Most traders assume that their brokerage provided 1099-B includes everything they need to file their taxes, but that is far from the truth.
Traders and investors must generate a Schedule D Form 8949 based on Publication 550 requirements which differ greatly from the requirements brokers have to follow when creating a 1099-B, especially when it comes to Wash Sales.
In addition, the IRS expects traders to reconcile their Form 8949 with what is reported on their 1099-Bs and make any necessary adjustments, which can be a monumental task without specialized software.
1099-B Serious Problems:
Please note what two of the leading trader tax professionals have to say about brokerage 1099-B reporting:
Robert A. Green, CPA:
Kaye Thomas, Tax Attorney & Trader Tax Expert:
Our blog article entitled "1099-B Reconciliation Woes" highlights even more problems with the 2014 1099s for 2014.
The IRS has always, and continues to, place the burden of accurate tax reporting ultimately upon the taxpayer, as is evident by the requirement for brokers to include a reminder to taxpayers that they are ultimately responsible for the accuracy of their tax returns (Pub. 1179 4.3.2).
The Information Reporting Program Advisory Committee noted this problem in their 2009 report to the IRS stating: "Since it is impractical to require that financial institutions be responsible for tracking all possible events and taxpayer-level elections that affect basis, financial institutions should be treated as passive repositories of basis information, rather than guarantors as to its accuracy." (IRS Notice 2009-17).
A separate Form 1099-B is provided by a brokerage or barter exchange to the IRS and to the taxpayer (client). The actual IRS form 1099-B is a triplicate form containing about 30 different boxes for reporting and looks more like a W-2 provided by employers. However, most traders and investors do not receive their 1099-B in this format because it would entail a separate form for each transaction. Instead, the IRS allows brokers to report 1099-B details in a substitute statement. Often this statement will also include other reporting from the broker such as 1099-INT, 1099-DIV, and 1099-OID.
In general, brokers report all proceeds for sales of stocks, bonds, and commodities. They also report the proceeds for regulated futures contracts, foreign currency contracts, and forward contracts on an aggregate basis.
Brokers do not report sale proceeds for option trades in the 2013 tax year. In the future, the IRS will require brokers to report some options transactions.
Brokers are required to report cost basis for covered securities. Covered securities are determined based on (1) the type of instrument and (2) the date the security was acquired. In general, the following are covered securities:
|TYPE OF SECURITY:||ACQUIRED ON OR AFTER:|
|Equities (Stocks and Bonds)||January 1, 2011|
|Mutual Funds, ETFs, and Dividend Reinvestment Plan (DRPs)||January 1, 2012|
|Options and Less Complex Fixed Income Securities||January 1, 2014|
|More Complex Fixed Income Securities and Options Issued as Part of a Fixed Income Security||January 1, 2016|
There are exceptions that apply in certain circumstances. And there are also varying interpretations of IRS requirements by some brokers.
Active traders typically receive 1099-B substitute statements. The format and layout of substitute statements can vary greatly depending on the broker. In 2012, the IRS outlined 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:
In each of the segregated sections, the broker must total sales price and cost basis known for the trades in that section.
1099-B substitute statements typically report key information in columns labeled to correspond with the box numbers on the 1099-B forms.
For each transaction the broker may report:
Other less common 1099-B boxes / columns are:
Brokers may provide additional information in conjunction with the 1099-B substitute statements, some of which may not be reported to the IRS. For example: many brokers will provide proceeds and cost basis for options trading, which is not reported on 1099-B or provided to the IRS. Some brokers also include realized gain/loss reporting either separately, or in conjunction with 1099-B reported details. This additional reporting may be helpful to active traders, but should not be confused with the information actually reported to the IRS.
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 ideal of congress when they passed cost-basis reporting legislation. Unfortunately, current 1099-B reporting and regulations are woefully inadequate. In fact, we have published a 25-page special report entitled The 1099-B Problem.
Our special report explains why active traders cannot use the 1099-B to complete Form 8949; the primary reasons:
TradeLog software includes a process for reconciling imported trade history with 1099-B gross proceeds. Reconciling proceeds allows taxpayers to verify that their trade history is complete, resulting in accurate Form 8949 reporting. Most active traders are able to verify and reconcile, at least in aggregate, the sale proceeds on the 1099-B.
Reconciling cost basis reported on 1099-B with actual trade history can be impossible in many cases. As explained in our special report, The 1099-B Problem, the information reported on the 1099-B lacks the detail needed in order to reconcile line-by-line with trade history reports or monthly statements. If a taxpayer cannot reconcile 1099-B cost basis with their actual trade history, then they cannot rely on that cost basis for generating accurate Form 8949 reports. For this reason, thousands of active traders, as well as leading trader tax CPAs, use the actual trade history to generate their tax reporting with TradeLog software.
Some popular tax software programs claim to provide the ability to import your broker’s 1099-B data in order to generate Forms 8949 and Schedule D. There are a few facts active traders should be aware of, and questions that result:
Most popular tax software programs were designed for average Americans - not active traders. Active traders deal with some of the most complex IRS reporting requirements and therefore need to use software designed especially for them.
TradeLog is software designed specifically for producing accurate tax reporting for active traders. TradeLog 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 10 years 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 includes a process for reconciling imported trade history with 1099-B gross proceeds in order to verify trade history and produce accurate Form 8949 reporting.
Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Armen Computing Ltd. 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.