The Definitive Guide to IRS Form 1099-B:
Proceeds From Broker and Barter Exchange Transactions

Introduction:

brokerage 1099-b explained

If you are an active trader or investor you will likely receive an IRS Form 1099-B from your broker each year. The main purpose of this form is to report your trading "Proceeds From Broker and Barter Exchange Transactions".

However, the reporting has evolved in recent years as a result of cost basis reporting legislation (Section 403 of the Emergency Economic Stabilization Act of 2008). Brokers are now required to report adjusted cost basis and wash sales for many transactions, making the 1099-B problematic.

In this guide we will answer many questions asked by traders about 1099-B reporting. We will explain exactly why the 1099-B is inadequate for taxpayer reporting, and we will address some of the specific challenges faced by active traders.

Contents:

What is Reported on Form 1099-B?

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.

Sale Proceeds

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.

Cost Basis

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.

Layout of 1099-B Statements

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:

  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.

Understanding 1099-B Columns and Boxes

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:

  • Box 1a - Date of sale or exchange
  • Box 1b - Date of acquisition
    • 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 will may leave this box/column blank, or report "various" on the statement.
    • If a security is non-covered (see box 6 below), then the broker is not required to report the date of acquisition.
  • Box 1c - 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.
  • Box 1d - Stock or other symbol (ticker symbol).
  • Box 1e - Quantity sold.
  • Box 2a - Gross proceeds of the sale - the broker is to indicate if they have adjusted the proceeds less commissions and options premiums
    • Brokers who adjust proceeds for option premiums typically indicate this on the 1099-B substitute statement in the column header or in additional notes at the beginning or end of the 1099-B section.
  • Box 3 - Cost or other basis
    • If a security is non-covered (see box 6 below), then the broker is not required to report the cost or other basis.
  • Box 4 - Federal income tax withheld - backup withholding is reported here.
  • Box 5 - Wash sale loss disallowed - 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 6 below), then the broker is not required to adjust or report wash sales.
  • Box 6 - (a) Whether the security is non-covered or covered and (b) if basis is reported to the IRS or not.
  • Box 8 - Description - this brief description may vary greatly. Some brokers use a full description of the stock, some use ticker symbols, some include quantities, some CUSIP numbers, there simply are no standards.

Other less common 1099-B boxes / columns are:

  • Box 2b - Is used to indicate if a loss is not allowed based on the amount reported in 2a because of acquisition of control or substantial change in capital structure.
  • Box 7 - Amounts received by a member or client of a barter exchange.
  • Boxes 9 - 12 - are used for Regulated Futures Contracts and typically reported in a separate section on substitute statements.
  • Boxes 13 - 14 - are used when State taxes are withheld

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. 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.

1099-B is Inadequate for Taxpayer Reporting

Most traders assume that their brokerage provided 1099-B includes everything they need to file their taxes. However, that is not always true:

  • Not all securities are reported. Option contracts are not required to be reported until 2014, some options not until 2016.
  • Cost basis for securities acquired prior to 2011 is not required on 1099-B. Some brokers provide this information, most do not.
  • Wash sale adjustments are incomplete. The IRS only requires brokers to adjust for wash sales between identical cusips. This means you are responsible for making all other wash sale adjustments as required in IRS Publication 550 (between stocks and options, and across all accounts - including IRA accounts).

For the reasons listed above, 1099-B cannot be used alone for tax reporting. Traders and investors must generate their Schedule D Form 8949 based on Publication 550 requirements. In addition, the IRS expects traders to reconcile their 8949 with what is reported on the 1099-B and make necessary adjustments. This can become nearly impossible for those with hundreds or thousands of trades.

Over the past three years we have documented numerous problems with 1099-B reporting from various brokers. You can read about these specific challenges on our dedicated webpage.

What Experts Say About 1099-B Problems:

Please note what two of the leading trader tax professionals have to say about brokerage 1099-B reporting:

Who is Responsible for Accurate Reporting?

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).

Using 1099-B Reporting

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:

  • The 1099-B reports limited wash sale adjustments using different requirements than those for taxpayers.
  • There are many documented errors, inconsistencies, and anomalies in 1099-B reporting provided by brokers.
  • The 1099-B reporting usually cannot be verified for accuracy - a vital principle in accounting.

Reconciling 1099-B

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 tax their reporting with TradeLog software.

Beware of Popular Tax Software Programs Which Use Brokerage 1099-B Reporting Exclusively

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:

  • There is no IRS standard for providing 1099-B data in a digital format. Since brokers are not required to report all cost basis information on 1099-B, how do these tax programs generate complete tax reporting?

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.

Why Active Traders Use TradeLog

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.

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