Bank Reporting Cost Basis To IRS

[yakers]

Note came in from WF Bank about their implementing reporting changes as required by the IRS:"... For the 2011
tax year and beyond, financial institutions are required to report not only the gross proceeds but also the adjusted cost basis for covered securities sold, and whether the related gain or loss is long-term or short-term."

Didn't they always do this or was it just on their report to me and not to the IRS? Doesn't seem like a big deal since I use their report to me to prepare my taxes.

I suppose if someone had a very complicated portfolio there might be an issue or if I didn't agree with what the bank is saying.

I don't know if anyone is still DRIPing stocks but it appears the bank/agent would have to keep cost basis information.

 

[MichaelB]

Note came in from WF Bank about their implementing reporting changes as required by the IRS:"... For the 2011
tax year and beyond, financial institutions are required to report not only the gross proceeds but also the adjusted cost basis for covered securities sold, and whether the related gain or loss is long-term or short-term."

Didn't they always do this or was it just on their report to me and not to the IRS? Doesn't seem like a big deal since I use their report to me to prepare my taxes.

I suppose if someone had a very complicated portfolio there might be an issue or if I didn't agree with what the bank is saying.

I don't know if anyone is still DRIPing stocks but it appears the bank/agent would have to keep cost basis information.

No, this is new. What you got from your bank was data they sent to you but not the IRS - who only got proceeds (sales) data. This has always been a major opportunity to, well, miscalculate.

This applies to new asset purchases beginning in 2011. People should always keep their cost data regardless - I have found a number of mistakes on my tax reports over the years.

 

[Nords]

Note came in from WF Bank about their implementing reporting changes as required by the IRS:"... For the 2011
tax year and beyond, financial institutions are required to report not only the gross proceeds but also the adjusted cost basis for covered securities sold, and whether the related gain or loss is long-term or short-term."

Well, golly, this is going to wreak havoc with the specific-shares sales method.

But I guess that these days most fund companies & brokerages allow customers to specify those shares right on the website.

 

[LOL!]

WF has always had this since I've been using them as a broker (well, WellsTrade that is) so it is no big deal. One of the advantages of WellsTrade 1099 statements downloaded into TurboTax is that they report to TurboTax the cost basis and date acquired accurately. This is not the case for Vanguard nor for TDAmeritrade, though these institutions will have to comply with the new rules soon.

 

[Texas Proud]

Well, golly, this is going to wreak havoc with the specific-shares sales method.

But I guess that these days most fund companies & brokerages allow customers to specify those shares right on the website.

The note I got from Vanguard is that you will have to specify which shares you plan to sell... or tell them LIFO or FIFO... (IIRC)... they will not be using averages going forward Hmmmm wonder about fund sales

 

[Delawaredave5]

This applies to new asset purchases beginning in 2011.

Couple questions please:
1. If you have a fund with all shares purchased before 2011 and no additional purchases in 2011 or beyond, and you sell shares in 2011 or beyond - then the IRS receives only gross proceeds (like historically done) ?

2. What if you have 1,000 shares in a fund purchased before 2011 and you purchase 500 more shares in 2011. When you sell shares in this fund - what will be reported ?

Thanks !

 

[Delawaredave5]

Found this - looks applicable - haven't read...

http://www.gainskeeper.com/us/docs/...portingLawOverview_Whitepaper_Nov52008_FF.pdf

 

[MichaelB]

Couple questions please:
1. If you have a fund with all shares purchased before 2011 and no additional purchases in 2011 or beyond, and you sell shares in 2011 or beyond - then the IRS receives only gross proceeds (like historically done) ?

2. What if you have 1,000 shares in a fund purchased before 2011 and you purchase 500 more shares in 2011. When you sell shares in this fund - what will be reported ?

Thanks !

Schedule is: equities in 2011, mutual funds in 2012, other assets in 2013. The law applies to new purchases, not assets already in accounts, so answer to 1) is yes, IRS only receives gross proceeds unless custodian chooses to provide more (unlikely).

For 2), my guess is custodian or broker will most likely report separate 1099's for assets subject to cost basis reporting and assets not subject.

 

[MichaelB]

IRS proposed new 1099

 

[Texas Proud]

IRS proposed new 1099

Wow... unless they can give you a schedule like they do now... you will be getting a 1099 for every trade... and if it is a mutual fund with ST and LT gains... two for that trade

 

[MichaelB]

Wow... unless they can give you a schedule like they do now... you will be getting a 1099 for every trade... and if it is a mutual fund with ST and LT gains... two for that trade

Or one very long 1099 with 15 line items for each transaction. Actually, probably 2 1099's - one each for pre and post assets subject to the new reporting requirement.

Really isn't any worse than now. At Fidelity if I buy 1000 shares of something and the actual trade is a bunch of smaller pieces, F* reports that as a series of individual trades. I guess that makes it easier for them to record the data that way.

 

[Martha]

How are brokers going to deal with accounts that were transferred to them from another broker? They won't have the cost basis.

 

[ziggy29]

How are brokers going to deal with accounts that were transferred to them from another broker? They won't have the cost basis.

The (presumably) unintended consequences of all this 1099 shenanigans coming in 2011 are really starting to rear their ugly head.

 

[easysurfer]

Average? FIFO? LILO? -- I bet a lot of accountants are gonna get rich from these rules

 

[FinanceDude]

How are brokers going to deal with accounts that were transferred to them from another broker? They won't have the cost basis.

If the IRS won't allow average cost basis then the CPAs will be as lost as the taxpayer. Since the onus is on the taxpayer, most of whom have terrible records, I think I know whose going to get screwed..........

 

[easysurfer]

article on topic: Mutual Funds and Cost Basis Compliance: Plan Now to be Prepared in 2012 by Wall Street & Technology

 

[MichaelB]

A good source of info http://www.dtcc.com/downloads/leadership/whitepapers/costbasis_whitepaper.pdf from DTCC DTCC › Home

For an investors securities positions received from another broker, the delivering broker must provide cost basis information to the receiving broker. If the brokers systems are not ready to collect the cost basis information and share lots, the shareholder accounting systems will need to be upgraded accordingly, as these transactions are mandated in the new legislation. The receiving broker must decide to accept the prior brokers cost basis information or to run an internal event capture and calculation process to verify the cost basis information received.

Brokers generally elect the default rule for cost basis reporting as first-in, first-out (FIFO). A shareholder can change the default to their personal preference, such as specific lot
basis, last in, first out, and highest (cost) in, first out. Consequently, brokers must be prepared to provide a default basis method and to accept a shareholders instruction to change that default. For DRiP shares and mutual funds, average basis reporting can be the default basis reporting method. The average cost method can be used for the initial purchase of the DRiP shares, and any subsequent reinvestment or voluntary contributions. Changes must be effected when an investor notifies the broker of a different preference

I predict capital gains taxes will increase.

 

[Nords]

I predict capital gains taxes will increase.

That's a pretty safe bet considering the 2003 tax breaks expire in just 86 days and Congress isn't in session right now.

I suspect that the collections of cap gains taxes will also soar as investors can no longer "self-report"...

It'll be interesting to see if the IRS uses this database to enforce whatever they've always intended to enforce with the wash-sale rule.

 

[MichaelB]

That's a pretty safe bet considering the 2003 tax breaks expire in just 86 days and Congress isn't in session right now.

I suspect that the collections of cap gains taxes will also soar as investors can no longer "self-report"...

You're right on both counts. I was referring to collections but it appears rates are going up as well.

It'll be interesting to see if the IRS uses this database to enforce whatever they've always intended to enforce with the wash-sale rule.

Looks that way. Wash sale reporting has been mentioned in the briefs and is part of the proposed new 1099 (box 5 wash sale loss disallowed).