Your Broker’s 1099 Statement Will Be Different for 2011

August 3rd, 2011

For years, the IRS has had the ability to identify the gross sales of taxpayers from broker transactions, including security (reported on a 1099-B) and property sales (reported on 1099-S forms). However, these identified only the sales price, quantity sold (for securities), and dates of the transactions. To determine the profit or loss, you must also know the tax basis of the property that was sold. Without confirmation of the basis, which up to now has been obtainable only from the taxpayer via an audit, the IRS has no way to verify the reported profit or loss from the sale, leaving this area open to abuse.

That will be changing starting in 2011, at least for security sales. Beginning in 2011, every broker who is required to file an information return reporting the gross proceeds of a security must include in the informational return the customer’s adjusted basis in the security and whether any gain or loss with respect to the security is short-term or long-term.

Securities initially covered under this new requirement include: (a) shares of stock in a corporation, (b) notes, bonds, debentures, or other evidence of indebtedness and (c) commodities, contracts, or derivatives with respect to the commodities.

The requirement is being phased in and will generally apply to:

  • Corporation stocks acquired after 2010,
  • Regulated investment companies (mutual funds) and dividend reinvestment plans after 2011,
  • Certain other securities (as determined by the IRS) after 2012.

The IRS estimates that more than one in three taxpayers who sold securities may have misreported capital gains and losses—in many cases because they misreported their basis—and it expects the new basis reporting rules to go a long ways toward correcting that problem. However, since the effective dates for broker basis reporting will be based on the acquisition dates of the securities, there will still be many sales in the years to come for which brokers may not report the basis because they lack the information. For these sales, the basis of the securities that were sold will need to be determined by taxpayers, as in the past.

Under this new reporting requirement, the gain or loss reported by a brokerage firm will be based on a first-in first-out (FIFO) method unless the customer notifies the broker by means of making an adequate identification of the stock sold or transferred. In the case of securities where the “average cost basis” method is allowable, brokerage firms are to use the “average cost basis” method unless customers notify brokers that they elect another acceptable method with respect to the account in which the stock is held.

This is a complicated undertaking and, undoubtedly, there will be some confusion in terms of matching basis with transactions. For example, under these new rules, a customer’s adjusted basis is determined without regard to the wash sale rules unless the transactions occur in the same account. This will create basis matching problems where identical securities are held in other accounts.

If you have questions related to these new broker reporting requirements and how they might affect you, please give us a call.

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