Armen Computing, the makers of TradeLog Software, has published a special report entitled The 1099-B Problem: Why IRS Regulations Have Failed to Meet Cost Basis Reporting Needs. The 25-page report is available as a free e-book download. Why did we publish this report? What is the purpose? To appreciate the answers to those questions let me provide some background about cost basis reporting and the 1099-B.
When cost basis legislation was first passed by Congress in 2008 we wondered what the end result would be for active traders. Here at TradeLog we have known for many years that the 1099-B was problematic. Prior to the new legislation brokerage firms were not required to provide anything more than sale proceeds for certain types of trades. In order to accurately generate tax reporting, traders and investors need both sale proceeds and cost basis information. Therefore, we applauded the intention of the legislation to require brokers to report cost basis information.
But there were troubling aspects of the legislation and subsequent IRS regulations. Besides reporting cost basis and sale proceeds brokers would also be reporting adjustments to cost basis including wash sales. Many questions arose: how would brokers account for wash sales in multiple accounts and between other brokers? Would the IRS finally provide clearer guidance on the many vague aspects of the wash sale rules? What about the many other complex rules involving trader taxes, would these be accounted for on the 1099-B?
By the time the new 1099-B reports started to be sent out for 2011 it was obvious that the IRS had made a bigger headache for active traders. The answer to some of the questions about wash sales was simple: brokers would not need to report all wash sales as is required by taxpayers. So the taxpayer would be responsible for verifying the 1099-B reports and making additional adjustments. However, brokers varied in their interpretations of wash sale rules, method for adjustments, even in which securities they reported! Worse yet, the 1099-B reports provided such limited information that it was impossible to understand what adjustments were made to the cost basis (and sometimes the sale proceeds) that was reported.
To add to the challenges, the IRS introduced Form 8949 and the concept that taxpayers could simply take their 1099-B information and fill out the 8949, then make any needed corrections or adjustments to each trade. That sounds great, until you have hundreds or thousands of trades. And as we stated, since the 1099-B does not provide enough information to be able to verify what the broker reported, how is the taxpayer supposed to make corrections or adjustments needed? Did anyone at the IRS sit down and try following these instructions with an active trader?
Of course, there was also the problem of broker reporting. As we already mentioned, the brokers had varying interpretations on some aspects of the rules. But then there were major errors in reporting that surfaced with many brokers. Most brokers struggled to meet the February 15th deadline for providing the 1099-B – some were months late with no penalty from the IRS. Many taxpayers received several revisions to their 1099-B. Unexplainable anomalies and inaccuracies on the resulting reports were baffling and added to the challenges faced by taxpayers. Brokers have struggled, and understandably so since they are being asked to provide more than just a reporting of trade history but tax accounting adjustments as well.
The 2012 tax year was no better. While the IRS did make a few changes to help standardize the format of 1099-B and brokers improved in some of their weaknesses the underlying problems still exist. Brokers and taxpayers have two different sets of rules for reporting. The 1099-B fails to provide sufficient detail needed to be a verifiable and objective report. The IRS continues to provide misleading information about how to use reports and file taxes accurately.
It is clear to us that, instead of making tax reporting easier for active traders and investors, the IRS has increased the tax burden – particularly for those who want to file accurate tax reporting. In addition, the main objective of Congress, to close the tax gap for those traders who try to evade taxes or simply file inaccurately, has not been met. In fact, the new “system” the IRS has created may actually make it easier for some to evade taxes!
While some groups have simply thrown in the towel and are embracing the regulations and trying to make the best of them, we here at TradeLog feel that things need to change. Our special report, The 1099-B Problem, not only explains some of the major problems with the new 1099-B and IRS regulations, but it also provides recommended solutions. For over a decade TradeLog has been generating trader tax reporting and we know what is needed to do so: accurate trade history. Using accurate trade history makes it possible to calculate taxable gains and losses and adjust for all wash sales.
We published this special report to help active traders, investors, CPAs, tax experts, as well as legislators, regulators, brokerage firms, and advocacy groups to understand that the current 1099-B is a problem. The IRS can get this right, but they need to change direction.
We encourage you to download and read this detailed report. Share this information with others who need to know, and do your part to say “the 1099-B is a problem and needs to change”. Keep following our blog and social media channels, because in the months to come we will be publishing more details about the 1099-B problem.
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.