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Surviving the Tax Season - How to Read Form 1099-B

Published: February 28, 2017
Tagged: 1099-B, IRS tax forms, trader taxes, Active Trading, TradeLog, cost basis, Schedule D, Wash Sales, 2016 taxes

So, it’s February and you’re looking over your new broker 1099. There are some significant changes to the form that you didn't see last year. We'll help you sort them out.

2017 Form 1099-B

First things first...what is Form 1099-B?

According to the instructions for IRS Form 1099-B, a broker or barter exchange must file Form 1099-B "Proceeds From Broker and Barter Exchange Transactions" for each person:

How is it used?

The IRS Form 1099-B helps you to sort out your capital gains taxes. Usually, when you sell something for more than it cost you to acquire it, the profit is a capital gain, and it may be taxable. On the other hand, if you sell something for less than you paid for it, then you may have a capital loss, which you might be able to use to reduce your taxable capital gains or other income.

You pay capital gains taxes with your income tax return, using Schedule D, and the data from Form 1099-B helps you fill out Schedule D.

Box 2 of the 1099-B form indicates if the gain or loss is short-term or long-term. If you owned an asset such as stock, for a year or less before selling it, any gain or loss from a sale is short-term. If you owned it for more than a year, you have a long-term gain. The distinction is extremely important, since tax rates on long-term gains are generally significantly lower than those on short-term gains.

Understanding 1099-B Columns and Boxes

1099-B consolidated statements provided by brokers typically report key information in columns labeled to correspond with the box numbers on the 1099-B forms. Notice the similarities in the columns on the Fidelity Form 1099-B below:

2017 Fidelity Form 1099-B

Brokers that use substitute statements may be able to include customer transactions (stock sales (Form 1099-B), interest earned (Forms 1099-INT and OID), dividends (Form 1099-DIV), and foreign taxes paid (Form 1099-INT)) for the year in the consolidated Form 1099-B statement provided to their customers.

For each transaction the broker may report:

Box 1a - Description of property

This brief description may vary greatly by broker; you may see a full description of the stock, ticker symbols or CUSIP numbers, with or without the quantity of shares. The IRS does not provide a reporting standard for the description.

Box 1b - Date acquired

For short sales, this is the date you acquired the property to deliver to the broker or lender to close the short sale; typically the trade date of the buy-to-cover trade. See our discussion about reporting short sales on Form 8949 for more details.

Brokers are allowed to group trades acquired on various dates but sold on the same day. In such cases, they may leave this box/column blank or report "various" on the statement.

If a security is non-covered (see box 5 below), then the broker is not required to report the date of acquisition.

Box 1c - Date sold or disposed

For short sales, this is the date you delivered the property to the broker or lender to close the short sale; typically the settlement date of the buy-to-cover trade. For aggregate reporting in boxes 8 through 11, the broker will leave this box blank. See our discussion about reporting short sales on Form 8949 for more details.

Box 1d - Proceeds

This is generally the cash proceeds less any commissions, fees or transfer taxes related to the sale of a stock, debt instrument, commodity, forward contract, non-Section 1256 contract, securities futures and widely-held fixed investment trust (WHFITs).

Brokers are allowed to aggregate sales that occurred on the same calendar day for the same stock sold in a single order even though the sale may have been executed in differing lots and prices. This aggregation can make reconciliation with actual trade history very difficult. You may choose to notify your broker not to use this method.

If the proceeds have been adjusted for option premiums, this will be indicated in box 6. Brokers are not required to adjust proceeds for option premiums if the option was acquired before 2014. However, they are typically required to do so for options acquired after 2013.

If you received any property in a reportable change in control or capital structure arising from the corporate transfer of property to a foreign corporation, this box may show the aggregate amount of cash and fair market value of the stock or property received.

Losses on forward contracts or non-Section 1256 contracts will be shown in parentheses.

Box 1e - Cost or other basis

This is adjusted cost basis, not the actual cost basis which may be reported on your trade history.

If a security is non-covered (see box 5 below), then the broker is not required to report the cost or other basis and this box may be blank.

If the acquisition caused a wash sale which was reported on 1099-B, then the broker will adjust the cost basis by this amount. However, there is no type of indication on the 1099-B if the cost basis has been adjusted by a wash sale and the corresponding quantity of shares or amount. This makes verification of cost basis nearly impossible.

Brokers are required to account for option premiums in determining the basis of shares acquired by exercising an option if the option was acquired in 2014 or later. If the option was acquired before 2014, then the broker may choose to account for option premiums at their discretion.

Brokers are allowed to aggregate cost basis of shares purchased on the same calendar day for the same stock in a single order even though the trade may have been executed in differing lots and prices. This aggregation can make reconciliation with actual trade history very difficult. You may choose to notify your broker not to use this method.

Box 1f - Accrued market discount

In this box, the broker reports a discount bond's increase in value resulting from the approach of its maturity date rather than a drop in interest rates. This occurs because the holder will receive the par value in full upon maturity, regardless of the mount of the discount at time of purchase. Accrued market discount is calculated by subtracting the purchase price of the bond from the bond's market value at any point in time following its purchase.

Example: A bond with a $1,000 par value is purchased at a discount price of $600 with four years remaining until maturity. Over the next four years, the market value of the bond will slowly move from $600 to $1,000 as the maturity date nears. If the holder wishes to sell the bond one year later for $700, the accrued market discount would be calculated as follows:

$700 current value - $600 purchase price = $100 accrued market value

The accrued market discount would be $100.

If a security is non-covered (see box 5 below), then this box may be blank. For more details on market discount, see Schedule D (Form 1040) instructions, Form 8949 instructions and Pub. 550.

Box 1g - Wash sale loss disallowed

Shows the amount of non-deductible loss in a wash sale transaction. Brokers are only required to make limited wash sale adjustments - see our discussion of differing wash sale rules in our Definitive Guide to Wash Sales.

If a security is non-covered (see box 5 below), then the broker is not required to adjust or report wash sales.

Box 2 - Short-term gain or loss, long-term gain or loss or ordinary loss

Type of gain or loss (short-term or long-term), determined by the holding period of the shares or contracts. The IRS requires substitute statement data to be segregated according to the holding period. If a security is non-covered (see box 5 below), then this box may be blank. For example, the IRS made a permanent exemption for factor bonds and short-term debt (fixed maturity dates of less than a year from issuance) from the new cost basis reporting legislation rolled out in 2011. These security types will remain "non-covered".

If the "Ordinary" box is checked, your security may be subject to special rules. For example, gain on a contingent payment debt instrument subject to the "non-contingent bond method" is generally treated as ordinary interest income rather than as capital gain. Please see the Instructions for Form 8949, Pub. 550, or Pub. 1212 for more details on whether there are any special rules or adjustments that might apply to your security.

Box 3 - If checked, basis reported to IRS

The broker will check this box to indicate that the basis in box 1e has been reported to the IRS (you will see one of the boxes in box 2 checked, as well). The 1099-B instructions mention that you may be able to report your transaction(s) directly on Schedule D if box 3 s checked on the 1099-B and no adjustment is required. However, if "Ordinary" is checked in box 2, an adjustment may be required.

Box 4 - Federal income tax withheld

Backup withholding is reported here.

Box 5 - If checked, non-covered security

If a security is covered, then the broker must report basis to the IRS. If a security is non-covered, they are not required to report basis to the IRS, but may choose to do so (in which case they will check Box 3).

Covered versus non-covered status applies to cost basis reporting requirements and will affect taxpayer Form 8949 reporting. See our explanation about covered securities and Form 8949 categories to understand how trades are classified.

Brokers who provide substitute statements are required to segregate the 1099-B data based on whether cost basis is reported or not.

Typical non-covered securities are stock purchased before 2011, stock in most mutual funds purchased before 2012, stock purchased in or transferred to a dividend reinvestment plan before 2012, debt acquired before 2014, options granted or acquired before 2014, and securities futures contracts entered into before 2014.

Box 6 - Reported to IRS: gross proceeds, net proceeds

The broker will indicate in this box if the exercise of an option resulted in a sale of a security and whether the amount in box 1d was adjusted for premium.

Box 7 - If checked, loss is not allowed based on amount in box 1b

This box has to do with acquisition of control or substantial change in capital structure. Your broker should advise you of any losses on a separate statement. See the Form 8949 and Schedule D instructions for more details.

Boxes 8 to 11 - Section 1256 option contracts, regulated futures contracts, foreign currency contracts

This information is typically reported in a separate section of the 1099-B statement from brokers. Data in these boxes is reported on IRS Form 6781:

Box 12 - Check if proceeds from collectibles.

Amounts received from a transaction involving collectibles.

Box 13 - Bartering

Cash you received, the fair market value of any property or services you received, and the fair market value of any trade credits credited to your account by a barter exchange.

Boxes 14 to 16 are used when State taxes are withheld. See Pub. 525 for more details.

Additional Reporting Provided on 1099-B Substitute Statements

Brokers may provide additional information in conjunction with the 1099-B substitute statements, some of which may not be reported to the IRS, such as realized gain/loss reporting. This additional reporting may be helpful to active traders, but should not be confused with the information actually reported to the IRS.

Amended or Corrected 1099-Bs

A corrected Consolidated Form 1099 may be required under these circumstances:

Generally, you can expect to receive corrected 1099s in March or April.

Why Active Traders Use TradeLog

Ideally, taxpayers would be able to take broker-provided 1099-B reporting and use the information to create their Forms 8949 and Schedule D. In fact, this was the intention of Congress when they passed new cost-basis reporting legislation back in 2008.

Despite this new legislation, current 1099-B reporting and regulations continue to be problematic for the average investor or active trader. For example, brokers are required to report wash sale adjustments using different IRS requirements than for taxpayers. This renders the data your broker has diligently provided on your 1099 unusable when it comes time to prepare your trader tax return.

So I can't just send in my 1099-B. How can TradeLog help?

TradeLog software was designed to produce accurate tax reporting for active traders. It utilizes proven methods to generate Form 8949 reports that reconcile with broker-provided 1099-B. Learn more about why active traders use TradeLog.

For over a decade, TradeLog software has generated accurate trader tax reporting for Schedule D. TradeLog imports actual trade history from online brokers, then matches and adjusts trades according to IRS rules for capital gains and losses and wash sales - using the rules for taxpayers.

TradeLog also offers an intuitive process for reconciling imported trade history with 1099-B gross proceeds in order to verify trade history and produce accurate Form 8949 reporting. If there is a discrepancy in gross proceeds or cost basis, TradeLog produces an IRS-ready statement outlining the reason(s) why the broker 1099 amounts do not match what has been reported in TradeLog. Simply attach this statement to your Form 8949 and you are ready to file.

Watch the video below to see how TradeLog generates an IRS-ready Form 8949.

Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Cogenta Computing, Inc. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.