New Basis Reporting Rules

New Basis Reporting Rules

New basis reporting rules required by a 2008 law will ease some of the burden for establishing gains and losses from securities sales. But the new rules will coexist with the old rules, so it is still important to retain the necessary records.

Background: When you sell securities, you may show a taxable capital gain or a deductible capital loss for the difference between the sale price and the basis. For this purpose, “basis” is generally your acquisition cost, plus certain adjustments (including broker commissions).

If you have owned the securities for more than one year, any capital gain is treated as long-term gain, taxed at a maximum rate of 15% in 2010 (0% for certain low-income taxpayers). Losses offset capital gains plus up to $3,000 of ordinary income. But complications often arise if you sell only some of the shares of a security. In addition, you may not have adequate records showing the initial cost of the securities.

Currently, brokers and other financial institutions must report the amount of proceeds received in a security sale to the IRS, but not the basis of the shares. The IRS has long claimed that some investors inflate their basis in order to maximize the tax benefits.

New rules: Under the Emergency Economic Stabilization Act of 2008, a broker is required to submit information returns including the basis of covered securities that have been sold, in addition to the amount of the sale proceeds. It must also indicate if a gain or loss is short-term or long-term. These rules apply to stock and mutual fund shares acquired after 2010; stocks in a mutual find or dividend reinvestment plan acquired after 2011; and other securities (e.g., notes, bonds and commodity contracts and options) acquired after 2012.

Therefore, for acquisitions made before these dates, the old rules remain in effect. For instance, if you acquire stock in 2010, you are responsible for establishing the basis.

Q&A on the new basis reporting rules:

When do the new reporting requirements begin? The statute is phased-in over three years:

• Phase 1 – stock in a corporation acquired after 2010

• Phase 2 – stock in U.S. mutual funds and dividend reinvestment plans (DRP) acquired after 2011
• Phase 3 – other securities acquired after 2012

How will gains and losses be reported?

You will receive a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, showing sales proceeds for each closing sale transaction. Basis information will be reported along with the calculated gain or loss on the trade. The gain or loss will be classified on the form as short-term or long-term based on the acquisition date of the security. The information reported to you on Form 1099-B will also be reported to the IRS.

How will tax lots that lack basis be reported?

Gain/loss cannot be calculated for closing trades of tax lots without acquisition cost. For these trades, only sale proceeds will be reported.

Am I required to specifically identify which tax lots are being sold? No, selecting lots is not mandatory.

What is the default tax lot take down method?

First In First Out (FIFO) is the default accounting method for new accounts opened. You may choose an alternate accounting method (LIFO, Highest cost, or Lowest cost) for your account.

Is stock that is part of a dividend reinvestment plan (DRP) part of the first phase?

The proposed regulations make DRP stock part of the second phase of the three year phase-in. Without finalized regulations revisions, gain/loss reporting on DRP stock acquired in 2011 is not required for closing sales in 2011.

What qualifies as DRP stock?

DRP stock includes the initial purchase of stock in the DRP, subsequent transfers of identical stock into the DRP, additional periodic purchases of identical stock through the DRP, and all identical stock acquired through reinvestment of dividends paid under the DRP.

Does basis reporting affect wash sales?

Yes, beginning in tax year 2011, the effects of wash sales on cost basis will be tracked for stock acquired after 2010. Form 1099-B reporting will reflect the loss deferred and basis on open lots will be adjusted accordingly.

Are the new wash sales rules applied to substantially identical securities?

The proposed regulations provide that the new wash sale reporting by brokerage firms is only applicable if both the purchase and sale transactions occur in the same account with the same CUSIP number.

Will the basis on short sales be reported to the IRS?

Beginning in 2011, short sales will be reported in the year they are closed. Gain/loss and short/long-term will be calculated and reported.

Is a brokerage firm required to report on security positions transferred in from other firms?

Yes, provided that the positions were acquired after the applicable phase-in date and the delivering firm has provided the necessary basis information.

What basis information is needed for inherited assets?

For inherited assets, brokerage firms must report the date of death as the acquisition date and the cost basis according to the valuation provided by an authorized representative of the estate.What basis information is needed for gifted securities?

In addition to the donor’s acquisition date and cost, the date of the gift and the valuation of the asset on the date of the gift must be reported if available.

Remember that the new basis reporting rules are being phased in over a three-year period. Furthermore, the old rules continue to apply to any pre-2011 acquisition. Please contact us forassistance.

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