As part of the 2010 tax changes, new rules were released by the Internal Revenue Service (IRS) affecting the method of calculating investment profits on one’s tax filings. This method, known as the “investment basis,” is the point in value used to determine what is an investment cost versus and investment profit. Identified profit is then included in taxable income to determine taxes owed for the tax year by the filer.
Brokerages and mutual fund companies will now be required as of 2011 to begin providing detailed information on investments by a client and to calculate their investment basis for the clients. The universe of public investments (i.e. stocks) will be fully covered by the rules by 2012. This reporting per client account is to be provided to both the client and the IRS, similar to other investment tax reporting clients receive.
Under the old method prior to these reporting changes, clients would get summary information from a brokage, but they would still have to figure out each individual transaction in terms of when the investment was bought and sold. Keep in mind the dates dictate what tax rate applies to the profit made. If the purchase and sale were in the same year, the capital gains tax rate that applies will be the highest. If, alternatively, the stock was held for two or three years, then it will be eligible for a longer capital gains tax rate which is lower.
The changes are expected to make reporting by taxpayers more consistent with validated information. This in theory can reduce the number of audit issues when brokerage and client filings differ, and it will make it easier for clients to complete their taxes.
The authorization to require these changes actually passed back in 2008 under the Energy Improvement and Extension Act passed by Congress.
IRS form 1099-B, Proceeds from Broker and Barter Exchange Transactions, is the general form that is used to tell the IRS and the client what their tax impact is with investments held by the broker. This form is distributed annually at the end of the tax year before taxes are due the following April 15th.
The 1099-B form will be redesigned for the 2011 tax year to include the additional data criteria for investment basis requirements. A unique benefit of the form will be that it will now highlight which investments bought and sold are long-term versus short-term. This makes figuring out capital gains tax rates far easier. The earliest mass release of the form to taxpayers and clients will be 2012.