Should brokers report tax basis on 1099s?
August 15, 2005
Subject: Capital Gains Tax Gap
Date: Mon, 01 Aug 2005
I am interested in your opinion as to the magnitude and lack of compliance regarding reporting of basis for the sale of stocks and bonds, since it is not reported by dealers and brokers in the 1099s. It would seem logical that investors would benefit from reporting of tax basis on their 1099s. What is your opinion?
Date: Mon, 08 Aug 2005
I don't have any statistics for non-compliance of reporting basis information on Schedule D. We try to be conscientious in this area for the tax returns that we prepare.
Although it is helpful for brokers and investment managers to track tax basis for their investor clients, there can be basis adjustments that they are unaware of. For example, securities may be transferred between brokerage firms and the previous history may not be readily available. When a taxpayer dies, different basis adjustments can apply, depending on how the title is held and whether the alternate valuation date is elected on the estate tax return. A taxpayer may hold a stock certificate, receive return of capital dividends (which reduce tax basis) and later deposit the certificate in a brokerage account. In other words, basis can be an accounting nightmare that it is unrealistic to require the broker to report on Form 1099.
Mutual funds are now required to report an "average cost" basis to their investors when shares are sold. This may not be the most tax-advantageous way to account for the tax basis of the securities sold, but can be a real timesaver when only a small value of securities or the entire account is sold.
Taxpayers need to recognize their responsibilities for accounting for the tax basis (cost to determine taxable gain or loss) and keep good records, including copies of their trade confirmation slips. This will be critical if the estate tax is repealed (now scheduled for one year for 2010), because some of the ability to receive a "fresh start" basis will be lost. Discuss this with your tax advisor.
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