Apr 19, 2011

Stockbrokers to Start Reporting Clients' Tax Basis

Taxpayers will be receiving a little more assistance from their stock brokers when it comes to the preparation of the annual Schedule D in their tax returns -- the Energy Improvement and Extension Act of 2008 has mandated that every broker required to file a return with the IRS reporting sales proceeds must also report a customer's adjusted basis in the security, and whether any gain or loss on the sale is long or short term in nature.

A "covered security" is stock in a corporation acquired on or after January 1, 2011, or shares in a mutual fund, or shares acquired in a dividend reinvestment plan (DRP) acquired after January 1, 2012.

If a customer sells less than his or her entire position of a security in an account, a broker must report the customer's basis (other than mutual fund or DRP shares) generally using the first-in, first-out (FIFO) method unless the customer provides the broker an adequate and timely identification of the shares or units the customer wants to sell. A broker must report the adjusted basis of mutual fund or DRP stock (for which the customer may average the basis of the stock) in accordance with the broker's "default" method unless the customer notifies the broker that the customer elects a different permitted method.

The new rules change the way taxpayers determine the average basis of mutual fund stock and permit them to average stock held in a DRP. Starting in 2012, taxpayers who elect to average the basis of mutual fund shares will compute separate averages for fund shares held in different accounts. Taxpayers will also be permitted to average the basis of mutual fund shares in one account but not average them in another account.

The due date for brokers to so report will be February 15 after the end of the tax year in question. And when a taxpayer changes brokers, the rules will require the transferring broker to furnish to the receiving broker a written statement with all necessary information required for the receiving broker to comply with the Act's basis reporting requirements. Statements required by this rule are generally due no later than 15 days following the transfer of the covered securities.

Won't all the brokers just love this new burden upon them!

For more of the gory details, check out the IRS' 68 "frequently asked questions" at http://www.irs.gov/taxpros/article/0,,id=237099,00.html.