To address the question of what can happen if a taxpayer fails to report capital gains, it will help if we start by clarifying the terminology. Acapital gainis the difference between what you pay to acquire something (an asset) and what you sell it for. Assets can be tangible, like stocks, gold, and property, or intangible, like copyrights or patents.
The asset's cost is often referred to as the "basis," and there are adjustments to the basis that are relevant to reporting. Keep in mind that until a gain is realized (due to the investor selling the asset), it is only a theoretical or paper gain that can't be captured or reported. Reporting the gain takes place in the subsequent tax filing after the occurrence.
What Is the Basis of a Gain?
For real estate, the basis is the cost of the asset (sales price) plus expenses like commission and other closing costs. In addition, the adjusted basis would include capital improvements made to the property, minus decreases like casualty losses and depreciation. For a stock gain, the calculation is more straightforward—the sales price minus the purchase price is the gain.
Why Does the Length of Ownership Matter?
If you have a capital gain on an asset you have held for less than one year; the gain is taxed at the same rate as ordinary income, not at the capital gains tax rate. The ordinary income rate is higher, so it is typically advantageous to the taxpayer to hold an asset for more than a year before selling. For example, the capital gains tax rates for 2023 can be between 0 and 20%, depending on the taxpayer's filing status, with a possible additional net investment income tax of 3.8 percent in some cases. In contrast, the ordinary income rates go all the way up to 37 percent for 2023.
How do I report capital gains (or losses)?
Form 8949, officially called "Sales and Other dispositions of Capital Assets," is used to report most capital gains. It is also the method of reporting deferral of gains invested in a QOF, gains from involuntary conversions (not from casualty losses or thefts), and bad debts of a non-business nature. You don't need Form 8949 if your broker completes a 1099-B, so ask your broker if you have questions about which form you should use.
When you sell real estate assets for a capital gain, you should receive form 1099-S, and you will report the gain on Schedule D.
What Happens if I Don’t Report a Capital Gain?
Whether the gain is from selling stocks, real estate, or some other capital asset, the IRS wants to know about it. If you do not include the information in your tax filing (either accidentally or in error), the chances are that the IRS will find out through some other reporting mechanism. The IRS has the authority to impose fines and penalties for your negligence, and they often do. If they can demonstrate that the act was intentional, fraudulent, or designed to evade payment of rightful taxes, they can seek criminal prosecution.
It’s a better idea to consult your tax advisor to be sure you have included the appropriate and required forms to report all necessary transactions when you file your taxes.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
FAQs
The IRS has the authority to impose fines and penalties for your negligence, and they often do. If they can demonstrate that the act was intentional, fraudulent, or designed to evade payment of rightful taxes, they can seek criminal prosecution.
What happens if you don't report capital gains to the IRS? ›
If you fail to report the gain, the IRS will become immediately suspicious. While the IRS may simply identify and correct a small loss and ding you for the difference, a larger missing capital gain could set off the alarms.
What happens if you forget to declare capital gains? ›
Not declaring or paying what you owe is an offence that could land you with a fine, possibly leaving you to pay more than you originally owed in interest. However, there are a number of reliefs and conditions which, if you receive the right financial advice, may mean the amount of CGT you pay is lower.
How does the IRS know if you have capital gains? ›
You have indicated that you received a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. You must report all 1099-B transactions on Schedule D (Form 1040), Capital Gains and Losses and you may need to use Form 8949, Sales and Other Dispositions of Capital Assets.
What happens if capital gains are not reported? ›
Non-declaration of such income can get you into trouble as taxmen will have complete access to any capital gains you have made.
What happens if you forgot to claim capital gains? ›
You cannot report the gain in a different year from the year you receive it. There is no duty to amend a tax return if you made an honest mistake (even if the mistake results in more tax owed). However, you may wish to file an amended return, either to get a refund or to stop interest/penalties from accruing.
Do I have to report very small capital gains? ›
While all capital gains are taxable and must be reported on your tax return, only capital losses on investment or business property are deductible.
Do I have to worry about capital gains tax? ›
If you want to invest money and make a profit, you will owe capital gains taxes on that profit. There are, however, a number of perfectly legal ways to minimize your capital gains taxes: Hold your investment for more than one year.
How long can you go without paying capital gains tax? ›
As long as you lived in the property as your primary residence for 24 months within the five years before the home's sale, you can qualify for the capital gains tax exemption. And if you're married and filing jointly, only one spouse needs to meet this requirement.
Do you report capital gains if you don't sell? ›
Note that tax is only owed on capital gains when they are realized or sold. If you hold onto this stock instead of selling it, you have what's termed an unrealized capital gain. No tax would be due on the gain until you sold the asset.
Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.
What is the 6 year rule for capital gains tax? ›
Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they move out of their PPOR and then rent it out. There are some qualifying conditions for leaving your principal place of residence.
Do I owe taxes on capital gains? ›
Capital gains are generally included in taxable income, but in most cases, are taxed at a lower rate. A capital gain is realized when a capital asset is sold or exchanged at a price higher than its basis. Basis is an asset's purchase price, plus commissions and the cost of improvements less depreciation.
What capital gains are not taxed? ›
These include 401(k) plans, individual retirement accounts and 529 college savings accounts, in which the investments grow tax-free or tax-deferred. That means you don't have to pay capital gains tax if you sell investments within these accounts.
Do you have to report capital gains if you don't withdraw? ›
If you have a taxable (not an IRA, 401k or similar account) brokerage account and you sell stocks or mutual funds, you have "realized" a gain (or loss) and it must be reported on your tax return, even if your didn't withdraw the money form the account.
What capital gains must be reported? ›
Capital gains may apply to any type of asset, including investments and those purchased for personal use. The gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.
What happens if the IRS finds unreported income? ›
If a discrepancy exists, a Notice CP2000 is issued. The CP2000 isn't a bill, it's a proposal to adjust your income, payments, credits, and/or deductions. The adjustment may result in additional tax owed or a refund of taxes paid.
