My understanding is that this kicks in for securities bought after 2010 -- the basis will be attached to the securities, and will travel with them to wherever they may be transferred. For securities bought before 2011, the old system (the honor system) will be in place, as it is now.
Well, this is going to get interesting.
A friend of mine is doing a fair amount of trading, including options against stock he owns. While he says he has always tried to comply with the spirit of the tax laws on these trades, he has taken some accounting shortcuts from time to time if it didn't reduce his tax. An example would be to not go through all the details of some interim wash sales if he completely liquidated all holdings in that stock that year (the end result is the same tax-wise, just less entries and less chance of error with the extra steps). I've done the same.
The past couple years, he has become paranoid about getting audited, and is making a concerted effort to cross every 't' and dot every 'i'. Before I go into a rant, I'll just cover some factual information which would seem to make it impossible for brokers to provide accurate cost basis information, and some that just make me question how they are going to comply with the letter of the law:
1) It's been discussed here, but selling at a loss and buying that same product in another account or even in an IRA will trigger a wash sale. How is your broker going to track this?
2) Options on a stock you hold can effect holding periods and trigger wash sales. Are the brokers ready for this? And this is one I'll call 'impossible' for them to comply with. Why? Because Congress has 'fuzzy' rules. It is affected by how far in/out the money the option is, but Congress did not actually provide any hard cut-offs on this. What is a tax payer to do? What is a broker, who can't sit and make judgment calls on this?
Wash Sales Between Stocks and Options
What this means for the stock and options trader is that if you take a loss on a stock or an option, and then buy back that same stock, or an option on that same stock, whether the option is the same month and strike price or not, you have a wash sale. The same holds true if you close an option position for a loss and then buy the same underlying stock within the 30 day window.
There is no clarification in the tax law as to how far "in or out of the money" the option is, or what month and year the option expires.
3) AFAIK, the IRS has never ruled on what "substantially equivalent" holdings are for a wash sale. How are brokers going to deal with this?
A funny thing about wash sales, they don't want to let you take a loss at the time this way, but they do allow for 1035 exchanges, which is essentially the same thing but for delaying the gain.
I'll skip the rant - it should be obvious by now....
Maybe there is a silver lining - maybe brokers have enough power to push through some clarification of this stuff (mini-rant: do Congress's job for them)
-ERD50.
