I use the specific identification method for reporting gains in my brokerage account. Contrary to my instructions the brokerage reported gains to the IRS based on average cost. Can I use specific identification anyway since the brokerage firm erred?
Yes, you can still use the specific identification method for reporting gains in your brokerage account, even if the brokerage firm reported gains to the IRS based on average cost. However, you will need to take some additional steps to ensure your taxes are filed correctly.
Here's what you need to do:
1. Gather documentation:
- You will need to obtain documentation from your brokerage firm that shows the specific shares you bought and sold, including the purchase date, price, and number of shares. This documentation is usually available on your online account statement or you can request it from customer service.
- You will also need to provide copies of your purchase confirmations and trade confirmations if your brokerage statement doesn't explicitly show the specific shares you bought and sold.
2. File Form 8949:
- You will need to file Form 8949, Sales and Dispositions of Capital Assets, with your tax return. This form allows you to report your capital gains and losses for the year, including the specific identification method.
- Be sure to enter the correct information on Form 8949, including the date, symbol, quantity, cost basis, and proceeds of each share sold.
- You can download and print Form 8949 from the IRS website.
3. Attach a statement explaining the discrepancy:
- You should attach a statement to your tax return explaining the discrepancy between the information on your Form 8949 and the information provided to the IRS by your brokerage firm.
- This statement should include the following information:
- The name of your brokerage firm
- The date you contacted your brokerage firm about the error
- The specific shares involved in the error
- The correct cost basis for each share
- You should also provide copies of your documentation from your brokerage firm to support your claim.
4. Consider consulting a tax professional:
- If you are unsure how to proceed or you have any other questions about your taxes, you should consult with a tax professional.
- A tax professional can help you ensure that your taxes are filed correctly and that you are not paying more than you owe.
It's important to note that even though you can still use the specific identification method, it may take longer for the IRS to process your tax return. This is because the IRS will need to verify the information you provided.
Here are some additional resources that you may find helpful:
- IRS Publication 550: This publication provides information on how to report capital gains and losses on your tax return.
- IRS Form 8949 instructions: These instructions provide detailed information on how to complete Form 8949.
- National Association of Tax Professionals: This organization offers a directory of tax professionals in your area.
By following these steps, you can ensure that your taxes are filed correctly and that you are not paying more than you owe.