Do brokerage firms report cost basis to IRS?
Reporting rules for cost basis
Back in 2008, Congress passed a law requiring brokers to report the cost basis of certain securities to the IRS when a sale occurred. The reporting requirements were rolled out in phases beginning in 2011. Let's take a quick look at the implementation schedule for required reporting.
In 2008, Congress enacted mandatory cost basis reporting for brokers and mutual funds.
Note: Schwab will NOT report the cost basis information to the IRS. Schwab provides this information to you on your copy of your tax form. You are responsible for reporting the cost basis for the sale to the IRS on Form 8949 and Schedule D. The cost basis is NOT included on the copy Schwab submits to the IRS.
The IRS expects taxpayers to keep the original documentation for capital assets, such as real estate and investments. It uses these documents, along with third-party records, bank statements and published market data, to verify the cost basis of assets.
Most brokerages offer cost basis tracking and report any necessary gains and losses to the IRS on Form 1099-B. The general default method for determining cost basis by brokerages is First In, First Out (FIFO).
When a security is noncovered, this means a brokerage doesn't have to report its cost basis directly to the IRS. However, a taxpayer must still report it to the IRS when calculating the profit or loss on the sale of that security for their income taxes.
Stock sales and other distributions may be reported by brokers on a 1099 Consolidated Statement or Substitute 1099. Use Form 8949 for reporting details of capital gain or loss transactions. Short-term transactions go on Form 8949, page 1. Long-term transactions go on Form 8949, page 2.
The bottom line is that the IRS expects you to keep and maintain records that identify the cost basis of your securities. If you do not have adequate records, you may have to rely on the cost basis that your broker reports—or you may be required to treat the cost basis as zero.
The Form 1099-B that you receive might only report the sale date and sales proceeds. If it does not report the date acquired or cost basis, you still need to enter that information when you report your Form 1099-B in the TaxAct program so that it will transfer to Schedule D and/or Form 8949.
Does IRS track brokerage accounts?
Starting in 2012, brokers were required to track the basis of stock holdings, and report these to the IRS, when sold. From this, the IRS can tell whether a capital gain occurred. Let's keep this simple. Your money was “on the books” when you purchased stock.
accounts to another firm. Although the customer's assets may be electronically moved to his or her new firm through the National Securities Clearing Corporation's (NSCC) Automated Customer Account Transfer Service (ACATS), ACATS does not transfer cost basis information.
Average Cost
This method of calculating cost basis is permitted for mutual funds only and cannot be used to calculate cost basis for individual securities such as stocks and bonds.
You aren't allowed to change your method retroactively after you've sold any shares while the average basis method was in effect. In this situation you can change to the separate lot method prospectively, but it won't be possible to restore the original cost basis of lots you held while using the average basis method.
Some reasons for unknown cost basis include: merger or transfer activity occurred on a fund account and basis was not provided, the fund account was established prior to average cost being calculated on non-covered shares, basis was not provided at the shareholder's request on non-covered shares, or the fund account ...
With the single-category method, you add up your total investment in the fund (including all those bits and pieces of reinvested dividends), divide it by the number of shares you own, and voila, you know the average basis. That's the figure you use to calculate gain or loss on sale.
Basis is the amount of your investment in property for tax purposes. The basis of property you buy is usually its cost. You need to know your basis to figure any gain (or loss) on the sale or other disposition of the property.
When someone inherits investment assets, the IRS resets the asset's original cost basis to its value at the date of the inheritance. The heir then pays capital gains taxes on that basis. The result is a loophole in tax law that reduces or even eliminates capital gains tax on the sale of these inherited assets.
In its broadest sense, cost basis refers to the price you paid for your shares. That figure is adjusted upward for reinvested dividends and capital gains and any commissions or transaction fees you paid. What cost basis won't necessarily tell you is how much money you made on an investment.
If you sell an asset for more than the cost basis, you will incur taxes on the profit. If you sell an asset for less than the cost basis, you will incur a loss and not incur any taxes. This loss can also be used to offset taxes on other capital gains.
What can you do with missing cost basis?
If you have cost basis information missing in a taxable account, it is important to work with your custodian on correcting the missing information. By default, they will report a cost basis of $0, which is a gain of 100%, unless you provide them with a better guess.
Cost basis is the amount you paid for an investment, but it isn't always what you paid when you purchased it. Reinvesting dividends or capital gains will increase your cost basis.
If you do not report your cost basis to the IRS, the IRS considers your securities to have been sold at a 100% capital gain, which can result in a higher tax liability.
Most investors are individuals and hold these securities for a substantial period of time. Sales of these securities result in capital gains and losses that must be reported on Schedule D (Form 1040), Capital Gains and Losses and on Form 8949, Sales and Other Dispositions of Capital Assets as appropriate.
The IRS Form 1099-B is part of the non-exempt Fidelity Tax Reporting Statement and is also part of the information that we are required to report to the IRS.
