Schedule D - Capital Gains and Losses

Memo of Major Changes for Instructions for Schedule D (Form 1065)

Starting with the 2008 revisions, we have made the Instructions for Schedule D (Form
1065) a separate product.
We eliminated the “What’s New” section, as there is nothing new to report at this time. If
there are changes that warrant restoring the “What’s New” section, we will add it back to
the instructions.

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Instructions for Schedule D

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2008

Department of the Treasury
Internal Revenue Service

Instructions for Schedule D
Capital Gains and Losses
Section references are to the Internal
Revenue Code unless otherwise noted.

General Instructions
Purpose of Schedule
Use Schedule D (Form 1065) to report
sales or exchanges of capital assets,
capital gain distributions, and
nonbusiness bad debts. Do not report on
Schedule D capital gains (losses)
specially allocated to any partners.
Enter capital gains (losses) specially
allocated to the partnership as a partner
in other partnerships and from estates
and trusts on Schedule D, line 4 or 9,
whichever applies. Enter capital gains
(losses) of the partnership that are
specially allocated to partners directly on
line 8, 9a, or 11 of Schedule K. See How
Income Is Shared Among Partners in the
Instructions for Form 1065 for more
information.
Note. For more information, see Pub.
544, Sales and Other Dispositions of
Assets.

Other Forms The
Partnership May Have To
File
Use Form 4797, Sales of Business
Property, to report:
• Sales or exchanges of property used in
a trade or business.
• Sales or exchanges of depreciable or
amortizable property.
• Sales or other dispositions of securities
or commodities held in connection with a
trading business, if the partnership made
a mark-to-market election (see page 5 of
the instructions for Form 1065).
• Involuntary conversions (other than
from casualties or thefts).
• The disposition of noncapital assets
(other than inventory or property held
primarily for sale to customers in the
ordinary course of a trade or business).
Use Form 4684, Casualties and
Thefts, to report involuntary conversions
of property due to casualty or theft.
Use Form 6781, Gains and Losses
From Section 1256 Contracts and
Straddles, to report gains and losses from
section 1256 contracts and straddles. If
there are limited partners, see section
1256(e)(4) for the limitation on losses
from hedging transactions.
Use Form 8824, Like-Kind Exchanges,
if the partnership made one or more
like-kind exchanges. A “like-kind

exchange” occurs when business or
investment property is exchanged for
property of a like kind.

What Are Capital Assets?
Each item of property the partnership held
(whether or not connected with its trade
or business) is a capital asset except:
• Stock in trade or other property
included in inventory or held mainly for
sale to customers.
• Accounts or notes receivable acquired
in the ordinary course of the trade or
business for services rendered or from
the sale of stock in trade or other property
held mainly for sale to customers.
• Depreciable or real property used in the
trade or business, even if it is fully
depreciated.
• Certain copyrights; literary, musical, or
artistic compositions; letters or
memoranda; or similar property. See
section 1221(a)(3).
• U.S. Government publications,
including the Congressional Record, that
the partnership received from the
Government, other than by purchase at
the normal sales price, or that the
partnership got from another taxpayer
who had received it in a similar way, if the
partnership’s basis is determined by
reference to the previous owner.
• Certain commodities derivative
financial instruments held by a dealer.
See section 1221(a)(6).
• Certain hedging transactions entered
into in the normal course of the trade or
business. See section 1221(a)(7).
• Supplies regularly used in the trade or
business.

Items for Special
Treatment

• Transactions by a securities dealer.

See section 1236.
• Bonds and other debt instruments. See
Pub. 550, Investment Income and
Expenses.
• Certain real estate subdivided for sale
that may be considered a capital asset.
See section 1237.
• Gain on the sale of depreciable
property to a more than 50%-owned
entity, or to a trust in which the
partnership is a beneficiary, is treated as
ordinary gain.
• Liquidating distributions from a
corporation. See Pub. 550 for details.
• Gain on the sale or exchange of stock
in certain foreign corporations. See
section 1248.
Cat. No. 51610S

• Gain or loss on options to buy or sell,
including closing transactions. See Pub.
550 for details.
• Gain or loss from a short sale of
property. See Pub. 550 for details.
• Transfer of property to a political
organization if the fair market value (FMV)
of the property exceeds the partnership’s
adjusted basis in such property. See
section 84.
• Any loss on the disposition of
converted wetland or highly erodible
cropland that is first used for farming after
March 1, 1986, is reported as a long-term
capital loss on Schedule D, but any gain
on such a disposition is reported as
ordinary income on Form 4797. See
section 1257 for details.
• Transfer of partnership assets and
liabilities to a newly formed corporation in
exchange for all of its stock. See Rev.
Rul. 84-111, 1984-2 C.B. 88.
• Disposition of foreign investment in a
U.S. real property interest. See section
897.
• Any loss from a sale or exchange of
property between the partnership and
certain related persons is not allowed,
except for distributions in a complete
liquidation of a corporation. See sections
267 and 707(b) for details.
• Any loss from securities that are capital
assets that become worthless during the
year is treated as a loss from the sale or
exchange of a capital asset on the last
day of the tax year.
• Nonrecognition of gain on sale of stock
to an employee stock ownership plan
(ESOP) or an eligible cooperative. See
section 1042 and Temporary Regulations
section 1.1042-1T for rules under which
the partnership may elect not to recognize
gain from the sale of certain stock to an
ESOP or an eligible cooperative.
• A nonbusiness bad debt must be
treated as a short-term capital loss and
can be deducted only in the year the debt
becomes totally worthless. For each bad
debt, enter the name of the debtor and
“schedule attached” in column (a) of line 1
and the amount of the bad debt as a loss
in column (f). Also attach a statement of
facts to support each bad debt deduction.
• Any loss from a wash sale of stock or
securities (including contracts or options
to acquire or sell stock or securities)
cannot be deducted unless the
partnership is a dealer in stock or
securities and the loss was sustained in a
transaction made in the ordinary course
of the partnership’s trade or business. A
wash sale occurs if the partnership
acquires (by purchase or exchange), or

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Instructions for Schedule D

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has a contract or option to acquire,
substantially identical stock or securities
within 30 days before or after the date of
the sale or exchange. See section 1091
for more information.
• Gain from installment sales. If the
partnership sold property at a gain and it
will receive a payment in a tax year after
the year of sale, it generally must report
the sale on the installment method unless
it elects not to. However, the installment
method may not be used to report sales
of stock or securities traded on an
established securities market. Use Form
6252, Installment Sale Income, to report
the sale on the installment method. Also
use Form 6252 to report any payment
received during the tax year from a sale
made in an earlier year that was reported
on the installment method.
If the partnership wants to elect out of
the installment method for installment
gain that is not specially allocated among
the partners, it must report the full amount
of the gain on a timely filed return
(including extensions).
If the partnership wants to elect out of
the installment method for installment
gain that is specially allocated among the
partners, it must do the following on a
timely filed return (including extensions):
1. For a short-term capital gain,
report the full amount of the gain on
Schedule K, line 8 or 11.
For a long-term capital gain, report the
full amount of the gain on Schedule K,
line 9a or 11. Report the collectibles
(28%) gain on Schedule K, line 9b.
2. Enter each partner’s share of the
full amount of the gain on Schedule K-1,
box 8 or 9a, or in box 11 using code F,
whichever applies. Report the collectibles
(28%) gain on Schedule K-1, box 9b.
If the partnership filed its original return
on time without making the election, it
may make the election on an amended
return filed no later than 6 months after
the due date of the return (excluding
extensions). Write “Filed pursuant to
section 301.9100-2” at the top of the
amended return.
• A sale or other disposition of an interest
in a partnership owning unrealized
receivables or inventory items may result
in ordinary gain or loss. See Pub. 541,
Partnerships, for more details.
• Gain from certain constructive
ownership transactions. Gain in excess of
the gain that would have been recognized
if the partnership had held a financial
asset directly during the term of a
derivative contract must be treated as
ordinary income. See section 1260 for
details.
• Gain from the sale of collectibles.
Report any collectibles (28%) gain (loss)
included on lines 6 through 10 on line 9b
of Schedule K (and each partner’s share
in box 9b of Schedule K-1). A collectibles
(28%) gain (loss) is any long-term gain or
deductible long-term loss from the sale or
exchange of a collectible that is a capital
asset.

Collectibles include works of art, rugs,
antiques, metals (such as gold, silver, and
platinum bullion), gems, stamps, coins,
alcoholic beverages, and certain other
tangible property.
Also include gain (but not loss) from
the sale or exchange of an interest in a
partnership or trust held more than 1 year
and attributable to unrealized appreciation
of collectibles. For details, see
Regulations section 1.1(h)-1. Also, attach
the statement required under Regulations
section 1.1(h)-1(e).
Special rules for traders in securities.
Traders in securities are engaged in the
business of buying and selling securities
for their own account. To be engaged in
business as a trader in securities:
• The partnership must seek to profit
from daily market movements in the
prices of securities and not from
dividends, interest, or capital
appreciation.
• The partnership’s trading activity must
be substantial.
• The partnership must carry on the
activity with continuity and regularity.
The following facts and circumstances
should be considered in determining if a
partnership’s activity is a business:
• Typical holding periods for securities
bought and sold.
• The frequency and dollar amount of the
partnership’s trades during the year.
• The extent to which the partners
pursue the activity to produce income for
a livelihood.
• The amount of time devoted to the
activity.
Like an investor, a trader must report
each sale of securities (taking into
account commissions and any other costs
of acquiring or disposing of the securities)
on Schedule D or on an attached
statement containing all the same
information for each sale in a similar
format. However, if a trader made the
mark-to-market election (see page 5 of
the instructions for Form 1065), each
transaction is reported in Part II of Form
4797 instead of Schedule D. Regardless
of whether a trader reports its gains and
losses on Schedule D or Form 4797, the
gain or loss from the disposition of
securities is not taken into account when
figuring net earnings from
self-employment on Schedules K and
K-1. See section 1402(i) for an exception
that applies to section 1256 contracts.
The limitation on investment interest
expense that applies to investors does
not apply to interest paid or incurred in a
trading business. A trader reports interest
expense and other expenses (excluding
commissions and other costs of acquiring
or disposing of securities) from a trading
business on page 1 of Form 1065.
A trader also may hold securities for
investment. The rules for investors
generally will apply to those securities.
Allocate interest and other expenses
between the partnership’s trading
business and its investment securities.

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Investment interest expense is reported
on line 13b of Schedule K and in box 13
of Schedule K-1 using code G.
Constructive sale treatment for certain
appreciated positions. Generally, the
partnership must recognize gain (but not
loss) on the date it enters into a
constructive sale of any appreciated
position in stock, a partnership interest, or
certain debt instruments as if the position
were disposed of at FMV on that date.
The partnership is treated as making a
constructive sale of an appreciated
position when it (or a related person, in
some cases) does one of the following:
• Enters into a short sale of the same or
substantially identical property (that is, a
“short sale against the box.”)
• Enters into an offsetting notional
principal contract relating to the same or
substantially identical property.
• Enters into a futures or forward contract
to deliver the same or substantially
identical property.
• Acquires the same or substantially
identical property (if the appreciated
position is a short sale, offsetting notional
principal contract, or a futures or forward
contract).
Exception. Generally, constructive sale
treatment does not apply if:
• The partnership closed the transaction
before the end of the 30th day after the
end of the tax year in which it was
entered into,
• The partnership held the appreciated
position to which the transaction relates
throughout the 60-day period starting on
the date the transaction was closed, and
• At no time during that 60-day period
was the partnership’s risk of loss reduced
by holding certain other positions.
For details and other exceptions to
these rules, see Pub. 550.
Rollover of gain from qualified stock.
If the partnership sold qualified small
business stock (defined below) it held for
more than 6 months, it may postpone
gain if it purchased other qualified small
business stock during the 60-day period
that began on the date of the sale. The
partnership must recognize gain to the
extent the sale proceeds exceed the cost
of the replacement stock. Reduce the
basis of the replacement stock by any
postponed gain.
If the partnership chooses to postpone
gain, report the entire gain realized on the
sale on line 1 or 6. Directly below the line
on which the partnership reported the
gain, enter in column (a) “Section 1045
Rollover” and enter as a (loss) in column
(f) the amount of the postponed gain.
Attach a statement for Form 1065 that
(a) identifies the replacement qualified
small business stock, (b) shows the
computation of the adjustment to the
partnership’s basis in the replacement
stock for the amount of any postponed
gain under section 1045, and (c) shows
the dates on which the replacement stock
was acquired by the partnership.

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Instructions for Schedule D

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The partnership also must
separately state the amount of the
CAUTION gain rolled over on qualified stock
under section 1045 on Form 1065,
Schedule K, line 11. Each partner must
determine if he or she qualifies for the
rollover at the partner level or if he or she
wants to opt out of the section 1045
election. Also, the partnership must
separately state on that line (and not on
Schedule D) any gain that would qualify
for the section 1045 rollover at the partner
level instead of the partnership level
(because a partner was entitled to
purchase replacement stock) and any
gain on qualified stock that could qualify
for the partial exclusion under section
1202.

• One involving services performed in the
fields of health, law, engineering,
architecture, accounting, actuarial
science, performing arts, consulting,
athletics, financial services, or brokerage
services.
• One whose principal asset is the
reputation or skill of one or more
employees.
• Any banking, insurance, financing,
leasing, investing, or similar business.
• Any farming business (including the
raising or harvesting of trees).
• Any business involving the production
of products for which percentage
depletion can be claimed.
• Any business of operating a hotel,
motel, restaurant, or similar business.

To be qualified small business stock,
the stock must meet all of the following
tests:
• It must be stock in a C corporation (that
is, not S corporation stock).
• It must have been originally issued
after August 10, 1993.
• As of the date the stock was issued,
the corporation was a qualified small
business. A qualified small business is a
domestic C corporation with total gross
assets of $50 million or less (a) at all
times after August 9, 1993, and before
the stock was issued and (b) immediately
after the stock was issued. Gross assets
include those of any predecessor of the
corporation. All corporations that are
members of the same parent-subsidiary
controlled group are treated as one
corporation.
• The partnership must have acquired
the stock at its original issue (either
directly or through an underwriter), either
in exchange for money or other property
or as pay for services (other than as an
underwriter) to the corporation. In certain
cases, the partnership may meet the test
if it acquired the stock from another
person who met this test (such as by gift
or at death) or through a conversion or
exchange of qualified business stock by
the holder.
• During substantially all the time the
partnership held the stock:
1. The corporation was a C
corporation,
2. At least 80% of the value of the
corporation’s assets were used in the
active conduct of one or more qualified
businesses (defined below), and
3. The corporation was not a foreign
corporation, domestic international sales
corporation (DISC), former DISC,
corporation that has made (or that has a
subsidiary that has made) a section 936
election, regulated investment company
(RIC), real estate investment trust (REIT),
real estate mortgage investment conduit
(REMIC), financial asset securitization
investment trust (FASIT), or cooperative.

Rollover of gain from empowerment
zone assets. If the partnership sold a
qualified empowerment zone asset it held
for more than 1 year, it may be able to
elect to postpone part or all of the gain.
For details, see Pub. 954, Tax Incentives
for Distressed Communities, and section
1397B.

!

Note. A specialized small business
investment company (SSBIC) is treated
as having met test 2 above.
A qualified business is any business
other than the following:

Exclusion of gain from qualified
community assets. If the partnership
sold or exchanged a qualified community
asset held for more than 5 years, it can
exclude any qualified capital gain. The
exclusion applies to an interest in, or
property of, certain qualified community
assets.
Qualified community asset. A
qualified community asset is any of the
following.
• Qualified community stock.
• Qualified community partnership
interest.
• Qualified community business property.
Qualified capital gain. Qualified
capital gain is any gain recognized on the
sale or exchange of a qualified
community asset, but does not include
any of the following.
• Gain treated as ordinary income under
section 1245.
• Section 1250 gain figured as if section
1250 applied to all depreciation rather
than the additional depreciation.
• Gain attributable to real property, or an
intangible asset, that is not an integral
part of a qualified community business.
• Gain from a related-party transaction.
See Sales and Exchanges Between
Related Persons in chapter 2 of Pub. 544.

Exclusion of gain from DC Zone
assets. If the partnership sold or
exchanged a District of Columbia
Enterprise Zone (DC Zone) asset that it
held for more than 5 years, it may be able
to exclude the qualified capital gain. The
DC Zone asset must have been acquired
after 1997, but before 2008, to qualify as
an asset for which the partnership may be
able to take the exclusion. The sale or
exchange of DC Zone capital assets
reported on Schedule D includes:
• Stock in a domestic corporation that
was a DC Zone business.
• Interest in a partnership that was a DC
Zone business.
Report the sale or exchange of
property used in the partnership’s DC
Zone business on Form 4797.
Gains not qualified for exclusion.
The following gains do not qualify for the
exclusion of gain from DC Zone assets.
• Gain on the sale of an interest in a
partnership, which is a DC Zone
business, attributable to unrecaptured
section 1250 gain. See the instructions for
line 9c of Schedule K for information on
how to report unrecaptured section 1250
gain.
• Gain on the sale of an interest in a
partnership or S corporation attributable
to real property or an intangible asset
which is not an integral part of the DC
Zone business.
• Gain from a related-party transaction.
See Sales and Exchanges Between
Related Persons in chapter 2 of Pub. 544.
See Pub. 954 and section 1400B for
more details on DC Zone assets and
special rules.
How to report. Report the entire gain
realized from the sale or exchange as the
partnership otherwise would without
regard to the exclusion. To report the
exclusion, enter “DC Zone Asset
Exclusion” on Schedule D, line 6, column
(a) and enter as a (loss) in column (f) the
amount of the exclusion.

Specific Instructions
Columns (b) and (c). Date
Acquired and Date Sold

See Pub. 954 and section 1400F for
more details on qualified community
assets and special rules.

Use the trade dates for date acquired and
date sold for stocks and bonds traded on
an exchange or over-the-counter market.
The acquisition date for an asset the
partnership held on January 1, 2001, for
which it made an election to recognize
any gain on a deemed sale, is the date of
the deemed sale and reacquisition.

How to report. Report the entire gain
realized from the sale or exchange as the
partnership otherwise would without
regard to the exclusion. On Schedule D,
line 6, enter “Qualified Community Asset”
in column (a) and enter as a loss in
column (f) the amount of the allowable
exclusion. If reporting the sale directly on
Schedule D, line 6, use the line the
partnership is using to report the gain
from the sale to report the exclusion.

Enter in this column either the gross sales
price or the net sales price from the sale.
On sales of stocks and bonds, report the
gross amount as reported to the
partnership by the partnership’s broker on
Form 1099-B, Proceeds From Broker and
Barter Exchange Transactions, or similar
statement. However, if the broker advised
the partnership that gross proceeds
(gross sales price) less commissions and

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Column (d). Sales Price

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option premiums were reported to the
IRS, enter that net amount in column (d).

Column (e). Cost or Other Basis
In general, the cost or other basis is the
cost of the property plus purchase
commissions and improvements minus
depreciation, amortization, and depletion.
If the partnership got the property in a
tax-free exchange, involuntary
conversion, or wash sale of stock, it may
not be able to use the actual cash cost as
the basis. If the partnership does not use
cash cost, attach an explanation of the
basis.
If the partnership sold stock, adjust the
basis by subtracting all the stock-related
nontaxable distributions received before
the sale. This includes nontaxable
distributions from utility company stock
and mutual funds. Also adjust the basis
for any stock splits or stock dividends.
If the partnership elected to recognize
gain on an asset held on January 1, 2001,
its basis in the asset is its closing market
price or FMV, whichever applies, on the
date of the deemed sale and

reacquisition, whether the deemed sale
resulted in a gain or an unallowed loss.
If a charitable contribution deduction is
passed through to a partner because of a
bargain sale of property to a charitable
organization, the adjusted basis for
determining gain from the sale is an
amount that has the same ratio to the
adjusted basis as the amount realized
has to the FMV.
See section 852(f) for the treatment of
certain load charges incurred in acquiring
stock in a mutual fund with a reinvestment
right.
If the gross sales price is reported in
column (d), increase the cost or other
basis by any expense of sale, such as
broker’s fees, commissions, or option
premiums, before making an entry in
column (e).
For more details, see Pub. 551, Basis
of Assets.

Column (f). Gain or (Loss)
Make a separate entry in this column for
each transaction reported on lines 1 and

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6 and any other line(s) that applies to the
partnership. For lines 1 and 6, subtract
the amount in column (e) from the amount
in column (d). Enter negative amounts in
parentheses.

Lines 4 and 9. Capital Gains
(Losses) From Other
Partnerships, Estates, and
Trusts
See the Schedule K-1 or other
information supplied to you by the other
partnership, estate, or trust.

Line 10. Capital Gain
Distributions
On line 10, column (f), report the total
amount of (a) capital gain distributions
and (b) the partnership’s share of
undistributed capital gains from a RIC or
REIT. Report the partnership’s share of
taxes paid on undistributed capital gains
by a RIC or REIT on a statement attached
to Form 1065 for Schedule K, line 15f
(and each partner’s share in box 15 of
Schedule K-1 using code F).