Looking Ahead: Filing 2012 Taxes for Traders and Investors

Published: December 28, 2012
Tagged: Trader Taxes

Tax ManAs a new year approaches you may be wondering what’s in store for 2012 tax filing. Here is some early information to help you plan and prepare.

The 2011 tax year filing involved major changes for traders and investors including new 1099-B broker reporting and new Schedule D Form 8949 for tax payer reporting. These changes wreaked major havoc as taxpayers struggled to interpret the new reports and reconcile the major differences in reporting requirements. The good news is 2012 tax filing will not involve such significant changes. The bad news is, the same challenges exist.

Rules for Traders and Investors

The IRS has already issued Publication 550 for 2012 returns. This publication outlines the rules for investment income and expenses, including capital gains and losses. The rules for taxpayer reporting are essentially the same as in 2011.

Schedule D and Form 8949

The IRS has not yet released the 2012 version of Schedule D Form 8949, which is used by most taxpayers for reporting capital gains and losses from investment income. The final 2012 Form 8949 will likely be released by the IRS in mid January 2013. We know little about the layout of the final form, but our sources tell us that the new form may change to a landscape layout for more column space. Any other changes are yet to be seen.

Broker 1099-B Report

Your 1099-B report from your broker may be different. New boxes/columns have been added to the 1099-B by the IRS for additional information. For example, the IRS is asking brokers to report is the stock ticker symbol (or other symbol) for securities, this should prove helpful in identifying trades on the 1099-B.

In addition, since most brokers provide a substitute statement instead of individual 1099-B forms, the IRS has made some rules to make those statements more consistent and user-friendly. Starting with the 2012 tax year, the 1099-B statement must segregate trades in up to five categories:

  1. Short-term transactions in which cost basis is reported to the IRS.
  2. Short-term transactions in which cost basis is NOT reported to the IRS.
  3. Long-term transactions in which cost basis is reported to the IRS.
  4. Long-term transactions in which cost basis is NOT reported to the IRS.
  5. Transactions in which cost basis is NOT reported to the IRS and the holding period is unknown.

In each of the segregated sections, the broker must total sales price and cost basis known for the trades in that section. Many broker 1099-B statements included no such segregation or totaling in 2011 and if you received one you know how useless the report was. Hopefully we will see more consistent 1099-B reporting going forward, which will make it easier to find the numbers you need to enter into TradeLog for reconciliation and adjustment!

For the 2012 tax year, brokers are required to report cost basis for:

When can I file with TradeLog?

No trader or investor can file accurate taxes until the appropriate forms have been released by the IRS. Once those forms are available, the TradeLog development team will implement the needed final adjustments for TradeLog reporting. TradeLog version 12 will be the version used for filing 2012 taxes. Until TradeLog version 12 is released you should not complete your tax reporting!

Will my 1099-B and TradeLog generated Form 8949 match for 2012 tax year?

Probably not. Sadly, many traders and investors still do not understand the reporting changes that took effect in 2011 – and the consequences. Here are two things you must remember:

  1. The broker 1099-B does not report all trades, nor does it report all wash sales. If you trade stocks and options, or have more than one brokerage account, or you have an IRA account – then your 1099-B is NOT accurate for tax purposes. Even if those situations do not apply to you, your broker 1099-B may not contain all of the information for tax reporting. The facts are the rules for 1099-B reporting are different than the rules for tax payer reporting. That is why the IRS instructs brokers to include a statement on the 1099-B reminding taxpayers that they are ultimately responsible for the accuracy of their tax returns.

  2. The Form 8949 is not designed to match the 1099-B, because for most traders and investors it won’t! As a taxpayer you are required to keep your own records and then accurately report gains and losses including all required wash sale adjustments on Form 8949. The 1099-B can be used to help you fill out the 8949, but that does not mean the two forms will match. In TradeLog, there are features to help account for discrepancies between the 1099-B and Form 8949 in order to help reduce audit risk.

The 1099-B continues to be a big problem and has increased the tax burden on both tax payers and brokers. As long as the 1099-B reporting requirements stay the same as they are, this problem will not go away. And it will likely take an act of congress (literally) to bring about the needed changes.

In review:

For the most part 2012 tax filing should be a little bit easier than last year since the rules are generally the same – although there are still challenges. When TradeLog version 12 is released you will be able to generate final tax reporting using the 2012 IRS forms. If you don’t understand the differences between 1099-B and Form 8949 then stay tuned to the TradeLog Blog for continuing education on the tax challenges that affect you.

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.