Gain-Loss Tax Reporting Laws
Brokers are required to maintain the tax (cost) basis of most positions held and are required to prepare gain-loss computations and submit this to the Internal Revenue Service, with a copy sent to the taxpayer. In practice, these gain-loss reports and the accompanying wash sale adjustments are rife with errors. Some level of reconciliation should be done by the taxpayer to assure that taxes are not overpaid (or underpaid). Various broker-supplied reports and software are available to make this reconciliation possible.
Effective with 2008, brokers are required to submit form 1099-B no later than later than February 15th of the following calendar year. (the prior law was January 31st)
(Pub. L. 110-343, Div. B, §403(a)(3), amended subsec. (b) of IRC §6045)
In order to bridge an income tax revenue gap cause by underreporting of taxable gains by taxpayers – brokerage houses submit to the IRS the gain-loss computations of stocks, mutual funds, options and bonds. This new provision is expected to raise $6.7B between 2011 and 2020.
Mark-to-market traders should notify their brokers, in writing, not to employ the wash sale rule when compiling their gain-loss computations (see §1.6045-1(d)(7)(ii)(C)). Similarly, the updated “versus purchase” or “tax lot reporting” procedures that many brokers provide, are not applicable to mark-to-market traders. Exception: wash sale and versus purchase are applicable at the beginning of the initial year of the M2M election.
Starting with the 2016 version of Form 1099-B Proceeds From Broker and Barter Exchange Transactions the issuing broker may indicate if the gain or loss is “ordinary” vs. being “short-term or long-term capital gain.” But the issuing broker is not required to consider any customer representations that a trader’s election was made to use the §475 mark-to-market method of accounting for purposes of ordinary gains/losses nor for wash sale computations.
WASH SALE TRICK in case your broker fails to eliminate the wash sale calculations: EVERY DECEMBER (preferably before the 25th) close all positions in the account, going all cash. Stay all cash with no buying or selling of securities for at least 31 calendar days. By doing this trick, all of the account’s wash sale computations should be reversed out under the 31 day rule and the bottom line resulting gain/loss computation provided by the broker to the IRS should be exactly that same as would be for a M2M trader without wash sales adjustments.
M2M TRICK The above Wash Sale Trick is also helpful for maintaining easier to compute and verify M2M adjustments for M2M traders as well.
What follows are some keys points from the details in the laws that brokers are required to follow with their gain-loss reporting.
As indicated above, brokers are required to maintain the tax (cost) basis of most positions held and are required to prepare gain-loss computations and submit this to the Internal Revenue Service, with a copy sent to the taxpayer. In lieu of the default of FIFO determination of the cost basis, the brokerage house is not prohibited from using “versus purchase” or “tax lot reporting,” nor is the brokerage house prohibited from ignoring the wash sales rule for taxpayers who have elected M2M. Short sales are no longer to be reported to IRS based on the date of the sale that opens the short position, but will now be reported once the short position is covered or closed. See H.R. 1424 Emergency Economic Stabilization Act of 2008 (Act, Pub. L. No. 110-343). which was passed into law on October 3, 2008.
The initial effective date to begin cost basis reporting for most stocks & other “equities” applies to positions opened after December 31, 2010.
The above date is deferred by one year for most S corporations. Starting with such positions opened after December 31, 2011 they will be reported to the IRS on form 1099-B in the same fashion as Individuals and Partnerships, which effectively closes an illegal non-reporting loophole. (per Section 3(b))
The initial effective date to begin cost basis reporting for most mutual funds, ETFs, and dividend reinvestment plan (DRIP) stock (or similar “average cost basis” arrangements) applies to positions opened after December 31, 2011.
The initial effective date to begin cost basis reporting for most debt instruments, stock options* and certain other securities applies to positions opened after December 31, 2012. update: Extended by IRS Notice 2012-34 – now applies to positions opened after December 31, 2013.
Effective with 2011, securities brokers are required to do the trade-matching and provide the gain-loss report to the customer no later than February 15th of the following calendar year. Pub. L. 110-343, Div. B, §403(a)(2), added this requirement. IRC §6045, §6045A & §6045B cover special new rules for the reporting of options*, wash sales, “versus purchase” or VSP sales, transfers of securities into broker accounts, and corporate actions such as stock splits and spin offs. See Wolters Kluwer Financial Services Cost Basis Reporting Resource Center for additional details.
Starting with 2011 form 1099-B reports to the IRS your wash sales and your FIFO (or VSP) taxable gain-loss for each sale made. Proposed instructions to securities brokers were issued on 12/17/2009 see Reg-101896-09
Section 3(a). Wash Sales
Section 6045(g)(2)(B)(ii) provides that, unless the Secretary provides otherwise, a customer’s adjusted basis in a covered security generally is determined for reporting purposes without taking into account the effect on basis of the wash sale rules of section 1091 unless the purchase and sale transactions resulting in a wash sale occur in the same account and are in identical securities i.e. same CUSIP# (rather than substantially identical securities as required by section 1091).
Observation: In practice, brokers are complying on a partial-sale-by-partial-sale basis, but they are not providing any organized summary information to traders regarding the amounts of disallowed losses that were added to basis and also are being deferred to the following year.
In practice with some brokers (Schwab for example) the “total proceeds” minus the “cost basis” yields a larger loss than the trader actually incurred. But when the disallowed loss in taken off (added back) the resulting gain/loss is correct.
In practice with some other brokers (TD Ameritrade’s Gainskeeper for example) the “adjusted proceeds” minus the “adjusted cost” yields the correct loss that the trader had. Any disallowed losses that were added to adjusted cost bases are subsequently deducted from adjusted cost bases to avoid the double counting.
Starting with 2011 form 8949 is used to report short-term and long term gains and losses.
Starting with 2011 schedule D is used to report a summary of short-term and long term gains and losses.
* As of November 2008 IR Regs §1.6045-1(a)(3)(vi) remained unchanged: “[The term “security” means:] An interest in a security described in paragraph (a)(3) (i) or (iv) (but not including options or executory contracts that require delivery of such type of security).” and Regs §1.6045-1(a)(9) remains unchanged “[The term “sale” does not include grants or purchases of options, exercises of call options, or entering into contracts that require delivery of personal property or an interest therein.” Meaning – that taxpayers may need to continue to do their own trade matching when it comes to their options trading.
But now §403(a)(2) mandates that IR Code §6045 is amended as follows:
IRC §6045(h) Application to Options on Securities-
(1) EXERCISE OF OPTION- For purposes of this section, if a covered security is acquired or disposed of pursuant to the exercise of an option that was granted or acquired in the same account as the covered security, the amount received with respect to the grant or paid with respect to the acquisition of such option shall be treated as an adjustment to gross proceeds or as an adjustment to basis, as the case may be.
(2) LAPSE OR CLOSING TRANSACTION- In the case of the lapse (or closing transaction (as defined in section 1234(b)(2)(A))) of an option on a specified security or the exercise of a cash-settled option on a specified security, reporting under subsections (a) and (g) with respect to such option shall be made for the calendar year which includes the date of such lapse, closing transaction, or exercise.
(3) PROSPECTIVE APPLICATION- Paragraphs (1) and (2) shall not apply to any option which is granted or acquired before January 1, 2013.
See H.R.5720 for full details.
On October 12th, 2010, the IRS issued final regulations for the Cost Basis Reporting Law, enacted as part of the 2008 Emergency Economic Stabilization Act.
IRS Notice 2010-67 dated October 25, 2010 delays until January 1, 2012 the requirement for broker-dealers to transfer historic cost basis information along with a “covered security”** during a DTC transfer to another custodian. Such transfers during 2011 at the broker-dealer’s determination, may result in the item being classified as a “non-covered security” and exempt from the cost-basis rules.
Further action may be forthcoming as the industry complains to the IRS about the requirement as it pertains to providing the cost-basis information along with securities lending transfers.
** IRC §6045(g)(3) defines a covered security as any “specified security” purchased on or after January 1, 2011 in the case of equities (other than stock of a regulated investment company (“RIC”) or stock that is part of a dividend reinvestment plan (“DRIP”); January 1, 2012 in the case of RIC or DRIP stock; and, January 1, 2013 in the case of any other security unless exempted by the IRS. A specified security is any share of stock in a corporation; any note, bond, debenture, or other evidence or indebtedness; any commodity or contract on such commodity; and, any other financial instrument determined by the IRS to be appropriate for cost basis reporting.
re: M2M election
IRS Wash Sales Regulations allow M2M securities traders to inform their broker of their M2M trader status and request that the broker not apply wash sale computation to the securities traded in the account:
§1.6045-1(d)(7)(ii) Adjustments For Wash Sales—
§1.6045-1(d)(7)(ii)(A) In General.
A broker must apply the wash sale rules under section 1091 if both the sale and purchase transactions are of covered securities with the same CUSIP number or other security identifier number that the Secretary may designate by publication in the Federal Register or in the Internal Revenue Bulletin (see §601.601(d)(2) of this chapter).
§1.6045-1(d)(7)(ii)(B) Securities In Different Accounts.
A broker is not required to apply paragraph (d)(7)(ii)(A) of this section if the securities are purchased and sold from different accounts, if the purchased security is transferred to another account before the wash sale, or if the securities are treated as held in separate accounts under §1.1012-1(e). A security is not purchased in an account if it is purchased in another account and transferred into the account.
Updated August 2015 for a common misconception – Caution: Perhaps while searching for answers, someone went so far as to post this question on the internet: “How can a broker know for sure that a trader elected Section 475 on time and or (sic) is entitled to use Section 475, which is conditional (sic) on qualifying for trader tax (sic) status?” and with that he also erroneously stated that “Brokers are supposed to prepare Form 1099Bs for the everyman, [and] not based on a taxpayer’s election or other facts and circumstances.”
For the edification of those confused by such website postings – the answer is as simple and straightforward as clicking this link for the authoritative Reg.:
§1.6045-1(d)(7)(ii)(C) Effect Of Election Under Section 475(f)(1).
A broker is not required to apply paragraph (d)(7)(ii)(A) of this section to securities in an account if a customer has in writing both informed the broker that the customer has made a valid and timely election under section 475(f)(1) and identified the account as solely containing securities subject to the election. For purposes of this paragraph (d)(7)(ii)(C), a writing may be in electronic format. If a customer subsequently informs a broker that the election no longer applies to the customer or the account, the broker must prospectively apply paragraph (d)(7)(ii)(A) of this section but is not required to apply paragraph (d)(7)(ii)(A) of this section for the period covered by the customer’s prior instruction to the broker. A taxpayer that is not a trader in securities within the meaning of section 475(f)(1) does not become a trader in securities, or create an inference that it is a trader in securities, by notifying a broker that it has made a valid and timely election under section 475(f)(1).
§1.6045-1(d)(7)(ii)(D) Reporting At Or Near The Time Of Sale.
If a wash sale occurs after a broker has completed a return or statement reporting a sale of a covered security, the broker must redetermine whether gain or loss on the sale is long-term or short-term under this paragraph (d)(7)(ii) and, if the return or statement included information inconsistent with this redetermination, correct the return or statement by the applicable original due date set forth in this section for the return or statement.
§1.6045-1(d)(7)(iii) Constructive Sale And Mark-To Market Adjustments.
A broker is not required to apply section 1259 (regarding constructive sales), section 475 (regarding the mark-to-market method of accounting), or section 1296 (regarding the mark-to-market method of accounting for marketable stock in a passive foreign investment company) when determining whether any gain or loss on the sale of a security is long-term or short-term.
IRS Notice 2010-67 pdf.
How To Complete Form 8949, Columns (b) and (g)
|IF . . .||THEN enter this code in column (b) . . .||AND. . .|
|You received a Form 1099-B (or substitute statement) and the basis shown in box 3 is incorrect. . . .||B||Enter the basis shown on Form 1099-B (or substitute statement) in column (f).If the correct basis is higher than the basis shown on Form 1099-B (or substitute statement), enter the difference between the two amounts as a negative number (in parentheses) in column (g).If the correct basis is lower than the basis shown on Form 1099-B (or substitute statement), enter the difference between the two amounts as a positive number in column (g).|
|You received a Form 1099-B (or substitute statement) and the type of gain or loss (short term or long term) shown in box 8 is incorrect . . . .||T||Enter -0- in column (g) unless an adjustment is required because of another code. Report the gain or loss in the correct Part of Form 8949.|
|You received a Form 1099-B or 1099-S as a nominee for the actual owner of the property. . . .||N||Report the transaction on Form 8949 as you would if you were the actual owner, but enter any resulting gain as a negative adjustment (in parentheses) in column (g) or any resulting loss as a positive adjustment in column (g). However, if you received capital gain distributions as a nominee, report them instead as described under Capital Gain Distributions, earlier.|
|You sold or exchanged your main home at a gain, must report the sale or exchange on Form 8949, and can exclude some or all of the gain. . . .||H||Report the sale or exchange on Form 8949 as you would if you were not taking the exclusion. Then enter the amount of excluded (nontaxable) gain as a negative number (in parentheses) in column (g). See the example in the instructions for Form 8949, column (g).|
|You sold or exchanged qualified small business stock and can exclude part of the gain. . . .||S||Report the sale or exchange on Form 8949 as you would if you were not taking the exclusion. Then enter the amount of the exclusion as a negative number (in parentheses) in column (g).|
|You can exclude all or part of your gain under the rules explained earlier in these instructions for DC Zone assets or qualified community assets. . . .||X||Report the sale or exchange on Form 8949 as you would if you were not taking the exclusion. Then enter the amount of the exclusion as a negative number (in parentheses) in column (g).|
|You are electing to postpone all or part of your gain under the rules explained earlier in these instructions for rollover of gain from QSB stock, empowerment zone assets, publicly traded securities, or stock sold to ESOPs or certain cooperatives. . . .||R||Report the sale or exchange on Form 8949 as you would if you were not making the election. Then enter the amount of postponed gain as a negative number (in parentheses) in column (g).|
|You have a nondeductible loss from a wash sale. . . .||W||Enter the amount of the nondeductible loss as a positive number in column (g). See Wash Sales, earlier, for details.|
|You have a nondeductible loss other than a loss indicated by code W. . . .||L||Enter the amount of the nondeductible loss as a positive number in column (g). See the example under Nondeductible Losses, earlier.|
|You include any expense of sale or certain option premiums in column (g) or you have an adjustment not explained above in this column. . . .||O||Enter your expenses of sale or the appropriate adjustment amount in column (g). Enter any expenses of sale as a negative number (in parentheses). See the instructions for Form 8949, column (g). If you sold a call option and it was exercised, see Gain or Loss From Options, earlier, for information about reporting certain option premiums.|
|None of the other statements in this column apply. . .||Leave columns (b) and (g) blank.|