When you are working with cost basis information either from your broker or in bivio, here are some of the terms you will encounter and need to understand:
- 1099-B Form
A form you receive from your broker at tax time each year that reports capital gains information on your stock sales. Brokers also provide a copy of the form to the IRS. The information you report on your investment club taxes needs to match this form or you need to have a valid reason why the brokers information is incorrect.
- Adjusted Cost Basis
Your initial basis in a stock investment is the original price you paid plus any commissions and fees directly related to the purchase.
Over the course of the time you own it, its basis can continue to be adjusted due to the tax impact of events like wash sales and corporate actions such as stock splits, mergers, spinoffs and stock dividends.
In addition, sometimes part of the distributions you receive from an investment get reclassified as a return of capital rather than dividends. That changes the cost basis of your shares.
Your basis at the time of a sale, after taking all these things into account is called your Adjusted Cost basis.
- Net Proceeds
This is the amount you receive from the sale of your shares minus any commissions and fees you paid for making the sale.
- Capital Gains and Losses
The difference between the net proceeds of a sale and your adjusted cost basis. This is the amount you get taxed on.
- Tax Lot
If you have purchased a stock at several different times, including purchases you make each time you reinvest dividends, you will have what are called different tax lots.
There will be a different cost basis associated with each of them.
- Tax Lot Identification
If you do not sell all of your tax lots at one time, your taxable gain or loss will depend on the cost basis of the lots you actually sold. This will need to be identified by the broker in order to prepare your reports correctly.
- Default Cost Basis Method
If you do not tell a broker which lots to sell prior to a sale closing, they will apply a default cost basis method to select the lots sold.
For stocks, by default and per the IRS requirements, the oldest lots will be sold first. This is called First In First Out or FIFO.
Some brokers allow you to specify a different default lot selection method. If you choose one of those, you will need to make manual entries in bivio to keep your records in agreement with theirs.
To complicate matters, the IRS default cost cost basis method for ETF's, Mutual funds and DRIP investment program is Average cost. This is a method that is not easily supported by bivio. If you have any of these investments, it will be especially important that you tell your broker to change the default lot selection method to FIFO to keep your record keeping as simple as possible.
- Covered Securities
Your tax lots that the new cost basis reporting rules apply to.
Brokers are only required to report cost basis information to the IRS on covered securities. When you sell lots purchased before the new rules went into effect those lots are called non-covered securities
You will see different sections on your 1099-B for reporting sales of covered and non-covered shares in both the long term and the short term gains sections.
Some brokers do report cost basis and capital gains information for non-covered securities on your 1099-B but they do not send it to the IRS. Even if they don't, you still have to report all information correctly on your tax forms.
If your broker doesn't provide cost basis information in the non-covered categories, you will have to double check the cost basis for those sales using data from somewhere else. If you've had the same broker all along, you can often get the information you need to do the checks from them on a "Realized gain/loss report".