New rules make it easier to obtain critical investment information for taxes

Personal Finance Writer

The Dallas Morning News – March 20, 2011 – When you sell an investment, you have to tell the Internal Revenue Service whether you have a capital gain or loss.

And to determine that, you need to know the “cost basis,” essentially the price of the stock or bond when you purchased it, plus the commission.

The difference between the cost basis and the price at which you sold the stock is the amount you either gained or lost on your investment.

Simple, huh?

Unfortunately for average investors, the process can be somewhat complicated.

That’s especially true if the “cost basis information has not been tracked or verified continuously over the years, so investors have little or no information as to what their starting point is or what the purchase price is,” said Nico Willis, chief executive of NetWorth Services Inc., which offers products that help investors calculate their basis.

Now, Congress is making it easier for investors.

Under rules that took effect at the beginning of this year, brokerage firms now must tell clients the gross proceeds from the sale of an investment, the adjusted cost basis and whether the difference is a long-term or short-term capital gain or loss.

The information will appear on IRS Form 1099-B “Proceeds from Broker and Barter Exchange Transactions.”

“The basic reason it was passed is, often when accounts were moved or the broker moved, the basis information did not follow with the individual’s account, and then it often became next to impossible to get the information,” said Ken Sibley, a certified public accountant in Dallas.

The change applies to different types of investments in three stages:

Individual stocks — January of this year.

Mutual funds and dividend investment plans — January 2012.

Bonds, options and other securities — January 2013.

There’s a key facet of the law that investors need to know: It applies only to securities purchased after the beginning of this year.

“All other positions, they will not provide the information, so it’s completely on the investor,” Willis said.

“There will be massive confusion,” he predicted.

Depending on the actions of the company you’ve invested in, your cost basis may not be just the stock’s original purchase price.

“There are about 50 corporate-action events that have a material impact on the original purchase price of an investment,” Willis said.

Those include stock splits, spinoffs, mergers and dividends.

“That is what’s called the adjusted basis, because that accounting mathematical computation that you must do to adjust your purchase to the new basis is what’s confusing everyone and making it very intimidating,” Willis said.

No matter what information your broker provides, you are ultimately responsible for the accuracy of information on your income tax return.

So keep your investment records as complete as possible. That includes confirmation statements for transactions.

If you transferred your account from one brokerage firm to another, keep the records from the original brokerage.

“The broker really only has to report on a transaction that originated with that broker or a predecessor broker, so if you’ve got something that you’ve held a long time, you may still have to track the basis yourself,” said Mark Luscombe, principal federal tax analyst at CCH, which publishes information for tax professionals.

Thankfully, Congress has made the task easier in the future, even if only for investments made beginning this year.