STOCK TRANSACTIONS REPORTING CAN BE A NIGHTMARE

Beginning with the 2011 tax return, reporting stock transactions has become significantly more complicated because of the new requirement for brokerage firms to track the purchase price of stocks acquired after 2010 and subsequent years and to include that information on the information-reporting document 1099-B.

For several years now, the IRS has required brokerage firms to report the gross proceeds from the sale of stocks and other securities on the Form 1099-B. But just knowing the proceeds from a security sale does not allow the IRS to verify the profit or loss reported by the taxpayer. So beginning with 2011 purchase transactions, brokers are required to track the price paid for the securities and include that information on the 1099-B when that particular security is subsequently sold.

So that the IRS can use the new data to verify taxpayer profit or loss transactions attributable to purchases where the cost information is included with the 1099-B, the year’s transactions must now be broken down into six categories (the last two categories listed do not apply to stock transactions but may apply to sales of other capital assets):

• Long-term sales where the broker IS reporting the cost of the security
• Short-term sales where the broker IS reporting the cost of the security
• Long-term sales where the broker IS NOT reporting the cost of the security
• Short-term sales where the broker IS NOT reporting the cost of the security
• Long-term sales for which no 1099-B is issued
• Short-term sales for which no 1099-B is issued

The IRS has provided a new form 8949 for segregating the transactions within each of these categories. A separate form 8949 must be used for category so the IRS can match what the taxpayer reported as profit/loss for transactions where the broker reported the profit/loss.

Prior to 2011 it was common practice to summarize a taxpayers long-term and short term transactions and make a single long-term and single short-term entry on the old version of Schedule D saying “see attached” in description block and including the broker’s statement of long-term and short-term gains and losses with the return filing. Under this new regimen this is longer possible because brokerage firms are not segregating the transactions into the required categories in reports they provided to their clients.

This has created a reporting nightmare for taxpayers with significant numbers of transactions during the year (typically managed accounts) where the transactions can run in the hundreds. These taxpayers or their tax preparer are faced with entering every transaction on the tax return in order to accomplish the required segregation, which is time consuming and expensive.

Although not a perfect solution, many tax software products will import stock transactions from a spreadsheet and most brokerage firms will provide a spreadsheet of the transactions upon request. Once loaded each transaction coded as to whether the 1099-B included the cost basis or not. Most brokerage accounts use the term “covered” to designate transaction where they report basis and “uncovered” where they didn’t.

If all that is not enough, the reporting process is complicated where the securities traded were acquired by gift or inheritance. Special adjustments are also required for wash sales and when sales can be attributed to a prior purchase of the same security.

There is little chance the IRS will change the new reporting requirement since they feel a significant number of taxpayers overstate the tax basis of their sales and this this new reporting requirement was designed to counter that practice. So, hopefully, the brokerage firms will come to realize the needs of their clients and adjust their reporting to simplify the process for their clients.

Now that the IRS has profit or loss matching capabilities, it is important to correctly report the transactions as the IRS expects to see them. Failure to do so could lead to correspondence audits or even face-to-face audits.

Please call this office if you have questions relating to reporting your security sales this year.