Background: When you sell securities, you may show a taxable capital gain or a deductible capital loss for the difference between the sale price and the basis. For this purpose, “basis” is generally your acquisition cost, plus certain adjustments (including broker commissions).
If you have owned the securities for more than one year, any capital gain is treated as long-term gain, taxed at a maximum rate of 15% in 2010 (0% for certain low-income taxpayers). Losses offset capital gains plus up to $3,000 of ordinary income. But complications often arise if you sell only some of the shares of a security. In addition, you may not have adequate records showing the initial cost of the securities.
Currently, brokers and other financial institutions must report the amount of proceeds received in a security sale to the IRS, but not the basis of the shares. The IRS has long claimed that some investors inflate their basis in order to maximize the tax benefits.
New rules: Under the Emergency Economic Stabilization Act of 2008, a broker is required to submit information returns including the basis of covered securities that have been sold, in addition to the amount of the sale proceeds. It must also indicate if a gain or loss is short-term or long-term. These rules apply to stock and mutual fund shares acquired after 2010; stocks in a mutual fund or dividend reinvestment plan acquired after 2011; and other securities (e.g., notes, bonds, and commodity contracts and options) acquired after 2012.
Therefore, for acquisitions made before these dates, the old rules remain in effect. For instance, if you acquire stock in 2010, you are responsible for establishing the basis.
The new proposed regulations provide guidance to financial institutions. Here are some of the highlights:
- Your basis must be adjusted for transactions within an account, but other transactions that take place outside of an account, such as “wash sales,” may be ignored. A wash sale results in a disallowed loss when substantially identical securities are acquired within 30 days of a sale.
- Information must be reported on a single return for multiple purchases of securities. Separate returns are required if sales are both long-term and short-term or involve “covered” and “noncovered” securities.
- A security transferred into an account will be presumed to be a covered security unless the receiving broker receives an inadequate transfer statement.
- A broker, custodian or issuer transferring a covered security must provide the basis and acquisition date to the receiving broker no later than 15 days after the transfer.
- A stock issuer must report to the IRS any organizational action affecting basis, such as a merger or stock split, within 45 days of occurrence. Stockholders must receive the information by January 15 of the following year. Alternatively, the stock issuer can post the information on its Web site.
Remember that the new basis reporting rules are being phased in over a three-year period. Furthermore, the old rules continue to apply to any pre-2011 acquisition. Obtain professional assistance to address the complexities.
Other articles in the October 2010 Edition of Business Matters: