Capital Gains and Losses and Built-In Gains (Schedule D)

2012

Instructions for Schedule D
(Form 1120S)

Department of the Treasury
Internal Revenue Service

Capital Gains and Losses and Built-in Gains
Section references are to the Internal Revenue
Code unless otherwise noted.

Future Developments

For the latest information about
developments related to Schedule D
(Form 1120S) and its instructions, such as
legislation enacted after they were
published, go to www.irs.gov/form1120s.

What's New
Form 8949. Many transactions that, in
previous years, would have been reported
on Schedule D must be reported on Form
8949, Sales and Other Dispositions of
Capital Assets. For 2012, Schedule D
(Form 1120S) filers will not list separate
capital asset transactions on Schedule D
(Form 1120S). Instead, Schedule D (Form
1120S) filers that have transactions that
must be listed on line 1, 2, 3, 8, 9, or 10
must complete Form 8949 before
completing line 1, 2, 3, 8, 9, or 10. See the
Instructions for Form 8949.
Built-in gains. For tax years beginning in
2012 or 2013, the recognition period for
built-in gains tax is a 5-year period. See
Part III. Built-in Gains Tax and section
1374(d)(7).
In addition, for tax years beginning after
2011, the treatment of all payments
received from an installment sale follows
certain built-in gains tax rules in effect for
the tax year of the sale. See section
1374(d)(7)(E).

General Instructions
Purpose of Schedule

Use Schedule D to report the following.
The overall capital gains and losses
from transactions listed on Form 8949.
Gains on distributions to shareholders
of appreciated capital assets.
Capital gain from Form 6252,
Installment Sale Income.
Capital gain or loss from Form 8824,
Like-Kind Exchanges.
Tax on built-in gains. See Part III.
Built-in Gains Tax.

Jan 24, 2013

Other Forms the
Corporation May Have To
File

Use Form 4797, Sales of Business
Property, to report the following.
The sale, exchange, or distribution of
property used in a trade or business.
The sale, exchange, or distribution of
depreciable and amortizable property.
The sale or other disposition of
securities or commodities held in
connection with a trading business, if the
corporation made a mark-to-market
election.
The involuntary conversion (from other
than casualty or theft) of property used in
the corporation's trade or business and
capital assets held in connection with a
trade or business or a transaction entered
into for profit.
The disposition of noncapital assets
other than inventory or property held
primarily for sale to customers in the
ordinary course of the corporation's trade
or business.
Use Form 4684, Casualties and Thefts,
to report involuntary conversions of
property due to casualty or theft.
Use Form 6781, Gains and Losses
From Section 1256 Contracts and
Straddles, to report gains and losses from
section 1256 contracts and straddles.
Additional information. For more
information, see Pub. 544, Sales and
Other Dispositions of Assets, and Pub.
550, Investment Income and Expenses
(Including Capital Gains and Losses).

Capital Assets

Each item of property the corporation held
(whether or not connected with its trade or
business) is a capital asset except the
following. See section 1221(a).
Stock in trade or other property
included in inventory or held mainly for
sale to customers. However, see the Note
below.
Accounts or notes receivable acquired
in the ordinary course of the trade or
business for services rendered or from the
sale of stock in trade or other property
included in inventory or held mainly for
sale to customers.
Depreciable or real property used in the
trade or business, even if it is fully
depreciated.
Cat. No. 64419L

Certain copyrights; literary, musical, or
artistic compositions; letters or
memoranda; or similar property. However,
see the Note below.
U.S. Government publications,
including the Congressional Record, that
the corporation received from the
Government, other than by purchase at
the normal sales price, or that the
corporation got from another taxpayer who
had received it in a similar way, if the
corporation's basis is determined by
reference to the previous owner's basis.
Certain commodities derivative financial
instruments held by a dealer not in
connection with its dealer activities.
Certain identified hedging transactions
entered into in the normal course of the
trade or business.
Supplies regularly used in the trade or
business.
Note. The corporation can elect to treat
as capital assets certain musical
compositions or copyrights it sold or
exchanged. See section 1221(b)(3) and
Pub. 550 for details.

Items for Special
Treatment

Note. For more information, see Pub.
544.

Loss from a sale or exchange between
the corporation and a related person.
Except for distributions in complete
liquidation of a corporation, no loss is
allowed from the sale or exchange of
property between the corporation and
certain related persons. See section 267.
Loss from a wash sale. The corporation
cannot deduct a loss from a wash sale of
stock or securities (including contracts or
options to acquire or sell stock or
securities) unless the corporation is a
dealer in stock or securities and the loss
was sustained in a transaction made in the
ordinary course of the corporation's trade
or business. A wash sale occurs if the
corporation acquires (by purchase or
exchange), or has a contract or option to
acquire, substantially identical stock or
securities within 30 days before or after
the date of the sale or exchange. See
section 1091.
Report a wash sale transaction on
Form 8949, Part I or Part II (with the
appropriate box checked). Enter "W" in

column (f) and enter as a positive number
in column (g) the amount of the loss not
allowed. Complete all remaining columns.
See the Instructions for Form 8949.

bank, treat the loss as a capital loss as of
the last day of the tax year. See section
582 for the rules on the treatment of
securities held by a bank.

Gain on distributions of appreciated
property. Generally, gain (but not loss) is
recognized on a nonliquidating distribution
of appreciated property to the extent that
the property's fair market value exceeds
its adjusted basis. See section 311.

Nonrecognition of gain on sale of
stock to an employee stock ownership
plan (ESOP) or an eligible cooperative.
See section 1042 and Temporary
Regulations section 1.1042-1T for rules
under which the corporation can elect not
to recognize gain from the sale of certain
stock to an ESOP or an eligible
cooperative.

Gain or loss on distribution of property in complete liquidation. Generally,
gain or loss is recognized on property
distributed in a complete liquidation. Treat
the property as if it had been sold at its fair
market value. See section 336.
Gain or loss on certain short-term federal, state, and municipal obligations
(other than tax-exempt obligations).
These obligations are treated as capital
assets in determining gain or loss. On any
gain realized, a portion is treated as
ordinary income and any remaining
balance as a short-term capital gain. See
section 1271(a)(3).
Gain from installment sales. If the
corporation sold property at a gain and it
will receive a payment in a tax year after
the year of sale, it generally must report
the sale on the installment method unless
it elects not to. However, the installment
method may not be used to report sales of
stock or securities traded on an
established securities market.
Use Form 6252 to report the sale on
the installment method. Also use Form
6252 to report any payment received
during the tax year from a sale made in an
earlier year that was reported on the
installment method.
To elect out of the installment method,
report the full amount of the gain on Form
8949 for the year of the sale on a return
filed by the due date (including
extensions). If the original return was filed
on time without making the election, the
corporation can make the election on an
amended return filed no later than 6
months after the original due date
(excluding extensions). Write “Filed
pursuant to section 301.9100-2” at the top
of the amended return.
Gain or loss on an option to buy or sell
property. See sections 1032 and 1234
for the rules that apply to a purchaser or
grantor of an option or a securities futures
contract (as defined in section 1234B).
See Pub. 550 for details.
Gain or loss from a short sale of property. Report the gain or loss to the extent
that the property used to close the short
sale is considered a capital asset in the
hands of the taxpayer.
Loss from securities that are capital
assets that become worthless during
the year. Except for securities held by a

Bonds and other debt instruments.
See Pub. 550.
Nonbusiness bad debts. A
nonbusiness bad debt must be treated as
a short-term capital loss and can be
deducted only in the year the debt
becomes totally worthless. See
Nonbusiness Bad Debts in Pub. 550 for
details.
Real estate subdivided for sale.
Certain lots or parcels that are part of a
tract of real estate subdivided for sale may
be treated as capital assets. See section
1237.
Sale of a partnership interest. A sale or
other disposition of an interest in a
partnership owning unrealized receivables
or inventory items may result in ordinary
gain or loss. See Pub. 541, Partnerships.
Special rules for traders in securities.
Traders in securities are engaged in the
business of buying and selling securities
for their own account. To be engaged in a
business as a trader in securities, the
corporation:
Must seek to profit from daily market
movements in the prices of securities and
not from dividends, interest, or capital
appreciation.
Must be involved in a trading activity
that is substantial.
Must carry on the activity with continuity
and regularity.
The following facts and circumstances
should be considered in determining if a
corporation's activity is a business.
Typical holding periods for securities
bought and sold.
The frequency and dollar amount of the
corporation's trades during the year.
The extent to which the shareholders
pursue the activity to produce income for a
livelihood.
The amount of time devoted to the
activity.
Like an investor, a trader must report
each sale of securities (taking into account
commissions and any other costs of
acquiring or disposing of the securities) on
Form 8949 or on an attached statement
containing all the same information for
each sale in a similar format. However, if a
trader made the mark-to-market election
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(see the Instructions for Form 4797), each
transaction is reported in Part II of Form
4797 instead of on Form 8949.
The limitation on investment interest
expense that applies to investors does not
apply to interest paid or incurred in a
trading business. A trader reports interest
expense and other expenses (excluding
commissions and other costs of acquiring
and disposing of securities) from a trading
business on page 1 of Form 1120S.
A trader also may hold securities for
investment. The rules for investors
generally will apply to those securities. If
they apply, allocate interest and other
expenses between your trading business
and investment securities. Report
investment interest expense on line 12b of
Schedule K and in box 12 of Schedule K-1
using code H.
Gain from certain constructive ownership transactions. Gain in excess of the
gain the corporation would have
recognized if it had held a financial asset
directly during the term of a derivative
contract must be treated as ordinary
income. See section 1260.
Gain on the constructive sale of certain appreciated financial positions.
Generally, if the corporation holds an
appreciated financial position in stock or
certain other interests, it may have to
recognize gain (but not loss) if it enters
into a constructive sale (such as a “short
sale against the box”). See Pub. 550.
Rollover of gain from qualified stock.
If the corporation sold qualified small
business (QSB) stock (defined below) it
held for more than 6 months, it can
postpone gain if it purchased other QSB
stock during the 60-day period that began
on the date of the sale. The corporation
must recognize gain to the extent the sale
proceeds exceed the cost of the
replacement stock. Reduce the basis of
the replacement stock by any postponed
gain.
If the corporation chooses to postpone
gain, report the entire gain realized on the
sale on Form 8949, Part I or Part II (with
the appropriate box checked). Enter "R" in
column (f) and enter the amount of the
postponed gain as a negative number (in
parentheses) in column (g). Complete all
remaining columns. See the Instructions
for Form 8949.
The corporation also must
separately state the amount of
CAUTION
the gain rolled over on qualified
stock under section 1045 on Form 1120S,
Schedule K, line 10, because each
shareholder must determine if he or she
qualifies for the rollover at the shareholder
level. Also, the corporation must
separately state on that line (and not on
Form 8949) any gain that could qualify for
the section 1045 rollover at the

!

Instructions for Schedule D (Form 1120S)

shareholder level instead of the corporate
level (because a shareholder was entitled
to purchase replacement stock). If the
corporation had a gain on qualified stock
that could qualify for the exclusion under
section 1202, report that gain on Form
8949 (and on Form 1120S, Schedule K,
line 10).
To be QSB stock, the stock must meet
all of the following tests.
It must be stock in a C corporation.
It must have been originally issued after
August 10, 1993.
As of the date the stock was issued, the
corporation was a qualified small
business. A qualified small business is a
domestic C corporation with total gross
assets of $50 million or less (a) at all times
after August 9, 1993, and before the stock
was issued, and (b) immediately after the
stock was issued. Gross assets include
those of any predecessor of the
corporation. All corporations that are
members of the same parent-subsidiary
controlled group are treated as one
corporation.
The corporation must have acquired the
stock at its original issue (either directly or
through an underwriter), either in
exchange for money or other property or
as pay for services (other than as an
underwriter) to the corporation. In certain
cases, the corporation may meet the test if
it acquired the stock from another person
who met this test (such as by gift or
inheritance) or through a conversion or
exchange of qualified small business
stock held by the corporation.
During substantially all the time the
corporation held the stock:
1. The issuer was a C corporation,
2. At least 80% of the value of the
issuer's assets were used in the active
conduct of one or more qualified
businesses (defined below), and
3. The issuing corporation was not a
foreign corporation, DISC, former DISC,
corporation that has made (or that has a
subsidiary that has made) a section 936
election, regulated investment company,
real estate investment trust, REMIC,
FASIT, or cooperative.
Note. A specialized small business
investment company (SSBIC) is treated as
having met test (2) above.
A qualified business is any business
other than the following.
One involving services performed in the
fields of health, law, engineering,
architecture, accounting, actuarial
science, performing arts, consulting,
athletics, financial services, or brokerage
services.
One whose principal asset is the
reputation or skill of one or more
employees.
Instructions for Schedule D (Form 1120S)

Any banking, insurance, financing,
leasing, investing, or similar business.
Any farming business (including the
raising or harvesting of trees).
Any business involving the production
of products for which percentage
depletion can be claimed.
Any business of operating a hotel,
motel, restaurant, or similar business.
For more details about limits and
additional requirements that may apply,
see Pub. 550 or section 1202.
Exclusion of gain from DC Zone assets. If the corporation sold or exchanged
a District of Columbia Enterprise Zone
(DC Zone) asset acquired after 1997 and
before 2012, and held for more than 5
years, it can exclude any qualified capital
gain. The sale or exchange of DC Zone
capital assets reported on Schedule D
include:
Stock in a domestic corporation that
was a DC Zone business.
Interest in a partnership that was a DC
Zone business.
Report the sale or exchange of
property used in the corporation's DC
Zone business on Form 4797.
Gains not qualified for exclusion.
The following gains do not qualify for the
exclusion of gain from DC Zone assets.
Gain attributable to unrecaptured
section 1250 gain on the sale of an
interest in a partnership that is a DC Zone
business. See the instructions for line 8c
of Schedule K for information on how to
report unrecaptured section 1250 gain.
Gain on the sale of an interest in a
partnership attributable to real property or
an intangible asset that is not an integral
part of a DC Zone business.
Gain from a related-party transaction.
See Sales and Exchanges Between
Related Persons in chapter 2 of Pub. 544.
See section 1400B for more details on
DC Zone assets and special rules.
How to report. Report the sale or
exchange as the corporation otherwise
would without regard to the exclusion on
Form 8949, Part II (with the appropriate
box checked). Enter "X" in column (f) and
enter the amount of the exclusion as a
negative number (in parentheses) in
column (g). Complete all remaining
columns. See the Instructions for Form
8949 for details.
Exclusion of gain from qualified community assets. If the corporation sold or
exchanged a qualified community asset
acquired after 2001 and before 2010, and
held for more than 5 years, it may be able
to exclude any qualified capital gain. The
exclusion applies to an interest in, or
property of, certain renewal community
businesses.

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Qualified community asset. A
qualified community asset is any of the
following.
Qualified community stock.
Qualified community partnership
interest.
Qualified community business property.
Qualified capital gain. Qualified
capital gain is any gain recognized on the
sale or exchange of a qualified community
asset, but does not include any of the
following.
Gain treated as ordinary income under
section 1245.
Section 1250 gain figured as if section
1250 applied to all depreciation rather
than the additional depreciation.
Gain attributable to real property, or an
intangible asset, that is not an integral part
of a renewal community business.
Gain from a related-party transaction.
See Sales and Exchanges Between
Related Persons in chapter 2 of Pub. 544.
See section 1400F for more details on
qualified community assets and special
rules.
How to report. Report the sale or
exchange as the corporation otherwise
would without regard to the exclusion on
Form 8949, Part II (with the appropriate
box checked). Enter "X" in column (f) and
enter the amount of the exclusion as a
negative number (in parentheses) in
column (g). Complete all remaining
columns. See the Instructions for Form
8949.
Collectibles (28%) rate gain or (loss).
Report any 28% gain or loss on line 8b of
Schedule K (and each shareholder's
share in box 8b of Schedule K-1). A
collectibles gain or loss is any long-term
gain or deductible long-term loss from the
sale or exchange of a collectible that is a
capital asset.
Collectibles include works of art, rugs,
antiques, metals (such as gold, silver, and
platinum bullion), gems, stamps, coins,
alcoholic beverages, and certain other
tangible property.
Report any 28% gain or loss from a
sale or exchange of a collectible on Form
8949, Part II (with the appropriate box
checked). See the Instructions for Form
8949.
Also include gain (but not loss) from the
sale or exchange of an interest in a
partnership or trust held more than 1 year
and attributable to unrealized appreciation
of collectibles. See Regulations section
1.1(h)-1. Also, attach the statement
required under Regulations section
1.1(h)-1(e).

Specific Instructions
Complete all necessary pages of Form
8949 before you complete line 1, 2, 3, 8, 9,
or 10 of Schedule D.
Rounding off to whole dollars. You can
round off cents to whole dollars on your
Schedule D. If you do round to whole
dollars, you must round all amounts. To
round, drop amounts under 50 cents and
increase amounts from 50 and 99 cents to
the next dollar. For example, $1.39
becomes $1 and $2.50 becomes $3.
If you have to add two or more amounts
to figure the amount to enter on a line,
include cents when adding the amounts
and round off only the total.

Parts I and II
Lines 1, 2, 3, 8, 9, and 10,
Column (h)—Gain or Loss

Figure gain or loss on each line. First,
subtract cost or other basis in column (e)
from proceeds (sales price) in column (d).
Then combine the results with any
adjustments in column (g). Enter the
results in column (h). Enter negative
amounts in parentheses.
Example 1—gain. Column (d) is
$6,000 and column (e) is $2,000. Enter
$4,000 in column (h).
Example 2—loss. Column (d) is
$6,000 and column (e) is $8,000. Enter
($2,000) in column (h).
Example 3—adjustment. Column (d)
is $6,000, column (e) is $2,000, and
column (g) is ($1,000). Enter $3,000 in
column (h).

Part III. Built-in Gains Tax

Section 1374 provides for a tax on built-in
gains. The built-in gains tax may apply to
the following S corporations.
1. An S corporation that was a C
corporation before it elected to be an S
corporation.
2. An S corporation that acquired an
asset with a basis determined (in whole or
in part) by reference to its basis (or the
basis of any other property) in the hands
of a C corporation (a transferred-basis
acquisition). See section 1374(d)(8).

An S corporation may owe the tax if it
has net recognized built-in gain during the
applicable recognition period. For tax
years beginning in 2012 or 2013, the
applicable recognition period is the 5-year
period beginning:
For an asset held when the S
corporation was a C corporation, on the
first day of the first tax year for which the
corporation is an S corporation; or
For an asset with a basis determined by
reference to its basis (or the basis of any

other property) in the hands of a C
corporation, on the date the asset was
acquired by the S corporation.
A corporation described in both (1) and
(2), above, must figure the built-in gains
tax separately for the group of assets it
held at the time its S election became
effective and for each group of assets it
acquired from a C corporation with basis
determined (in whole or in part) by
reference to the basis of the asset (or any
other property) in the hands of the C
corporation. For details, see Regulations
section 1.1374-8.
Certain transactions involving the
disposal of timber, coal, or domestic iron
ore under section 631 are not subject to
the built-in gains tax. See Rev. Rul.
2001-50, which is on page 343 of Internal
Revenue Bulletin 2001-43 at
www.irs.gov/pub/irs-irbs/irb01-43.pdf.

Line 16

Generally, enter the amount that would be
the taxable income of the corporation for
the tax year if only recognized built-in
gains (including any carryover of gain
under section 1374(d)(2)(B)) and
recognized built-in losses were taken into
account.
Generally, recognized built-in gain
includes the following items.
1. Any gain recognized during the
applicable recognition period on the sale
or distribution (disposition) of any asset,
except to the extent the corporation
establishes that:
a. The asset was not held by the
corporation as of the beginning of the
applicable recognition period, or
b. The gain exceeds the excess of the
fair market value of the asset as of the
beginning of the applicable recognition
period over the adjusted basis of the asset
at that time; and
2. Any item of income that is properly
taken into account during the applicable
recognition period but is attributable to
periods before the applicable recognition
period.
Generally, recognized built-in loss
includes the following items.
1. Any loss recognized during the
applicable recognition period on the
disposition of any asset to the extent the
corporation establishes that:
a. The asset was held by the
corporation as of the beginning of the
applicable recognition period, and
b. The loss does not exceed the
excess of the adjusted basis of the asset
as of the beginning of the applicable
recognition period, over the fair market
value of the asset as of that time; and
2. Any amount that is allowed as a
deduction during the applicable
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recognition period (determined without
regard to any carryover) but is attributable
to periods before the applicable
recognition period.
For details, see section 1374(d) and
Regulations section 1.1374-4.
The corporation must show on an
attachment its total net recognized built-in
gain and list separately any capital gain or
loss and ordinary gain or loss.

Line 17

Figure taxable income by completing lines
1 through 28 of Form 1120. Follow the
instructions for Form 1120. Enter the
amount from line 28 of Form 1120 on
line 17 of Schedule D. Attach to
Schedule D the Form 1120 computation or
other worksheet used to figure taxable
income.
For corporations figuring the built-in
gains tax for separate groups of assets,
taxable income must be apportioned to
each group of assets in proportion to the
net recognized built-in gain for each group
of assets. For details, see Regulations
section 1.1374-8.
Note. Taxable income is figured as
provided in section 1375(b)(1)(B) and is
generally figured in the same manner as
taxable income for line 9 of the Excess Net
Passive Income Tax Worksheet for
Line 22a in the Instructions for Form
1120S.

Line 18

If, for any tax year in the recognition
period, the amount on line 16 exceeds the
taxable income on line 17, the excess is
treated as a recognized built-in gain in the
succeeding tax year. This carryover
provision applies only in the case of an S
corporation that made its election to be an
S corporation after March 30, 1988. See
section 1374(d)(2)(B).
For corporations figuring the built-in
gains tax for separate groups of assets, do
not use the amount from Schedule B,
line 8. Instead, figure the amount of net
unrealized built-in gain separately for each
group of assets.

Line 19

Enter the section 1374(b)(2) deduction.
Generally, this is any net operating loss
carryforward or capital loss carryforward
(to the extent of net capital gain included
in recognized built-in gain for the tax year)
either arising in tax years for which the
corporation was a C corporation or
acquired in a transferred-basis acquisition
(defined earlier). The section 1374(b)(2)
deduction must be figured and applied
separately for each separate group of
assets. See section 1374(b)(2) and
Regulations section 1.1374-5.
Instructions for Schedule D (Form 1120S)

Line 22

Enter the section 1374(b)(3) credit.
Generally, this is any general business
credit arising in tax years for which the
corporation was a C corporation or
acquired in a transferred-basis acquisition
(defined earlier). The section 1374(b)(3)
credit must be figured and applied
separately for each separate group of
assets. Section 1374(b)(3) business credit
and minimum tax credit carryforwards
from C corporation years are subject to
the business credit limitation in section
38(c) and the AMT credit limitation in
section 53(c), as modified by Regulations
section 1.1374-6(b).
If corporations made the section 168(k)
(4) election in prior years, they can elect to
increase these limitations for pre-2006
unused minimum tax credits in lieu of
claiming the special depreciation

Instructions for Schedule D (Form 1120S)

allowance for certain property acquired
after March 31, 2008, and placed in
service before January 1, 2013. (For
corporations with tax years ending after
December 31, 2012, this election is
available for certain property placed in
service before January 1, 2014.) For
details, see Form 4562, Depreciation and
Amortization; Form 8827, Credit for Prior
Year Minimum Tax—Corporations; and
related instructions. Also, see Rev. Proc.
2009-33, 2009-29 I.R.B. 150, available at
www.irs.gov/irb/2009-29_IRB/ar09.html;
Rev. Proc. 2009-16, 2009-6 I.R.B. 449,
available at
www.irs.gov/irb/2009-06_IRB/ar10.html;
and Rev. Proc. 2008-65, 2008-44 I.R.B.
1082, available at
www.irs.gov/irb/2008-44_IRB/ar15.html.
An S corporation that made this
election can use the credit
CAUTION
carryforwards only against the
built-in gains tax. The refundable credit
provisions do not apply to S corporations.

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Line 23

The built-in gains tax is treated as a loss
sustained by the corporation during the
same tax year. The character of the
deemed loss is determined by allocating
the loss proportionately among the net
recognized built-in gains giving rise to the
tax and attributing the character of each
net recognized built-in gain to the
allocable portion of the loss. Deduct the
tax attributable to:
Short-term capital gain as short-term
capital loss on Schedule D, line 6.
Long-term capital gain as long-term
capital loss on Schedule D, line 14.
Ordinary income as a deduction for
taxes on Form 1120S, line 12.