Starting this year there is a big change in regards to cost basis reporting for investments. Because of the Energy Improvement and Extension Act of 2008, brokers (Scottrade, Sharebuilder, ect) are now required to file adjusted cost basis on any security that you sold in 2011. This is reported on IRS Form 1099-B. For those of you unfamiliar cost basis is the amount you paid for a security plus any commissions.
Up until these new rules went into affect brokers only needed to show the specific proceeds from the sale of securities. Not that Cost Basis is being reported it is important that you select your tax strategy for selling securities because this could mean a much larger or smaller tax bills.
As an example let’s say you purchase 10 shares of a stock on July for $10 and you bought another 20 shares of the same stock in September for $15. In December you decided to sell 15 shares at $14. Now depending on the tax strategy you choose you could either have a capital gain or a capital loss. Below are to of the most common tax strategies.
- FIFO (First In First Out) – This means that the first shares you bought would be the first ones sold.
- LIFO (Last In First Out) – This means that the last shares bought are the first ones sold.
In the above scenario the best option to choose would LIFO because then you would be reporting a capital loss whereas if you had sold the $10 purchased shares you would have had a reported gain.
As of right now the only securities that have gone to cost basis reporting are stocks and a select few ETF’s. This started on January 1, 2012 for any stock purchased on or after January 1, 2011. Starting in 2013 they will be required to make the change on mutual funds purchased on or after January 1, 2012. Everything else not covered will be required to change as of 2014 for anything purchase on or after January 13, 2013.
Most of you will think this is pretty straight forward but it is actually incredibly complicated if you buy and sell a lot of securities throughout the year or have a security that you have held for several years before recently selling. One of the biggest headaches will be for investors who reinvest dividends because all of these reinvestments will have to be figured in. Your best bet to tackle all of these changes to reporting is to work with your financial planner or contact your broker.
If you have any questions as far as any of this goes please leave a comment and myself or another reader will be willing to help you out.
I was given some stock in December of 2010 and I sold it in 2011. Can’t I just base the acquisition date as my purchase date since it was originally bought by someone else years before?
Jeri,
That is a really good question. Let me do a little bit of research on how gifting of stock works with this. Are your shares currently through a broker such as Scottrade or TD Ameritrade? If so you might want send them an email and see what they say.
Sean