Investors: Capital Gains, Dividends & Schedule D

In late January the envelopes start coming. A 1099-B from the brokerage listing every stock you sold. A 1099-DIV for your dividends. A 1099-INT for a little interest. Each one is dense with numbered boxes, and somewhere in the software a form called “Schedule D” is waiting, next to a phrase — “wash sale” — that sounds like something you might have done wrong without knowing it. If your stomach tightened a little, that is the normal reaction, and it is the reaction this lesson is built to undo.

So let us put the three fears on the table right now, and answer each one before we teach anything. Fear one: “How much is selling going to cost me?” For most long-held investments, gently — the tax on a long-term gain runs 0%, 15%, or 20%, and for a lot of people the rate really is zero. Fear two: “Did I trigger a wash sale?” Maybe, and if you did, the loss is not gone — it moves into the cost of your new shares. Fear three: “Schedule D looks impossible.” It is mostly copying: your broker already filled in the numbers, and the form is a tidy sheet of arithmetic that nets your gains against your losses.

We will follow four people. Priya and Raj Malhotra, a married couple in Seattle with a real brokerage account — gains, dividends, a wash sale, and enough income to meet a surcharge most people never see. Nadia, single in Columbus, making her very first taxable sale and paying a surprising amount: nothing. Tara, a landlord, whose real-estate gains follow a different rulebook we will point to. And Chad, a crypto trader whose lesson is just ahead. By the end, the stack of forms will look like what it is — a summary of decisions you already made — and you will be able to read it.

Start with the single idea that dissolves most of the fear: a gain is not taxed while you hold it. If Priya bought a semiconductor stock for $36,000 and it climbs to $60,000, that $24,000 of profit is real on her statement — but to the IRS it does not exist yet. It is an unrealized gain, and unrealized gains are not taxed, no matter how big they get or how many years they pile up. The tax event is the sale. The moment she sells and locks in the $24,000, it becomes a realized gain, and only then does it land on a tax return.

This is why long-term investors can let a position grow for decades without a yearly tax bill on the growth — and why the timing of a sale is a decision with tax consequences. It is also the source of a common myth worth killing early: the taxable moment is the sale, not the day the cash reaches your bank. If Priya sells the stock and immediately buys a different one inside the same brokerage — never moving a dollar to checking — she has still realized the $24,000 gain. Swapping one fund for another in a taxable account is a sale and a purchase, each reportable.

Notice the top half of that diagram: buy, hold, sell. Everything that happens between the buy and the sell — the climb from $36,000 to $60,000 — is untaxed. Hold this thought, because it also means a loss on paper does nothing for you until you sell either. A stock that has fallen is not a deduction while you own it; it becomes a usable loss only when you realize it.

Once you sell, the very first question the tax code asks is: how long did you own it? There is a single line — one year — and it splits every sale into two worlds. Hold an investment for one year or less and sell at a profit, and it is a short-term capital gain. Hold it more than one year — at least a year and a day — and it is a long-term capital gain. The holding period is counted from the day after you bought through the day you sold.

That line matters because the two kinds of gain are taxed completely differently. A short-term gain is taxed as ordinary income — stacked in with your wages and taxed at your regular bracket (the 10%, 12%, 22%, 24%, 32%, 35%, and 37% rates for TY2026). A long-term gain gets a separate, gentler set of rates: 0%, 15%, or 20%. Congress built in that discount on purpose, to reward holding investments rather than flipping them.

Look again at the holding-period ruler in the diagram above. Priya and Raj's Delta Robotics shares, sold at five months, land on the short-term side — their $3,000 gain is taxed like a paycheck. Their Meridian Semiconductor shares, held three years, land on the long-term side — the $24,000 gain gets the preferential rate. Same account, same investors; the only difference is the calendar.

Here is the part almost everyone gets wrong, and it is good news. The long-term rate is not a flat number you look up — it depends on how much total income you have, because a long-term gain (and a qualified dividend — a dividend that meets a holding-period test, covered under Dividends below) stacks on top of your ordinary income. You fill up your ordinary taxable income first; the gain sits on top of that stack; and where the top of the stack lands decides the rate.

Read the single column: if your taxable income (the gain included) stays under $49,450, your long-term gains are taxed at 0% — a real zero. Between there and $545,500, they are taxed at 15%. Only above $545,500 does the 20% rate begin. And the rate is not a cliff: if a gain straddles a breakpoint, the part below is taxed at the lower rate and only the part above jumps up. It splits across bands, exactly like your ordinary brackets do.

The visual makes the punchline concrete. Nadia, single, has $41,180 of ordinary taxable income. A $5,000 long-term gain stacks on top, reaching $46,180 — still under her $49,450 ceiling — so the whole gain is taxed at 0%. She owes nothing on it. Priya and Raj, with about $252,000 of ordinary taxable income, are far above the joint 0% ceiling of $98,900; their gains stack in the 15% band. The very same $5,000 gain costs them 15% plus a 3.8% surcharge — about $940. Identical gain, wildly different bills, purely because of the income each gain stacks on.

That extra 3.8% on Priya and Raj's gain has a name: the Net Investment Income Tax, or NIIT. It is a separate surtax on investment income for higher earners, and it is the reason a “15% gain” can really cost 18.8%. You met it in passing in the other-taxes lesson; here is what an investor needs to know.

• It is 3.8%, charged on the smaller of your net investment income or the amount your income runs over a threshold. So it never applies to more than your actual investment income.
• The thresholds (modified AGI) are $250,000 for a married couple filing jointly, $200,000 for single or head-of-household filers, and $125,000 for married filing separately. These numbers are fixed in the law — they are not adjusted for inflation, so more people drift over them each year.
• It applies to investment income: interest, dividends, capital gains, rental and royalty income, and the like. It does NOT apply to wages, self-employment income, Social Security, or withdrawals from a 401(k) or IRA.
• It is figured on Form 8960 and carried through Schedule 2 onto your 1040 — the software handles it once your income crosses the line.

For Priya and Raj, whose income sits well above the $250,000 joint threshold, every dollar of their investment gains and dividends catches the extra 3.8%. For Nadia, whose total income of about $57,280 is nowhere near the $200,000 single threshold, the NIIT is not even in the room. This is a rich-and-getting-richer tax by design, and if your income is comfortably under the threshold you can set it aside entirely. The deeper mechanics of the NIIT (and its cousins, the Additional Medicare Tax and the AMT) get their own treatment in the higher-income lesson later in the track.

A gain is proceeds minus basis. Proceeds are easy — it is what the sale paid you. Basis is where the money is won or lost, because your basis is subtracted before anything is taxed. Cost basis starts as what you paid for the investment, including the commission or fee, but it does not stay frozen. It is an adjusted basis, and a few common events move it:

• Reinvested dividends ADD to basis. Every time a dividend buys more shares, you paid for those shares with money you were already taxed on — so their cost counts. Forgetting years of reinvestments is the single most common way people overstate a gain and overpay.
• A stock split reallocates basis. Two-for-one split? Your total basis is unchanged, but it now spreads across twice as many shares, so the per-share basis halves.
• A return of capital (box 3 of a 1099-DIV) SUBTRACTS from basis. It is not taxed when you receive it; instead it lowers your basis, so you pay when you eventually sell. Once basis hits zero, further returns of capital become gain.
• A disallowed wash-sale loss ADDS to the basis of your replacement shares — the mechanism we unpack later that keeps the loss alive.

Basis also decides which shares you sell, when you own several lots bought at different prices. Say Priya owns three batches of a fund. If she does nothing, the IRS default is FIFO — first in, first out — and the oldest, usually lowest-basis, shares are treated as sold first, producing the largest gain. But she can instead use specific identification: tell the broker exactly which lots to sell, and get written confirmation, at or before the sale. Choosing high-basis lots means a smaller gain. The catch that trips people up: specific-ID must be done at the time of the trade — you cannot go back at tax time and re-pick the lots.

Since 2011, brokers have been required to track and report your cost basis to the IRS for shares you buy — these are called covered securities. When you sell a covered lot, the basis shows up in box 1e of your 1099-B and is reported straight to the IRS. That is a genuine convenience: for a plain covered lot with no complications, the numbers flow onto your return almost automatically.

But not everything is covered, and this is where filers overpay. A non-covered security is one the broker is not required to report basis for — typically shares bought before the cutoff dates, shares gifted or inherited to you, or shares transferred in from another firm without their basis history. The cutoffs phase in by type: stock bought after 2010, mutual-fund and dividend-reinvestment shares after 2011, simpler bonds and options after 2013, and more complex debt after 2015. On a 1099-B, a non-covered lot has box 5 checked, and box 1e — the basis — is often blank.

Priya and Raj have exactly this situation. Most of their lots are covered — basis reported, easy. But one lot, 150 shares of a timber company, was inherited, so it is non-covered and its 1099-B basis box is blank. Priya fills in $9,000 — the value of the shares on the date she inherited them, the “stepped-up” basis. (Why inherited shares get a fresh basis at date-of-death value is the estates lesson later in the track; here, it is simply the number she writes in.) Without it, the IRS would see $12,000 of proceeds and no cost, and tax her on a $12,000 phantom gain instead of her real $3,000.

Dividends — the cash a company or fund pays you for holding it — come in two flavors, and the difference is worth real money. Ordinary (non-qualified) dividends are taxed at your regular income rates. Qualified dividends get the same gentle 0/15/20% treatment as long-term gains. Most dividends from ordinary U.S. stocks are qualified; the exceptions are things like money-market payouts, most REIT distributions, and dividends on shares you did not hold long enough.

“Long enough” is a real test: to be qualified, you must have held the stock more than 60 days during the 121-day window that starts 60 days before the ex-dividend date (the first day a buyer no longer gets the upcoming dividend). Preferred stock has its own longer version of the test. The point for a normal buy-and-hold investor: if you own your shares for a while around the dividend, they are almost always qualified — the test mainly catches people who buy just to grab a dividend and sell right away.

The specimen also shows two boxes worth knowing. Box 2a, capital gain distributions, is where a fund passes its own realized gains to you — taxable as a long-term gain even if you never sold the fund, and it flows onto Schedule D. Box 3, nondividend distributions, is a return of capital: not taxed now, but it lowers your basis, so you pay later when you sell. Priya and Raj's boxes 2a and 3 are zero this year, but knowing what they mean keeps a future statement from surprising you.

Now the form that scared you at the top of the lesson. A consolidated 1099-B lists every sale your broker processed, and its genius is that it pre-sorts your trades into the exact groups Schedule D wants. Let us read Priya and Raj's whole form and see that it is a summary, not a test.

Read it top to bottom. The short-term group holds Delta Robotics: bought October 2025, sold March 2026 (box 1b and 1c), $18,000 of proceeds (box 1d) against a $15,000 basis (box 1e) — a $3,000 short-term gain. Because the basis was reported to the IRS (box 12 checked), it belongs in Form 8949 Box A. The long-term group holds Meridian ($60,000 against $36,000, a $24,000 gain) and Rainier ($21,000 against $30,000, a $9,000 loss). Both are covered, so they go to Box D.

Then the row that carries the lesson's most feared word: Cascade Software, sold for an $11,000 versus a $15,000 basis — a $4,000 loss — but box 1g, “wash-sale loss disallowed,” shows the entire $4,000. The broker is flagging that Priya rebought the shares within 30 days, so the loss cannot be used this year. We work exactly how that happens in a moment. Finally, the non-covered group: the inherited Evergreen Timber lot, box 5 checked, its basis box blank — the row where Priya must supply the $9,000 herself. Every dollar on this form is either handed to you or, in one place, flagged for you to fill in. That is the whole 1099-B.

Schedule D is not where you type your trades — that is Form 8949's job. Form 8949 is the detailed list (one line per sale), and Schedule D is the one-page adding machine that nets it all together. The flow is always the same: 8949 lists each lot under its box, the box subtotals carry to Schedule D, Schedule D nets short-term against long-term, and a single number drops onto Form 1040 line 7.

On Form 8949, watch the Cascade row. The math in column (h) is always proceeds minus basis plus any adjustment. Cascade's raw loss is $4,000, but code W in column (f) flags it while the disallowed $4,000 goes into the adjustment column (g) as a positive number, so the reported gain becomes exactly $0 — the loss is neutralized on the form. That code W is how a wash sale actually shows up on a return. The Box D subtotal, then, is $92,000 of proceeds against $81,000 of basis plus the $4,000 add-back, a $15,000 long-term gain.

Those subtotals now land on Schedule D: the short-term Box A total on line 1b ($3,000), the long-term Box D total on line 8b ($15,000), and the non-covered Box E total on line 9 ($3,000). Line 7 nets the short-term side to $3,000; line 15 nets the long-term side to $18,000; line 16 combines them into a $21,000 net capital gain — which flows to Form 1040 line 7 and joins their income. If line 16 had been a loss instead, line 21 would step in — and that is the next section.

Losses are not just bad news at tax time — they are a tool, and the code lets you use them in a specific order. First, losses net against gains of the same type: short-term losses cancel short-term gains, long-term losses cancel long-term gains. Then the two sides are combined. If you still have a net loss left over after all that netting, it becomes genuinely useful: it can reduce your ordinary income — your wages — too.

But only so much per year. You can deduct a net capital loss against ordinary income up to $3,000 a year ($1,500 if you file married filing separately). That figure is written into the law and has not moved in decades — it is not indexed for inflation. Whatever is left after the $3,000 does not vanish: it carries forward to next year, and the year after, indefinitely, until it is used up. The carried-over loss keeps its character (short-term stays short-term, long-term stays long-term), and short-term losses are applied first.

This is the mechanical engine behind “tax-loss harvesting” — deliberately selling losers to bank losses against gains. That is a strategy with timing and judgment, and it gets its own lesson later. Here, the point is simply that a realized loss is an asset: it offsets gains dollar-for-dollar, chips $3,000 off your ordinary income, and waits patiently for the rest. There is just one way to fumble it — the wash sale.

Here is the fear named at the very start, finally faced. The wash-sale rule stops you from claiming a loss while never really letting go of the investment. If you sell a security at a loss and buy the same (or a “substantially identical”) security within 30 days before or after the sale — a 61-day window centered on the sale — the loss is disallowed for that year. It applies to losses only; it never touches a gain.

That is what happened to Priya and Raj. They sold Cascade Software at a $4,000 loss on March 10, then rebought 150 shares on March 20 — just ten days later, squarely inside the window. The $4,000 loss is disallowed this year. Now the reassurance, because this is the part that terrifies people: the loss is not gone. It is added to the cost basis of the replacement shares, and the old holding period tacks onto the new ones. So when they eventually sell those replacement shares, the $4,000 is baked into their cost and they get the benefit then. The deduction is deferred, not destroyed.

The practical takeaway is calm, not fearful: if you sell at a loss and want to keep the deduction this year, simply wait until day 31 to rebuy — or buy something similar but not substantially identical (a different company, or a broad fund instead of the single stock). And if you did trip a wash sale, you have not broken anything; your broker flags it in box 1g and the loss follows your new shares.

Let us assemble the whole thing and see it reconcile. Priya and Raj's investment income for 2026 has three parts — their net capital gain, their dividends, and the rate each part meets. Their ordinary taxable income already places them in the 24% bracket, and their income is over the $250,000 NIIT threshold, so the 3.8% surcharge rides along on every piece.

Walk the numbers. The $18,000 long-term gain and the $6,000 of qualified dividends are both preferential income; stacked on their $252,000 of ordinary income they land in the 15% band ($24,000 × 15% = $3,600). The $3,000 short-term gain and the $1,200 of non-qualified dividends are ordinary income, taxed at their 24% rate ($4,200 × 24% = $1,008). And every dollar of that $28,200 of net investment income also catches the 3.8% NIIT ($1,072). The whole investment year costs them about $5,680 in federal tax — a blended rate of roughly 20% on $28,200 of income, exactly what you would expect from a mostly-long-term investor above the surcharge line.

Now the contrast that makes the whole rate structure click. Nadia, single in Columbus, sells a fund lot she has held for three years for a $5,000 long-term gain — her first ever taxable sale. She braces for a bill. There is none.

Here is why. Her ordinary taxable income is $41,180 (the number from her foundation return). The single-filer 0% ceiling for long-term gains is $49,450. Stack her $5,000 gain on top of $41,180 and you reach $46,180 — still under the ceiling. So the entire gain falls in the 0% band and is taxed at nothing. The same $5,000 gain that costs Priya and Raj about $940 costs Nadia exactly $0, not because her gain is different but because it stacks on far less income.

For a first-time investor, this is the reassurance the whole lesson has been building toward: selling is not automatically a tax event to dread. If your income is modest, your long-term gains may be taxed at zero, and even when they are not, the long-term rate is gentle. The forms still have to be filed — Nadia still reports the sale on Form 8949 and Schedule D — but the number that lands on her 1040 line 7, and the tax that follows it, can be far smaller than the fear suggested.

Capital gains are a big country, and this lesson mapped one province of it — securities in a taxable account. Three neighboring territories follow different rules, and it is worth knowing where the borders are so you do not apply a stock rule to something it does not fit.

Real estate. When Tara sells one of her rental duplexes, she does not simply pay 0/15/20% on the gain. The depreciation she deducted over the years is “recaptured” — that slice of gain is taxed at a rate up to 25% (called unrecaptured section 1250 gain), higher than the normal long-term rate. She also has tools securities investors do not, like the 1031 like-kind exchange that defers the gain entirely. None of that touches a stock sale — shares never generate section 1250 gain and cannot be 1031-exchanged. Real-estate gains are the real-estate investor lesson's job.

Crypto. Chad's digital-asset trades are capital assets too, and they land on the same Form 8949 and Schedule D — but they now come on a new form, the 1099-DA, with their own 8949 boxes, per-wallet basis tracking, and the digital-asset question at the top of the 1040. The rules are close cousins of what you just learned, with enough twists to deserve the dedicated crypto lesson ahead.

Harvesting strategy. You now know the mechanics — losses offset gains, the $3,000 limit, the carryover, the wash-sale trap. Turning those mechanics into a deliberate year-round practice (which lots to sell, when to realize a gain in a 0% year, how to avoid the wash sale while staying invested) is strategy, and the gain-and-loss-harvesting lesson builds it on this foundation.

The dangers for investors are less about villains phoning you and more about quiet mistakes and too-good-to-be-true pitches. Four are worth naming, along with the one rule that guards against most of them.

The first two are self-inflicted and common: a wash sale triggered without realizing it (remember, the window reaches your other accounts, your spouse's, and your IRA), and a broker basis trusted without checking — a blank or wrong basis on a non-covered lot that turns your sale price into phantom gain, or an under-report that the IRS's matching computers catch and question with a CP2000 notice a year later. The third is the persistent myth that a sale is not taxable until the cash leaves the brokerage. The fourth is outright fraud: promoters selling fabricated capital losses, sham “tax-free” trading structures, and hidden offshore brokerage accounts — all on the IRS Dirty Dozen, and all leaving you, not the promoter, holding the tax, penalties, and interest.

Maybe you are reading this after the fact. You already filed, and only now realize you forgot to add years of reinvested dividends to your basis — so you overpaid. Or you sold at a loss, rebought a week later, and just learned what a wash sale is. Or a matching notice, a CP2000, arrived saying your broker reported a sale you did not include. Set down the self-blame first: the capital-gains rules are genuinely intricate, the forms are dense, and the basis reporting really is incomplete for older and inherited shares. Missing something here is ordinary, not negligent.

And almost all of it is fixable:

• Overpaid because of a missing or too-low basis? File an amended return (Form 1040-X) for that year with the corrected Form 8949 — you generally have three years from filing to claim the refund. Reinvested dividends and inherited step-up basis are the two most common reasons a corrected basis puts money back in your pocket.
• Got a CP2000 because a sale was left off? It is a proposed adjustment, not a bill and not an audit. Respond by the date on the notice. Often the IRS saw only your proceeds (with no basis) and assumed the whole amount was gain — you reply with the basis and the real, much smaller gain, and the proposed balance shrinks or disappears.
• Tripped a wash sale? Nothing is broken. Report it with code W; the disallowed loss rides into your replacement shares' basis and you claim it when you sell them (unless it was in an IRA).
• Not sure you can reconstruct an old basis? Brokers, the company's investor-relations history, and past statements can rebuild it. A reasonable, documented estimate is far better than defaulting to $0.

Then, if a preparer or a scheme steered you wrong, report it — not to punish yourself, but so the next investor is warned. A mistake on an investment return is a paperwork problem with a paperwork fix, not a verdict on you.

For investment-tax questions, the right kind of help escalates with the size and complexity of the problem. Work down this ladder:

1. Your broker's tax documents and support first. The consolidated 1099, the supplemental basis pages (which often show non-covered basis your broker knows but did not report to the IRS), and a request for a corrected 1099-B are the fastest fixes for a wrong number.
2. IRS Publication 550 (Investment Income and Expenses) and the Schedule D / Form 8949 instructions — the authoritative, free source for how gains, dividends, the wash-sale rule, and carryovers actually work.
3. Free preparation help if your income qualifies: VITA and TCE volunteers handle straightforward brokerage returns; IRS Free File and Free File Fillable Forms cover the electronic forms. (Note: IRS Direct File is not currently available; the durable free options are Free File, Free File Fillable Forms, and MilTax.)
4. A CPA or Enrolled Agent when the portfolio is large or complex — many lots, non-covered or inherited shares, big gains that trigger the NIIT or estimated-tax planning, or a wash-sale mess across accounts. This is where paid expertise earns its fee.
5. The Taxpayer Advocate Service (TAS) for a problem that is stuck or causing hardship, a Low Income Taxpayer Clinic (LITC) for free or low-cost representation if you qualify and are in a dispute with the IRS, and IRS Appeals or Tax Court if you disagree with an assessment after a notice. These are the backstops when the ordinary channels have not resolved it.

The questions that come up again and again once the forms are in front of you:

• “My stock went up but I didn't sell — do I owe tax?” No. Unrealized gains are not taxed. You owe only when you sell (or when a fund passes a gain through to you in box 2a).
• “I reinvested all my dividends — is that taxed?” Yes, the dividends are taxed in the year paid even though you never touched the cash. The upside: each reinvestment adds to your basis, which lowers the gain when you eventually sell. Don't forget to count it.
• “How do I know if my gain is short- or long-term?” Count from the day after you bought to the day you sold. More than one year is long-term (the gentle rates); one year or less is short-term (your ordinary rate).
• “My 1099-B basis box is blank — what do I put?” Your actual cost from your records: old confirmations, statements, or, for inherited shares, the value on the date you inherited them. Never leave it at $0, which would tax your whole sale price.
• “Can I pick which shares to sell to lower my tax?” Yes — use specific identification and tell your broker which lots at or before the sale. Otherwise the default is FIFO, which sells your oldest (often lowest-basis) shares first.
• “I sold at a loss and bought back a week later — can I still deduct it?” No, that's a wash sale, disallowed this year. But the loss is added to your new shares' basis (so it's deferred, not lost) — unless the rebuy was in an IRA, where it's gone.
• “Can losses cut my regular income?” After netting against gains, yes — up to $3,000 a year ($1,500 if married filing separately). Anything more carries forward to future years with no expiration.
• “Are my dividends the good kind?” Most dividends on U.S. stocks you've held a while are qualified (0/15/20% rates). Box 1b of your 1099-DIV shows the qualified amount; it's a subset of box 1a, not extra.
• “What's this 3.8% I keep hearing about?” The Net Investment Income Tax — an extra surtax on investment income for higher earners (over $200,000 single / $250,000 joint). If your income is well under that, it doesn't apply to you.
• “Do I have to file Schedule D even for a tiny sale?” Yes — every sale is reportable, even a $50 gain and even a loss. The good news is the 1099-B does most of the typing, and small, simple covered sales can go straight onto Schedule D.
• “A big gain — will I owe a penalty for not paying during the year?” Possibly, if you don't cover it. You can make an estimated payment or rely on the safe harbor; the withholding-and-estimates lesson shows how to keep April penalty-free.

Put it all in motion. Enter a sale — proceeds, basis, how long you held it, your filing status, your other income — and the estimator shows the gain or loss, the rate band it lands in, the 3.8% NIIT if your income reaches it, and a wash-sale flag if you rebought within 30 days. It is pre-filled with Priya and Raj's Meridian lot; switch to Nadia to watch a $5,000 gain tax out at zero, or to Cascade to see a wash sale disallow a loss.

Try the experiments that teach the lesson's spine. Flip Priya and Raj's Meridian sale from long-term to short-term and watch the tax jump as the rate goes from 15% to 24%. Raise Nadia's other income and watch her 0% gain slide into the 15% band once her total crosses $49,450. Turn a gain into a loss and see the message change to how the loss is used. This is your own return in miniature — and a rough estimate for learning, not a substitute for the real worksheets or a professional.

The vocabulary of an investor's tax return, in plain terms:

• Realization — the moment a gain or loss becomes taxable, which is when you sell (or otherwise dispose of) the investment. Until then a gain is “unrealized” and untaxed.
• Capital gain / capital loss — the profit or loss on selling a capital asset (like stock): proceeds minus your cost basis.
• Short-term vs. long-term — held one year or less (short-term, taxed at ordinary rates) vs. held more than one year (long-term, taxed at 0/15/20%).
• Cost basis — what you paid for an investment, including fees; the amount subtracted from proceeds to find the gain.
• Adjusted basis — your basis after events that change it: reinvested dividends and wash-sale losses add to it; return of capital subtracts; splits reallocate it.
• FIFO — “first in, first out,” the default rule that treats your oldest shares as sold first when you don't specify.
• Specific identification — telling your broker exactly which lots to sell, at or before the sale, to control the size of the gain.
• Covered vs. non-covered lot — shares whose basis the broker must report to the IRS (covered) vs. shares it need not, so you supply the basis (non-covered — often older, gifted, or inherited shares).
• Qualified dividend — a dividend that meets a payer test and a holding-period test, so it is taxed at the low 0/15/20% rates instead of ordinary rates.
• Form 1099-B — the broker's report of your sales: proceeds, basis, and flags for wash sales and non-covered lots.
• Form 1099-DIV — the report of your dividends (box 1a total, box 1b qualified subset) and fund distributions (box 2a).
• Form 8949 — the detailed list of each sale, grouped by box (A/B/C short-term, D/E/F long-term), where adjustments like the wash sale (code W) are made.
• Schedule D — the summary that nets short-term against long-term, applies the loss limit, and sends the result to Form 1040 line 7.
• Wash-sale rule — a disallowed loss when you rebuy the same or substantially identical security within 30 days before or after selling at a loss; the loss is added to the replacement shares' basis (and lost for good if the rebuy is in an IRA).
• Capital-loss carryover — the part of a net capital loss above the annual limit that carries forward indefinitely, keeping its short- or long-term character.
• The $3,000 limit — the most net capital loss you can deduct against ordinary income in one year ($1,500 if married filing separately); the rest carries over.
• Net Investment Income Tax (NIIT) — an extra 3.8% on investment income for filers above $200,000 (single) / $250,000 (joint), figured on Form 8960.
• Capital gain distribution — a fund's own realized gains passed through to you (1099-DIV box 2a), taxable even in a year you didn't sell the fund.