- February 29, 2012
In this short, five post series, we will break down the Top 5 issues of the new cost basis legislation that can impact taxpayers and investors; how investors can navigate each to avoid penalties, as well as how to minimize your capital gains tax responsibility.
Issue Number One: Covered vs. Non-Covered
Thanks to some confusing stories in the media, many taxpayers believe their brokers will provide an accurate cost basis for their portfolios regardless of when the security was purchased. However, this is not the case. For the 2011 tax season, brokers are only legally required to provide clients with cost basis information for stocks purchased AFTER January 1, 2011. This is known as a covered position and will result in cost basis information coming from the broker. However, ANY security purchased BEFORE January 1, 2011 is known as a Non-Covered position and the broker is NOT required to provide cost basis. The catch is that the taxpayer is required to accurately report cost basis for their entire portfolio whether the information is provided to them or not.
Because most people have portfolios that stretch back further than January 1, 2011 this is a key issue for the taxpayer to understand. The IRS is cracking down on inaccurate cost basis reporting with fines up to $1000 for each mistake and $5000 if the agency can prove the taxpayer “willfully disregarded” the new rules.
Cost basis can be tricky to determine, but by using Netbasis, a powerful tool that automatically determines cost basis on any security back to 1925, tax payers can rest assured that the information they provide on their taxes is accurate. Individual cost basis calculations are available for only $19.95.