In general, you’re required to file a federal income tax return when your gross income is equal to or exceeds the sum of your exemption plus standard deduction (internal revenue code section 6012(a)(1)).
For 2018 returns, to be filed in 2019, the personal exemption is zero. The basic standard deduction is $12,000 when you’re single or married filing separate returns, $18,000 if you file as head of household, and $24,000 when you’re married filing a joint return or a surviving spouse.
So what happens when gross proceeds from the sale of property exceed the gross income filing requirement and the gain from the sale of that property is less than the gross income filing requirement?
Say for example, a taxpayer sells stock and receives gross proceeds of $100,000. This is the only income for the year, and the basis in the stock is $98,000. Does a federal income tax return need to be filed for the year of sale?
Here’s the relevant tax law.
From internal revenue code section 61. Provides that gross income means all income from whatever source derived. In general, this includes all gains and profits from any source before allowable deductions for expenses incurred in getting the income and before losses are offset against such income. Gross income is arrived at by reducing gross receipts by the cost of goods sold and other costs that represent a return of capital.
From treasury regulation 1.61: Provides, in general, that the gain realized from the sale or exchange of property is included in gross income.
From internal revenue code section 1001: Provides that the determination of gain from the sale or other disposition of property is the excess of the amount realized for the property over the adjusted basis of the property. The amount realized is the sum of money received or the fair market value of property other than money received.
From internal revenue code section 1011: Provides that the basis of property for determining gain or loss on the sale or other disposition of property is its cost as adjusted under section 1016.
From internal revenue code section 1016: Basis is adjusted for items properly chargeable to a capital account, such as the cost of any improvements. Gross income from dealings in property is the amount realized in excess of basis.
In the example above, where the gross proceeds from a stock sale are $100,000 and the taxpayer’s basis is $98,000, is the taxpayer required to file a federal income tax return?
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The filing requirement is triggered by gross income. Gross income includes all gains and profits from any source before allowable deductions for expenses incurred in getting the income and before losses are offset against such income. Gross income is arrived at by reducing gross receipts by the cost of goods sold and other costs that represent a return of capital. Gross income from dealings in property is the amount realized in excess of basis.
Once the computation has been completed and the gross income has been determined from the dealings in property, whether or not the amount equals or exceeds the sum of the exemption amount plus the applicable standard deduction determines whether a filing requirement exists. A taxpayer need not file a return unless the “gross income” exceeds the sum of the exemption amount plus the applicable standard deduction.
In this specific example, the technical answer is that a taxpayer would not have a filing requirement.
Note however, that the IRS will typically receive Form 1099 from the taxpayer’s broker. If a federal income tax return is not filed, the taxpayer may receive an inquiry from the IRS. The taxpayer may choose to file a return showing no tax due to avert potential questions.