Schedule D is used to report capital gains and losses on assets held for personal or investment purposes. You may need to use Form 4797 to report gains or losses on sales, exchanges or other disposals of business property.
You need to file Schedule D with your federal income tax return when you have capital gains and losses. These include:
Gains or losses on the sale or exchange of capital assets you hold for personal or investment purposes, and not for business or profit,
Gains or losses on the involuntary conversion of capital assets you hold for personal or investment purposes,
Capital gain distributions that you cannot report directly on Form 1040,
Other capital gains and losses that you are not required to report on another form or schedule,
Non-business bad debts.
Sale or Exchange of Capital Assets Held for Personal or investment Purposes
A sale is a transfer of property for money or for the promise to pay, such as a mortgage or other debt. An exchange is the transfer of property for other property or services.
Gain or loss on either a sale or exchange is determined as the difference between what you realize; that is, the total money and fair market value of the property and services you receive; and your adjusted basis in the property you give up. Your adjusted basis is generally your cost or other original basis (depending on whether you acquired the property by purchase, transfer, gift, inheritance, etc.), plus certain additions, such as improvements, and minus certain deductions, such as depreciation or casualty losses.
Certain exchanges may be nontaxable, such as like-kind exchanges in which property held for investment or for productive use in a business or trade is exchanged for property of the same nature or character.
What is a Capital Asset?
In order to know how a gain or loss on the sale, exchange, or disposal of property has to be reported for tax purposes, you must first determine whether the property is a capital or non-capital asset. Gains or losses on capital assets are referred to as capital gains and losses, and are generally subject to special tax rates. Gains and losses on non-capital assets are referred to as ordinary gains and losses, and are generally taxed at the normal rate that applies.