Cost Basis Reporting

Many people have noticed something different with the 1099’s they’ve recently received from their brokerage firms. Beginning in 2011, you will begin seeing Cost Basis information being reported under Form 1099-B. Section 403 of the Energy Improvement and Extension Act of 2008 amended the Internal Revenue Code to mandate that every broker is required to file a return with the IRS reporting gross proceeds from the sale of a covered security. Additionally, they must now report a customer’s adjusted basis in the security and whether any gain or loss on the sale is classified as short-term or long-term.

The most frequent question we’ve heard this tax season regarding this new change is, “why is my cost basis missing”? It would be impossible to go over all the rules of the new law, but the simple answer is that not all purchases are required to be reported. The IRS rules determine whether a security is covered by the act or not covered, and, if it is a “covered” security, then it only must be reported if that security was acquired prior to a certain date. For instance, the basis for stocks purchased BEFORE 01/01/11 does not have to be reported, while stocks purchased AFTER 01/01/11 would have to be reported.

So, for this year, if the cost basis is missing from your 1099 Form, it most likely is because you purchased that security before 01/01/11. The act doesn’t prohibit brokers from listing the cost basis on pre-01/01/11 purchased securities, but because they would be subject to penalties for any incorrect information, we would expect that they will only report what they are required to report, and nothing more.

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