How Does Cost Basis Reporting on 1099-B
Affect Traders and Investors?

Requiring brokers to report cost basis is certainly a step in the right direction for traders and investors (and for the IRS). However, the new reporting requirements are still woefully inadequate for calculating gains and losses which get reported on Schedule D for tax filing purposes. We will here consider some details of the reporting requirements before considering how this looks on 1099-B

What gets reported, what does not:

• Broker reporting is in the form of a new 1099-B. Brokers are NOT required to provide you a Schedule D – that form is your responsibility as a tax payer.
• The new 1099-B will make a disclaimer that you are ultimately responsible for making sure the data is accurate when filing. The IRS has acknowledged that there are limitations that brokers will face, and they have made provisions for leniency in that regard. However, the tax code for capital gains and losses has not changed for the tax payer!
• Brokers only have to begin tracking cost basis for stocks purchased in 2011 onward. Anything purchased prior to 2011 they are not required to track – but you still are!
• Some instruments will not be reported until 2012 and 2013 by the broker, such as some mutual funds and options. However, you must still report them, even if they don't - including wash sales between stocks and options.
• Wash Sales: though brokers are required to make limited adjustments for wash sales, they do NOT have to adjust based on the same rules as tax payers. For example, they must report wash sales between ‘identical securities’ but not ‘substantially identical securities’ – as is required for tax payers. Also, if you have multiple accounts the burden is put on YOU to notify your broker if a wash sale occurred as a result of a trade in another account. And they are not responsible for tracking those if you fail to tell them.

As you can see from the information above, this added reporting does NOT change the tax reporting rules for you, the taxpayer. The new reporting simply provides the IRS with more information to help them enforce the rules and collect taxes that are not being paid.

Do I still need TradeLog software?

The simple answer is YES, and here are three reasons why:

1. You cannot rely on the new broker provided 1099-B data for filing an accurate Schedule D. Taxpayers are required to follow all the rules for calculating gains and losses and reporting them on Schedule D as outlined in IRS Publication 550 – your broker is not. Therefore you cannot rely solely on your broker provided 1099 to file an accurate Schedule D.
2. Multiple accounts create another level of responsibility for the taxpayer. If you trade in multiple accounts at different brokerages or even the same brokerage, you need to track wash sales across all your brokerage accounts and report any cross-account adjustments. The new cost basis reporting requirements for brokers do not include calculating wash sales across multiple accounts.
3. The risk of being audited will be much higher. Now more than ever traders and investors need TradeLog software in order to make sure that their Schedule D is accurate!  In over 10 years of doing business we have NEVER had a report of the IRS rejecting our TradeLog generated Gains & Losses or Schedule D-1 reports.