How does cost basis reporting impact investor taxes? It depends on the securities and how long positions are held. We explain.
Brokers are now well into the initial phases of required cost basis reporting—rule changes that forever altered the days when we simply revealed to the IRS each investor’s proceeds on market positions sold and that was pretty much it. Folks just starting their investment journey may not yet have a basis for comparison. Get it? No reason taxes can’t be funny.
So, for starters, what's cost basis? It's the original price of an asset, such as stocks, bonds, mutual funds, property, and more, after all applicable basis adjustments have been calculated. The most common basis adjustments occur due to return of capital, wash sale adjustments, corporate action and merger calculations, inheritance, and gift adjustments, to name a few. The original purchase amount will include any commissions or fees associated with the purchase.
Depending on what types of securities you get into and how long your positions are held, you may have cost basis reporting on all of your transactions, or you may have absolutely no basis reporting, or some combination.
Back in 2008, Congress passed a law requiring brokers to report the cost basis of certain securities to the IRS when a sale occurred. The reporting requirements were rolled out in phases beginning in 2011. Let’s take a quick look at the implementation schedule for required reporting.
There’s a big difference between “required not to” and “not required to.” If you sell an equity that you purchased in 2010 or earlier, its cost basis is not reported to the IRS by your broker. This isn’t because your broker doesn’t want to; it’s because they are required not to. The IRS doesn’t want the purchase records from 2010, which can be deemed unreliable since the regulations specifically stated January 1, 2011.
You used to have Broker A and transferred all (or part) of your portfolio to Broker B. If you did that before brokers were required to send basis information back and forth for securities that were transferred, Broker B is not likely to have your original purchase data. In this case, you would need to provide Broker B with your basis information.
Brokers are required to retain records for a minimum of six years. If you are holding positions that are aged beyond this, they may not have this information. Granted, most firms are keeping data longer and have systems in place that will track indefinitely, but purchases from long ago may not have made it into the system to begin with. Fortunately, TD Ameritrade clients have access to GainsKeeper®*. It’s been tracking most investments since 2007, in addition to roughly 10 years of previous statements.
Noncovered basis is shown on the 1099-B for positions sold. Remember, this information won't be delivered to the IRS; it will appear on TD Ameritrade tax forms as a courtesy. You're still responsible for reporting your basis to the IRS on your individual tax filings with the IRS.
If basis information for the security is not provided in GainsKeeper, no value will be shown. We want to make your tax filings as easy as possible, so review your positions in GainsKeeper to ensure basis is showing.
Log in to your TD Ameritrade account and go to My Account > Gain/Loss. If you have sold positions, you definitely want to take a look at the Realized Gain/Loss tab. To avoid future issues, review the Unrealized Gain/Loss section. If you see positions without a basis, or a basis you are unsure of, we’d love to help.
In addition to troubles tracking cost basis through transfers, you may experience issues if your original brokerage firm merges with, or is acquired by, another firm. Older mergers and acquisitions were not as purchase-history-friendly as they are now, so it's possible the original firm did not give historical information to the new firm.
Some investors get into a wee bit of trouble with the IRS. Even though your broker is reporting covered cost basis to the IRS, that doesn’t mean you don’t have to file your investment gains/losses. Having your broker report this information is a big win when you think of all the variances that can happen to your original basis. It takes out the guesswork, time spent rifling through years of monthly statements, bookkeeping, and so on. Time is money! But remember, your broker's 1099-B reporting requirements are not always aligned with IRS taxpayer requirements. There are rules like wash sales, constructive sales, and several others that will impact your reporting, but won't impact your broker’s reporting. (Learn more about wash sales differences.) That being said, you do want to track your basis, as accurate IRS cost basis reporting is still your responsibility.
What was the driving force behind broker basis reporting? Good question! Let’s take a look at the U.S. Government Accountability Office (GAO). This group is sometimes referred to as the “congressional watchdog.” It investigates how our government is spending your hard-earned tax dollars. The GAO provides Congress with insight to improve operations and make the government more effective and efficient. They found that taxpayers misreported basis information during the 2001 tax year, causing a “tax gap” of approximately $11 billion. The GAO also estimated that 38% of taxpayers misreported their taxable gains or losses to the IRS. These findings gave lawmakers the push into basis reporting. Now, it isn’t that the GAO is claiming that 38% of taxpayers committed fraud. Granted, that does play a role, but it also has to do with complexities in the tax code.
If you are interested in learning more about the “tax gap,” take a look at the IRS site for more information. To familiarize yourself with the “congressional watchdogs,” visit the U.S. GAO site. It never hurts to be informed!
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*Tax lot and performance reporting is offered and conducted by Wolters Kluwer Financial Services (“WKFS”) for all securities in an account and is made available by TD Ameritrade for general reference and education purposes. However, for those securities defined as “covered” under current IRS cost basis tax reporting regulations, TD Ameritrade is responsible for maintaining accurate basis and tax lot information for tax reporting purposes. TD Ameritrade employs WKFS’s GainsKeeper® system in doing so, and the information that GainsKeeper provides is included with the aforementioned tax lot and performance reporting maintained by the GainsKeeper system. TD Ameritrade is not responsible for the reliability or suitability of the information for those securities that are not “covered.” TD Ameritrade does not provide tax advice. You may wish to consult independent sources with respect to tax lot and performance reporting. Please consult with a tax-planning professional with regard to your personal circumstances. TD Ameritrade and Wolters Kluwer Financial Services, Inc. are separate, unaffiliated companies and are not responsible for each other’s policies and services. GainsKeeper is a registered trademark of Wolters Kluwer Financial Services, Inc.
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