Positions Transfer Between Brokers

Discussion in 'Retail Brokers' started by dragonman, Oct 28, 2011.

  1. Hi,

    I made a position transfer (US options) between brokers, and in the realized gains/losses that I see in the first broker's tax report I see that the transfer was recorded as a closing transaction and not as a positions transfer. So that, for example, if I originally shorted an option for 1.00 in the first broker, following the transfer the tax report showed that I closed this position at 0 (zero cost) on the transfer date and therefore had a gain of 1.00, while the truth is that I did not have a realized gain at all following the transfer, since the position was just transferred to another broker, and not closed.

    I told this to the broker and I was told that the it cannot make such updates in its data and when I file my tax return I should update the cost basis manually. However, since the broker reports separately to the IRS, I am worried that this transaction will be recorded as a closing transaction and not as a transfer transaction, and therefore even if I can update the cost basis it will not help me, since the transaction will be recorded as a closing transaction and this what makes the distortion in the first place, not the cost basis.

    Have anyone had a similar issue? This is the first time that I encounter such problem, and any feedback will be appreciated. Thanks.
  2. IB-AN

    IB-AN Interactive Brokers

    While this transfer appears to be inaccurately reported on your activity statement, the relevant question you should be asking your transferring broker is whether they will also treat it as a sale and report the proceeds on your 1099 for 2011 (which is filed with the IRS).

    Most brokers do not report option transactions (i.e., proceeds from sales or expiration related) on the 1099 unless the exercise/assignment of that option resulted in the sale of the underlying security (put exercise or call assignment). Moreover, with respect to the new cost basis reporting rules, options will not be considered a 'covered' security until January 2013. Therefore, even if this was a true sale, there would be no obligation for the broker to report the cost basis along with the sales proceeds to the IRS.
  3. Report the transaction to the IRS based on the actual event, not on what was reported to you. Yes, it might get kicked out resulting in a letter to you from the IRS. Then you'll have to explain what you did and provide supporting documentation. But it won't result in a full audit or a major problem.

    I've had something similar happen a few times (although not related to a broker transfer) and it can be dealt with.
  4. Thanks for the responses.

    I asked the broker and I was told that the inaccuracy is only due to a technical error in the tax preparation software used by this broker, while the data that the broker reports to IRS is the accurate data and should not be affected by this technical error. I hope this is correct :)