Making Heads or Tails of the Form 1099-B

Having to pay capital gains tax is one of the downsides to selling stocks and realizing gains outside of a retirement account. Through 2010, individuals’ 1099-B forms offer some of the details pertinent to the transaction and help with reporting requirements. However, only reported are the sales proceeds a taxpayer received during the year along with the date the sale took place. So a taxpayer’s own records were always needed to supplement the Form 1099-B information

Notice that we just used past tense when referring to these forms? That’s because the 1099-B is changing in 2011 and becoming more user-friendly going forward.

Adjusted Basis

On the old 1099-B, there was no requirement to record the purchase price of the stock that was sold. On the new version, brokers are expected to report the adjusted basis, which includes commissions and taxes as well as the cost of the underlying security itself when the trade was executed.

One of the best aspects of this change is that it includes stocks acquired after a split or as a dividend or reorganization. Of course, only covered securities are included in this requirement, so don’t expect it to occur for securities purchased before 2011 or for those computed on an average-cost basis method, such as dividend reinvestments and mutual-fund transactions.

When transferring securities from one brokerage firm, it’s important to verify records and ensure that the cost-basis information is correct so that information reported on the new 1099-B is accurate. You can always call your broker to make changes if you notice mistakes.

Wash Sale Loss                                       

The wash sale rule states that an individual cannot take a loss on a stock if buying the same stock (or a substantially similar one) 30 days before or after it is sold. The goal of this rule is to prevent taxpayers from planning a purchase in order to lose money, or taking a loss on something that they have intentions of completely replacing very quickly.

With the new 1099-B, brokers will be required to report losses that are disallowed due to the purchase of a same-CUSIP buy in the account in which the loss was realized within the 30-day time frame. While not required, brokers may also report other transactions that could disallow the loss, such as same-CUSIP purchases into different accounts.

The Takeaway

While these changes will likely help reporting of accurate securities transaction details without spending hours poring over buy-and-sell confirmations and statements, there is another side of the coin for consideration. Brokers may supply this data, but it is the taxpayer's responsibility to report it accurately and properly. The new 1099-B does not free individuals from accountability; however, taxpayers can verify information with their brokers throughout the year to ensure that it is correctly reflected on the 1099-B rather than hunting through documents at tax time. If you want tips on how to better organize important, reportable data, give us a call. One of CRI's business advisors can work with you to develop a system of financial recordkeeping that works for you.