Botched 1099-B cost-basis reporting: The List

My yearend reports matched the monthlies to the penny until I switched to IB's unbundled commissions. Since then, they have always been off by a few dollars. That bothered me at first, but now I don't sweat it. I think the variances are due to fees and rebates coming in late. I make sure my tax return matches the 1099 though.

 

rwk,
Interesting ... I'm unbundled as well. I do the same as you regarding taxes. Close enough.

 

Last time I tried to use Quicken it seemed to have flaws for stock trading. Or at least very inconvenient to use. As I recall it did not handle short stock sales very well. I think it kept adding shares or some other inconvenient stuff, I don't recall the details. Anyway that was a couple of years ago.

I assume that Quicken has fixed these problems based on your ability to import two whole years of transactions. Can you expand a little bit on how you did that? Did you download the IB monthly statements for each month?

BTW, when you say "it was sort of embarrassing" did you mean that Quicken gave bad results?

Don

P.S. my IB 1099 also doesn't look right and I'd like to see what Quicken says.

 

Should I write up a Petition to Rally Congress on this matter?

Earlier this week, I emailed top IRS people in leading roles for cost-basis reporting our request that the IRS computers not match taxpayer Form 8949 filings to broker-provided 1099-Bs. I asked the IRS to read all our content on cost-basis reporting problems.

I understand a leading national CPA accounting group is working on a similar request, but they are moving more slowly, which is expected for institutions arranging actions by meetings and consensus. Hopefully, the IRS is informed on what is happening and they are seeing very botched Form 1099-Bs filed by brokers, and Form 8949's filed by taxpayers. The IRS needs to provide some relief for taxpayers soon.
I don’t think the IRS will waive Form 8949 and the IRS can’t ask brokers to issue 1099-Bs under the old rules. This means we all have to struggle through cost-basis reporting this tax filing season.

Maybe, I should write up an online petition to Rally Congress like I did for blocking financial-transaction taxes. Would you all sign the petition and spread the word for other traders to sign it too? Congress passed these new rules and they should be responsible to taxpayers’ for correcting this confusion, unfair cost and pain.

Here is new content (next post) on our Cost-Basis Reporting page http://www.greencompany.com/EducationCenter/Trader-Tax-Center/Cost-Basis-Reporting.shtml.

Perhaps, I can start with this content for the petition. Please add your comments for inclusion in the petition too.

 

The Basics on Cost-Basis Reporting:

If you trade or invest in securities, you need to learn about “cost-basis reporting,” a new set of IRS rules for taxpayers starting with 2011 tax filings. Previously, taxpayers could simply enter their capital gains and losses (proceeds, cost basis and holding period) onto Schedule D of their individual income tax return. That’s no longer allowed and get ready for a real mess.

Under the new cost-basis reporting regime, taxpayers must decipher broker-provided Form 1099-Bs. In prior years, taxpayers and their accountants could easily use a Form 1099-B to enter proceeds from each securities sale on their Schedule D. Taxpayers then entered their own record of cost-basis information and they were done. Investors often looked up the original purchase price in an earlier year brokerage statement and considered stock splits or other corporate actions, which are rare. Active traders generally used software like TradeLog, which downloaded all trade executions and provided an easy-to-use Schedule D-1 attachment.

You would think that when brokers entered the picture providing cost-basis information to taxpayers and the IRS on Form 1099-Bs, taxpayer compliance would be easier. You would be very wrong!

Take one look at your Form 1099-B and you will see the problem. While stock proceeds may look the same as prior years, the new cost-basis information is extremely confusing. Some Brokers mark cost information with quirky new codes like P (provided to the IRS), N (not provided to the IRS) and W (wash sales). Some brokers do not provide totals for the amounts they are reporting. Plus there are covered securities, non-covered securities and other. All individual trades must be entered on the new tax form 8949, which includes Parts A (proceeds and cost basis both reported to the IRS), B (proceeds reported to the IRS but not cost basis) and C (other or not reported on a 1099). Separate Form 8949s must be filed for short term and long term. Add it up: That’s up to six different categories on the Form 8949s instead of the single Schedule D required in the past. This is a huge burden and is very confusing for taxpayers.

That’s just a fraction of the problem. It turns out the rules brokers are required to follow for 1099-B reporting are different from the rules for taxpayers. For example, brokers report “potential wash sales” based on “identical positions” (same symbol), whereas taxpayers must report actual wash sales based on “substantially identical positions” (between stock and options). There’s a long list of other problems on wash sales, too.

Wash sales are a major factor for investors and traders. Using a 1099-B for wash sale reporting is a big mistake. IRS cost-basis reporting rules state that taxpayers should not rely on 1099-Bs for tax reporting purposes. What?

The IRS requires brokers to only report 2011 cost basis on “covered” securities. Most brokers don’t include 2010 cost basis, which means they omit wash sales losses deferred from 2010. The IRS should have required standardization, as broker reporting is all over the map. Many brokers are making errors too.

Phasing in the rules seems to be part of the problem. While the IRS phased in the new rules for brokers, it did not do so for taxpayers. The IRS hammers taxpayers by deputizing them as accountants to figure out all the inevitable discrepancies between 1099-Bs and Form 8949 results.

What’s happening? Most investors and active traders are upset, throwing in the towel and filing extensions. They’re being forced to hire accountants and experts when they’re accustomed to preparing their own tax returns with consumer software. Unsuspecting taxpayers are filing and not realizing they’re either overpaying or underpaying their taxes. The devil is in the details — errors on Form 8949 are compounded onto Schedule D, and the final Schedule Ds don’t add up.

Taxpayers have no confidence on wash sales — they’re extremely hard to figure out by hand.

We suggest reading our blogs on this saga to understand the new IRS rules, how 1099-Bs are constructed and how you should handle Form 8949. We recommend using software like TradeLog and filing an extension. We hope for relief from the IRS soon.

 

Robert, thank you for all the valuable info you've shared in this thread.

Re the not trading anything in Dec. making wash sales "go away" ... any advice on how to handle the situation where my broker statements say otherwise? (they show "disallowable wash sales" figures even though I had no securities trades whatsoever in all of December 2011).

Maybe I don't understand the way they work, but I too was under the impression wash sales would be a non-issue if I stopped all trading other than futures for the month of December.

Also, other than wash sales issues, for the new 2011 rules do I have all the information necessary to correctly complete the forms if I have my own accurate tally of a) cost basis, b) sales price, and c) proceeds(gain or loss), including commisions, for each trade? .... Thx

 

Petition: Securities Traders Need Tax Relief on IRS Cost-Basis Reporting Rules
http://greentradertax-traders-assoc...lief-on-irs-cost-basis-reporting-ru/?m=758320

New “cost-basis reporting” rules for 2011 are not functioning properly. Botched implementation is unfairly causing millions of taxpayers to significantly overpay their tax bills. The IRS should have issued the same set of rules for brokers and taxpayers, but did not. How can the IRS now send tax notices and audits to hundreds of thousands of taxpayers over 1099-Bs prepared under one set of rules, while holding taxpayers accountable to another set of rules? Taxpayers did not sign up to be deputy accountants for this mess!

Kindly sign in below to read our full petition. Please sign and send it to your Congressmen very soon.

 

Disallowed wash sale loss was a concern for me too but after the total numbers were entered into schedule D including total wash sale as adjustment it matched my simple p&l calculations (no wash sale adjustments) on 8949. So if they update cost basis correctly (which I believe now they do) it might not be a problem for final p&l.

 

For sure, many brokers botched the wash sales. TradeLog will show the correct P&L and wash sale adjustments. But, if your 1099-B has errors on wash sales, we expect the IRS to send tax notices about it. tradeLog will show the necessary reconciliation difference on Form 8949, but that extra line item can draw IRS attention too. We are filing extensions and we want brokers to correct 1099s and / or the IRS to hold the notices. Don't rush to file, you will be among the first one audited.

Please sign our petition to get relief on this problem.http://greentradertax-traders-assoc...lief-on-irs-cost-basis-reporting-ru/?m=758320

 

Same answer as my last post. Yes, don't include phony wash sales reported by the broker on the 1099-B, but you still have to worry about an IRS notice. It pays to force the broker to fix the 1099 rather than endure a tax notice or exam later. The extension gives you more time to let the dust settle here.