In the context of 'who must file' requirements, is net capital gain or gross sales amount considered?
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For purposes of determining whether you must file a U.S. federal income tax return, the relevant amount to consider from the sale of property (such as stocks, securities, or other capital assets) is the net capital gain—not the gross sales proceeds.
Legal Basis and Explanation
1. Definition of Gross Income for Filing Purposes
- The requirement to file a tax return is generally based on whether your gross income meets or exceeds the filing threshold for your filing status, age, and dependency status.
- For sales of property, gross income is defined as the gain realized from the sale, not the total amount received (gross proceeds).
2. How to Compute Gross Income from Sales
- The Internal Revenue Code and Treasury Regulations specify that gross income from the sale of property is the amount realized (i.e., the sales price) minus the adjusted basis (i.e., your cost or other basis in the property).
- Treasury Regulation §1.61-6(a) states: "The gain realized from the sale or exchange of property is included in gross income. The gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged."
3. Filing Thresholds and Capital Gains
- IRS Publication 501 clarifies that for purposes of the filing requirement, gross income includes gains, but not losses, reported on Form 8949 or Schedule D. It does not include the gross proceeds from the sale.
- Example: If you sell stock for $100,000 (gross proceeds) but your basis is $98,000, your gross income from the sale is $2,000 (the gain). Only this $2,000 is counted toward the filing threshold, not the $100,000 gross proceeds.
4. IRS Guidance and Service Center Advice
- The IRS has issued Service Center Advice (SCA 200018051) confirming that a taxpayer is not required to file a return solely because the gross proceeds reported on Form 1099-B exceed the filing threshold. The key is whether the net gain (gross income) from the sale, when combined with other gross income, meets or exceeds the filing threshold.
5. Practical Considerations
- If you receive a Form 1099-B showing large gross proceeds but your net gain is below the filing threshold (and you have no other income requiring you to file), you are not required to file a return. However, the IRS may send a notice if it receives a Form 1099-B and no return is filed. Filing a return in such cases can help avoid IRS inquiries, but it is not legally required if your gross income is below the threshold.
6. Summary Table
7. Conclusion
The net capital gain (not the gross sales amount) is what counts toward the income threshold for determining whether you must file a tax return. Only if your total gross income—including net capital gains and other income—meets or exceeds the filing threshold for your filing status, age, and dependency status are you required to file a return.
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