Reporting Investment Gains Incurred in 2011

Investors Prepare for problems with Cost Basis Reporting on 2011 Returns.

A provision in the  Emergency Economic Stabilization Act of 2008 requires brokers to report to the IRS the amount you paid for that stock — that is, your cost basis. The purpose of the new law is to make sure investors don’t pay less than the law requires in capital-gains taxes.

For your 2011 tax return, the law applies only to stock transactions. Beginning in 2012 the rules will apply to mutual funds and exchange-traded funds, and then in 2013 to fixed-income and commodities investments.

By Feb. 15  of next year, brokers must mail to investors  and  the IRS cost-basis information on the revised Form 1099-B. Investors will use that information to fill out the new Form 8949, which is then used to complete the revised Schedule D.

How to Report

Investors always had to report cost-basis, of course. So, eventually, the fact that brokers are providing that information likely will make their tax-filing lives easier. But the first few years of the new rules will create a good deal of confusion, given that only certain transactions are “covered” and required to be reported by the broker — while other transactions are not covered but will still have to be reported to the IRS by the taxpayer.

If in 2011 you bought stock through the same broker where you ended up selling the shares, that’s a covered transaction. All of your other sales transactions, including those involving stock you bought before 2011 are not covered.

That means when filling out the 2012 Form 8949 taxpayers could end up filing as many as six pieces of paper because they must file a separate page of the form for each of the following situations: short-term gains or losses (the security was held for one year or less) that the broker is reporting to the IRS; short-term transactions that are not being reported by the broker; long-term sales that the broker is reporting; long-term sales the broker is not reporting; and short- and long-term sales that don’t fall into either of those two previous categories. You can find Form 8949 and Schedule D instructions on this IRS.gov page.

Stock Options

In stock-option transactions, the Form 1099-B you receive from the broker may underreport your cost basis, causing you to overpay taxes unless you adjust the amount. That can happen because the broker may not include the compensation component of the transaction which increases basis which can serve to lower your gain (or increase your loss). In that situation, you may also need to make an adjustment on Form 8949.

Reporting of investment gains and losses is going to become much more difficult beginning with the filing of 2011 tax returns and if you have not previously engaged the services of a CPA, next year may be the time to do so.