New Cost Basis Reporting for Sales of Securities Set to Begin

Published on Friday, December 9, 2011

Effective for tax year 2011, Form 1099-B issued by stock brokers is required to report the cost basis of certain securities sold during the year. Under the old rules Form 1099-B reported the gross sale proceeds for securities sold during the year. Beginning with the 2011 year Form 1099-B will also report the cost basis of securities sold during 2011 BUT only for stock purchased in 2011 and later. This means your 2011 Form 1099-B will report gross proceeds from securities sold during the year and will report cost basis for those that were purchased during 2011 and will not report cost basis for those purchased in prior years.

What does this mean to you? Probably not much. Most brokerage firms now provide clients with “realized gain and loss” schedules for security transactions. For tax preparation purposes, such schedules will still be important and we will want you to provide them to us as you have in the past. We will also want you to provide us with the Forms 1099-B as you have in the past.

Eventually the cost basis for all security sales is expected to be reported on Form 1099-B. This will enable the government to “audit” the gain and loss reported on your tax return. The accuracy of cost basis reported on Form 1099-B will vary depending on the ability of the broker to gather such information for securities for which basis is not determined by reference to a purchase price. Securities that are received as a gift or inheritance will often have a basis different from their purchase price. Care will need to be taken by all parties to insure the proper basis is reported to the broker and ultimately reported on Form 1099-B. Many of you may have been the unfortunate recipient of an IRS notice in the past inquiring about the difference between information reported on a Form 1099 and what is reported on your tax return. These notices are very common and take time to prepare responses. We expect this new cost basis reporting requirement to add to the number of notices that will be received by taxpayers.