It's time for investors to get serious about cost basis, if for no other reason than the IRS finally is. Cost basis, in simple terms, is what an investor has paid for an investment. The original cost basis is then adjusted for subsequent purchases or sales, as well as for reinvested dividends and capital gains. Then there are stock splits, commissions, fees and other possible adjustments. This is principally an issue with taxable investments, not IRAs or other retirement accounts.
If you own mutual funds through a brokerage account, you have received a letter or will get one soon asking you to make a cost- basis method choice before year's end. What's this all about? The Emergency Economic Stabilization Act of 2008 requires that when brokers report the sale of securities to the IRS, they also include the customer's adjusted basis in the sold securities and classify any gain or loss as long-term or short-term.
We bought shares of AT&T and other Baby Bells both before and after the breakup of the Bell system. Our problem is establishing the cost basis. Our original purchases were made through payroll deductions while employed by AT&T from 1962 to 1975. We have accumulated additional shares through automatic dividend reinvestment, while paying income taxes every year on the reported dividends. It is virtually impossible to figure out the cost basis of these shares. We no longer have records and the only information that AT&T offers is the breakup percentages as well as prices from 1983 on. I am concerned the IRS may not accept an estimated cost basis should we sell any shares.
The IRS suspects investors are shortchanging it more than $11 billion a year. Now it has a plan to get some of that back. New rules kicked in this year that require brokerages, for the first time, to start tracking how much investors paid for stocks and report this information to the IRS for the 2011 tax year.
Under new IRS regulations, beginning with the 2011 tax year, financial institutions must report to the IRS on clients' Forms 1099- B (Proceeds from Broker and Barter Exchange Transactions) not only gross proceeds of sales but also the adjusted cost basis for stock sold and whether the related gain or loss is long-term or short- term. The new cost basis reporting regulations implement key provisions of the Emergency Economic Stabilization Act of 2008 that apply to institutions that issue IRS Form 1099-B.
The Emergency Economic Stabilization Act, more commonly referred to as the bailout of the U.S. financial system, was enacted by the U.S. Congress and signed into law by President George W. Bush in 2008. Part of the legislation includes new rules to ensure the accurate reporting of gains and losses of securities by investors on their personal tax returns. Prior to this legislation, financial service firms were only required to report gain and loss information to the investor, who was then responsible for including this information in their tax filings. Only gross proceeds of the sale were reported to the IRS.
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