By changing the reporting requirements for capital asset sales the Internal Revenue Service (IRS) will increase their ability to verify and track these sales. The reporting change also enables the IRS to electronically match data; thereby increasing their audit process efficiency. It’s an easy equation for the IRS: verify + track + match data + audit = increased tax collection. To facilitate this process, the IRS has modified two existing tax forms and created one new form.
Schedule D was previously used to list details of all capital gain and loss transactions. The form was broken into two sections – one for reporting short term transactions (capital assets held less than one year), the second for reporting long term transactions (capital assets held one year or more). For 2011 tax returns, Schedule D will now function as a summary rather than a detailed schedule of all capital gains transactions.
Form 1099‐B, used by brokers and custodians to report transaction details for the sale of securities, has also been modified. Revisions to Form 1099‐B were necessary to facilitate the new cost basis reporting requirements. The updated 1099‐B requires the following information for covered securities:
• Date of acquisition
• Cost basis
• Nature of the transaction (long or short term)
• Whether the transaction is a wash sale
Historically, the broker or custodian could report transactions on the 1099‐B in any order (alphabetical, chronological, etc). Now the transactions will need to be grouped into one of three categories:
1. Covered securities with short‐term gains or losses
2. Covered securities with long‐term gains or losses
3. Non‐covered securities
These three categories correspond with a box that must be checked at the top the IRS’s new Form 8949, to designate what types of transactions are being reported, and correspond to the summary lines on the revised Schedule D, reporting total sales of each category.
The new form, Form 8949 “Sales and Other Dispositions of Capital Assets”, is designed to separately report shortterm gains and losses from long‐term gains and losses, just like Schedule D. However, you may need to file three separate Forms 8949 with your tax return, based on how the cost basis of the asset was reported to the IRS. A separate Form 8949 is required for each of three categories:
1. Transactions with cost basis reported on Form 1099‐B
2. Transactions that do not have cost basis reported on Form 1099‐B
3. Transactions that do not fit into the other two categories
Form 8949 requires additional information ‐ a “Code” that gives additional data on the transaction and any resulting “Adjustments to Gain or Loss”. The Code column is used to explain a difference between the cost basis you are reporting on your tax return and the cost basis reported to the IRS on Form 1099‐B. There are a total of ten codes defined in the Form 8949 instructions. The Adjustments column is then used to report the amount necessary to adjust cost basis to the correct amount. Once the necessary Forms 8849 are completed the totals are
then reported on Schedule D.
Prior to 2012, maintaining cost basis data was the responsibility of the taxpayer. Now the reporting and monitoring burden is somewhat shifted to the broker or custodian, who may need additional time to reconcile trade data to the 1099‐B data to ensure they match.
For the sale of a non‐covered security (one purchased before the required reporting implementation date), the broker or custodian has the option whether or not to include this information on Form 1099‐B. We would suggest contacting your brokers and custodians to clarify their method for reporting non‐covered securities. If your records are not consistent with your broker or custodian, you may want to request the additional data not be reported for non‐covered securities.
Current IRS procedures allow individuals to attach brokerage or custodial statements to Schedule D in lieu of a line-by-line listing on the actual forms. This practice will also be allowed for Form 8949. Due to the additional information required, certain broker or custodian formats on the Form 1099‐B may not be readily available for you to include with your 2011 tax return.
To limit the number of differences we will have to report on Form 8949 we are reconciling current cost basis with our brokers or custodians now, to ensure our lot selection methods agree. Our efforts have been a time consuming, year‐long challenge.
To ensure compliance with Treasury Circular 230, we are required to inform you that any advice concerning tax issues contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed by any governmental taxing authority or agency.