New Forms for Capital Assets

Back in 2008, The Energy Improvements and Extension Act of 2008 passed with a provision that required brokers to track the cost basis of stocks and mutual funds they purchase for clients beginning in 2011. This basis is then reported to the client (and the IRS) on a Form 1099B.

What is basis? For stocks and mutual funds it’s the purchase price plus commission. Then it depends on how I chose to handle the dividends and capital gains. If I take those in cash, my basis doesn’t change. However, if the dividends and capital gains (if a mutual fund) are reinvested in more shares of the fund or stock, then my basis changes to reflect the additional shares and their cost. When the stocks or funds are sold, I don’t pay tax on the actual selling price but the difference between the selling price and my cost basis. Let’s say I have $5000 to open a brokerage account and have the broker buy all the shares of MAC stock they can for that amount (say 250). My basis in MAC is $5000 or $20 a share. That won’t change if I have the dividends paid to me when they are issued. If I have the dividends reinvested, I add more shares and change the basis because I will report and pay tax on those dividends. For example, at the end of the year, my stock earns a $50 dividend. The price per share at that time is $23 so I now own 252.17 shares ($50/23 added to the original 250). My investment is $5000 + 50 = $5050 or $20.03 a share. This process is repeated every time there is a dividend or capital gain distribution for a mutual fund.

Too often, the preparer has to calculate the basis at the time of the sale basis on what statements, tax returns and company information the taxpayer and preparer can find. Part of the tax gap can be traced to incorrect basis reporting when the stock or fund is sold. (And out right lying about basis is part of that problem too). That is why the new rules about reporting the cost basis on the 1099B that reports the sale of the security. Actually, a lot of brokers already do part of this. I get 1099Bs that come with cost basis info in separate statements all the time. Currently, these are not reported to the IRS. But this year that changes. Technically, the new rules only apply to 2011 and beyond purchases but I expect to see the brokers who already provide the info to be using the new forms.

The new IRS forms for reporting stock and mutual fund sales have been released in draft form. (Thanks to Atticus and Doug L. for the heads up.) The big change is the new form 8949. This form is where the actual transactions will be reported. The totals will be carried from here to the revised Schedule D. Just like the Sch. D, Form 8949-Sales and Other Dispositions of Capital Assets breaks the sales into long and short term assets. But it also separates the assets by how the sale is reported; on 1099B with a cost basis, 1099B without a cost basis, and sales with no 1099B. One reporting type will be allowed per 8949. So, it will be possible to have 3 Form 8949s on a return carry to one Sch. D. (Can you say, Paperwork Reduction Act?)

It will take some time for the new reporting requirements to impact the tax gap significantly since it is not retroactive. It only has to cover 2011 and beyond purchases. As I said, I hope that brokers who already provide that info to their clients will adopt the new rules this year. One impact some investors might have already felt is an increase in broker fees to cover the additional record keeping. Hopefully, that will be offset by a reduction in tax return preparation fees for recreating a basis.

Links to download the draft forms:

8949

Schedule D

1099B

1099B Instructions.