Tax Forms
Tax forms
Form 1099-B now has cost basis information

But some money managers already have been reporting basis as a customer service. In those cases, brokers are reporting whatever basis information they have even if they are not legally required to report it yet.

"Each custodian is going to be different," says Klimek. "Nobody really knows until these things start showing up."

And such confusion as to why some 1099-B forms show basis for investment sales and others don't will likely continue until the reporting requirements on all types of holdings are fully phased in in 2013.

Mutual funds next

Kitces also offers some cautions for mutual fund investors, who will see basis reporting data on 1099-Bs they receive next year.

Mutual fund owners need to carefully consider which cost method of accounting they want to use. The default basis method for mutual funds is average cost. But that means that one sale of a portion of a fund will affect the basis calculation for all future sales of that fund.

Mutual fund cost basis methods
Average cost.The shares in the account at the time of the sale are averaged to determine the cost. This includes reinvested dividends and capital gains distributions.
First in, first out, or FIFO.Assets acquired first are sold first.
Last in, first out, or LIFO.Assets acquired last are sold first.
Highest in, first out.Highest-cost shares are sold first.
Low cost, first out.Lowest-cost shares are sold first.
Loss/gain utilization.Evaluates losses and gains, and also strategically selects lots based on the loss/gain in conjunction with the holding period.
Specific share or specific lot identification.Specific shares are selected to sell or exchange at the time of each sale. The selected shares determine the cost basis and holding period.

"When you have a mutual fund that gets sold with the average cost basis as default, you lock all shares as average cost the first time you make a sale," says Kitces. "If I own 100 shares of an individual security, each bought on 100 different dates, and sell one share of stock, the only thing I lock in is the actual cost basis of that one share.

"But if I own 100 shares of a mutual fund and sell one share under the average share methodology, I've permanently locked all 100 shares forever under average cost," says Kitces. "For example, I held a mutual fund for 17 years and sold a piece of it in January. I still have 99.9 percent of the fund, but by selling the 0.1 percent I have now tagged my shares as sold under average cost."

You can make a prospective change for future purchases and sales. Just make the decision, tell your broker or fund custodian what basis method you want, and make sure they report it accordingly.

Despite the short-term transition headaches now, once the basis issues are sorted out, tax filing for investors should be easier.

"Now you'll have to figure out whether you are you selling the shares being reported on or shares that are not being reported on. It's a little bit messier in the near term," says Kitces.

But eventually, every investment will be a covered security, and when you want to know your cost basis, says Kitces, your broker will tell you. And anything that provides some reporting information is better for taxpayers.



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