receive Form 1099-B from the broker. Use the
Form 1099-B to complete Form 8949 and/or Schedule D
(Form 1040).
If you received a Form 1099-B for a transaction, you
usually report the transaction on Form 8949. Report the
proceeds shown in box 1d of Form 1099-B in column (d)
of either Part I or Part II of Form 8949, whichever applies.
Include in column (g) any selling expenses or option
premiums not reflected in box 1d or box 1e of Form
1099-B. If you include a selling expense in column (g), en-
ter “E” in column (f).
100 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Enter the basis shown in box 1e in column (e). If the ba-
sis shown on Form 1099-B is not correct, see the table
How To Complete Form 8949, Columns (f) and (g), in the
Instructions for Form 8949 for the adjustment you must
make. If no basis is shown on Form 1099-B, enter the cor-
rect basis of the property in column (e). See the instruc-
tions for Form 1099-B, Form 8949, and Schedule D (Form
1040) for more information.
Example 1. You sold 100 shares of Fund HIJ for
$2,500. You paid a $75 commission to the broker for han-
dling the sale. Your Form 1099-B shows that the net sales
proceeds, $2,425 ($2,500 − $75), were reported to the
IRS. Report $2,425 in column (d) of Form 8949. Complete
columns (a), (b), (c), and (e).
Example 2. You sold 200 shares of Fund KLM for
$10,000. You paid a $100 commission at the time of the
sale. The broker reported the gross proceeds to the IRS
on Form 1099-B, so on Form 8949, you enter “E” in col-
umn (f), $10,000 in column (d), and $100 as a negative
adjustment in column (g). Complete all remaining col-
umns.
Section 1256 contracts and straddles. Use Form
6781 to report gains and losses from section 1256 con-
tracts and straddles before entering these amounts on
Schedule D (Form 1040). Include a copy of Form 6781
with your income tax return.
Market discount bonds. Report the sale or trade of a
market discount bond on Part I or Part II of Form 8949,
whichever is appropriate. See the table How To Complete
Form 8949, Columns (f) and (g), in the Instructions for
Form 8949 to help you figure the amounts to report for a
sale or trade of a market discount bond. Use the Work-
sheet for Accrued Market Discount Adjustment in Column
(g) in those instructions to figure the adjusted accrued
market discount. Also report the amount of accrued mar-
ket discount as interest income on Schedule B (Form
1040), line 1, and identify it as “Accrued Market Discount.”
See the Instructions for Form 8949 for more information.
Form 1099-CAP transactions. If a corporation in which
you own stock has had a change in control or a substantial
change in capital structure, you should receive Form
1099-CAP, Changes in Corporate Control and Capital
Structure, from the corporation. Use the Form 1099-CAP
to fill in Form 8949. If your computations show that you
would have a loss because of the change, do not enter
any amounts on Form 8949 or Schedule D (Form 1040) as
a result of this transaction.
Report the aggregate amount received shown in box 2
of Form 1099-CAP as the sales price in column (d) of ei-
ther Part I or Part II of Form 8949, whichever applies.
Form 1099-S transactions. If you sold or traded reporta-
ble real estate, you should generally receive from the real
estate reporting person a Form 1099-S showing the gross
proceeds.
“Reportable real estate” is defined as any present or fu-
ture ownership interest in any of the following.
• Improved or unimproved land, including air space.
• Inherently permanent structures, including any resi-
dential, commercial, or industrial building.
• A condominium unit and its accessory fixtures and
common elements, including land.
• Stock in a cooperative housing corporation (as de-
fined in section 216 of the Internal Revenue Code).
• Any noncontingent interest in standing timber.
A “real estate reporting person” could include the buy-
er's attorney, your attorney, the title or escrow company, a
mortgage lender, your broker, the buyer's broker, or the
person acquiring the biggest interest in the property.
Your Form 1099-S will show the gross proceeds from
the sale or exchange in box 2. See the Instructions for
Form 8949 and the Instructions for Schedule D (Form
1040) for how to report these transactions and include
them in Part I or Part II of Form 8949, as appropriate. How-
ever, report like-kind exchanges on Form 8824 instead.
It is unlawful for any real estate reporting person to sep-
arately charge you for complying with the requirement to
file Form 1099-S.
Nominees. If you receive gross proceeds as a nominee
(that is, the gross proceeds are in your name but actually
belong to someone else), see the Instructions for Form
8949 for how to report these amounts on Form 8949.
File Form 1099-B or Form 1099-S with the IRS. If
you received gross proceeds as a nominee in 2024, you
must file a Form 1099-B or Form 1099-S for those pro-
ceeds with the IRS. Send the Form 1099-B or Form
1099-S with a Form 1096 to your Internal Revenue Serv-
ice Center by February 28, 2025 (March 31, 2025, if you
file Form 1099-B or Form 1099-S electronically). Give the
actual owner of the proceeds Copy B of the Form 1099-B
or Form 1099-S by February 17, 2025. On Form 1099-B,
you should be listed as the “Payer.” The actual owner
should be listed as the “Recipient.” On Form 1099-S, you
should be listed as the “Filer.” The actual owner should be
listed as the “Transferor.” You do not have to file a Form
1099-B or Form 1099-S to show proceeds for your
spouse. For more information about the reporting require-
ments and the penalties for failure to file (or furnish) cer-
tain information returns, see the General Instructions for
Certain Information Returns.
Sale of property bought at various times. If you sell a
block of stock or other property that you bought at various
times, report the short-term gain or loss from the sale on
one row in Part I of Form 8949 and the long-term gain or
loss on one row in Part II of Form 8949. Enter “Various” in
column (b) for the “Date acquired.”
Sale expenses. On Form 8949, include in column (g)
any expense of sale, such as broker's fees, commissions,
state and local transfer taxes, and option premiums, un-
less you reported the net sales price in column (d). If you
include an expense of sale in column (g), enter “E” in col-
umn (f).
Short-term gains and losses. Capital gain or loss on
the sale or trade of investment property held 1 year or less
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 101
is a short-term capital gain or loss. You report it in Part I of
Form 8949.
You combine your share of short-term capital gain or
loss from partnerships, S corporations, and fiduciaries,
and any short-term capital loss carryover, with your other
short-term capital gains and losses to figure your net
short-term capital gain or loss on line 7 of Schedule D
(Form 1040).
Long-term gains and losses. A capital gain or loss on
the sale or trade of investment property held more than 1
year is a long-term capital gain or loss. You report it in Part
II of Form 8949.
You also report the following in Part II of Schedule D
(Form 1040).
• Undistributed long-term capital gains from a mutual
fund (or other regulated investment company) or REIT.
• Your share of long-term capital gains or losses from
partnerships, S corporations, and fiduciaries.
• All capital gain distributions from mutual funds and
REITs not reported directly on Form 1040, line 7.
• Long-term capital loss carryovers.
The result after combining these items with your other
long-term capital gains and losses is your net long-term
capital gain or loss (line 15 of Schedule D (Form 1040)).
Total net gain or loss. To figure your total net gain or
loss, combine your net short-term capital gain or loss
(Schedule D (Form 1040), line 7) with your net long-term
capital gain or loss (Schedule D (Form 1040), line 15). En-
ter the result on Schedule D (Form 1040), Part III, line 16.
If your losses are more than your gains, see Capital Los-
ses, next. If both lines 15 and 16 of your Schedule D
(Form 1040) are gains and your taxable income on your
Form 1040 is greater than zero, see Capital Gain Tax
Rates, later.
Capital Losses
If your capital losses are more than your capital gains, you
can claim a capital loss deduction. Report the deduction
on Form 1040, line 7, enclosed in parentheses.
Limit on deduction. Your allowable capital loss deduc-
tion, figured on Schedule D (Form 1040), is the lesser of:
• $3,000 ($1,500 if you are married and file a separate
return), or
• Your total net loss as shown on line 16 of Schedule D
(Form 1040).
You can use your total net loss to reduce your income dol-
lar for dollar, up to the $3,000 limit.
Capital loss carryover. If you have a total net loss on
line 16 of Schedule D (Form 1040) that is more than the
yearly limit on capital loss deductions, you can carry over
the unused part to the next year and treat it as if you had
incurred it in that next year. If part of the loss is still un-
used, you can carry it over to later years until it is com-
pletely used up.
Worksheet 4-1. Capital Loss Carryover Worksheet Keep for Your Records
Use this worksheet to figure your capital loss carryovers from 2024 to 2025 if Schedule D (Form 1040), line 21, is a loss
and (a) that loss is a smaller loss than the loss on Schedule D (Form 1040), line 16, or (b) if the amount on your 2024
Form 1040, line 15, would be less than zero if you could enter a negative amount on that line. Otherwise, you do not have
any carryovers.
1. Enter the amount from Form 1040, line 15. If the amount would have been a loss and if you could enter a
negative number on that line, enclose the amount in parentheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.
2. Enter the loss from Schedule D (Form 1040), line 21, as a positive amount . . . . . . . . . . . . . . . . . . . . . . . . 2.
3. Combine lines 1 and 2. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Enter the smaller of line 2 or line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
If line 7 of Schedule D is a loss, go to line 5; otherwise, enter -0- on line 5 and go to line 9.
5. Enter the loss from Schedule D (Form 1040), line 7, as a positive amount . . . . . . . . . . . . . . . . . . . . . . . . . 5.
6. Enter any gain from Schedule D (Form 1040), line 15. If a loss, enter -0- . . . . . . . . . . . 6.
7. Add lines 4 and 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
8. Short-term capital loss carryover to 2025. Subtract line 7 from line 5. If zero or less, enter -0- . . . . . . 8.
If line 15 of Schedule D is a loss, go to line 9; otherwise, skip lines 9 through 13.
9. Enter the loss from Schedule D (Form 1040), line 15, as a positive amount . . . . . . . . . . . . . . . . . . . . . . . . 9.
10. Enter any gain from Schedule D (Form 1040), line 7. If a loss, enter -0- . . . . . . . . . . . . 10.
11. Subtract line 5 from line 4. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.
12. Add lines 10 and 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.
13. Long-term capital loss carryover to 2025. Subtract line 12 from line 9. If zero or less, enter -0- . . . . . 13.
102 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
When you figure the amount of any capital loss carry-
over to the next year, you must take the current year's al-
lowable deduction into account, whether or not you
claimed it and whether or not you filed a return for the cur-
rent year.
When you carry over a loss, it remains long term or
short term. A long-term capital loss you carry over to the
next tax year will reduce that year's long-term capital gains
before it reduces that year's short-term capital gains.
Figuring your carryover. The amount of your capital
loss carryover is the amount of your total net loss that is
more than the lesser of:
1. Your allowable capital loss deduction for the year, or
2. Your taxable income increased by your allowable cap-
ital loss deduction for the year.
If your deductions are more than your gross income for
the tax year, use your negative taxable income in figuring
the amount in (2) above.
Complete Worksheet 4-1 to determine the part of your
capital loss that you can carry over.
Example. Bob and Shelly sold securities in 2024. The
sales resulted in a capital loss of $7,000. They had no
other capital transactions. Their taxable income was
$26,000. On their joint 2024 return, they can deduct
$3,000. The unused part of the loss, $4,000 ($7,000 −
$3,000), can be carried over to 2025.
If their capital loss had been $2,000, their capital loss
deduction would have been $2,000. They would have no
carryover.
Use short-term losses first. When you figure your
capital loss carryover, use your short-term capital losses
first, even if you incurred them after a long-term capital
loss. If you have not reached the limit on the capital loss
deduction after using the short-term capital losses, use
the long-term capital losses until you reach the limit.
Decedent's capital loss. A capital loss sustained by a
decedent during the decedent’s last tax year (or carried
over to that year from an earlier year) can be deducted
only on the final income tax return filed for the decedent.
The capital loss limits discussed earlier still apply in this
situation. The decedent's estate cannot deduct any of the
loss or carry it over to following years.
Joint and separate returns. If you and your spouse
once filed separate returns and are now filing a joint re-
turn, combine your separate capital loss carryovers. How-
ever, if you and your spouse once filed a joint return and
are now filing separate returns, any capital loss carryover
from the joint return can be deducted only on the return of
the spouse who actually had the loss.
Capital Gain Tax Rates
The tax rates that apply to a net capital gain are generally
lower than the tax rates that apply to other income. These
lower rates are called the maximum capital gain rates.
The term “net capital gain” means the amount by which
your net long-term capital gain for the year is more than
your net short-term capital loss.
For 2023, the maximum capital gain rates are 0%, 15%,
20%, 25%, and 28%. See Table 4-4 for details.
If you figure your tax using the maximum capital
gain rate and the regular tax computation results
in a lower tax, the regular tax computation applies.
Example. All of your net capital gain is from selling
collectibles, so the capital gain rate would be 28%. If you
are otherwise subject to a rate lower than 28%, the 28%
rate does not apply.TIP
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 103
Investment interest deducted. If you claim a deduction
for investment interest, you may have to reduce the
amount of your net capital gain that is eligible for the capi-
tal gain tax rates. Reduce it by the amount of the net capi-
tal gain you choose to include in investment income when
figuring the limit on your investment interest deduction.
This is done on the Schedule D Tax Worksheet or the
Qualified Dividends and Capital Gain Tax Worksheet. For
more information about the limit on investment interest,
see Interest Expenses in chapter 3.
28% rate gain. This gain includes gain or loss from the
sale of collectibles and the eligible gain from the sale of
qualified small business stock minus the section 1202 ex-
clusion.
Collectibles gain or loss. This is gain or loss from the
sale or trade of a work of art, rug, antique, metal (such as
gold, silver, and platinum bullion), gem, stamp, coin, or al-
coholic beverage held more than 1 year.
Collectibles gain includes gain from the sale of an inter-
est in a partnership, S corporation, or trust due to unreal-
ized appreciation of collectibles.
Gain on qualified small business stock. If you real-
ized a gain from qualified small business stock that you
held more than 5 years, you can generally exclude some
or all of your gain under section 1202. The eligible gain mi-
nus your section 1202 exclusion is a 28% rate gain. See
Gains on Qualified Small Business Stock, earlier in this
chapter.
Unrecaptured section 1250 gain. Generally, this is any
part of your capital gain from selling section 1250 property
(real property) that is due to depreciation (but not more
than your net section 1231 gain), reduced by any net loss
in the 28% group. Use the Unrecaptured Section 1250
Gain Worksheet in the Schedule D (Form 1040) instruc-
tions to figure your unrecaptured section 1250 gain. For
more information about section 1250 property and section
1231 gain, see chapter 3 of Pub. 544.
Tax computation using maximum capital gain rates.
Use the Qualified Dividends and Capital Gain Tax Work-
sheet or the Schedule D Tax Worksheet (whichever ap-
plies) to figure your tax if you have qualified dividends or
net capital gain. You have net capital gain if Schedule D
(Form 1040), lines 15 and 16, are both gains.
Schedule D Tax Worksheet. Use the Schedule D
Tax Worksheet in the Schedule D (Form 1040) instructions
to figure your tax if:
• You have to file Schedule D (Form 1040); and
• Schedule D (Form 1040), line 18 (28% rate gain) or
line 19 (unrecaptured section 1250 gain), is more than
zero.
Table 4-4. What Is Your Maximum Capital Gain Rate?
IF your net capital gain is from... AND...
THEN your maximum
capital gain rate is...
collectibles gain 28%
eligible gain on qualified small business stock minus
the section 1202 exclusion 28%
unrecaptured section 1250 gain 25%
other gain 1 and the regular tax rate that would apply is
37%
your taxable income is...
$583,751 or more if married filing jointly or surviving
spouse;
$551,351 or more if head of household;
$291,851 or more if married filing separately;
$518,901 or more if single; or
$15,451 or more if estate or trust… 20%
other gain 1 and the regular tax rate that would apply is
22%, 24%, 32%, or 35%
your taxable income is...
$94,051 – $583,750 if married filing jointly or surviving
spouse;
$63,001 – $551,350 if head of household;
$47,026 – $291,850 if married filing separately;
$47,026 – $518,900 if single; or
$3,151 – $15,450 if estate or trust… 15%
other gain 1 and the regular tax rate that would apply is
10% or 12%
your taxable income is...
$0 – $94,050 if married filing jointly or surviving
spouse;
$0 – $63,000 if head of household;
$0 – $47,025 if married filing separately;
$0 – $47,025 if single; or
$0 – $3,150 if estate or trust… 0%
1 “Other gain” means any gain that is not collectibles gain, gain on small business stock, or unrecaptured section 1250 gain.
104 Chapter 4 Sales and Trades of Investment Property Publication 550 (2024)
Qualified Dividends and Capital Gain Tax Work-
sheet. If you do not have to use the Schedule D Tax
Worksheet (as explained above) and any of the following
apply, use the Qualified Dividends and Capital Gain Tax
Worksheet in the Instructions for Form 1040 to figure your
tax.
• You received qualified dividends. (See Qualified Divi-
dends in chapter 1.)
• You do not have to file Schedule D (Form 1040) and
you received capital gain distributions. (See Excep-
tions to filing Form 8949 and Schedule D (Form
1040 ), earlier.)
• Schedule D (Form 1040), lines 15 and 16, are both
more than zero.
Alternative minimum tax. These capital gain rates are
also used in figuring alternative minimum tax.
Special Rules for Traders in
Securities or Commodities
Special rules apply if you are a trader in securities or com-
modities in the business of buying and selling securities or
commodities for your own account. To be engaged in busi-
ness as a trader in securities or commodities, you must
meet all the following conditions.
• You must seek to profit from daily market movements
in the prices of securities or commodities and not from
dividends, interest, or capital appreciation.
• Your activity must be substantial.
• You must carry on the activity with continuity and regu-
larity.
The following facts and circumstances should be con-
sidered in determining if your activity is a securities or
commodities trading business.
• Typical holding periods for securities or commodities
bought and sold.
• The frequency and dollar amount of your trades during
the year.
• The extent to which you pursue the activity to produce
income for a livelihood.
• The amount of time you devote to the activity.
If your trading activities do not meet the above defini-
tion of a business, you are considered an investor, and not
a trader. It does not matter whether you call yourself a
trader or a “day trader.”
How To Report
Transactions from trading activities result in capital gains
and losses (unless a section 475(f) election has been
made) and must be reported on Form 8949 and Sched-
ule D (Form 1040), as appropriate. Losses from these
transactions are subject to the limit on capital losses
explained earlier in this chapter.
Mark-to-market election made. If you made the section
475(f) mark-to-market election, you should report all gains
and losses from trading as ordinary gains and losses in
Part II of Form 4797, instead of as capital gains and losses
on Form 8949 and Schedule D (Form 1040). In that case,
securities or commodities (depending upon which election
was made) held at the end of the year in your business as
a trader are marked to market by treating them as if they
were sold for fair market value on the last business day of
the year and gain or loss is recognized. But do not mark to
market any securities or commodities you held for invest-
ment. Report sales from those securities or commodities
on Form 8949 and Schedule D (Form 1040), as appropri-
ate, not Form 4797. See the Instructions for Form 8949
and the Instructions for Schedule D (Form 1040).
Note. You may be a trader in some securities or com-
modities and have some securities or commodities that
are not held in connection with your activities as a trader,
such as those held for investment. The mark-to-market
special rules discussed here do not apply to the securities
or commodities held for investment. You must keep de-
tailed records to distinguish those securities or commodi-
ties. The securities or commodities held for investment
must be identified as such in your records on the day you
acquired them (for example, by holding them in a separate
brokerage account) specifically identified under section
475.
Expenses. Interest expense and other investment ex-
penses that an investor would deduct on Schedule A
(Form 1040) are deducted by a trader on Schedule C
(Form 1040), Profit or Loss From Business, if the expen-
ses are from the trading business. Commissions and other
costs of acquiring or disposing of securities or commodi-
ties (depending upon which election was made) are not
deductible but must be used to figure gain or loss. The
limit on investment interest expense, which applies to in-
vestors, does not apply to interest paid or incurred in a
trading business.
Self-employment tax. Gains and losses from selling se-
curities or commodities as a trader are not subject to
self-employment tax. This is true whether the election is
made or not. For an exception that applies to section 1256
contracts, see Self-Employment Income, earlier.
How To Make the
Mark-to-Market Election
To make the mark-to-market election for 2025, you must
have filed an election statement no later than the due date
for your 2024 return (without regard to extensions). The
statement must be attached to that return or with a prop-
erly filed request for extension of time to file that 2024 re-
turn (Form 4868, Application for Automatic Extension of
Time To File U.S. Individual Income Tax Return). The
statement must have included the following information.
• That you are making an election under section 475(f)
(1) or (f)(2) of the Internal Revenue Code.
• The first tax year for which the election is effective.
Publication 550 (2024) Chapter 4 Sales and Trades of Investment Property 105
• The trade or business for which you are making the
election.
If you’re a new taxpayer that wasn’t required to file a tax
return for the prior year, you may make the election by
placing the above statement in your books and records no
later than 2 months and 15 days after the first day of the
year for which you intend the election to become effective.
You must attach a copy of the statement to your tax return
for that year.
If your method of accounting for 2024 is inconsistent
with the mark-to-market election, you must change your
method of accounting for securities under Revenue Proce-
dure 2024-23 (or its successor), available at IRS.gov/irb/
2024-23_IRB#REV-PROC-2024-23. Revenue Procedure
2024-23 requires you to file Form 3115, Application for
Change in Accounting Method. Follow its instructions. En-
ter “64” on line 1a of the Form 3115.
If you made a mark-to-market election within 5 tax
years of revoking a prior election, you can resume the
mark-to-market election of the new election. To restart the
mark-to-market election, you must file an election state-
ment no later than the due date for your 2024 return (with-
out regard to extensions) under Revenue Procedure
99-17, sections 5.03 and 5.04, and follow the non-auto-
matic change procedures to request a change in method
of accounting as described in Rev. Proc. 2015-13.
Once you make the election, it will apply to 2024 and all
later tax years, unless you get permission from the IRS to
revoke it. The effect of making the election is described
under Mark-to-market election made, earlier.
If you want to revoke a prior mark-to-market election
within the 5 tax years ending with the year of change for
the election, you must follow the non-automatic change
procedures in Revenue Procedure 2015-13 and Revenue
Procedure 2024-23, section 24.02(9).
For more information on this election, see Revenue
Procedure 99-17, on page 52 of Internal Revenue Bulletin
1999-7 at IRS.gov/pub/irs-irbs/irb99-07.pdf.
For information about method of accounting using the
non-automatic change, see Revenue Procedure 2015-13
in Internal Revenue Bulletin 2015-5, available at
IRS.gov/irb/2015-05_IRB#RP-2015-13 and Revenue Pro-
cedure 2024-23 in Internal Revenue Bulletin 2024-23,
available at IRS.gov/irb/2024-23_IRB#REV-
PROC-2024-23.
5.
How To Get Tax Help
If you have questions about a tax issue; need help prepar-
ing your tax return; or want to download free publications,
forms, or instructions, go to IRS.gov to find resources that
can help you right away.
Preparing and filing your tax return. After receiving all
your wage and earnings statements (Forms W-2, W-2G,
1099-R, 1099-MISC, 1099-NEC, etc.); unemployment
compensation statements (by mail or in a digital format) or
other government payment statements (Form 1099-G);
and interest, dividend, and retirement statements from
banks and investment firms (Forms 1099), you have sev-
eral options to choose from to prepare and file your tax re-
turn. You can prepare the tax return yourself, see if you
qualify for free tax preparation, or hire a tax professional to
prepare your return.
Free options for tax preparation. Your options for pre-
paring and filing your return online or in your local com-
munity, if you qualify, include the following.
• Direct File. Direct File is a permanent option to file in-
dividual federal tax returns online—for free—directly
and securely with the IRS. Direct File is an option for
taxpayers in participating states who have relatively
simple tax returns reporting certain types of income
and claiming certain credits and deductions. While Di-
rect File doesn't prepare state returns, if you live in a
participating state, Direct File guides you to a
state-supported tool you can use to prepare and file
your state tax return for free. Go to IRS.gov/DirectFile
for more information, program updates, and frequently
asked questions.
• Free File. This program lets you prepare and file your
federal individual income tax return for free using soft-
ware or Free File Fillable Forms. However, state tax
preparation may not be available through Free File. Go
to IRS.gov/FreeFile to see if you qualify for free online
federal tax preparation, e-filing, and direct deposit or
payment options.
• VITA. The Volunteer Income Tax Assistance (VITA)
program offers free tax help to people with
low-to-moderate incomes, persons with disabilities,
and limited-English-speaking taxpayers who need
help preparing their own tax returns. Go to IRS.gov/
VITA, download the free IRS2Go app, or call
800-906-9887 for information on free tax return prepa-
ration.
• TCE. The Tax Counseling for the Elderly (TCE) pro-
gram offers free tax help for all taxpayers, particularly
those who are 60 years of age and older. TCE volun-
teers specialize in answering questions about pen-
sions and retirement-related issues unique to seniors.
106 Chapter 5 How To Get Tax Help Publication 550 (2024)
Go to IRS.gov/TCE or download the free IRS2Go app
for information on free tax return preparation.
• MilTax. Members of the U.S. Armed Forces and quali-
fied veterans may use MilTax, a free tax service of-
fered by the Department of Defense through Military
OneSource. For more information, go to
MilitaryOneSource (MilitaryOneSource.mil/MilTax).
Also, the IRS offers Free Fillable Forms, which can
be completed online and then e-filed regardless of in-
come.
Using online tools to help prepare your return. Go to
IRS.gov/Tools for the following.
• IRS.gov/DirectFile offers an Eligibility Checker to help
you determine if Direct File is the right choice for your
tax filing needs.
• The Earned Income Tax Credit Assistant (IRS.gov/
EITCAssistant) determines if you’re eligible for the
earned income credit (EIC).
• The Online EIN Application (IRS.gov/EIN) helps you
get an employer identification number (EIN) at no
cost.
• The Tax Withholding Estimator (IRS.gov/W4App)
makes it easier for you to estimate the federal income
tax you want your employer to withhold from your pay-
check. This is tax withholding. See how your withhold-
ing affects your refund, take-home pay, or tax due.
• The First-Time Homebuyer Credit Account Look-up
(IRS.gov/HomeBuyer) tool provides information on
your repayments and account balance.
• The Sales Tax Deduction Calculator (IRS.gov/
SalesTax) figures the amount you can claim if you
itemize deductions on Schedule A (Form 1040).
Getting answers to your tax questions. On
IRS.gov, you can get up-to-date information on
current events and changes in tax law.
• IRS.gov/Help: A variety of tools to help you get an-
swers to some of the most common tax questions.
• IRS.gov/ITA: The Interactive Tax Assistant, a tool that
will ask you questions and, based on your input, pro-
vide answers on a number of tax topics.
• IRS.gov/Forms: Find forms, instructions, and publica-
tions. You will find details on the most recent tax
changes and interactive links to help you find answers
to your questions.
• You may also be able to access tax information in your
e-filing software.
Need someone to prepare your tax return? There are
various types of tax return preparers, including enrolled
agents, certified public accountants (CPAs), accountants,
and many others who don’t have professional credentials.
If you choose to have someone prepare your tax return,
choose that preparer wisely. A paid tax preparer is:
• Primarily responsible for the overall substantive accu-
racy of your return,
• Required to sign the return, and
• Required to include their preparer tax identification
number (PTIN).
Although the tax preparer always signs the return,
you're ultimately responsible for providing all the
information required for the preparer to accurately
prepare your return and for the accuracy of every item re-
ported on the return. Anyone paid to prepare tax returns
for others should have a thorough understanding of tax
matters. For more information on how to choose a tax pre-
parer, go to Tips for Choosing a Tax Preparer on IRS.gov.
Employers can register to use Business Services On-
line. The Social Security Administration (SSA) offers on-
line service at SSA.gov/employer for fast, free, and secure
W-2 filing options to CPAs, accountants, enrolled agents,
and individuals who process Form W-2, Wage and Tax
Statement; and Form W-2c, Corrected Wage and Tax
Statement.
Business tax account. If you are a sole proprietor, a
partnership, or an S corporation, you can view your tax in-
formation on record with the IRS and do more with a busi-
ness tax account. Go to IRS.gov/Business-Tax-Account for
more information.
IRS social media. Go to IRS.gov/SocialMedia to see the
various social media tools the IRS uses to share the latest
information on tax changes, scam alerts, initiatives, prod-
ucts, and services. At the IRS, privacy and security are our
highest priority. We use these tools to share public infor-
mation with you. Don’t post your social security number
(SSN) or other confidential information on social media
sites. Always protect your identity when using any social
networking site.
The following IRS YouTube channels provide short, in-
formative videos on various tax-related topics in English,
Spanish, and ASL.
• Youtube.com/irsvideos.
• Youtube.com/irsvideosmultilingua.
• Youtube.com/irsvideosASL.
Online tax information in other languages. You can
find information on IRS.gov/MyLanguage if English isn’t
your native language.
Free Over-the-Phone Interpreter (OPI) Service. The
IRS is committed to serving taxpayers with limited-English
proficiency (LEP) by offering OPI services. The OPI Serv-
ice is a federally funded program and is available at Tax-
payer Assistance Centers (TACs), most IRS offices, and
every VITA/TCE tax return site. The OPI Service is acces-
sible in more than 350 languages.
Accessibility Helpline available for taxpayers with
disabilities. Taxpayers who need information about ac-
cessibility services can call 833-690-0598. The Accessi-
bility Helpline can answer questions related to current and
future accessibility products and services available in al-
ternative media formats (for example, braille, large print,CAUTION
!
Publication 550 (2024) Chapter 5 How To Get Tax Help 107
audio, etc.). The Accessibility Helpline does not have ac-
cess to your IRS account. For help with tax law, refunds, or
account-related issues, go to IRS.gov/LetUsHelp.
Alternative media preference. Form 9000, Alternative
Media Preference, or Form 9000(SP) allows you to elect to
receive certain types of written correspondence in the fol-
lowing formats.
• Standard Print.
• Large Print.
• Braille.
• Audio (MP3).
• Plain Text File (TXT).
• Braille Ready File (BRF).
Disasters. Go to IRS.gov/DisasterRelief to review the
available disaster tax relief.
Getting tax forms and publications. Go to IRS.gov/
Forms to view, download, or print all the forms, instruc-
tions, and publications you may need. Or, you can go to
IRS.gov/OrderForms to place an order.
Mobile-friendly forms. You'll need an IRS Online Ac-
count (OLA) to complete mobile-friendly forms that require
signatures. You'll have the option to submit your form(s)
online or download a copy for mailing. You'll need scans of
your documents to support your submission. Go to
IRS.gov/MobileFriendlyForms for more information.
Getting tax publications and instructions in eBook
format. Download and view most tax publications and in-
structions (including the Instructions for Form 1040) on
mobile devices as eBooks at IRS.gov/eBooks.
IRS eBooks have been tested using Apple's iBooks for
iPad. Our eBooks haven’t been tested on other dedicated
eBook readers, and eBook functionality may not operate
as intended.
Access your online account (individual taxpayers
only). Go to IRS.gov/Account to securely access infor-
mation about your federal tax account.
• View the amount you owe and a breakdown by tax
year.
• See payment plan details or apply for a new payment
plan.
• Make a payment or view 5 years of payment history
and any pending or scheduled payments.
• Access your tax records, including key data from your
most recent tax return, and transcripts.
• View digital copies of select notices from the IRS.
• Approve or reject authorization requests from tax pro-
fessionals.
• View your address on file or manage your communica-
tion preferences.
Get a transcript of your return. With an online account,
you can access a variety of information to help you during
the filing season. You can get a transcript, review your
most recently filed tax return, and get your adjusted gross
income. Create or access your online account at IRS.gov/
Account.
Tax Pro Account. This tool lets your tax professional
submit an authorization request to access your individual
taxpayer IRS OLA. For more information, go to IRS.gov/
TaxProAccount.
Using direct deposit. The safest and easiest way to re-
ceive a tax refund is to e-file and choose direct deposit,
which securely and electronically transfers your refund di-
rectly into your financial account. Direct deposit also
avoids the possibility that your check could be lost, stolen,
destroyed, or returned undeliverable to the IRS. Eight in
10 taxpayers use direct deposit to receive their refunds. If
you don’t have a bank account, go to IRS.gov/
DirectDeposit for more information on where to find a bank
or credit union that can open an account online.
Reporting and resolving your tax-related identity
theft issues.
• Tax-related identity theft happens when someone
steals your personal information to commit tax fraud.
Your taxes can be affected if your SSN is used to file a
fraudulent return or to claim a refund or credit.
• The IRS doesn’t initiate contact with taxpayers by
email, text messages (including shortened links), tele-
phone calls, or social media channels to request or
verify personal or financial information. This includes
requests for personal identification numbers (PINs),
passwords, or similar information for credit cards,
banks, or other financial accounts.
• Go to IRS.gov/IdentityTheft, the IRS Identity Theft
Central webpage, for information on identity theft and
data security protection for taxpayers, tax professio-
nals, and businesses. If your SSN has been lost or
stolen or you suspect you’re a victim of tax-related
identity theft, you can learn what steps you should
take.
• Get an Identity Protection PIN (IP PIN). IP PINs are
six-digit numbers assigned to taxpayers to help pre-
vent the misuse of their SSNs on fraudulent federal in-
come tax returns. When you have an IP PIN, it pre-
vents someone else from filing a tax return with your
SSN. To learn more, go to IRS.gov/IPPIN.
Ways to check on the status of your refund.
• Go to IRS.gov/Refunds.
• Download the official IRS2Go app to your mobile de-
vice to check your refund status.
• Call the automated refund hotline at 800-829-1954.
The IRS can’t issue refunds before mid-February
for returns that claimed the EIC or the additional
child tax credit (ACTC). This applies to the entire
refund, not just the portion associated with these credits.CAUTION
!
108 Chapter 5 How To Get Tax Help Publication 550 (2024)
Making a tax payment. Payments of U.S. tax must be
remitted to the IRS in U.S. dollars. Digital assets are not
accepted. Go to IRS.gov/Payments for information on how
to make a payment using any of the following options.
• IRS Direct Pay: Pay your individual tax bill or estimated
tax payment directly from your checking or savings ac-
count at no cost to you.
• Debit Card, Credit Card, or Digital Wallet: Choose an
approved payment processor to pay online or by
phone.
• Electronic Funds Withdrawal: Schedule a payment
when filing your federal taxes using tax return prepara-
tion software or through a tax professional.
• Electronic Federal Tax Payment System: This is the
best option for businesses. Enrollment is required.
• Check or Money Order: Mail your payment to the ad-
dress listed on the notice or instructions.
• Cash: You may be able to pay your taxes with cash at
a participating retail store.
• Same-Day Wire: You may be able to do same-day
wire from your financial institution. Contact your finan-
cial institution for availability, cost, and time frames.
Note. The IRS uses the latest encryption technology to
ensure that the electronic payments you make online, by
phone, or from a mobile device using the IRS2Go app are
safe and secure. Paying electronically is quick, easy, and
faster than mailing in a check or money order.
What if I can’t pay now? Go to IRS.gov/Payments for
more information about your options.
• Apply for an online payment agreement (IRS.gov/
OPA) to meet your tax obligation in monthly install-
ments if you can’t pay your taxes in full today. Once
you complete the online process, you will receive im-
mediate notification of whether your agreement has
been approved.
• Use the Offer in Compromise Pre-Qualifier to see if
you can settle your tax debt for less than the full
amount you owe. For more information on the Offer in
Compromise program, go to IRS.gov/OIC.
Filing an amended return. Go to IRS.gov/Form1040X
for information and updates.
Checking the status of your amended return. Go to
IRS.gov/WMAR to track the status of Form 1040-X amen-
ded returns.
It can take up to 3 weeks from the date you filed
your amended return for it to show up in our sys-
tem, and processing it can take up to 16 weeks.
Understanding an IRS notice or letter you’ve re-
ceived. Go to IRS.gov/Notices to find additional informa-
tion about responding to an IRS notice or letter.
IRS Document Upload Tool. You may be able use the
Document Upload Tool to respond digitally to eligible IRSCAUTION
!
notices and letters by securely uploading required docu-
ments online through IRS.gov. For more information, go to
IRS.gov/DUT.
Schedule LEP. You can use Schedule LEP (Form 1040),
Request for Change in Language Preference, to state a
preference to receive notices, letters, or other written com-
munications from the IRS in an alternative language. You
may not immediately receive written communications in
the requested language. The IRS’s commitment to LEP
taxpayers is part of a multi-year timeline that began pro-
viding translations in 2023. You will continue to receive
communications, including notices and letters, in English
until they are translated to your preferred language.
Contacting your local TAC. Keep in mind, many ques-
tions can be answered on IRS.gov without visiting a TAC.
Go to IRS.gov/LetUsHelp for the topics people ask about
most. If you still need help, TACs provide tax help when a
tax issue can’t be handled online or by phone. All TACs
now provide service by appointment, so you’ll know in ad-
vance that you can get the service you need without long
wait times. Before you visit, go to IRS.gov/TACLocator to
find the nearest TAC and to check hours, available serv-
ices, and appointment options. Or, on the IRS2Go app,
under the Stay Connected tab, choose the Contact Us op-
tion and click on “Local Offices.”
—————————————————————
Below is a message to you from the Taxpayer Advocate
Service, an independent organization established by Con-
gress.
The Taxpayer Advocate
Service (TAS) Is Here To Help
You
What Is the Taxpayer Advocate Service? The Tax-
payer Advocate Service (TAS) is an independent organi-
zation within the Internal Revenue Service (IRS). TAS
helps taxpayers resolve problems with the IRS, makes ad-
ministrative and legislative recommendations to prevent or
correct the problems, and protects taxpayer rights. We
work to ensure that every taxpayer is treated fairly and that
you know and understand your rights under the Taxpayer
Bill of Rights. We are Your Voice at the IRS.
How Can TAS Help Me? TAS can help you resolve prob-
lems that you haven’t been able to resolve with the IRS on
your own. Always try to resolve your problem with the IRS
first, but if you can’t, then come to TAS. Our services are
free.
• TAS helps all taxpayers (and their representatives), in-
cluding individuals, businesses, and exempt organiza-
tions. You may be eligible for TAS help if your IRS
problem is causing financial difficulty, if you’ve tried
and been unable to resolve your issue with the IRS, or
if you believe an IRS system, process, or procedure
just isn't working as it should.
Publication 550 (2024) Chapter 5 How To Get Tax Help 109
• To get help any time with general tax topics, visit
www.TaxpayerAdvocate.IRS.gov. The site can help
you with common tax issues and situations, such as
what to do if you make a mistake on your return or if
you get a notice from the IRS.
• TAS works to resolve large-scale (systemic) problems
that affect many taxpayers. You can report systemic is-
sues at www.IRS.gov/SAMS. (Be sure not to include
any personal identifiable information.)
How Do I Contact TAS? TAS has offices in every state,
the District of Columbia, and Puerto Rico. To find your lo-
cal advocate’s number:
• Go to www.TaxpayerAdvocate.IRS.gov/Contact-Us,
• Check your local directory, or
• Call TAS toll free at 877-777-4778.
What Are My Rights as a Taxpayer? The Taxpayer Bill
of Rights describes ten basic rights that all taxpayers have
when dealing with the IRS. Go to
www.TaxpayerAdvocate.IRS.gov/Taxpayer-Rights for
more information about the rights, what they mean to you,
and how they apply to specific situations you may encoun-
ter with the IRS. TAS strives to protect taxpayer rights and
ensure the IRS is administering the tax law in a fair and
equitable way.
110 Chapter 5 How To Get Tax Help Publication 550 (2024)
Glossary
Accrual method: An accounting
method under which you report your in-
come when you earn it, whether or not
you have received it. You generally de-
duct your expenses when you incur a
liability for them, rather than when you
pay them.
At-risk rules: Rules that limit the
amount of loss you may deduct to the
amount you risk losing in the activity.
Basis: Basis is the amount of your in-
vestment in property for tax purposes.
The basis of property you buy is usu-
ally the cost. Basis is used to figure
gain or loss on the sale or disposition
of investment property.
Below-market loan: A demand loan
(defined later) on which interest is pay-
able at a rate below the applicable fed-
eral rate, or a term loan where the
amount loaned is more than the
present value of all payments due un-
der the loan.
Call: An option that entitles the pur-
chaser to buy, at any time before a
specified future date, property such as
a stated number of shares of stock at a
specified price.
Cash method: An accounting method
under which you report your income in
the year in which you actually or con-
structively receive it. You generally de-
duct your expenses in the year you pay
them.
Commodities trader: A person who
is actively engaged in trading section
1256 contracts and is registered with a
domestic board of trade designated as
a contract market by the Commodities
Futures Trading Commission.
Commodity future: A contract made
on a commodity exchange, calling for
the sale or purchase of a fixed amount
of a commodity at a future date for a
fixed price.
Covered security: Covered securities
are certain securities subject to added
reporting by your broker on any Form
1099-B you may receive. See the
Instructions for Form 1099-B for more
details.
Conversion transaction: Any trans-
action that you entered into after April
30, 1993, that meets both of these
tests.
1. Substantially all of your expected
return from the transaction is due
to the time value of your net invest-
ment.
2. The transaction is one of the fol-
lowing.
a. A straddle, including any set of
offsetting positions on stock.
b. Any transaction in which you
acquire property (whether or
not actively traded) at substan-
tially the same time that you
contract to sell the same prop-
erty or substantially identical
property at a price set in the
contract.
c. Any other transaction that is
marketed or sold as producing
capital gains from a transaction
described in (1).
Demand loan: A loan payable in full at
any time upon demand by the lender.
Dividend: A distribution of money or
other property made by a corporation
to its shareholders out of its earnings
and profits.
Equity option: Any option:
• To buy or sell stock, or
• That is valued directly or indirectly
by reference to any stock or nar-
row-based security index.
Fair market value: The price at which
property would change hands between
a willing buyer and a willing seller, both
having reasonable knowledge of the
relevant facts.
Forgone interest: The amount of in-
terest that would be payable for any pe-
riod if interest accrued at the applicable
federal rate and was payable annually
on December 31, minus any interest
payable on the loan for that period.
Forward contract: A contract to de-
liver a substantially fixed amount of
property (including cash) for a substan-
tially fixed price.
Futures contract: An exchange-tra-
ded contract to buy or sell a specified
commodity or financial instrument at a
specified price at a specified future
date. See also Commodity future.
Gift loan: Any below-market loan
where the forgone interest is in the na-
ture of a gift.
Interest: Compensation for the use or
forbearance of money.
Investment interest: The interest you
paid or accrued on money you bor-
rowed that is allocable to property held
for investment.
Limited partner: A partner whose
participation in partnership activities is
restricted, and whose personal liability
for partnership debts is limited to the
amount of money or other property that
they contributed or may have to con-
tribute.
Listed option: Any option (other than
a right to acquire stock from the issuer)
that is traded on (or subject to the rules
of) a qualified board or exchange.
Mark-to-market rule: The treatment
of each section 1256 contract (defined
later) held by a taxpayer at the close of
the year as if it were sold for its fair
market value on the last business day
of the year.
Market discount: The stated redemp-
tion price of a bond at maturity minus
your basis in the bond immediately af-
ter you acquire it. Market discount ari-
ses when the value of a debt obligation
decreases after its issue date.
Market discount bond: Any bond
having market discount except:
• Short-term obligations with fixed
maturity dates of up to 1 year from
the date of issue,
• Tax-exempt obligations that you
bought before May 1, 1993,
• U.S. savings bonds, and
• Certain installment obligations.
Mutual fund: A mutual fund is a regu-
lated investment company generally
created by “pooling” funds of investors
to allow them to take advantage of di-
versity of investments and professional
management.
Nominee: A person who receives, in
their name, income that actually be-
longs to someone else.
Noncovered security: Noncovered
securities are securities that are not
subject to added reporting by your
broker on any Form 1099-B you may
receive. See the Instructions for Form
1099-B for more details.
Nonequity option: Any listed option
that is not an equity option, such as
debt options, commodity futures op-
tions, currency options, and
broad-based stock index options.
Options dealer: Any person regis-
tered with an appropriate national se-
curities exchange as a market maker or
specialist in listed options.
Original issue discount (OID): The
amount by which the stated redemp-
tion price at maturity of a debt instru-
ment is more than its issue price.
Passive activity: An activity involving
the conduct of a trade or business in
which you do not materially participate
and any rental activity. However, the
rental of real estate is not a passive ac-
tivity if both of the following are true.
• More than one-half of the personal
services you perform during the
year in all trades or businesses are
performed in real property trades
or businesses in which you materi-
ally participate.
• You perform more than 750 hours
of services during the year in real
property trades or businesses in
which you materially participate.
Portfolio income: Gross income from
interest, dividends, annuities, or royal-
ties that is not derived in the ordinary
course of a trade or business. It in-
cludes gains from the sale or trade of
property (other than an interest in a
passive activity) producing portfolio
income or held for investment.
Premium: The amount by which your
cost or other basis in a bond right after
you get it is more than the total of all
amounts payable on the bond after you
get it (other than payments of qualified
stated interest).
Private activity bond: A bond that is
part of a state or local government
bond issue of which:
1. More than 10% of the proceeds
are to be used for a private busi-
ness use, and
2. More than 10% of the payment of
the principal or interest is:
a. Secured by an interest in prop-
erty to be used for a private
business use (or payments for
the property), or
b. Derived from payments for
property (or borrowed money)
used for a private business
use.
Put: An option that entitles the pur-
chaser to sell, at any time before a
specified future date, property such as
a stated number of shares of stock at a
specified price.
Real estate mortgage investment
conduit (REMIC): An entity that is
formed for the purpose of holding a
fixed pool of mortgages secured by in-
terests in real property, with multiple
classes of interests held by investors.
These interests may be either regular
or residual.
Regulated futures contract: A sec-
tion 1256 contract that:
• Provides that amounts that must be
deposited to, or may be withdrawn
from, your margin account depend
on daily market conditions (a sys-
tem of marking to market); and
• Is traded on, or subject to the rules
of, a qualified board of exchange,
such as a domestic board of trade
designated as a contract market by
the Commodity Futures Trading
Commission or any board of trade
or exchange approved by the Sec-
retary of the Treasury.
Restricted stock: Stock you get for
services you perform that is nontrans-
ferable and is subject to a substantial
risk of forfeiture.
Section 1256 contract: Any:
• Regulated futures contract,
• Foreign currency contract as de-
fined in chapter 4 under Foreign
currency contract,
• Nonequity option,
• Dealer equity option, or
• Dealer securities futures contract.
A section 1256 contract does not in-
clude certain swaps as listed in Excep-
tions under Section 1256 Contracts
Marked to Market in chapter 4.
Securities futures contract: A con-
tract of sale for future delivery of a sin-
gle security or of a narrow-based se-
curity index.
Short sale: The sale of property that
you generally do not own. You borrow
the property to deliver to a buyer and,
at a later date, you buy substantially
identical property and deliver it to the
lender.
Straddle: Generally, a set of offsetting
positions on personal property. A strad-
dle may consist of a purchased option
to buy and a purchased option to sell
on the same number of shares of the
security, with the same exercise price
and period.
Stripped preferred stock: Stock that
meets the following tests:
1. There has been a separation in
ownership between the stock and
any dividend on the stock that has
not become payable.
2. The stock:
a. Is limited and preferred as to
dividends,
b. Does not participate in corpo-
rate growth to any significant
extent, and
c. Has a fixed redemption price.
Term loan: Any loan that is not a de-
mand loan.
Wash sale: A sale of stock or securi-
ties at a loss within 30 days before or
112 Publication 550 (2024)
after you buy or acquire in a fully taxa-
ble trade, or acquire a contract or op-
tion to buy, substantially identical stock
or securities.
To help us develop a more useful index, please let us know if you have ideas for index entries.
See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.Index
A
Abusive tax shelters (See Tax
shelters)
Accrual method 10, 24, 35, 46, 111
Accuracy-related penalty 6
Acquisition discount 23, 66
Adjusted basis 30, 61, 62, 65
Alaska Permanent Fund
dividends 33, 48
Amortization of bond premium 49
Annuities:
Borrowing on 50
Interest on 8
Life insurance proceeds used to
buy 16
Sale of 78
Single-premium 50
Trade for 54, 72
Applicable federal rate 9
Appreciated financial positions 55
Arbitrage bonds 17
Assistance (See Tax help)
At-risk rules 45, 100, 111
Automatic investment service 63,
Average basis 67
Double-category method 67
Illustrated 68
B
Backup withholding 4
Bad debts 78, 84
Bankrupt financial institutions:
Deposit in 78
Bargain purchases 60
Basis 59, 73, 111
Adjusted 30, 61, 62, 65
Average 67
Cost 59, 67
Inherited property 61
Investment property 59
Like-kind exchanges 70
Other than cost 59
REITs 62
REMIC, residual interest 36
Replacement stock 98
Shares acquired by
reinvestment 63
Stocks and bonds 30, 32, 49, 62
Bearer obligations 20, 78
Below-market loans 8, 111
Bonds:
Accrued interest on 26
Amortization of premium 49
Arbitrage 17
Basis 49, 62
Capital asset 76
Convertible 71
Coupon 24
Enterprise zone facility 18
Federally guaranteed 17
Identification 62
Market discount 18, 47, 65, 77,
101, 111
New York Liberty bonds 18
Par value 66
Premiums on 49, 65, 112
Private activity 17, 112
Redemption or retirement of 54
Sold between interest dates 16
State and local government 76
Stripped 16, 20, 66
Tax credit bonds 17
Tax-exempt 76
Traded flat 8
U.S. savings (See U.S. savings
bonds)
U.S. Treasury (See U.S. Treasury
bills, notes, and bonds)
Brokerage fees 101
C
Calls and puts 89, 111
Table 4-3 90
Capital assets 75
Capital gain distributions 30, 34,
48, 83
Capital gains and losses 75-84
Constructive ownership
transactions 80
Definition 75
Empowerment zone assets 99
Investment property 76
Long-term 86, 102
Losses, limit on 102
Passive activities 100
Qualified covered call options 93
Qualified small business stock 97
Reporting requirements 93, 98
Short-term 86, 101
Tax rates 103, 104
Table 4-4 104
Capital loss carryover 94, 102
Worksheet 4-1 102
Cash method 10, 23, 46, 111
Reporting options for savings bond
interest 10
Cash-settled options 56
Casualty losses 78
CDOs (Collateralized debt
obligations) 36
Certificates of deposit (CDs) 20
Children:
Alaska Permanent Fund
dividends 48
Capital gain distributions 48
Custodian account for 4
Gifts to 5
Investment income of 4, 48
Qualified dividends 48
Savings account with parent as
trustee 5
U.S. savings bond owner 11
Co-owners of U.S. savings
bonds 11
Collateralized debt obligations
(CDOs) 36
Collectibles 104
Commissions 63
Commodities traders 111
Commodity futures 79, 83, 111
Community property:
U.S. savings bonds 11
Constructive ownership
transactions 74, 80
Constructive receipt 23
Constructive sales 55
Contractors, insolvency of 85
Conversion transactions 78, 111
Convertible stocks and bonds 71
Cooperatives, sales of stock to 96
Corporate distributions 27
Capital gain 34, 48, 83
Constructive 31
Dividends (See Dividends)
Fractional shares 32
Liquidating 31
Nondividend 30, 34
Return of capital 30
Stock rights 31
Undistributed capital gains 30
Corporate reorganizations 71
Cost basis 59, 67
Coupon bonds 24
Covered security, defined 111
D
Day traders 105
Dealer equity options 57
Dealer securities futures
contracts 57
Debt instruments, retirement of 77
Decedents 61, 103
U.S. savings bond interest, reporting
of 12
Demand loans 111
Demutualization 72
Deposits, loss on 78
Discount on debt instruments 18
Certificates of deposit 20
Election to report all interest as
OID 23
Face-amount certificates 20
Gain or loss treatment 76
Inflation-indexed 20
114 Publication 550 (2024)
Market discount bonds (See Market
discount bonds)
Original issue discount
(See Original issue discount
(OID))
Short-term obligations 22, 76
Stripped bonds and coupons 20
Discounted debt instruments 18
Discounted tax-exempt
obligations 66
Dividends 27, 111
(See also Form 1099-DIV)
Alaska Permanent Fund 33, 48
Exempt-interest 7, 33, 83
Extraordinary 87
Holding period 28
Insurance policies 33
Money market funds 30
Nominees 27, 34
Ordinary 28
Patronage 33
Payments in lieu of 86
Qualified 28, 34, 48
Qualified foreign corporation 29
Received in January 28
Reinvestment of 83
Reinvestment plans 30, 63
Reporting requirements 27, 33-35
Restricted stock 33
Sale or trade vs. 54
Scrip 32
Sold stock 28
Stock 63, 83
Underreported 5
Veterans' insurance 7, 33
Divorce 60, 73
E
Education Savings Bond
Program 14
Interest excluded under 26
Employee stock options 2
Employee stock ownership plans
(ESOPs), sales of stock to 96
Employer identification numbers
(EINs) 38
Empowerment zone 99
Endowment contracts 50
Enterprise zone facility bonds 18
Equity option 57, 111
Estate income received by
beneficiary 4
Exchanges of mutual fund
shares 72
Exclusion of gain:
DC zone assets 99
Exempt-interest dividends on
mutual fund stock 83
F
Face-amount certificates 20
Fair market 111
Fair market value 59, 60, 66
Federal guarantee on bonds 17
Financial asset securitization
investment trusts (FASITs) 37
First-in first-out (FIFO) 67
Foreign currency transactions 56
Foreign income 2
Forgone interest 111
Form 1040 or 1040-SR,
Schedule B 24
Form 1040 or Form 1040-SR 33
Form 1040-X 55
Form 1040, Schedule D 100
Form 1041 39
Form 1065 38
Schedule K-1 38
Form 1066, Schedule Q 36, 51
Form 1096 27, 34, 101
Form 1099-B 52, 100, 101
Covered security, defined 111
Noncovered security, defined 112
Form 1099-CAP 101
Form 1099-DIV 4, 27, 33, 34
Form 1099-INT 4, 6, 14, 24, 27, 36,
Form 1099-MISC 28, 86
Form 1099-OID 7, 19, 25, 36, 37
Form 1099-S 101
Form 1120 38
Form 2439 30
Form 3115 11, 50, 106
Form 4684 78
Form 4797 70, 80, 81
Form 4952 48
Form 6198 100
Form 6781 58, 79, 93, 101
Form 8275 42
Form 8275-R 42
Form 8582 37
Form 8615 4
Form 8815 14, 26
Form 8824 70
Form 8832 38
Form 8886 41, 42
Form 8949:
Bad debts 85
Basis adjustment 30
Capital Gains 100
Capital Losses 100
Cooperative, sale to certain 96
Copyrights in musical works 76
Employee stock ownership plan,
sale to 96
Empowerment Zone Assets 99
Exempt-interest dividends 83
Form 1099-B 52, 100
Form 1099-CAP 101
Form 1099-S 101
Fractional shares 32
Gain, qualified small business
stock 99
How to fill in, generally 100
Long-term gains and losses 102
Mark-to-market election 105
Market discount bonds 77, 101
Musical compositions 76
Nominees 101
Nonbusiness bad debt 78
Nondividend distributions 34
Option 89
Property bought at various
times 101
Rollover, qualified small business
stock 98
Sale expenses 101
Short-term gains and losses 101
Software 62
Worthless securities 55
Form SS-4 38
Form W-8BEN 5
Form W-9 5
Forward contracts 111
Fractional shares 32, 82
Frozen deposits 8, 26
Futures contracts:
Definition 111
Regulated 56, 112
Securities 83, 87, 88
Futures, commodity 79, 83, 111
Wash sales 87
G
Gains on qualified small business
stock 97
Gains on sales or trades 66, 73, 74
(See also Capital gains and losses)
Gifts 5, 60, 82, 111
Gifts of shares 69
Glossary 111
Government obligations 23
H
Hedging transactions 57, 58, 79
Holding period:
Investment property 81
Replacement stock 98
Shares acquired by
reinvestment 83
Straddles 94
I
Income from sources outside
U.S. 2
Income tax treaties (Table 1-3s) 29
Indian tribal government 16
Individual retirement arrangements
(IRAs):
Interest income 7
Inflation-indexed debt
instruments 20, 21
Inherited property:
Basis 61
Holding period 82
Transfer by inheritance 54
Insolvency of contractors 85
Installment sales 100
Insurance:
Borrowing on 50
Dividends, interest on 8, 33
Interest option on 16
Life insurance companies,
demutualization 72
Life, paid to beneficiary 16
Prepaid premiums 8
Single-premium life 50
Trades 72
Veterans' dividends, interest on 7,
Interest expenses:
Allocation of 46
Investment interest 45, 111
Limit on 47
When to deduct 46
Margin accounts 46
Paid in advance 46
Straddles 51
Interest income 6
Annuity contracts 8
Bonds traded flat 8
Certificates of deposits 7
Condemnation awards 8
Deferred interest accounts 7
Dividends on deposit or share
accounts 7
Frozen deposits 8, 26
Gift for opening account 7
Individual retirement arrangements
(IRAs) 7
Installment sale payments 8
Insurance dividends 8
Money market funds 7
Nominee distributions 6, 11, 14, 27
Prepaid insurance premiums 8
Reporting 23-27
Reporting requirements 24
Seller-financed mortgage 26
Tax refunds 8
Tax-exempt 16, 24
Taxable 7, 8, 15, 17
U.S. savings bonds, person
responsible for tax (Table 1-2) 12
Underreported 5
Unstated 59
Usurious interest 8
VA insurance dividends 7
Investment clubs 37-39
Investment expenses 44
Allocated 36
At-risk rules 45
Interest 104
Limits on deductions 45
Nondeductible 50
nonpublicly offered mutual fund or
REMIC 51
Investment income 2
Children 4, 48
General information 3
Net income 47
Records to keep 4
Reporting of (Table 1-1) 6
Investment interest expenses:
Reporting requirements 51
Investment property 45
Basis 59
Definition 52
Gain or loss treatment 76
Gift, received as 60
Holding period 81
Liquidation, received in 65
Nontaxable trades, received in 60
Sales and trades 52
Services, received for 59
Spouse, received from 60
Taxable trades, received in 60
J
Joint accounts 5
Joint and separate returns 44, 103
L
Life insurance companies:
demutualization 72
Like-kind exchanges 70, 73
Basis of property received 70
Reporting requirements 70
Limited partners 111
Liquidating distributions 31, 65
Listed options 57, 111
Load charges 63
Loans
Below-market 8, 111
Gift and demand 9, 111
Guarantees 84
Term 9, 112
Local government obligations
(See State or local government
obligations)
Long-term capital gains and
losses 86, 102
Losses on sales or trades 74
(See also Capital gains and losses)
Amount calculation 66
Carryback election 57, 58
Mutual fund or REIT stock held 6
months or less 83
Passive activities 37, 38, 45, 48
Related parties 73
Section 1244 (small business)
stock 80
Small business investment
company stock 81
Wash sales 93
M
Mark-to-market election 105
Mark-to-market rule 57, 111
Market discount bonds 18, 21, 22,
47, 65, 77, 101, 111
Accrued market discount 22
Maximum rate of capital gains
(Table 4-4) 104
Mechanics' and suppliers' liens 85
Missing children, photographs of 2
Mixed straddles 86, 94
Money market funds 30
Interest income 7
Mortgages:
Revenue bonds 17
Secondary liability on home 85
Seller-financed 26
Municipal bonds 16, 24, 76
(See also State or local government
obligations)
Mutual fund, defined 112
Mutual funds 30, 45, 47, 51, 62, 67,
Individual retirement arrangements
(IRAs) 2
publicly offered 52
N
Net Investment Income Tax 4
New York Liberty bonds 18
NIIT 4
Nominee distributions:
Dividends 27, 34
Interest income 6, 11, 14, 27
Original issue discount 19
Nominee, defined 112
Nonbusiness bad debts 78, 84
Noncapital assets 75
Noncovered security, defined 112
Nondeductible investment
expenses 50
Nondividend distributions 30
Nonequity options 56, 112
Nonqualified preferred stock 71
Nonresident aliens:
Backup withholding 5
Nontaxable return of capital 30
Nontaxable stock rights 83
Nontaxable trades 70, 82
Notes:
Individuals, bought at discount 77
U.S. Treasury (See U.S. Treasury
bills, notes, and bonds)
O
Options 88
Calls and puts 89, 111
Cash settlement 56, 89
Dealer equity 57
Deep-in-the-money 92
Employee stock 2
Equity 57, 111
Gain or loss 88, 92
Holding period 83
Listed 57, 111
Nonequity 56, 112
Qualified covered call 92
116 Publication 550 (2024)
Reporting requirements 89
Section 1256 contracts 56, 89
Wash sales 87
Options dealer 112
Ordinary gains and losses 75, 78
Original issue discount:
Nominee distributions 19
Original issue discount (OID) 16,
18-21, 66, 112
Adjustment to 27
Reporting requirements 19
Rules 19
P
Pass-through entities:
Rollover of gain 98
Passive activities 112
Gains and losses 37, 38, 45, 48,
Patronage dividends 33
Penalties:
Accuracy-related 6, 42
Backup withholding 5
Civil fraud 44
Early withdrawal 7, 27
Failure to pay tax 44
Failure to supply SSN 4
Substantial understatement 42
Section 199A deduction 42
Valuation misstatement 43
Political parties:
Debts owed by 85
Portfolio income 112
Preferred stock:
Nonqualified 71
Redeemable at a premium 32
Stripped 35, 112
Premiums on bonds 49, 65, 112
Private activity bonds 17, 112
Public utility stock reinvestment 63
Publications (See Tax help)
Puts and calls 89, 112
Table 4-3 90
Q
Qualified dividends 34
Qualified small business stock 65,
83, 97
Gains on 97
R
Real estate investment trusts
(REITs) 30, 62, 83
Real estate mortgage investment
conduits (REMICs) 35, 51, 112
Regular interest 35
Residual interest 36, 88
Recordkeeping requirements:
Investment income 4
Small business stock 81
Redemption of stock 54
Redemption or retirement of
bonds 54
Regulated futures contract 56, 112
Reinvestment rights 63
REITs (See Real estate investment
trusts (REITs))
Related party transactions 52, 73,
Related persons 91
REMICs (See Real estate mortgage
investment conduits (REMICs))
Reorganizations, corporate 71
Reporting requirements:
Bad debts 85
Bond premium amortization 50
Capital gains and losses 93, 98,
Dividend income 33
Interest income 24
Interest on U.S. savings bonds 10,
Investment interest expenses 51
Like-kind exchanges 70
Options 89
Original issue discount 19
S corporation income, deductions,
and credits 37
Section 1256 contracts 58
State or local government
obligations 17
Straddles 101
Substitute payments 86
Tax-exempt interest income 24
Trades 105
Repossession of real property 83
Restricted property 60
Restricted stock 33, 112
Retirement of debt instrument 77
Return of capital (See Nondividend
distributions)
Rollover of gain from sale:
Securities 98
S
S corporations 37, 65
Sales and trades of investment
property 52
Definition 53
Savings bonds (See U.S. savings
bonds)
SBIC stock (See Small business
investment company stock)
Scrip dividends 32
Section 1202 gain 99, 104
Section 1244 stock 80
Section 1250 gain 104
Section 1256 contracts 56, 83, 89,
101, 112
Net gain on 58
Net loss on 58
Reporting requirements 58
Securities:
Holding period 81
Installment sales 100
Rollover of gain from sale 98
Traders in 105
Worthless 54, 85
Securities futures 112
Securities futures contracts 57, 83,
Self-employment income 59
Self-employment tax 105
Seller-financed mortgages 26
Short sales 85-87
Adjusted basis 65
Defined 112
Expenses of 50
Extraordinary dividends 87
Puts 89
Small business investment
company stock 81
Short-term capital gains and
losses 86, 101
Short-term obligations 22, 23, 66,
Interest deduction, limit on 47
Sixty/forty (60/40) rule 57
Small business investment
company stock 81, 99
Reporting requirements 81
Small business stock 65, 80, 83, 97
Social security number (SSN):
Custodial accounts 4
Joint accounts 4
Requirement to give 4
Specialized small business
investment company stock 99
Spouses:
Transfers between 60, 73
(See also Related party
transactions)
State or local government
obligations 16-18
Market discount bonds (See Market
discount bonds)
Private activity bonds 17, 112
Registration requirement 16
Tax-exempt interest 16
Taxable interest 17
Stock:
Basis 30, 32, 62, 98
Capital asset 76
Constructive ownership 74
Convertible 71
Corporate 71
Dividends (See Dividends)
Fractional shares 32, 82
Identification 62
Installment sales 100
Nonqualified preferred stock 71
Options for employees 2
Public utility, reinvestment 63
Redemption of 54
Replacement stock 98
Restricted stock 33, 112
Rights 31, 64, 83
S corporations 65
Sales to ESOPs or cooperatives 96
Small business 65, 83
Splits 64
Straddles (See Straddles)
Stripped preferred stock 35, 112
Surrender of 54
Trades 71
Trust instruments treated as 56
Straddles 90-96
Defined 112
Holding period 94
Interest expense and carrying
charges 51
Loss deferral rules 91
Mixed 86, 94, 95
Reporting requirements 101
Stripped bonds and coupons 16,
20, 66
Stripped preferred stock 35, 112
Substitute payments 86
T
Tables:
Capital gains maximum rate
(Table 4-4) 104
Income tax treaties (Table 1-3) 29
Investment income, reporting of
(Table 1-1) 6
Puts and calls (Table 4-3) 90
U.S. savings bonds, person
responsible for tax (Table 1-2) 12
Tax credit bonds 17
Tax help 106
Tax rates:
Capital gain and losses 103
Tax refunds:
Interest on 8
Tax shelters 39-44
Penalties 42
Reporting requirements 41
Rules to curb abuse 40
Tax-exempt bonds 76
Tax-exempt income:
Expenses of 50
Interest 16, 24
Tax-exempt obligations 16, 21, 66
Taxable income, expenses of 50
Taxes:
State income 51
Term loans 9, 112
Trade or business 45
Traders in securities 105
Trades:
Insurance 72
Investment property 52
Like-kind 70, 73
Nontaxable 60, 70, 82
Reporting requirements 105
Stock 71
Taxable 60
U.S. Treasury notes or bonds 73
Treasury bills, notes, and bonds
(See U.S. Treasury bills, notes, and
bonds)
Treasury inflation-indexed
securities 20
Treasury inflation-protected
securities (TIPS) 16, 20
Treaties, income tax (Table 1-3) 29
Trust income received by
beneficiary 4
U
U.S. savings bonds 8, 10
Reporting interest on 8, 10
Retirement or profit-sharing plan,
distributed from 13
Worksheet 26
Tax, responsible person
(Table 1-2) 12
U.S. Treasury bills, notes, and
bonds 8, 15, 73, 82
Undistributed capital gains 34
Usurious interest 8
V
Veterans' insurance:
Dividends on 33
W
Warrants 87
Wash sales 87, 88, 112
Holding period 83
Loss deferral rules, straddles 93
Withholding, backup 4
Worksheets:
Capital loss carryover 102
Worthless securities 54, 85
118 Publication 550 (2024)