In 2008, the Energy Improvements and Extension Act passed into law. Part of this law required mutual fund managers, stockbrokers, and other fund managers to maintain a client record that indicated the original purchase price of the stocks and other assets so as to automatically show the capital gains on these assets. The law was passed to ensure more convenient filing for capital gains, as shareholders were required to make capital gain calculations that were complex in some instances. Besides this taxpayer convenience, this reporting requirement was also passed to ensure that no taxpayer would defraud Uncle Sam by indicating wrong purchase prices or by making erroneous calculations. This in turn, was expected to reduce the tax gap due to unreported or erroneous capital gains from stocks and mutual funds. Though passed in 2008, the act was set to take effect from January 1, 2011 and only affected the shares that were bought from this date forward.
What this Means for Stockbrokers
For stockbrokers and mutual fund managers, this requirement means that they are now expected to invest in various infrastructures that would generate the required reports to be forwarded to the taxpayer as well as the IRS. They will be required to indicate the details of the purchasing prices, sales prices and the capital gains in the Form 1099B, which are sent to their clients. Many stockbrokers and mutual fund managers had already made adjustments to their 1099B statements by 2011 and you may have noted these changes in your Form 1099B, sent by your stockbroker as far back as 2009.
What this Means for the Investors
The taxpayer on the other hand, will now need to separate stocks and mutual fund units purchased before 2011 and those purchased after 2011. For the lots purchased before 2011, the taxpayer will need to manually calculate the capital gains as they did formerly and pay the respective IRS taxes. For stocks purchased after 2011, the 1099B received from your stockbroker will include all the information you need to file your returns without needing to refer to the documentation of stock purchases or make capital gain calculations.
For the Dividend Reinvestment Plan (DRP), the calculation of the capital gains is usually more complicated. In these plans, the dividends received from various stocks are reinvested into stocks from the same counter. The extra shares bought will need to be considered as capital gain. However, these calculations will only affect stocks purchased before 2011; as for those purchased after this date, the stockbroker will be required to make the capital gain calculations in their Form 1099B.
New Draft Form Released by the IRS
The IRS has already released a draft of the reporting form to be used by taxpayers in their tax returns. The draft Form 8949-Sales and Other Dispositions of Capital Assets has three sections. One section is for scheduling the assets that do not have 1099B, the second section for assets that have a 1099B but that do not include cost basis – those bought before 2011- while the last section is for asset that have a 1099B that has the cost basis – those bought after 2011. The totals of the form 8949 will then be carried to Schedule D of the tax return Form 1040. If you have assets that fall in different sections of the Form 8949, you will have to fill out a different form 8949 for the assets that fall in a similar section. You may therefore need to fill out 2 or 3 form 8949s, depending on the type of assets sold and the date of purchase of these assets. However, the totals from these forms will all be forwarded to the Schedule D of your tax return form.