A recent federal law requires brokerage firms to report certain tax information to their customers and to the IRS starting with the 2011 tax year.
The change won't affect most investors now and for the next several years because it will be phased in gradually.
However, you could notice a difference in the Form 1099-B or its equivalent, a consolidated year-end report that can include a 1099-B.
Also, TurboTax will ask you about the cost basis of each security you sold and whether it was reported in Box 3 of Form 1099-B. We're asking that to make sure your information is accurately reported on the correct IRS form when you file your tax return.
What is the purpose of the law?
The goal of the law is to provide accurate tax reporting of gains and losses for stocks, bonds, mutual funds and other securities sold. That way, taxpayers do not owe more or less tax than required.
Starting with 2011, brokers and investment firms will report the cost basis of some, but not all, securities sold.
Basis is used to calculate taxable gains and allowable losses.
Read below to learn more.
What is cost basis?
Generally, cost basis is the original price of an asset, such as stocks, bonds, mutual funds and property. Cost basis includes the purchase price and any associated purchase costs.
For now brokers are required to report basis only on STOCKS bought AND sold in 2011.
Until now brokers were required only to report sales proceeds.
When do these changes take effect?
Stocks, bonds and mutual funds bought prior to 2011 will not be affected, even if they are sold in 2011 or after.
These changes will be phased in, based on the types of securities and when they were purchased, according to this schedule:
- Purchased starting in 2011 and sold thereafter:
- Stocks in corporations
- ADRs ( American Depository Receipts)
- REITs (Real Estate Investment Trusts)
- Some ETFs (Exchange Traded Funds)
- Purchased starting in 2012 and sold thereafter:
- Mutual funds
- DRIPs (dividend re-investment programs)
- Remaining EFTs
- Purchased starting in 2013 and sold thereafter:
- Bonds
- Notes
- Options
- Commodities and all others
Some brokers already report cost basis for securities bought before 2011, if they have that information.
It's a good idea to to verify your reported basis. Refer to purchase confirmation slips or brokerage statements you received from your broker at the time of purchase.
How do these requirements affect my tax return?
Brokers must by law report stocks that were bought AND sold in 2011, and list the cost basis in Box 3 of the 1099-B.
The IRS refers to these as "covered" securities, as in covered by the new law.
All other securities are considered "noncovered."
TurboTax will ask you whether securities you bought are reported on Form 1099-B and whether the cost basis is reported in Box 3 -- so we can report your sale accurately on the correct form.
For non-covered securities, brokers do not have to list cost basis in Box 3, although they can.
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