Figuring out cost basis can be one of the biggest hassles investors face at tax time. But a new Internal Revenue Service reporting requirement should eventually make this tax task easier.
For stocks or bonds, basis generally is the price you paid plus any additional costs, such as commissions and recording or transfer fees. You subtract the asset's basis from the amount you received on its sale, and that will tell you whether you owe taxes on a capital gain or have a capital loss you can use to reduce your tax bill.
But in some cases, it's difficult to document an asset's cost basis. Records are lost. Things such as splits, conversions and dividend reinvestments affect a stock's value. Tracking such information can be time-consuming and still can produce less-than-accurate results.
That's a problem not only for investors, but also for the U.S. Treasury. IRS in 2005 estimated the federal government was losing an estimated $11 billion in tax revenues because of inaccurate adjusted cost basis information.
To stem such losses, a new rule requiring brokers and other investment managers to include basis information on Form 1099-B came about, thanks to the Emergency Economic Stabilization Act of 2008, commonly known as the bailout bill.
The new cost basis information will be phased in over three years.
New cost basis information
|Investment acquired on or after:|
|Jan. 1, 2011||Jan. 1, 2012||Jan. 1, 2013|
|Type of Security||Stocks||Mutual funds||Bond, options, other|
This filing season, cost basis for some 2011 stock sales will be included on Form 1099-B. The reporting requirement expands to mutual funds with the 2012 tax year. Basis reporting will be fully implemented by 2013, with enhanced reporting on the basis of bonds, options and other investments beginning that year.
Money market funds and tax-deferred accounts, such as individual retirement accounts and other retirement plans, generally are not affected by the reporting changes.
Some get info, others don't
"It's not a new form, but there is new information on the form," says Derrek Klimek, CPA and financial adviser with Rehmann Financial in Grand Rapids, Mich. "In the past, brokers only had to report the sale amount. What is required this 2011 tax year is a report on the underlying basis in the sales of certain stock."
The key word is "certain." Don't be upset if you sold a stock but there's no basis information on your Form 1099-B. The new requirement only applies to stocks purchased in 2011 and also sold that year.
"Frankly, there aren't a lot of people doing 2011 sales only," says CFP Michael Kitces, director of research for Pinnacle Advisory Group, a private wealth management firm in Columbia, Md., and publisher of " The Kitces Report" newsletter. "You need to have done a lot of transactions and have completed them all in one year (2011). I don't imagine people are going to have a lot of concerns about their method of accounting for their stock sale."