Figuring out who should be receiving an IRS Form 1099-B

A large transfer agency with a Canadian client paying US sourced income enquired as to whether an IRS Form 1099-B, Proceeds from Broker and Barter Exchange Transactions – an information form used to report the proceeds received from the sale of securities during the current year – should be issued to non-residents of the US, or if this form is only required to be sent to Americans.

It was a good question and in a business where budgets are tight, it’s better to be safe than sorry.

I placed some calls to the IRS, spoke to people in the industry and checked through the IRS website and here was what my research turned up – and take notice of the wording used – as it is very similar to the wording used by the CRA regarding the T5008, Return of Securities Transactions.

“A broker or barter exchange must file Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, for each person:

For whom the broker has sold (including short sales) stocks, bonds, commodities, regulated futures contracts, foreign currency contracts (pursuant to a forward contract or regulated futures contract), forward contracts, debt instruments, etc., for cash,

Who received cash, stock, or other property from a corporation that the broker knows or has reason to know has had its stock acquired in an acquisition of control or had a substantial change in capital structure reportable on Form 8806, or

Who exchanged property or services through a barter exchange.”

Brokers

A broker is any person who, in the ordinary course of a trade or business, stands ready to effect sales to be made by others. A broker may include a U.S. or foreign person or a governmental unit and any subsidiary agency.

You are considered a broker if:

• You are an obligor that regularly issues and retires its own debt obligations or
• You are a corporation that regularly redeems its own stock.

Then the IRS pulls back a little bit here;

“However, for a sale, redemption, or retirement at an office outside the United States, only a U.S. payer or U.S. middleman is a broker.”

You are not considered a broker if:

• You are a corporation that purchases odd-lot shares from its stockholders on an irregular basis (unless facts indicate otherwise),
• You manage a farm for someone else, or
• You are an international organization that redeems or retires its own debt.

So a transfer agent, even through it is a Canadian Corporation, is paying out distributions in US dollars, which makes them an US payor for the purposes of the IRS legislation, must issue 1099’s to US persons no matter where in the world they reside.

W8 certified non-residents of the US instead receive a 1042S, which reports dividend income received on US stocks for foreign investors.

In additions, each transaction is reported (other than regulated futures or foreign currency contracts) on a separate Form 1099-B, so a US person could be receiving multiple 1099-B’s at year-end.  Transactions involving regulated futures or foreign currency contracts are reported on an aggregate basis.

Note: Sales of each of the following types of securities are reported on a separate Form 1099-B, even if all three types were sold in a single transaction:

• Covered securities (defined later) with short-term gain or loss,
• Covered securities with long-term gain or loss, and
• Noncovered securities (securities that are not covered securities) if you choose to check box 6a when reporting their sale.

The gross proceeds value on a 1099-B is reported minus commissions.

Other common 1099 forms used:

Form 1099-R

Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., is the US tax form used to report distributions made to taxpayers from their retirement accounts, including an IRA or Coverdell ESA

Form 1042-S

Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, is the federal information form used to report account information on accounts held by non-resident aliens, foreign corporations and other types of foreign entities. Information such as distributions of ordinary income dividends and short- and long-term capital gains, the tax withholding rate, and the amount of U.S. tax withheld and deposited is reported on Form 1042-S.

Form 1099-Q

This form is used to report an over-contribution from an Educational Savings Account (ESA).  Contributions to an ESA are not deductible, only the earnings are taxable.  The IRS does not require the use of tax codes on Form 1099-Q.

Related articles

• Taxes From A To Z (2013): Z Is For Zombie Debt (forbes.com)
• Bartering? Don’t forget the tax implications (dontmesswithtaxes.typepad.com)