When you sell stocks, you have capital gains
and losses to report on your investment club taxes. The amount of the
gain or loss is the difference between your adjusted cost basis and the
net proceeds from your sale.
Capital Gain/Loss = Net Sale Proceeds - Adjusted Cost Basis
For tax purposes, gains and losses are
classified as either Short term or Long term, depending on low long you
hold an investment before you sell it.
Long term means you've owned an
investment longer than a year. Short term means you've owned it for 1 year
or less. There are currently different tax rates on long and short term
capital gains.
Short Term - 1 year or less; Long Term - Greater than 1 year
For stocks purchased prior to 2011, brokers reported only net
sale proceeds to the IRS on 1099-B forms. The IRS had no way to easily
determine whether you were also reporting correct cost basis and
capital gains on your taxes.
On October 3, 2008 Congress passed the Emergency Economic
Stabilization Act.
You may fondly remember this being called the TARP or bailout bill. One
of the provisions included in this bill affected broker cost basis
reporting. In addition to net proceeds, brokers also had to start
reporting your adjusted cost basis and whether your gains or losses were
short or long term to the IRS.
Because of the work required by the brokers to implement this change, it was phased in over the course of 3 (later 4) years.
Investments Affected By More Detailed Cost Basis Reporting Laws
2011 - Stocks purchased this year and later.
- 2012 - DRIP's, ETF's and Mutual fund shares purchased in this year or later.
Note that DRIPS refer to qualified dividend reinvestment programs.
It was not supposed to apply to the situation where you have asked your
broker to automatically reinvest dividends for you. Many brokers
however, seem to have included those shares in this category.
- 2013 - fixed income, futures and
options purchases in 2013 and later (Options reporting was later delayed
and didn't start until 2014).
The answer to yesterdays question is that the the new law did not change the information that you have to report. It only changed the amount of information brokers have to provide to the IRS. The increased information gives the IRS an easier way to check that you have reported your taxes correctly.
But reporting your capital gains and losses correctly is not new. You've always had the obligation to do that. Questions for next week:
What is adjusted cost basis? What are net proceeds? What are "Covered Securities" What is a "Tax Lot"
Stay Tuned.
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