3/7/2013 4:12 PM ET|
Your broker is talking to the IRS
New laws require firms to report the 'cost basis' of stocks and other investments when they are sold. You should make sure the numbers on your 1099-B are correct.
This post is by Laura Saunders of The Wall Street Journal.
If so, read this before you file your 2012 tax return.
This is the second year investment firms have had to report to the Internal Revenue Service the "cost basis" of certain assets sold by clients.
Reporting began in 2011 for stocks and in 2012 for mutual funds, many exchange-traded funds and dividend-reinvestment plans, or DRIPs. Some firms already have sent 1099-B forms to clients detailing information the firms are giving the IRS, and others will soon follow.
Cost basis refers to the price of acquiring an investment -- the starting point for figuring tax after the asset is sold. This crucial subject often is confusing to taxpayers.
For example, say a woman bought 100 shares of a company at $50 a share in 2003 and another 100 for $70 a share in 2007. Last year, she sold her stake for $85 a share.
The taxable gain on the two lots is very different. On the 2003 shares, it is $35 a share, or $3,500, while the gain is less than half that for the 2007 lot -- $15 a share, or $1,500. Calculating cost basis is trickier if shares are bought with reinvested dividends, such as in a mutual fund or DRIP, or if stock splits or spinoffs cause adjustments.
That is a lot to keep straight over several years or decades. Nevertheless, investors must report the correct cost basis to the IRS after a sale.
In order to help honest taxpayers and discourage cheaters, Congress passed a law requiring brokers to file cost-basis report. Here is what investors need to know:
Investment firms must track and report cost basis for sales of stocks bought on or after Jan. 1, 2011. For mutual funds, many exchange-traded funds and DRIPs, the requirement applies to purchases since the start of 2012. Reporting for individual bonds -- as opposed to bond funds -- begins in 2014.
For example, if you bought a stock in 1978 and sold it last year, your brokerage firm needn't report the cost basis to the IRS. If you bought the stock in 2011 and sold in 2012, the firm does need to report it.
Note that even if your brokerage tells you the cost basis of an asset after a sale, it may not be telling the taxman. How can you tell? If Box 6b of the 1099-B form is checked, the firm is reporting cost basis to the IRS, says tax attorney Stevie Conlon of Wolters Kluwer Financial Services.
Be aware of nuances. If you reinvested dividends paid by a bond ETF or DRIP last year, then you bought new shares. If you then sold the entire investment in 2012, your investment firm must report the cost of the shares acquired last year, but not of the shares acquired before then.
If you sold shares at a loss 30 days before or after a dividend reinvestment, you might trigger a "wash sale." That means you can't deduct some or all of the loss right away, Conlon says.
Becky Groves, the director of government reporting at TD Ameritrade, says wash-sale questions provoked more calls to the brokerage firm last year than any other tax issue did.
Firms are required to track and report cost basis only for investments within one account. So if an investor bought shares of a stock in his IRA within 30 days of selling shares of the same stock at a loss from a joint account, then it is up to him to tell the IRS about the wash sale.
Check 1099-Bs for mistakes. Robert Green, an accountant who heads GreenTraderTax, a tax preparer for more than 1,000 investors, urges taxpayers to double-check brokerage cost-basis reports against their own records.
"Often the 1099-Bs don't match trading logs," he says, especially for frequent traders. In some cases, he has seen income over- or understated by $10,000 or more. Problems arise most frequently with wash-sale reporting, he says.
Investors subject to the new reporting should think twice before filing early, says Green's partner, Darren Neuschwander. Last year, some clients received five corrected versions of the same 1099-B, he says. Early indications are that there will be many corrected forms this year, too, he adds.
Remember: If your investment is held within an individual retirement account, Roth IRA, 401k or other tax-sheltered retirement plan, it isn't subject to cost-basis reporting.
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