If you’re like me, you’ve gotten a flurry of cost basis reporting requests from your brokers via email. And it’s about time I actually calculate and submit all the information… I just wish it was going to be that easy.
Let’s take a look at what is going on with cost basis reporting, what the brokers have to do, and most importantly what we have to do to prepare for 2012.
Cost Basis Reporting Requirements
The Energy Improvement and Extension Act of 2008 law requires that brokers now have to report the adjusted cost basis for securities you sell to the IRS on Form 1099-B. In addition, they have to classify the sale as short or long term. Until now, brokers only had to show the proceeds from a sale of securities.
What is Cost Basis?
The cost basis is the amount you paid for the stock, plus any commissions and fees. When you sell a stock, the difference between your cost basis and your proceeds from the sale are taxable.
The information will obviously be helpful to complete our taxes in the future, but there will be some growing pains over the next few years since brokers only had to retain that information since January of 2009.
New Cost Basis Reporting Deadlines
Brokers will have to report cost basis amounts for securities bought on or after the following dates:
- Stocks: January 1, 2011
- Mutual funds and DRPs: January 1, 2012
- All others: January 1, 2013
Brokers don’t have to report the basis for stocks you bought before 2011.
Cost Basis Methods
Going forward you can direct your broker on which method you want to use to calculate your cost basis. Brokers will have a default method of determining the cost basis. Unless you tell them differently, they’ll report the default method for any future sales. You can pick the method to apply to all transactions, or you can pick the method on a sale by sale basis.
Stocks. Many brokers, including Scottrade are using the first in first out (FIFO) method for stocks.
Mutual Funds. For mutual funds, you can average the basis of shares in an account; the averages will be separate for each account. In addition, beginning in 2012 you can use the average basis for one account, but not for another if you choose. If you previously used the double category method, you are no longer allowed to do so. If you want to use the average basis method, you should notify your broker in writing if it isn’t the default method they selected.
DRPs. For dividend reinvestment plans, you can average the basis for shares bought on or after January, 1, 2011, if “the written plan documents require that at least 10 percent of every dividend paid is reinvested in identical stock”. Fantastic. I can’t think of anything I’d rather do than spend time researching this requirement for each of my DRIPs.
In addition to FIFO and average cost methods, you’ll be able to select other cost basis methods based on the broker options. Some of the other cost basis methods include LIFO (last in first out), HIFO (highest in first out), low cost, minimum tax, maximum gain and specific lots.
What Do You Have to Do?
Since brokers don’t have to track the basis before 2011, that still falls on you. But brokers are going to ask you to provide that information to complete their records. In addition, many of the flurry of emails are asking you to select your cost basis method.
Do you have to provide the cost basis for stocks you already own to your broker? Well, I guess you don’t have to. But you’ll want to because when it comes time to file your taxes, you’ll want the gain (or loss) reported on your 1099-B to match the gain (or loss) you report on your Schedule D. Inconsistencies will be just like asking for a nice little visit from the IRS.
Do you have to select a cost basis method? While you can select a preferred cost basis method with your broker right now, you don’t have to do anything. Your broker will apply their default method and you are all set. This may not be the best choice from a tax standpoint, but at least you can cross it off your to do list.
Will there be a tax document delay? Probably. Because of the new reporting rules, brokers won’t have to give you your 1099-B until February 15 each year (it used to be January 31). If you’re used to working on your taxes right away, you might have to wait a little longer in the future if you had any stock sales.
All the countless hours I’ve spent wasting away making sure my Quicken data is exact down to the penny is finally paying off! Especially since some of our stocks were acquired years ago, with countless dividend reinvestments. It’ll be a pain, but at least I know I can put together the data to submit to our brokers.
I know there are many of you who are going to groan at the painful task of collecting all of this information. Feel free to commiserate about tracking down the cost basis of a 20 year old stock purchase with many subsequent reinvestments and additional share purchases in the comments!