Selling a stock, mutual fund or bond is a taxable event to the IRS. It should be an easy thing to calculate: net sales – cost = gain or loss. But what if you’ve reinvested dividends in stocks for the past few years and decide to sell all your stock? You paid tax on the dividends in the year of receipt, but who remembers how many shares you bought each time and for what price?
Up until 2011, brokers reported to the IRS and taxpayer only the gross sales proceeds of securities; it was up to you to figure out the gain or loss and whether it was short-term or long-term (different tax rates if security was owned at least one year). Beginning in 2011, the IRS is requiring that brokers also report the customer’s adjusted basis in the security and whether any gain or loss on the sale is classified as short-term or long-term. This is a tremendous aid in preparing your tax return, but there are still some pitfalls.
The “covered securities” subject to new IRS requirements include stocks acquired after January 1, 2011. It also includes Stock acquired in a mutual fund or in connection with a dividend reinvestment plan (DRP) after January 1, 2012. In any event, brokers are not required to report cost basis for any securities acquired before 2011.
There are other potential problems. Many times securities are transferred from one broker to another. For stocks transferred after January 1, 2011 (and mutual funds transferred after January 1, 2012) the transferor is required to provide the new broker with all the information necessary to comply with IRS reporting requirements. However if the transferring brokerage does not provide the information, the new broker can treat transferred stock as “noncovered securities” – after all, how is the new broker supposed to know the basis of transferred stock if the old broker doesn’t let them know.
The bottom line is this: your 2011 1099-B from the broker will include all sales amounts but may not include all cost amounts. We’ve already observed a case this year where the taxpayer’s broker showed detail totaling $1,000,000 sales, but cost basis for only $600,000 of the securities sold. Totals for sales and cost were listed on the bottom. An inexperienced tax preparer may have ignored the detail assumed the totals were correct. This would have potentially overstated $400,000 in capital gains!
This example is extreme but drives home the point: The new reporting requirements are certainly an improvement, but there is no substitute for using a tax professional to help you with an accurate tax return.
