written by Kevin Hogan

Kevin Hogan BW 9-06

Prior to 2011, your investment broker was required to report to the IRS gross proceeds you received from the sale of any security. You in turn received a Form 1099-B each January from your broker, showing the gross proceeds reported to the IRS for your prior year security sales. These gross proceeds were then reported on Schedule D of your federal income tax return, along with the related adjusted cost of the security sold (which you calculated from your own records), to determine your capital gain or loss from the sale.

Everything is about to change come this January, 2012, from what your broker is required to report to the IRS for your 2011 transactions, to how your capital gains or losses are reported on your federal income tax return.

Beginning in January, 2012, your broker will have additional reporting requirements for those securities the IRS calls “covered shares”. For “covered shares” sold in 2011 and beyond, your broker will not only report gross sales proceeds to the IRS, but also the adjusted cost basis, date acquired, date sold, and whether the sale was short-term or long-term. The 2011 Form 1099-B you will receive in January, 2012, will show this additional information for the “covered shares” you sold.

But when does a security become a “covered share”? The IRS has scheduled a three year phase-in period for classifying securities as “covered shares.” Click here to view a chart with full details Capital Gains & Losses Chart

Stocks and certain ETF’s that you acquired on or after January 1, 2011, are classified as “covered shares”, and will be subject to the new cost reporting rules.  Mutual funds, other ETF’s, and stock you acquired through dividend reinvestment plans (DRIP’s) on or after January 1, 2012 will also be covered be the new cost reporting rules.

The actual reporting of “covered shares” information on your 2011 federal income tax return has been complicated by these new rules.  The IRS has added Form 8949 for 2011, which requires you to now separate out your security sales into one of the following six different categories.

  • Short-term security sales reported by broker on Form 1099-B with cost basis information
  • Short-term security sales reported by broker on Form 1099-B without cost basis information
  • Short-term security sales not reported on Form 1099-B
  • Long-term security sales reported by broker on Form 1099-B with cost basis information
  • Long-term security sales reported by broker on Form 1099-B without cost basis information
  • Long-term security sales not reported on Form 1099-B

While tracking of your adjusted cost basis in a security has always been a difficult and important process, which this article does not go into, these new rules further your need to keep good records of all of your security transactions.  This article provides only a brief discussion of the new cost reporting rules for security transactions.  Please contact us with any questions you may have about these new rules and we can provide additional guidance.

Kevin specializes in tax consulting for businesses and individuals. Including employee benefit plan accounting and administration, with specific expertise in qualified retirement plans and cafeteria plans.

His education includes a B.S. in accounting and business administration from the University of Kansas. Kevin also earned a M.B.A. from the University of Kansas and a Master’s degree in Tax from Northern Illinois University.