• The sale or exchange of a capital asset (defined on this page).
• Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit.
• Capital gain distributions not reported directly on Form 1040, line 13.
• Nonbusiness bad debts.

Additional Information. See Pub. 544 and Pub. 550 for more details. For a comprehensive filled-in example of Schedule D, see Pub. 550.

Section references are to the Internal Revenue Code unless otherwise noted.

General Instructions

Changes To Note

Maximum Capital Gains Tax Rates. The 20% maximum tax rate on net capital gain (the excess of net long-term capital gain over net short-term capital loss) has
been reduced to 15%, and the 10% rate has been reduced to 5%, for sales and other dispositions after May 5, 2006 (and installment payments received after that
date). The 25% rate on unrecaptured section 1250 gain and the 28% rate on collectibles gain and section 1202 gain have not changed.

Qualified Dividends. Dividends paid by most domestic and foreign corporations after December 31, 2005, are eligible for the new maximum capital gains tax rate
of 15% (5% in some cases). Qualified dividends are reported on Form 1040, line 9b. For details, see the Instructions for Form 1040, line 9b, on page 23.

Qualified 5-Year Gain. The 8% maximum capital gains tax rate for qualified 5-year gain has been eliminated for sales and other dispositions after May 5, 2006
(and installment payments received after that date). Instead, gain from these transactions will be taxed at the 5% maximum capital gains tax rate described above.
See the instructions for line 35 on page D-10 for more details.

28% Rate Gain. Any 28% rate gain is now figured on a worksheet and entered on Schedule D, line 20. See the instructions for line 20 beginning on page D-8 for more details.

Capital Loss Carryover Worksheet. The Capital Loss Carryover Worksheet has been removed from the 2007 Instructions for Schedule D to simplify the preparation of your 2007 tax return. To figure your capital loss carryover to 2007, you will use a worksheet in the 2007 Instructions for Schedule D. See the instructions for line 18 on page D-7 for more details.

Other Forms You May Have To File

Use Form 4797 to report the following:

• The sale or exchange of:
  1. Property used in a trade or business;
  2. Depreciable and amortizable property;
  3. Oil, gas, geothermal, or other mineral property; and
  4. Section 126 property.
• The involuntary conversion (other than from casualty or theft) of property used in a trade or business and capital assets held for business or profit.
• The disposition of noncapital assets other than inventory or property held primarily for sale to customers in the ordinary course of your trade or business.
• Ordinary loss on the sale, exchange, or worthlessness of small business investment company (section 1242) stock.
• Ordinary loss on the sale, exchange, or worthlessness of small business (section 1244) stock.
• Ordinary loss on securities held in con-nection with your trading business, if you previously made a mark-to-market election. See Special Rules for Traders in Securities beginning on page D-3.

Use Form 4684 to report involuntary conversions of property due to casualty or theft.
Use Form 6781 to report gains and losses from section 1256 contracts and straddles.
Use Form 8824 if you made one or more "like-kind" exchanges. A like-kind exchange occurs when you exchange business or investment property for property of a like kind.

Capital Asset

Most property you own and use for personal purposes, pleasure, or investment is a capital asset. For example, your house, furniture, car, stocks, and bonds are capital assets. A capital asset is any property held by you except the following:

• Stock in trade or other property included in inventory or held for sale to customers.
• Accounts or notes receivable for services performed in the ordinary course of your trade or business or as an employee, or from the sale of stock in trade or other
  property held mainly for sale to customers.
• Depreciable property used in your trade or business even if it is fully depreciated.
• Real estate used in your trade or business.
• Copyrights, literary, musical, or artistic compositions, letters or memoranda, or similar property: (a) created by your personal efforts; (b) prepared or produced for you (in the case of letters, memoranda, or similar property); or (c) that you received from someone who created them or for whom they were created, as mentioned in (a) or (b), in a way (such as by gift) that entitled you to the basis of the previous owner.
• U.S. Government publications, including the Congressional Record, that you received from the government, other than by purchase at the normal sales price, or that you got from someone who had received it in a similar way, if your basis is determined by reference to the previous owner’s basis.
• Certain commodities derivative finan-cial instruments held by a dealer. See section 1221(a)(6).
• Certain hedging transactions entered into in the normal course of your trade or business. See section 1221(a)(7).
• Supplies regularly used in your trade or business.

Short Term or Long Term

Separate your capital gains and losses according to how long you held or owned the property. The holding period for short-term capital gains and losses is 1 year or less. The holding period for long-term capital gains and losses is more than 1 year. To figure the holding period, begin counting on the day after you received the property and include the day you disposed of it.

If you disposed of property that you acquired by inheritance, report the disposition as a long-term gain or loss, regardless of how long you held the property.

A nonbusiness bad debt must be treated as a short-term capital loss. See Pub. 550 for what qualifies as a nonbusiness bad debt and how to enter it on Schedule D.

Capital Gain Distributions

These distributions are paid by a mutual fund (or other regulated investment company) or real estate investment trust from its net realized long-term capital gains. Enter on line 13, column (f), the total capital gain distributions paid to you during the year, regardless of how long you held your investment. This amount is shown in box 2a of Form 1099-DIV.

If there is an amount in box 2b of Form 1099-DIV, include that amount on line 13, column (g).

If there is an amount in box 2c, include that amount on line 2 of the Qualified 5-Year Gain Worksheet on page D-8 if you are required to complete line 29 of Schedule D.

If there is an amount in box 2d, include that amount on line 11 of the Unrecaptured Section 1250 Gain Worksheet on page D-7 if you are required to complete line 19 of Schedule D.

If there is an amount in box 2e, see Exclusion of Gain on Qualified Small Business (QSB) Stock beginning on page D-4.

If there is an amount in box 2f, include that amount on line 4 of the 28% Rate Gain Worksheet on page D-8 if you complete line 20 of Schedule D.

If you received capital gain distributions as a nominee (that is, they were paid to you but actually belong to someone else), report
on line 13 only the amount that belongs to you. Attach a statement showing the full amount you received and the amount you received as a nominee. See the Instructions for Schedule B for filing requirements for Forms 1099-DIV and 1096.

Sale of Your Home

If you sold or exchanged your main home, do not report it on your tax return unless your gain exceeds your exclusion amount. Generally, if you meet the two tests below, you can exclude up to $250,000 of gain. If both you and your spouse meet these tests and you file a joint return, you can exclude up to $500,000 of gain (but only one spouse needs to meet the ownership requirement in
Test 1).

Test 1. You owned and used the home as your main home for 2 years or more during the 5-year period ending on the date you sold or exchanged your home.

Test 2. You have not sold or exchanged another main home during the 2-year period ending on the date of the sale or exchange of your home.

Even if you do not meet one or both of the above two tests, you still can claim an exclusion if you sold or exchanged the home because of a change in place of
employment, health, or certain unforeseen circumstances. In this case, the maximum amount of gain you can exclude is reduced.

See Pub. 523 for details, including how to report any taxable gain on Schedule D, if:

• You (or your spouse if married) used any part of the home for business or rental purposes after May 6, 1997, or
• Your gain exceeds your exclusion amount.

Partnership Interests

A sale or other disposition of an interest in a partnership may result in ordinary income, collectibles gain (28% rate gain), or unrecaptured section 1250 gain. For details on 28% rate gain, see page D-6. For details on unrecaptured section 1250 gain, see the instructions for line 19 beginning on page D-6.

Capital Assets Held for Personal Use

Generally, gain from the sale or exchange of a capital asset held for personal use is a capital gain. Report it on Schedule D, Part I or Part II. However, if you converted
depreciable property to personal use, all or part of the gain on the sale or exchange of that property may have to be recaptured as ordinary income. Use Part III of Form 4797 to figure the amount of ordinary income recapture. The recapture amount is included on line 31 (and line 13) of Form 4797. Do not enter any gain for this property on line 32 of Form 4797. If you are not completing Part III for any other properties, enter “N/A” on line 32. If the total gain is more than the recapture amount, enter “From Form 4797” in column (a) of line 1 or line 8 of Schedule D, skip columns (b) through (e), and in column (f) (and column (g) for sales after May 5, 2007) enter the ex-
cess of the total gain over the recapture amount.

Loss from the sale or exchange of a capital asset held for personal use is not deductible. But if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, you must report the transaction on Schedule D even though the loss is not deductible. For example, you have a loss on the sale of a vacation home that is not your main home and you received a Form 1099-S for the transaction. Report the transaction on line 1 or 8, depending on how long you owned the home. Complete columns (a) through (e). Because the loss is not deductible, enter zero in column (f).

Nondeductible Losses

Do not deduct a loss from the direct or indirect sale or exchange of property between any of the following.

• Members of a family.
• A corporation and an individual owning more than 50% of the corporation’s stock (unless the loss is from a distribution in complete liquidation of a corporation).
• A grantor and a fiduciary of a trust.
• A fiduciary and a beneficiary of the same trust.
• A fiduciary and a beneficiary of another trust created by the same grantor.
• An executor of an estate and a beneficiary of that estate, unless the sale or exchange was to satisfy a pecuniary bequest (i.e., a bequest of a sum of money).
• An individual and a tax-exempt organization controlled by the individual or the individual’s family.

See Pub. 544 for more details on sales and exchanges between related parties.

If you disposed of (a) an asset used in an activity to which the at-risk rules apply or (b) any part of your interest in an activity to which the at-risk rules apply, and you have amounts in the activity for which you are not at risk, see the instructions for Form 6198.

If the loss is allowable under the at-risk rules, it may then be subject to the passive activity rules. See Form 8582 and its instructions to see how to report capital gains and losses from a passive activity.

Items for Special Treatment

• Transactions by a securities dealer. See section 1236.
• Bonds and other debt instruments. See Pub. 550 for details.
• 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 of which you are a beneficiary. See Pub. 544 for details.
• Gain on the disposition of stock in an interest charge domestic international sales corporation. See section 955(c).
• Gain on the sale or exchange of stock in certain foreign corporations. See section 1248.
• Transfer of property to a partnership that would be treated as an investment company if it were incorporated. See Pub. 541.
• Sales of stock received under a qualified public utility dividend reinvestment plan. See Pub. 550 for details.
• Transfer of appreciated property to a political organization. See section 84.
• In general, no gain or loss is recognized on the transfer of property from an individual to a spouse or a former spouse if the transfer is incident to a divorce. See Pub. 504.
• Amounts received on the retirement of a debt instrument generally are treated as received in exchange for the debt instrument. See Pub. 550.
• 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 is reported as ordinary income on Form 4797.
• Amounts received by shareholders in corporate liquidations. See Pub. 550.
• Cash received in lieu of fractional shares of stock as a result of a stock split or stock dividend. See Pub. 550 for details.
• Mutual fund load charges may not be taken into account in determining gain or loss on certain dispositions of stock in mutual funds if reinvestment rights were exercised. For details, see Pub. 564.
• The sale or exchange of S corporation stock or an interest in a trust held for more than 1 year may result in collectibles gain (28% rate gain). See page D-6.
• Gain or loss on the disposition of securities futures contracts. See Pub. 550.
• Gain on the constructive sale of certain appreciated financial positions. See Pub. 550.
• The receipt of cash or stock (that you later sold) upon the demutualization of an insurance company. See Pub. 550 or use
  TeleTax topic 430 (see page 11 of the Form 1040 instructions).
• Certain constructive ownership transactions. Gain in excess of the gain you would have recognized if you had held a financial asset directly during the term of a derivative contract must be treated as ordinary income. See section 1260. If any portion of the constructive ownership transaction was open in any prior year, you may have to pay interest. See section 1260(b) for details, including how to figure the interest. Include the interest as an additional tax on Form 1040, line 58. Write
• Section 1260(b) interest�h and the amount of the interest to the left of line 58. This interest is not deductible.
• The sale of publicly traded securities, if you elect to postpone gain by purchasing common stock or a partnership interest in a specialized small business investment company during the 60-day period that began on the date of the sale. See Pub. 550.
• The sale of qualified securities held for at least 3 years to an employee stock ownership plan or eligible worker-owned cooperative, if you elect to postpone gain by purchasing qualified replacement property. See Pub. 550.
• The sale of qualified empowerment zone assets acquired after December 21, 2002, that you held for more than 1 year, if
  you elect to postpone gain by purchasing other qualified empowerment zone assets during the 60-day period that began on the
  date of the sale. See Pub. 550 and Pub. 954.

Wash Sales

A wash sale occurs when you sell or otherwise dispose of stock or securities (including a contract or option to acquire or sell stock or securities) at a loss and, within 30 days before or after the sale or disposition, you directly or indirectly:

• Buy substantially identical stock or securities,
• Acquire substantially identical stock or securities in a fully taxable trade, or
• Enter into a contract or option to acquire substantially identical stock or securities.

You cannot deduct losses from wash sales unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities. The basis of the substantially identical property (or contract or option to acquire such property) is its cost increased by the disallowed loss. For more details on wash sales, see Pub. 550.

Report a wash sale transaction on line 1 or 8. Enter the full amount of the (loss) in column (f). Also report this amount in column (g) if the transaction occurred after May 5, 2007. Directly below the line on which you reported the loss, enter “Wash Sale” in column (a), and enter as a positive amount in column (f) (and column (g) for transactions after May 5, 2007) the amount of the loss not allowed.

Traders in Securities

You are a trader in securities if you are engaged in the business of buying and sell-ing securities for your own account. To be engaged in business as a trader in securities:

• You must seek to profit from daily market movements in the prices of securi-ties and not from dividends, interest, or capital appreciation.
• Your activity must be substantial.
• You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a business.

• Typical holding periods for securities bought and sold.
• The frequency and dollar amount of your trades during the year.
• The extent to which you pursue the activity to produce income for a livelihood.
• The amount of time you devote to the activity.

You are considered an investor, and not a trader, if your activity does not meet the above definition of a business. It does not matter whether you call yourself a trader or a "day trader."

Like an investor, a trader must report each sale of securities (taking into account com-missions and any other costs of acquiring or disposing of the securities) on Schedule D or D-1 or on an attached statement contain-ing all the same information for each sale in a similar format. However, if a trader previously made the mark-to-market elec-tion (see below), each transaction is reported in Part II of Form 4797 instead of Schedules D and D-1. Regardless of whether a trader reports his or her gains and losses on Sched-ules D and D-1 or Form 4797, the gain or loss from the disposition of securities is not taken into account when figuring net earn-ings from self-employment on Schedule SE. See the Instructions for Schedule SE 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 Schedule C (instead of Schedule A).

A trader also may hold securities for in-vestment. The rules for investors generally will apply to those securities. Allocate in-terest and other expenses between your trad-ing business and your investment securities.

Mark-To-Market Election for Traders

A trader may make an election under section 475(f) to report all gains and losses from securities held in connection with a trading business as ordinary income (or loss), in-cluding securities held at the end of the year. Securities held at the end of the year are "marked to market" by treating them as if they were sold (and reacquired) for fair market value on the last business day of the year. Generally, the election must be made by the due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. To be effective for 2007, the election must have been made by April 15, 2007.

Starting with the year the election be-comes effective, a trader reports all gains and losses from securities held in connection with the trading business, including securi-ties held at the end of the year, in Part II of Form 4797. If you previously made the elec-tion, see the instructions for Form 4797. For details on making the mark-to-market election for 2007, see Pub. 550 or Rev. Proc. 99-17, 1999-7 I.R.B. 52.

If you hold securities for investment, they must be identified as such in your records on the day they are acquired (for example, by holding the securities in a separate brokerage account). Securities held for invest-ment are not marked-to-market.

Short Sales

A short sale is a contract to sell property you borrowed for delivery to a buyer. At a later date, you either buy substantially identical property and deliver it to the lender or deliver property that you held but did not want to transfer at the time of the sale. Usually, your holding period is the amount of time you actually held the property eventually delivered to the lender to close the short sale. However, your gain when closing a short sale is short term if you (a) held substantially identical property for 1 year or less on the date of the short sale, or (b) acquired property substantially identical to the property sold short after the short sale but on or before the date you close the short sale. If you held substantially identical property for more than 1 year on the date of a short sale, any loss realized on the short sale is a long-term capital loss, even if the property used to close the short sale was held 1 year or less.

Gain or Loss From Options

Report on Schedule D gain or loss from the closing or expiration of an option that is not a section 1256 contract, but that is a capital asset in your hands. If a purchased option expired, enter the expiration date in column (c) and enter "EXPIRED" in column (d). If an option that was granted (written) expired, enter the expiration date in column (b) and enter "EXPIRED" in column (e). Fill in the other columns as appropriate. See Pub. 550 for more details.

Undistributed Capital Gains

Include on line 11, column (f), the amount from box 1a of Form 2439. This represents your share of the undistributed long-term capital gains of the regulated investment company (including a mutual fund) or real estate investment trust. If there is an amount in box 1b of Form 2439, include that amount on line 11, column (g).

If there is an amount in box 1c, include that amount on line 2 of the Qualified 5-Year Gain Worksheet on page D-8 if you are required to complete line 29 of Schedule D.

If there is an amount in box 1d, include that amount on line 11 of the Unrecaptured Section 1250 Gain Worksheet on page D-7 if you are required to complete line 19 of Schedule D.

If there is an amount in box 1e, see Exclusion of Gain on Qualified Small Business (QSB) Stock on this page.

Enter on Form 1040, line 65, the tax paid as shown in box 2 of Form 2439. Also on line 65, check the box for Form 2439. Add to the basis of your stock the excess of the amount included in income over the amount of the credit for the tax paid. See Pub. 550 for details.

Installment Sales

If you sold property (other than publicly traded stocks or securities) at a gain and you will receive a payment in a tax year after the year of sale, you generally must report the sale on the installment method unless you elect not to. Use Form 6252 to report the sale on the installment method. Also use Form 6252 to report any payment received in 2007 from a sale made in an earlier year that you reported on the installment method.

To elect out of the installment method, report the full amount of the gain on Schedule D on a timely filed return (including extensions) for the year of the sale. If your original return was filed on time, you may make the election on an amended return filed no later than 6 months after the due date of your return (excluding extensions). Write "Filed pursuant to section 301.9100-2" at the top of the amended return, and file it at the same address you used for your original return.

Demutualization of Life Insurance Companies

Demutualization of a life insurance company occurs when a mutual life insurance company changes to a stock company. If you were a policyholder or annuitant of the
mutual company, you may have received either stock in the stock company or cash in exchange for your equity interest in the mutual company. The basis of your equity
interest in the mutual company is considered to be zero.

If the demutualization transaction qualifies as a tax-free reorganization, no gain is recognized on the exchange of your equity interest in the mutual company for stock.
The company can advise you if the transaction is a tax-free reorganization. Because the basis of your equity interest in the mutual company is considered to be zero, your basis in the stock received is zero. Your holding period for the new stock includes the period you held an equity interest in the mutual company. If you received cash in exchange for your equity interest, you must recognize a capital gain in an amount equal to the cash received. If you held the equity interest for more than 1 year, report the gain as a longterm capital gain on line 8. If you held the equity interest for 1 year or less, report the gain as a short-term capital gain on line 1.

If the demutualization transaction does not qualify as a tax-free reorganization, you must recognize a capital gain in an amount equal to the cash and fair market value of
the stock received. If you held the equity interest for more than 1 year, report the gain as a long-term capital gain on line 8. If you held the equity interest for 1 year or less, report the gain as a short-term capital gain on line 1. Your holding period for the new stock begins on the day after you received the stock.

Exclusion of Gain on Qualified Small Business (QSB) Stock

Section 1202 allows for an exclusion of up to 50% of the eligible gain on the sale or exchange of QSB stock. The section 1202 exclusion applies only to QSB stock held for more than 5 years.

To be QSB stock, the stock must meet all of the following tests.

• It must be stock in a C corporation (i.e., 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.
• You 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, you may meet the test if you acquired the stock from another person who met the test (such as by gift or inheritance) or through a conversion or exchange of qualified small business stock you held.
• During substantially all the time you 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 cor-poration, DISC, former DISC, regulated in-vestment company, real estate investment trust, REMIC, FASIT, cooperative, or a corporation that has made (or that has a sub-sidiary that has made) a section 936 election.

Note: A specialized small business investment company (SSBIC) is treated as having met test 2 above.

A qualified business is any business other than a:

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

For more details about limits and additional requirements that may apply, see section 1202.

Pass-Through Entities

If you held an interest in a pass-through entity (a partnership, S corporation, or mutual fund or other regulated investment company) that sold qualified small business stock, you must have held the interest on the date the pass-through entity acquired the qualified small business stock and at all times thereafter until the stock was sold to qualify for the exclusion.

How To Report

Report in column (f) of line 8 the entire gain realized on the sale of qualified small business stock. In column (g) of line 8, report as 28% rate gain an amount equal to the section 1202 exclusion. Directly below the line on which you reported the gain, enter in column (a) "Section 1202 exclusion" and enter as a (loss) in column (f) the amount of the allowable exclusion.

Gain From Form 1099-DIV. If you received a Form 1099-DIV with a gain in box 2e, part or all of that gain (which is also included in box 2a) may be eligible for the section 1202 exclusion. In column (a) of line 8, enter the name of the corporation whose stock was sold. In column (f), enter the amount of your allowable exclusion as a loss. In column (g), enter the amount of your allowable exclusion as a gain.

Gain From Form 2439. If you received a Form 2439 with a gain in box 1e, part or all of that gain (which is also included in box 1a) may be eligible for the section 1202 exclusion. In column (a) of line 8, enter the name of the corporation whose stock was sold. In column (f), enter the amount of your allowable exclusion as a loss. In column (g), enter the amount of your allowable exclusion as a gain.

Gain From an Installment Sale of QSB Stock. If all payments are not received in the year of sale, a sale of QSB stock that is not traded on an established securities market generally is treated as an installment sale and is reported on Form 6252. Figure the allowable section 1202 exclusion for the year by multiplying the total amount of the exclusion by a fraction, the numerator of which is the amount of eligible gain to be recognized for the tax year and the denominator of which is the total amount of eligible gain. In column (a) of line 8, enter the name of the corporation whose stock was sold. In column (f), enter the amount of your allowable exclusion as a loss. In column (g), enter the amount of your allowable exclu-sion as a gain.

Alternative Minimum Tax. You must enter 42% of your allowable exclusion for the year on line 12 of Form 6251.

Rollover of Gain From QSB Stock

If you sold QSB stock (defined above) that you held for more than 6 months, you may elect to postpone gain if you purchase other QSB stock during the 60-day period that began on the date of the sale. A pass-through entity also may make the election to post-pone gain. The benefit of the postponed gain applies to your share of the entity’s post-poned gain if you held an interest in the entity for the entire period the entity held the QSB stock. If a pass-through entity sold QSB stock held for more than 6 months and you held an interest in the entity for the entire period the entity held the stock, you also may elect to postpone gain if you, rather than the pass-through entity, purchase the replacement QSB stock within the 60-day period.

You must recognize gain to the extent the sale proceeds exceed the cost of the replace-ment stock. Reduce the basis of the replace-ment stock by any postponed gain.

You must make the election no later than the due date (including extensions) for filing your tax return for the tax year in which the QSB stock was sold. If your original return was filed on time, you may make the elec-tion on an amended return filed no later than 6 months after the due date of your return (excluding extensions). Write “Filed pursu-ant to section 301.9100-2” at the top of the amended return, and file it at the same ad-dress you used for your original return.

To make the election, report the entire gain realized on the sale on line 1 or 8. Directly below the line on which you re-ported the gain, enter in column (a) “Section 1045 rollover” and enter as a (loss) in column (f) the amount of the postponed gain.

Specific Instructions

Lines 1 and 8

Enter all sales and exchanges of capital assets, including stocks, bonds, etc., and real estate (if not reported on Form 4684, 4797, 6252, 6781, or 8824). But do not report the sale of your main home unless required (see page D-2). Include these transactions even if you did not receive a Form 1099-B or 1099-S (or substitute statement) for the transaction. You can use stock ticker symbols or abbreviations to describe the property as long as they are based on the descriptions of the property as shown on Form 1099-B or 1099-S (or substitute statement).

Use Schedule D-1 to list additional transactions for lines 1 and 8. Use as many Schedules D-1 as you need. Enter on Schedule D, lines 2 and 9, the combined totals from all your Schedules D-1.

Caution: Add the following amounts reported to you for 2007 on Forms 1099-B and 1099-S (or substitute statements) that you are not reporting on another form or schedule included with your return: (a) proceeds from transactions involving stocks, bonds, and other securities and (b) gross proceeds from real estate transactions (other than the sale of your main home if you are not required to report it). If this total is more than the total of lines 3 and 10, attach an explanation of the difference.

Column (b)—Date Acquired

Enter in this column the date the asset was acquired. Use the trade date for stocks and bonds traded on an exchange or over-the-counter market. For stock or other property sold short, enter the date the stock or property was delivered to the broker or lender to close the short sale.

The date acquired for an asset you held on January 1, 2002, for which you made an election to recognize any gain in a deemed sale is the date of the deemed sale.

If you disposed of property that you acquired by inheritance, report the gain or (loss) on line 8 and enter "INHERITED" in column (b) instead of the date you acquired the property.

If you sold a block of stock (or similar property) that was acquired through several different purchases, you may report the sale on one line and enter "VARIOUS" in column (b). However, you still must report the short-term gain or (loss) on the sale in Part I and the long-term gain or (loss) in Part II.

Column (c)—Date Sold

Enter in this column the date the asset was sold. Use the trade date for stocks and bonds traded on an exchange or over-the-counter market. For stock or other property sold short, enter the date you sold the stock or property you borrowed to open the short sale transaction.

Column (d)—Sales Price

Enter in this column either the gross sales price or the net sales price from the sale. If you sold stocks or bonds and you received a Form 1099-B or similar statement from your broker that shows gross sales price, enter that amount in column (d). But if Form 1099-B (or your broker) indicates that gross proceeds minus commissions and option premiums were reported to the IRS, enter that net amount in column (d). If the net amount is entered in column (d), do not include the commissions and option premiums from the sale in column (e).

You should not have received a Form 1099-B (or substitute statement) for a transaction merely representing the return of your original investment in a nontransferable obligation, such as a savings bond or a certificate of deposit. But if you did, report the amount shown on Form 1099-B (or substitute statement) in both columns (d) and (e).

Caution: Be sure to add all sales price entries on lines 1 and 8, column (d), to amounts on lines 2 and 9, column (d). Enter the totals on lines 3 and 10.

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 you inherited the property, got it as a gift, or received it in a tax-free exchange, involuntary conversion, or "wash sale" of stock, you may not be able to use the actual cost as the basis. If you do not use the actual cost, attach an explanation of your basis.

If you sold stock, adjust your basis by subtracting all the nontaxable distributions you received before the sale. Also adjust your basis for any stock splits. See Pub. 550 for details.

If you elected to recognize gain on an asset held on January 1, 2002, your basis in the asset is its closing market price or fair market value, whichever applies, on the date of the deemed sale, whether the deemed sale resulted in a gain or an unallowed loss.

You may elect to use an average basis for mutual fund shares if you acquired the shares at various times and prices and you left the shares on deposit in an account handled by a custodian or agent who acquired or redeemed those shares. If you are reporting on an average basis, include "AVGB" in column (a) of Schedule D. For details on making the election and how to figure average basis, see Pub. 564.

The basis of property acquired by gift is generally the basis of the property in the hands of the donor. The basis of property acquired from a decedent is generally the fair market value at the date of death. See Pub. 544 for details.

Increase the cost or other basis of an original issue discount (OID) debt instrument by the amount of OID that has been included in gross income for that instrument.

If a charitable contribution deduction is allowed because of a bargain sale of property to a charitable organization, the adjusted basis for purposes of determining gain from the sale is the amount which has the same ratio to the adjusted basis as the amount realized has to the fair market value.

Increase your cost or other basis by any expense of sale, such as broker’s fees, commissions, state and local transfer taxes, and option premiums, before making an entry in column (e), unless you reported the net sales price in column (d).

For more details, see Pub. 551.

Column (f)—Gain or (Loss) for the Entire Year

You must make a separate entry in this column for each transaction reported on lines 1 and 8 and any other line(s) that applies to you. For lines 1 and 8, subtract
the amount in column (e) from the amount in column (d). Enter negative amounts in parentheses.

Line 18

Limit on Capital Losses. For 2007, you may deduct capital losses up to the amount of your capital gains plus $3,000 ($1,500 if married separately). Capital Loss Carryover. You have a capital loss carryover from 2007 to 2007 if you have a loss on line 17a and either:

• That loss is more than the loss on line 18 or
• Form 1040, line 38, is less than zero.

To figure any capital loss carryover to 2007, you will use the Capital Loss Carryover Worksheet in the 2007 Instructions for Schedule D. If you want to figure your carryover now, see Pub. 550.

TIP You will need a copy of your 2007 Form 1040 and Schedule D to figure your capital loss carryover to 2007.

Line 19

If you complete Part IV, complete the worksheet on page D-7 if any of the following apply for 2007.

• You sold or otherwise disposed of section 1250 property (generally, real property that you depreciated) held more than 1 year.
• You received installment payments for section 1250 property held more than 1 year for which you are reporting gain on the installment method.
• You received a Schedule K-1 from an estate or trust, partnership, or S corporation that shows �gunrecaptured section 1250 gain.
• You received a Form 1099-DIV or Form 2439 from a real estate investment trust or regulated investment company (including a mutual fund) that reports "unrecaptured section 1250 gain."
• You reported a long-term capital gain from the sale or exchange of an interest in a partnership that owned section 1250 property.

Instructions for the Unrecaptured Section 1250 Gain Worksheet on Page D-7

Lines 1 through 3. If you had more than one property described on line 1, complete lines 1 through 3 for each property on a separate worksheet. Enter the total of the line 3 amounts for all properties on line 3 and go to line 4.

Line 4. To figure the amount to enter on line 4, follow the steps below for each installment sale of trade or business property
held more than 1 year.

Step 1. Figure the smaller of (a) the depreciation allowed or allowable or (b) the total gain for the sale. This is the smaller of line 22 or line 24 of your 2007 Form 4797 (or the comparable lines of Form 4797 for the year of sale) for the property.

Step 2. Reduce the amount figured in step 1 by any section 1250 ordinary income recapture for the sale. This is the amount from line 26g of your 2007 Form 4797 (or the comparable line of Form 4797 for the year of sale) for the property. The result is your total unrecaptured section 1250 gain that must be allocated to the installment payments received from the sale.

Step 3. Generally, the amount of section 1231 gain on each installment payment is treated as unrecaptured section 1250 gain until the total unrecaptured section 1250 gain figured in step 2 has been used in full. Figure the amount of gain treated as unrecaptured section 1250 gain for installment payments received in 2007 as the smaller of (a) the amount from line 26 or line 37 of the 2007 Form 6252, whichever applies, or (b) the amount of unrecaptured section 1250 gain remaining to be reported. This amount is generally the total unrecaptured section 1250 gain for the sale reduced by all gain reported in prior years (excluding section 1250 ordinary income recapture). However, if you chose not to treat all of the gain from payments received after May 6, 1997, and before August 24, 1999, as unrecaptured section 1250 gain, use only the amount you chose to treat as unrecaptured section 1250 gain for those payments to reduce the total unrecaptured section 1250 gain remaining to be reported for the sale. Include this amount on line 4.

Line 10. Include on line 10 your share of the partnership’s unrecaptured section 1250 gain that would result if the partnership had transferred all of its section 1250 property in a fully taxable transaction immediately before you sold or exchanged your interest in that partnership. If you recognized less than all of the realized gain, the partnership will be treated as having transferred only a proportionate amount of each section 1250 property. For details, see Regulations section 1.1(h)-1. Also attach the statement required under Regulations section 1.1(h)-1(e).

Line 12. An example of an amount to include on line 12 is unrecaptured section 1250 gain from the sale of a vacation home you previously used as a rental property but converted to personal use prior to the sale. To figure the amount to enter on line 12,
follow the applicable instructions below.

Installment sales. To figure the amount to include on line 12, follow the steps below for each installment sale of property held more than 1 year for which you did not make an entry in Part I of your Form 4797 for the year of sale.

• Step 1. Figure the smaller of (a) the depreciation allowed or allowable or (b) the total gain for the sale. This is the smaller of line 22 or line 24 of your 2007 Form 4797 (or the comparable lines of Form 4797 for the year of sale) for the property.
• Step 2. Reduce the amount figured in step 1 by any section 1250 ordinary income recapture for the sale. This is the amount
  from line 26g of your 2007 Form 4797 (or the comparable line of Form 4797 for the year of sale) for the property. The result is your total unrecaptured section 1250 gain that must be allocated to the installment payments received from the sale.
• Step 3. Generally, the amount of capital gain on each installment payment is treated as unrecaptured section 1250 gain until the total unrecaptured section 1250 gain figured in step 2 has been used in full. Figure the amount of gain treated as unrecaptured section 1250 gain for installment payments received in 2007 as the smaller of (a) the amount from line 26 or line 37 of your 2007 Form 6252, whichever applies, or (b) the amount of unrecaptured section 1250 gain remaining to be reported. This amount is generally the total unrecaptured section 1250 gain for the sale reduced by all gain reported in prior years (excluding section 1250 ordinary income recapture). However, if you chose not to treat all of the gain from payments received after May 6, 1997, and before August 24, 1999, as unrecaptured section 1250 gain, use only the amount you chose to treat as unrecaptured section 1250 gain for those payments to reduce the total unrecaptured section 1250 gain remaining to be reported for the sale. Include this amount on line 12.
• Other sales or dispositions of section 1250 property. For each sale of property held more than 1 year (for which you did not make an entry in Part I of Form 4797), figure the smaller of (a) the depreciation allowed or allowable or (b) the total gain for the sale. This is the smaller of line 22 or line 24 of Form 4797 for the property. Next, reduce that amount by any section 1250 ordinary income recapture for the sale. This is the amount from line 26g of Form 4797 for the property. The result is the total unrecaptured section 1250 gain for the sale. Include this amount on line 12.

Line 35--Qualified 5-Year Gain

Qualified 5-year gain is long-term capital gain (other than 28% rate gain or gain on line 6 or 10 through 12 of the Unrecaptured Section 1250 Gain Worksheet) from the sale or other disposition of property held more than 5 years. Qualified 5-year gain is taxed at 8% to the extent the gain would otherwise be taxed at 10%. To figure your qualified 5-year gain, complete the worksheet on this page if any of the following apply.

• You sold or otherwise disposed of property at a gain that you had held for more than 5 years.
• You received a Schedule K-1 from an estate, trust, partnership, or S corporation that reports "qualified 5-year gain".
• You received a Form 1099-DIV (or Form 2439) with "qualified 5-year gain"reported in box 2c (box 1c of Form 2439).
• You received payments before May 6, 2007, from an installment sale of long-term capital gain property that you had held for more than 5 years when you entered into the installment sale.