Under the new IRS regulations, financial institutions must report to the Internal Revenue Service on clients’ Forms 1099-B not only gross proceeds, but also the cost basis for covered securities sold, and whether the related gain or loss is long-term or short-term. For 2012, the reporting will be expanded to cover stock eligible for the average cost basis election – mutual funds (RICs) and Dividend Reinvestment Plan shares (DRIPs). This is in addition to equities, which became covered securities if they were acquired on or after January 1, 2011.
2012 Cost Basis Reporting Highlights:
- Mutual Funds and DRIPs became covered securities as of 01/01/2012
- The 2011 cost basis reporting changes that became effective for equities on 01/01/2011 will expand to include mutual funds and DRIPs purchased or acquired on or after 01/01/2012.
Average Cost Accounting Methodology
When a client elects average cost accounting, the election request MUST be in writing and is specific to that individual account or security chosen. Clients are responsible for the tracking and calculation of costs across different accounts regardless if the accounts are all held at the same financial institution or at various institutions. Please note that the average cost accounting election can only be applied to securities or accounts at the client’s request. Be aware that the election of the average cost accounting method removes the client’s ability to select specific lots and will limit tax planning around that investment.
- Post effective average cost means that, for the client who makes the election to do average cost on their mutual funds or dividend reinvestment positions, the cost basis will be an average on new shares (including reinvestments) purchased or acquired after their set effective date (which can be no earlier than 01/01/2012).
Average cost account methodology will be available for all eligible positions in a client’s account or on a security by security basis.
- Clients can choose to have all of their eligible securities in an account use the average cost account methodology or
- The individual selection of any eligible security within an account can use the average cost account methodology
Bifurcated cost information
- Client positions of mutual funds or DRIPs held prior to 01/01/2012 will not be part of the average cost calculation. These shares will remain “pre-effective” and closed out on a lot by lot accounting basis based on the account’s determined tax lot relief method.
- This will lead to a bifurcated cost……lot by lot prior to the effective date and averaged after the effective date.
- There is one major and distinct disadvantage to using the average cost accounting method. When clients own mutual funds or invest in dividend reinvestment plans, they are often reinvesting the dividends and may even be buying more shares at different dates and prices.
- When using average cost accounting, the client loses the ability to select specific lots for disposition which allows them to determine if gains or losses are realized upon a sale — a definite negative repercussion versus using the lot by lot accounting method for tax loss harvesting purposes.
- Different from choosing tax lot relief methods for an account, client requests to elect average cost for an account or security must be made to their financial professionals in writing. Verbal requests to initiate average cost for an account or security cannot be accepted.
S Corporation will be subject to tax reporting as of 01/01/2012
- Beginning in 2013 (for the 2012 tax year), S corporations will receive year-end statements that will include Forms 1099-B reporting sales of covered securities reported to the IRS.
- Financial institutions must identify whether corporate account holders are C corporations or S corporations. If this is unknown, it must be assumed that the corporation is an S Corporation and subject to Form 1099-B reporting.
- If that entity has not provided a certified taxpayer identification number (TIN) on a Form W-9 by the trade date of the sale, it will be subject to mandatory backup withholding.
For more information on Summit Brokerage Services, visit www.joinsummit.com or contact us at (800) 354-5528.