The IRS recently issued notice of proposed regulations to explain how securities brokers must report stock transactions. The regulations are guidance for brokers subject to the Energy Improvement and Extension Act of 2008, codified as I.R.C. §6045(g)(1), which requires brokers to include a client’s adjusted basis as well as classification of gains and losses as short-term or long-term when reporting the stock sales to the IRS. I.R.C. §6045(g)(1) applies to other types of investments such as mutual funds and other debt instruments, but that is beyond the scope of this blog post.
The new reporting requirements apply to stock transactions posted on or after January 1, 2011. I can certainly understand that new laws require sufficient lag time for proper implementation, but nearly three years is plenty of time for any profession to adjust. This is especially true considering basis and gain/loss classification is readily available.
I have a number of clients who have received adjustments to their respective tax accounts due to unreported stock transactions. In many cases, the client sold stock in 2008 and 2009 at a significant loss. Recognizing no income from the stock sale, these clients simply omitted it from Schedule D on the tax return.
The problem is that the IRS only required gross proceed reporting in the past. Thus, Form 1099-B only reported the stock sale, but not the basis. If a taxpayer does not report the basis on Schedule D, the IRS is forced to assume the basis in the stock is zero unless shown otherwise. The IRS issued numerous underreporting notices which were ultimately shown to be unnecessary.
Taxpayers are masters of their own tax domain and ultimately the one’s responsible for a return’s accuracy. However, brokers are in the best position to know a client’s gain/loss and basis as the information is readily available. If you sold stock at any time this year, make sure your broker adequately and accurately fills in Boxes 3 and 8 on Form 1099-B (see here), and make sure to include the information on Schedule D. This will save both you and the IRS a lot of time.