Finally – Brokerage Statements Required to Report Cost Basis – After 2010

Basis and character reporting on the way for securities acquired after 2010
Under one of the revenue offset provisions that accompanied the tax provisions that were enacted as part of the Emergency Economic Stabilization Act of 2008 (Act), every broker that is required to file an information return reporting the gross proceeds of a “covered security” will have to include in the return the customer’s adjusted basis in the security and whether any gain or loss with respect to the security is short term or long term under Code Sec. 1222 . This article looks at the inner workings of this new provision, which generally will apply to securities acquired after 2010.

Background. Every person doing business as a broker must file an information return in accordance with IRS regulations. The return must show the name and address of each customer, as well as details concerning gross proceeds and any other information IRS may require.

The information return (Form 1099-B) has to show the name, address, and taxpayer identification number of the customer for whom the sale was effected, the property sold, the Committee on Uniform Security Identification Procedures (CUSIP) number of the security sold (if known), the gross proceeds of the sale, the date on which the sale occurred (the trade or settlement date, whichever the broker uses on a consistent basis), and any other information required by the relevant return. The gross proceeds on a sale are the total amount paid to the customer or credited to the customer’s account as a result of the sale, reduced by the amount of any accrued but unpaid interest, and increased by any of that interest that wasn’t paid or credited because of repayment of margin loans. In the case of a closing transaction that results in a loss, gross proceeds are the amount debited from the customer’s account.

Under pre-Act law, brokers were not required to report the grant or purchase of options, exercises of call options, or the entering into contracts that require delivery of personal property or an interest in personal property.

Under pre-Act law, information reporting of a taxpayer’s basis in stock was not required, but there was an obligation to keep records from which basis could be determined.

New law. Under the Act, if a broker is otherwise required to make a return under Code Sec. 6045(a) with respect to the gross proceeds of the sale of a “covered security” (see below), the broker must include in the return:

• the customer’s adjusted basis in the security, and
• whether any gain or loss with respect to the security is long-term or short-term. ( Code Sec. 6045(g)(2)(A) )

The customer’s adjusted basis is determined:

(I) in the case of any security (other than any stock for which an average basis method is permissible under Code Sec. 1012 ), in accordance with the first-in first-out (FIFO) method unless the customer notifies the broker by means of making an adequate identification of the stock sold or transferred, and

(II) in the case of any stock for which an average basis method is permissible under Code Sec. 1012 , in accordance with the broker’s default method unless the customer notifies the broker that he elects another acceptable method under Code Sec. 1012 with respect to the account in which the stock is held. ( Code Sec. 6045(g)(2)(B) )

Except as otherwise provided by IRS, the customer’s adjusted basis is determined without regard to Code Sec. 1091 (relating to disallowed loss from wash sales of stock or securities) unless the transactions occur in the same account with respect to identical securities. ( Code Sec. 6045(g)(2)(B)(ii) )

Covered security. The term “covered security” means any “specified security” (defined below) acquired on or after the “applicable date” (defined below) if the security:

(i) was acquired through a transaction in the account in which the security is held,
(ii) was transferred to the account from an account in which the security was a covered security, but only if the broker received a statement under Code Sec. 6045A with respect to the transfer. ( Code Sec. 6045(g)(3)(A) )

In the case of the sale of a covered security acquired by an S corporation (other than a financial institution) after Dec. 31, 2011, the S corporation will be treated in the same manner as a partnership for purposes of the Code Sec. 6045 reporting requirements. ( Code Sec. 6045(g)(4) )

In the case of a short sale, reporting under Code Sec. 6045 will be made for the year in which the sale is closed. ( Code Sec. 6045(g)(5) )

Specified security. The term “specified security” means:

(a) any share of stock in a corporation,
(b) any note, bond, debenture, or other evidence of indebtedness,
(c) any commodity, or contract or derivative with respect to the commodity, if IRS determines that adjusted basis reporting is appropriate, and

(d) any other financial instrument with respect to which IRS determines that adjusted basis reporting is appropriate. ( Code Sec. 6045(g)(3)(B) )

Applicable date. The term “applicable date” means:

(i) Jan. 1, 2011, in the case of any specified security which is stock in a corporation (other than any stock described in item (ii), below, and

(ii) Jan. 1, 2012, in the case of any stock for which an average basis method is permissible under Code Sec. 1012 , and

(iii) Jan. 1, 2013, or any later date IRS determines in the case of any other specified security. ( Code Sec. 6045(g)(3)(C) )

Reporting requirements for exercised options. The Act generally eliminates the pre-Act regulatory exception from Code Sec. 6045(a) reporting for certain options. If a covered security is acquired or disposed of under the exercise of an option that was granted or acquired in the same account as the covered security, the amount received with respect to the grant or paid with respect to the acquisition of that option is treated as an adjustment to gross proceeds or as an adjustment to basis, as the case may be. ( Code Sec. 6045(h)(1) )

Gross proceeds and basis reporting also generally is required when there is a lapse of, or a closing transaction with respect to, an option on a covered security. Thus, in the case of the lapse (or closing transaction as defined in Code Sec. 1234(b)(2)(A) ) of an option on a specified security or the exercise of a cash-settled option on a specified security, reporting under Code Sec. 6045(a) or Code Sec. 6045(g) with respect to that option must be made for the calendar year which includes the date of the lapse, closing transaction, or exercise. ( Code Sec. 6045(h)(2) )

The option reporting and the closing transaction reporting rule do not apply to any option that is granted or acquired before Jan. 1, 2013. ( Code Sec. 6045(h)(3) )

Source: Federal Taxes Weekly Alert, 10/23/2008, Volume 54, No. 43