At long last, the new cost basis rules that have been talked about for years are taking effect. Now, it should be easier to assemble the information needed to complete your tax return in years in which you sell securities. However, the new rules may also limit your ability to tilt tax results in your favor.
When you sell securities, your taxable gain or loss is generally equal to the difference between your adjusted “basis” in the securities—what you paid, adjusted for subsequent stock splits, reinvested dividends, or other factors—and the sales price. It’s your responsibility to report gains and losses on your tax return reflecting the Form 1099-Bs that financial institutions send to both you and the IRS. But the roles don’t obligate institutions to dig up the cost of securities you acquired long ago. And it has been easy to get buried in an avalanche of paperwork if you hold multiple shares of securities, purchased at different times, and sell only some of the shares.
Complicating matters still further, you have been able to use one of several methods to determine which shares you were actually selling. For instance, if you sold stock, you could identify specific lots or use a “first in-first out” (FIFO) method or last-in, last-out (LIFO), among other choices. For example, you might opt for the LIFO method if that would result in a smaller taxable gain or the FIFO method if it produced a larger loss to offset other gains. You identified the basis of your shares and the method when you completed your tax return for the year of the sale.
But now the rules are changing due to a law enacted in 2008. If you sell securities covered by the new requirements, the financial institution must provide the relevant cost basis information on your 1099-B. This should eventually save you a lot of time and hassle, particularly when you’re selling long-held securities. But the new rules don’t go very far back. They apply to securities such as stocks (both domestic and foreign) and American Depository Receipts (ADRs) acquired after 2010, mutual fund and dividend reinvestment plan shares purchased after 2011, and all other securities acquired after 2012.
The financial institution will now use a default method to identify the shares you’ve sold unless you make a different choice at the time of the transaction. So you’ll no longer be able to wait until you do your taxes to choose the method that’s most beneficial. For stocks, the FIFO method will now be the default. (Other rules will apply to mutual fund shares.)
Obviously, these new rules are not a panacea. You’ll still face many challenges, especially with securities you acquired before the effective dates of the new rules. We can help you understand the changes and make the choices that work best for you.