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New rules included in the latest tax law will result in more information being reported to the IRS about your investment activities in the future.
Background: Currently, brokerage houses, mutual funds, and other institutions file information returns with the IRS that report gross proceeds from the sale of securities (using Form 1099-B). However,
they are not required to report the "cost basis," which is defined as the purchase price, including commissions and certain other expenses. They also do not provide gain or loss calculations.
In other words, the IRS is informed about how much investors sell securities for, but the tax agency relies on investors to provide the purchase prices.
Tax officials have long suspected that many taxpayers overstate their cost basis in order to pay less tax. In response, the Treasury Department has pushed for legislation that would require cost basis reporting by investment firms.
Changes included in the Emergency Economic Stabilization Act of 2008 will eventually require securities brokers to calculate gains and losses and classify them as short-term or long-term. This information will then be reported to customers and the IRS.
However, these greatly expanded reporting requirements will only apply for specified securities acquired on or after the dates listed below:
January 1, 2011 - For corporate stock shares and mutual fund shares.
January 1, 2012 - For stocks for which the use of an average basis method is allowed (for example, blocks of mutual fund shares acquired in several different transactions).
January 1, 2013 - For other specified securities such as notes, bonds, commodity contracts, and other securities and financial instruments that may be designated by the IRS. Note that expanded basis reporting requirements will apply to option transactions, acquired on or after this date.
Advisory: The new law also extends the deadline for supplying Forms 1099-B to customers. The new deadline is February 15 of the year following the year during which transactions occur (the old deadline was January 31). The new deadline applies to Forms 1099-B due after 2008.
In other words, while investment brokers don't have to begin complying with the new gain/loss reporting rules until 2011, they will get an extra 15 days to supply 1099-B forms to customers for 2008 sales of securities.
Information Must Be Supplied by Old to New Broker
After these expanded information reporting rules become effective, the new law also requires a broker transferring specified securities to new brokers to supply certain information to them. Presumably, this means the basis and acquisition date information a new broker will need to calculate gains and losses and classify them as short-term or long-term.
Companies Must Also Supply Investors with Information Regarding How Organizational Actions Impact Basis of Affected Securities
For organizational actions that affect the basis of specified securities after the applicable acquisition dates listed earlier, the law also requires companies to supply investors with information about how the basis of their securities is affected.
For example, say the shareholders of acquired Company A surrender their shares in exchange for acquiring Company B shares in a tax-free reorganization that takes place after 2010. Company B must tell the company A shareholders how to allocate the basis from their old Company A shares to their new Company B shares.
You'll begin to hear more about these rules as we get closer to the start dates listed above. Important: The new rules only apply for the specified securities acquired on or after the start dates. Until then, and for investments acquired before those dates, you will continue to provide the purchase prices and the gain or loss calculations.
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