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Old 05-24-2013, 08:54 AM   #21
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Taxpayers are required to report the sale of capital assets on their Form 1040 individual income tax returns using Schedule D. Financial institutions provide some help by reporting the transaction to both investors and to the IRS.
Before 2011, financial institutions have only been required to report the proceeds of investment sales not the actual gain or loss. Under new federal rules, institutions will report to the IRS gains and losses realized from the sale of:
  • Individual stocks purchased after Jan. 1, 2011
  • Mutual fund shares purchased after Jan. 1, 2012
  • Bonds, options and other securities purchased after Jan. 1, 2014

Collectively, investments acquired after the above dates are called "covered securities," because they are covered by the new IRS regulations. It's important to note that investors will still be solely responsible for calculating and reporting gains and losses realized on the sale of noncovered securities those acquired before the above dates.

While financial institutions may report a basis to you, if it is a noncovered security, it is up to you to verify that the basis is correct, and it is not reported to the IRS. If you have changed brokers, high probability that your current brokerage does not have an accurate basis. I do about 180 tax returns a year and it is a very common problem. If anyone has noncovered securities, It'd be a good idea to start now investigating your cost basis.
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Old 05-24-2013, 09:12 AM   #22
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While accounting for every penny and every transaction may not pass the effort vs reward test for everyone (calculating your rate of return is probably the main purpose), keeping track of the basis for your IRAs can be important for tax purposes. If you have nondeductible contributions to Traditional IRAs, basis data will reduce your taxed once your are withdrawing. Knowing your basis for Roth IRAs is important if you want to withdraw from your Roth, without penalty, prior to age 59 1/2.

While brokerages keep track of cost basis for investments, I have not noticed anywhere they keep up with IRA cost basis. With rollovers, etc it could be tough for them to have accurate data.

That is one reason that I never invested after tax money into a 401(k) or IRA.... I saw only bad options with them...


But, I lie.... I did do it a couple of years ago and did a backdoor ROTH conversion.... it was my only non-ROTH IRA, so it was easy to figure out....
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Old 05-24-2013, 09:13 AM   #23
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Speaking of which, how they heck are you supposed to indicate the purchase date on sales reported to IRS on your tax forms when you use average cost method? I use the earliest date of purchase if I know it or just pull a number more than two years old out of my a** if not. Am I at risk?
Probably not. The tax software I have used uses VAR (for VARIOUS) when the transactions are combined and long term.
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Old 05-24-2013, 09:14 AM   #24
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Originally Posted by RE2Boys View Post

While financial institutions may report a basis to you, if it is a noncovered security, it is up to you to verify that the basis is correct, and it is not reported to the IRS. If you have changed brokers, high probability that your current brokerage does not have an accurate basis. I do about 180 tax returns a year and it is a very common problem. If anyone has noncovered securities, It'd be a good idea to start now investigating your cost basis.
So how do you address this common problem when your clients do not have documentation? Also, to the extent that clients have used their best estimate about dates and costs have they withstood audit? DW and I have never been audited and pay enough tax that we won't jump out of the IRS computers but...
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Old 05-24-2013, 09:38 AM   #25
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So how do you address this common problem when your clients do not have documentation? Also, to the extent that clients have used their best estimate about dates and costs have they withstood audit? DW and I have never been audited and pay enough tax that we won't jump out of the IRS computers but...
Frankly, I've never had the issue where the IRS challenged the basis of a common security or mutual fund transaction. In most cases, not enough potential revenue to make it worthwhile. But if the sum of your 1099B's reported to the IRS is more than what your reported as proceeds on your tax return, the IRS will catch that, it's a simple computer records match. IRS will send a dunning notice and assume zero basis for the shortfall.

Often we make a good faith effort to establish a date or approximation and use internet tools to determine the approximate basis, and document for our records how we arrived at that figure.

Whole different ball game when come to sale of a share in a business, including publicly traded partnerships. The latter, you can't just take off the brokerage statement but must go through the calculations as outlined in the voluminous K-1 additional info as special treatment of some items in the past will require an adjustment to basis in calculating cap gains/loss.
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Old 05-24-2013, 10:43 AM   #26
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Frankly, I've never had the issue where the IRS challenged the basis of a common security or mutual fund transaction. In most cases, not enough potential revenue to make it worthwhile. But if the sum of your 1099B's reported to the IRS is more than what your reported as proceeds on your tax return, the IRS will catch that, it's a simple computer records match. IRS will send a dunning notice and assume zero basis for the shortfall.

Often we make a good faith effort to establish a date or approximation and use internet tools to determine the approximate basis, and document for our records how we arrived at that figure.

Whole different ball game when come to sale of a share in a business, including publicly traded partnerships. The latter, you can't just take off the brokerage statement but must go through the calculations as outlined in the voluminous K-1 additional info as special treatment of some items in the past will require an adjustment to basis in calculating cap gains/loss.

Just commenting on your last stmt....

Most of the time it is not that big of a deal and trying to track basis for a business or partnership (one where you buy shares, not actually work in) is not worth the trouble....

Unless you are buying big chunks of them.... the difference is usually not that great...
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Old 05-24-2013, 11:26 AM   #27
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Quicken takes care of that with very little work on my part.
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Old 05-24-2013, 01:07 PM   #28
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That is one reason that I never invested after tax money into a 401(k) or IRA.... I saw only bad options with them...


But, I lie.... I did do it a couple of years ago and did a backdoor ROTH conversion.... it was my only non-ROTH IRA, so it was easy to figure out....
Your point is a good one. I've never been one for excess 401(k) or Roth contributions either. However, in the pre-Roth days of the '80s, depending on your income, it was sometimes a choice between nondeductible traditional IRA contributions or none at all.
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Old 05-24-2013, 04:03 PM   #29
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I had to do manual spreadsheet cost basis calculations for some mutual fund investments in taxable accounts that were opened back in the early 1980s. Unfortunately, I also made monthly automatic investments in them for several years, which makes for a VERY long spreadsheet. Fortunately, I had almost all of my year-end statements filed away (thanks, Dad, for showing me the way to do it!) so it was more tedious than difficult.
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Old 05-25-2013, 11:21 AM   #30
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For cost basis, my mode was to just ignore it until I sold something, and then cobble together a spreadsheet from paper statements as I was preparing my taxes. It made me not want to sell anything, hehe.

As to the routine work of tracking, I wrote a screen scraper application that pulls data (share counts and prices) from my banks, treasury direct, fido, vanguard, work 401(k) all into a single spreadsheet with asset allocation calculations. Even supplies me with graphs with +/- 10% bands around the asset categories . When I was writing the app, I thought I'd use it a lot, but for whatever reason, it's been gathering dust lately. But by doing it this way, I don't have to trust one of those online consolidation apps, yet I still get a unified picture.
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