Form 1099B

In 2008, Congress under then President George Bush enacted changes to the Federal requirements for cost basis tax reporting that required stockbrokers to report this information to customers and the IRS. This legislation laid out the timelines for reporting the cost basis for various instruments and securities purchased by investors.

When filing your tax returns, you will now get a new Form 1099B issued by your stockbroker. Let us briefly look at the changes and how it will affect you. This new legislation is being phased in and is effective as of:

• Equity securities transactions effective January 2011
• Sale of Mutual funds and dividend reinvestment plans effective January 2012
• Trading in options and fixed income securities effective January 2013

3 Things to Note about Your 1099B

Tax form, Filing Taxes 1040 Form—Philip Taylor PT (Flickr.com)

While the impact of this legislation will be felt by all market intermediaries, for our purposes we will only look at its impact on investors. Since this is only effective 2011, you don’t need to worry about your tax returns for any period prior to January 2011.

1) The first thing you should do is examine your statements that you receive from your broker and ensure that the correct cost basis for the stocks that you hold is reflected. This is important especially when you bought the same stock(s) at different price levels.

2) When you sell your stocks, you need to specify the basis on which you want the cost to be calculated, i.e. match the stock sale to the preferred purchase amount. To minimize the impact of capital gains, you may want to specify the highest cost of acquisition as the lot that is sold first. Else, by default, your broker would use the First in First out (FIFO) method to report the cost of acquisition and arrive at the capital gains.

3) The third thing you need to keep in mind is when you change brokers. You should ensure that correct information is passed on to your new broker.

1099B Problem areas:

While the treatment of cost basis seems fairly straightforward for most stocks, there are some areas that require more attention.

For example, some brokers reported cost information pertaining to some Exchange Traded Funds (ETFs) while investors had to figure out the information for someother ETFs. You may need to fill out a new form called 8949 that will provide detailed information on tracking down the purchases and sales into lots and tell the IRS how the brokerage tracks the information.

Also, you need to reconcile any difference in your method of calculating the costs vis-à-vis what the broker reported. Brokers also factor in the effect of “wash rule sale” and hence may issue an amended 1099B to you if any of the capital loss that you would have claimed otherwise is disallowed. So, if you have filed your tax returns early, you may end up filing a revised one, if your broker issues you with a revised form.

It is possible that you may hear from the IRS if what you reported on your tax returns is not consistent with what your broker reported. You need to be aware of the changes and be prepared to respond if you face an audit.

Tax-Filing Headaches Stem From Stock Basis Reporting BusinessWeek

Author Bio:

Christopher is a finance professional, blogger and caring husband. He has contributed many posts on Elite Money saving tips and profitable investments. He is passionately working towards creating an exceptional portfolio of investment properties.