Do you know your cost basis?

9/17/2013

When it comes to stocks, bonds, or other capital assets your cost basis is extremely important unless you like to pay taxes.

Over the past several years new regulations have been phasing in requiring the different brokerage and other companies to report to the IRS and the taxpayer certain cost basis information. There has been considerable confusion about certain items for the taxpayer and the practitioners that are preparing their tax returns. The proliferation of publically traded partnerships has added to this as the brokerage companies that are generating the 1099-B does not also have sufficient to correct the basis for tax distributions or certain other information that gets reported differently on the 1099-B vs on the taxpayers K-1. Another concern stems from the wash sale rules and reporting requirements.

Consider this, just a few years ago when reporting sales of stocks, bonds, mutual funds, etc. The taxpayer would complete a Schedule D, and have additional pages if necessary. Now it is required that these items be broken down further and reported on separate schedules to the schedule D. The 8949 is the form used to report each transaction and there is one for each classification and holding period. So now instead of just a schedule D the taxpayer could have a total of 7 pages for the same information, creating a much more complicated tax compliance requirement.

Tax planning can be very beneficial given the current atmosphere of new taxes and regulations. Ideally the practitioner (me) would be consulted prior to engaging in a transaction that may have tax consequences. Certainly prior to year end a discussion could be helpful to plan transactions that could help minimize the years tax liability and position the taxpayers assets according to how they would like.

Reviewing the lot selection methods at the various brokerage accounts, especially with multiple transactions for a single security the defaulted method (first in first out, average cost, etc.) may not be the ideal method for effective tax strategies. The best course of action is to have open communication with your tax advisor or practitioner in order to discuss any concerns, especially before the transaction takes place.

Fortunately many of the issues and concerns will eventually be figured out and items will be for transparently reported in a consistent manner, but that wont take place for many years yet.

As always, if you have questions about this or other topics please contact me for more information.

Christopher S Thomas, CPA