IRS Issues Final Regulations on New Basis Reporting Requirement; For Investors, Reporting Gains and Losses Gets Easier Starting in 2011

IR-2010-104, Oct. 12, 2010

WASHINGTON — The Internal Revenue Service today issued final regulations under a law change that will require reporting of basis and other information by stock brokers and mutual fund companies for most stock purchased in 2011 and all stock purchased in 2012 and later years. The reporting will be to investors and the IRS.

This additional reporting will be optional for stock purchased prior to these dates.

These regulations, posted today in the Federal Register, implement a provision in the Energy Improvement and Extension Act of 2008. Among other things, the regulations describe who is subject to this reporting requirement, which transactions are reportable and what information needs to be reported. Besides providing numerous examples, they also adopt a number of comments and suggestions received since the proposed regulations were issued last December.

Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, long used to report sales prices, will be expanded in 2011 to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stock brokers and mutual fund companies will use this form to make these expanded year-end reports.

The expanded form will also be used to report whether gain or loss realized on these transactions is long-term (held more than one year) or short-term (held one year or less), a key factor affecting the tax treatment of gain or loss. The expanded form, to be first used for calendar-year 2011 sales, must be filed with the IRS and furnished to investors in early 2012.

The IRS today also announced penalty relief for brokers and custodians for reporting certain transfers of stock in 2011.

The relief is described in Notice 2010-67.

Cost Basis Reporting

Cost Basis Reporting is turning the brokerage world upside down.

Here is some legislation. Let’s try to make heads or tales if it, and speculate on it’s impact.

SEC. 403. BROKER REPORTING OF CUSTOMER’S BASIS IN SECURITIES TRANSACTIONS.
(a) In General-
(1) BROKER REPORTING FOR SECURITIES TRANSACTIONS

Section 6045 is amended by adding at the end the following new subsection:
`(g) Additional Information Required in the Case of Securities Transactions, etc-
`(1) IN GENERAL- If a broker is otherwise required to make a return under subsection (a) with respect to the gross proceeds of the sale of a covered security, the broker shall include in such return the information described in paragraph (2).
`(2) ADDITIONAL INFORMATION REQUIRED-
`(A) IN GENERAL- The information required under paragraph (1) to be shown on a return with respect to a covered security of a customer shall include the customer’s adjusted basis in such security and whether any gain or loss with respect to such security is long-term or short-term (within the meaning of section 1222).
`(B) DETERMINATION OF ADJUSTED BASIS- For purposes of subparagraph (A)–
`(i) IN GENERAL- The customer’s adjusted basis shall be determined–
`(I) in the case of any security (other than any stock for which an average basis method is permissible under section 1012), in accordance with the first-in first-out method unless the customer notifies the broker by means of making an adequate identification of the stock sold or transferred, and

`(II) in the case of any stock for which an average basis method is permissible under section 1012, in accordance with the broker’s default method unless the customer notifies the broker that he elects another acceptable method under section 1012 with respect to the account in which such stock is held.

`(ii) EXCEPTION FOR WASH SALES- Except as otherwise provided by the Secretary, the customer’s adjusted basis shall be determined without regard to section 1091 (relating to loss from wash sales of stock or securities) unless the transactions occur in the same account with respect to identical securities.
`(3) COVERED SECURITY- For purposes of this subsection–
`(A) IN GENERAL- The term `covered security’ means any specified security acquired on or after the applicable date if such security–
`(i) was acquired through a transaction in the account in which such security is held, or
`(ii) was transferred to such account from an account in which such security was a covered security, but only if the
broker received a statement under section 6045A with respect to the transfer.
`(B) SPECIFIED SECURITY- The term `specified security’
means–
`(i) any share of stock in a corporation,
`(ii) any note, bond, debenture, or other evidence of indebtedness,
`(iii) any commodity, or contract or derivative with respect to such commodity, if the Secretary determines that
adjusted basis reporting is appropriate for purposes of this subsection, and
`(iv) any other financial instrument with respect to which the Secretary determines that adjusted basis reporting is
appropriate for purposes of this subsection.
`(C) APPLICABLE DATE- The term `applicable date’ means–
`(i) January 1, 2011, in the case of any specified security which is stock in a corporation (other than any stock
described in clause (ii)),

`(ii) January 1, 2012, in the case of any stock for which an average basis method is permissible under section 1012, and
`(iii) January 1, 2013, or such later date determined by the Secretary in the case of any other specified security.
`(4) TREATMENT OF S CORPORATIONS- In the case of the sale of a covered security acquired by an S corporation (other than a financial institution) after December 31, 2011, such S corporation shall be treated in the same manner as a partnership for purposes of this section.
`(5) SPECIAL RULES FOR SHORT SALES- In the case of a short sale, reporting under this section shall be made for the year in which such sale is closed.’.
(2) BROKER INFORMATION REQUIRED WITH RESPECT TO
OPTIONS- Section 6045, as amended by subsection (a), is amended by adding at the end the following new subsection:
`(h) Application to Options on Securities-
`(1) EXERCISE OF OPTION- For purposes of this section, if a covered security is acquired or disposed of pursuant to the exercise of an option that was granted or acquired in the same account as the covered security, the amount received with respect to the grant or paid with respect to the acquisition of such option shall be treated as an adjustment to gross proceeds or as an adjustment to basis, as the case may be.
`(2) LAPSE OR CLOSING TRANSACTION- In the case of the lapse (or closing transaction (as defined in section 1234(b)(2)(A))) of an option on a specified security or the exercise of a cash-settled option on a specified security, reporting under subsections (a) and (g) with respect to such option shall be made for the calendar year which includes the date of such lapse, closing transaction, or exercise.
`(3) PROSPECTIVE APPLICATION- Paragraphs (1) and (2) shall not apply to any option which is granted or acquired before January 1, 2013.
`(4) DEFINITIONS- For purposes of this subsection, the terms `covered security’ and `specified security’ shall have the meanings given such terms in subsection (g)(3).’.
(3) EXTENSION OF PERIOD FOR STATEMENTS SENT TO CUSTOMERS-
(A) IN GENERAL- Subsection (b) of section 6045 is amended by striking `January 31′ and inserting `February 15′.
(B) STATEMENTS RELATED TO SUBSTITUTE PAYMENTS Subsection
(d) of section 6045 is amended–
(i) by striking `at such time and’, and
(ii) by inserting after `other item.’ the following new sentence: `The written statement required under the preceding sentence shall be furnished on or before February 15 of the year following the calendar year in which the payment was made.’.
(C) OTHER STATEMENTS- Subsection (b) of section 6045 is amended by adding at the end the following: `In the case of a consolidated reporting statement (as defined in regulations) with respect to any customer, any statement which would otherwise be required to be furnished on or before January 31 of a calendar year with respect to any item reportable to the taxpayer shall instead be
required to be furnished on or before February 15 of such calendar year if furnished with such consolidated reporting statement.’.
(b) Determination of Basis of Certain Securities on Account by Account or Average Basis Method- Section 1012 is amended–
(1) by striking `The basis of property’ and inserting the following:
`(a) In General- The basis of property’,
(2) by striking `The cost of real property’ and inserting the following:
`(b) Special Rule for Apportioned Real Estate Taxes- The cost of real property’, and
(3) by adding at the end the following new subsections:
`(c) Determinations by Account-
`(1) IN GENERAL- In the case of the sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by regulations under this section shall be applied on an account by account basis.
`(2) APPLICATION TO CERTAIN FUNDS-
`(A) IN GENERAL- Except as provided in subparagraph (B), any stock for which an average basis method is permissible under section 1012 which is acquired before January 1, 2012, shall be
treated as a separate account from any such stock acquired on or after such date.
`(B) ELECTION FUND FOR TREATMENT AS SINGLE
ACCOUNT- If a fund described in subparagraph (A) elects to have this subparagraph apply with respect to one or more of its stockholders–
`(i) subparagraph (A) shall not apply with respect to any stock in such fund held by such stockholders, and
`(ii) all stock in such fund which is held by such stockholders shall be treated as covered securities described in section 6045(g)(3) without regard to the date of the acquisition of such stock.
A rule similar to the rule of the preceding sentence shall apply with respect to a broker holding such stock as a nominee.
`(3) DEFINITIONS- For purposes of this section, the terms `specified security’ and `applicable date’ shall have the meaning given such terms in section 6045(g).
`(d) Average Basis for Stock Acquired Pursuant to a Dividend Reinvestment Plan-
`(1) IN GENERAL- In the case of any stock acquired after December 31, 2010, in connection with a dividend reinvestment plan, the basis of such stock while held as part of such plan shall be determined using one of the methods which may be used for determining the basis of stock in an openend fund.
`(2) TREATMENT AFTER TRANSFER- In the case of the transfer to another account of stock to which paragraph (1) applies, such stock shall have a cost basis in such other account equal to its basis in the dividend reinvestment plan immediately before such transfer (properly adjusted for any fees or other charges taken into account in connection with such transfer).
`(3) SEPARATE ACCOUNTS; ELECTION FOR TREATMENT AS SINGLE ACCOUNT- Rules similar to the rules of subsection (c)(2) shall apply for purposes of this subsection.
`(4) DIVIDEND REINVESTMENT PLAN- For purposes of this subsection–
`(A) IN GENERAL- The term `dividend reinvestment plan’ means any arrangement under which dividends on any stock are reinvested in stock identical to the stock with respect to which the
dividends are paid.
`(B) INITIAL STOCK ACQUISITION TREATED AS ACQUIRED IN CONNECTION WITH PLAN- Stock shall be treated as acquired in connection with a dividend reinvestment plan if such stock is acquired pursuant to such plan or if the dividends paid on such stock are subject to such plan.’.
(c) Information by Transferors To Aid Brokers-
(1) IN GENERAL- Subpart B of part III of subchapter A of chapter 61 is amended by inserting after section 6045 the following new section:
`SEC. 6045A. INFORMATION REQUIRED IN CONNECTION WITH TRANSFERS OF COVERED SECURITIES TO BROKERS.
`(a) Furnishing of Information- Every applicable person which transfers to a broker (as defined in section 6045(c)(1)) a security which is a covered security (as defined in section 6045(g)(3)) in the hands of such applicable person shall furnish to such broker a written statement in such manner and setting forth such information as the Secretary may by regulations prescribe for purposes of
enabling such broker to meet the requirements of section 6045(g).
`(b) Applicable Person- For purposes of subsection (a), the term `applicable person’ means–
`(1) any broker (as defined in section 6045(c)(1)), and

`(2) any other person as provided by the Secretary in regulations.
`(c) Time for Furnishing Statement- Except as otherwise provided by the Secretary, any statement required by subsection (a) shall be furnished not later than 15 days after the date of the transfer described in such subsection.’.
(2) ASSESSABLE PENALTIES- Paragraph (2) of section 6724(d), as amended by the Housing Assistance Tax Act of 2008, is amended by redesignating subparagraphs (I) through (DD) as subparagraphs (J) through (EE), respectively, and by inserting after subparagraph (H) the following new subparagraph:
`(I) section 6045A (relating to information required in connection with transfers of covered securities to brokers),’.
(3) CLERICAL AMENDMENT- The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by inserting after the item relating to section 6045 the following new item:
`Sec. 6045A. Information required in connection with transfers of covered securities to brokers.’.
(d) Additional Issuer Information To Aid Brokers-
(1) IN GENERAL- Subpart B of part III of subchapter A of chapter 61, as amended by subsection (b), is amended by inserting after section 6045A the following new section:
`SEC. 6045B. RETURNS RELATING TO ACTIONS AFFECTING BASIS OF SPECIFIED SECURITIES.
`(a) In General- According to the forms or regulations prescribed by the Secretary, any issuer of a specified security shall make a return setting forth–
`(1) a description of any organizational action which affects the basis of such specified security of such issuer,
`(2) the quantitative effect on the basis of such specified security resulting from such action, and
`(3) such other information as the Secretary may prescribe.
`(b) Time for Filing Return- Any return required by subsection (a) shall be filed not later than the earlier of–
`(1) 45 days after the date of the action described in subsection (a), or

`(2) January 15 of the year following the calendar year during which such action occurred.
`(c) Statements To Be Furnished to Holders of Specified Securities or Their Nominees- According to the forms or regulations prescribed by the Secretary, every person required to make a return under subsection (a) with respect to a specified security shall furnish to the nominee with respect to the specified security (or certificate holder if there is no nominee) a written statement showing-
`(1) the name, address, and phone number of the information contact of the person required to make such return,
`(2) the information required to be shown on such return with respect to such security, and
`(3) such other information as the Secretary may prescribe.  The written statement required under the preceding sentence shall be furnished to the holder on or before January 15 of the year following the calendar year during which the action described in subsection (a) occurred.
`(d) Specified Security- For purposes of this section, the term `specified security’ has the meaning given such term by section 6045(g)(3)(B). No return shall be required under this section with respect to actions described in subsection (a) with respect to a specified security which occur before the applicable date (as defined in section 6045(g)(3)(C)) with respect to such security.
`(e) Public Reporting in Lieu of Return- The Secretary may waive the requirements under subsections (a) and (c) with respect to a specified security, if the person required to make the return under subsection (a) makes publicly available, in such form and manner as the Secretary determines necessary to carry out the purposes of this section–
`(1) the name, address, phone number, and email address of the information contact of such person, and

`(2) the information described in paragraphs (1), (2), and (3) of subsection (a).’.
(2) ASSESSABLE PENALTIES-
(A) Subparagraph (B) of section 6724(d)(1), as amended by the Housing Assistance Tax Act of 2008, is amended by redesignating clause (iv) and each of the clauses which follow as clauses (v) through (xxiii), respectively, and by inserting after clause (iii) the following new clause:
`(iv) section 6045B(a) (relating to returns relating to actions affecting basis of specified securities),’.
(B) Paragraph (2) of section 6724(d), as amended by the Housing Assistance Tax Act of 2008 and by subsection (c)(2), is amended by redesignating subparagraphs (J) through (EE) as subparagraphs (K) through (FF), respectively, and by inserting after subparagraph (I) the following new subparagraph:
`(J) subsections (c) and (e) of section 6045B (relating to returns relating to actions affecting basis of specified securities),’.
(3) CLERICAL AMENDMENT- The table of sections for subpart B of part III of subchapter A of chapter 61, as amended by subsection (b)(3), is amended by inserting after the item relating to section 6045A the following new item:
`Sec. 6045B. Returns relating to actions affecting basis of specified securities.’.
(e) Effective Date-
(1) IN GENERAL- Except as otherwise provided in this subsection, the amendments made by this section shall take effect on January 1, 2011.
(2) EXTENSION OF PERIOD FOR STATEMENTS SENT TO CUSTOMERS- The amendments made by subsection (a)(3) shall apply to statements required to be furnished after December 31, 2008

Mutual Funds and Cost Basis Reporting – IRS

With each sale or exchange of mutual fund shares, you may realize a capital gain or loss that must be reported to the IRS. To calculate gains and losses, you need to determine which shares were sold and the cost basis of those shares. The sales proceeds minus the cost basis of the shares is your gain or loss.

The IRS permits four methods of accounting for mutual fund cost basis:

First-In, First-Out (FIFO) Method

  • The FIFO method is the most common way of computing a basis. If you do not specify that another method is being used, the IRS will presume you are using the FIFO method. As the name implies, the oldest shares available (first-in) are those considered sold first (first-out).

Specific Identification Method

  • The specific identification method allows you to choose which shares you are selling, thereby giving you more control over whether you will generate a gain or loss by the transaction. To use this method, you must specify to the mutual fund at the time of sale the particular shares to be sold. Your gain or loss will vary, depending on which shares you choose.

Average Cost – Single and Double Category

  • You may elect to calculate the cost basis of your mutual fund shares using an average price. There are some special requirements if you wish to do so. The IRS requires you to elect this method by stating so on your tax return and by using the method consistently for all your accounts in the same fund. The choice is effective until you get permission from the IRS to revoke it. These methods may be appealing for shareholders who redeem shares infrequently. 

    The single category method averages all shares owned at the time of sale.

    In determining the holding period, the IRS considers the shares sold to be those shares acquired first (i.e., first-in, first-out).

    The double category method requires you to divide all shares owned at the time of sale into two categories (long- and short-term) and calculate an average cost for each category. Shares held one year or less are short-term. Shares held longer than one year are long-term.

    Similar to the specific identification method, you may specify to the fund at the time of sale from which category you wish to sell shares. If no specification is made, you must first charge the shares sold against the long-term category and then any remaining shares sold against the short-term category.

Mutual Funds and Cost Basis Reporting

With each sale or exchange of mutual fund shares, you may realize a capital gain or loss that must be reported to the IRS.  To calculate gains and losses, you need to determine which shares were sold and the cost basis of those shares.

The sales proceeds minus the cost basis of the shares is your gain or loss.

The IRS permits the following methods of accounting for mutual fund cost basis:

1. First-In, First-Out (FIFO) Method

The FIFO method is the most common way of computing a basis. If you do not specify that another method is being used, the IRS will presume you are using the FIFO method.  As the name implies, the oldest shares available (first-in) are those considered sold first (first-out).

2. Specific Identification Method

The specific identification method allows you to choose which shares you are selling, thereby giving you more control over whether you will generate a gain or loss by the transaction. To use this method, you must specify to the mutual fund at the time of sale the particular shares to be sold. Your gain or loss will vary, depending on which shares you choose.

3. Average Cost – Single and Double Category

You may elect to calculate the cost basis of your mutual fund shares using an average price. There are some special requirements if you wish to do so. The IRS requires you to elect this method by stating so on your tax return and by using the method consistently for all your accounts in the same fund. The choice is effective until you get permission from the IRS to revoke it. These methods may be appealing for shareholders who redeem shares infrequently.

The single category method averages all shares owned at the time of sale.

In determining the holding period, the IRS considers the shares sold to be those shares acquired first (i.e., first-in, first-out).

The double category method requires you to divide all shares owned at the time of sale into two categories (long- and short-term) and calculate an average cost for each category. Shares held one year or less are short-term. Shares held longer than one year are long-term.

Similar to the specific identification method, you may specify to the fund at the time of sale from which category you wish to sell shares. If no specification is made, you must first charge the shares sold against the long-term category and then any remaining shares sold against the short-term category.

Wash Sale Rule

If you sell shares at a loss and purchase shares in the same fund within 30 days before or after the sale, the IRS considers the purchase to have “washed” all or a portion of your loss. The IRS designed this rule to discourage investors from selling securities solely for the purpose of generating a tax loss. A wash sale is indicated on your statement.

In the case of a wash sale, two important adjustments must be made. All or a portion of the loss must be deferred and added back to the basis, and the holding period of the purchased shares must be changed to account for the deferral. Your statement already reflects the adjusted cost basis and allowable loss. You need not make any further adjustments.