What Counts as a 'Sale'?

Generally, if you receive money or other property in exchange for your asset, a sale has occurred and Uncle Sam will want a cut.

Tip

Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.

A redemption of stock, or a redemption or retirement of a bond, is considered a sale, and should be reported even if you have no gains or losses on the transaction (for instance, if you held a bond until maturity and received an amount exactly equal to your tax basis).

You can even have a taxable gain caused by a casualty loss, although this can generally be avoided by purchasing replacement property for the items that were damaged or destroyed.

Also, if stock, stock options or rights, or bonds that you owned became worthless, you may have a deductible loss. The "sale" is treated as occurring on the last day of the year in which the item became worthless, which means that your holding period (for determining whether the loss was short- or long-term) ends on December 31. If this applies to you, enter the appropriate code on Line 1(b) of Form 8949.

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If you learned this year that securities you own became worthless in some earlier year, you can file an amended tax return on Form 1040X for the year in which the investment became worthless, and deduct the loss. You must claim the deduction within seven years of the due date of your return for loss year, or within two years of the date you paid taxes for that year, whichever is later.

Bad debts. Occasionally, a taxpayer may be able to take a deduction for a bad debt not related to their trade or business. However, in order to deduct a nonbusiness bad debt, the debt must be totally worthless and you must already have some basis in the debt - that is, you must have loaned out your cash, or you must already have included some expected money in your income. If you're a cash basis taxpayer, you can't deduct a bad debt if someone merely reneges on a promise to pay you some income such as wages, rent, fees, interest, or dividends, unless you had already included the amount in taxable income (although you might be able to deduct the expense you had in earning this income). You should also have some documentation that the debt exists, such as a signed promissory note or loan agreement.

If you do have a nondeductible bad debt, you would record it as a short-term capital loss on Form 8949. Enter the name of the debtor, and write "statement attached." Be sure to attach a statement to your tax return that shows the name of the debtor, and any business or family relationship you have with him or her; a description of the debt, the date it became due, and the amount; the efforts you made to collect it; and why you decided it was completely worthless (e.g., the debtor went bankrupt or legal action to collect would probably not result in any payment).

You can only deduct a nonbusiness bad debt in the year it became totally worthless; however, if you discover that a debt had become worthless in an earlier year, you can file an amended tax return within seven years of the due date for that year's taxes. Use Form 1040X.

There are a very few types of transactions that are considered nontaxable.