Saturday, December 24, 2011
Surprise: New IRS Form May Confuse
The agency’s revamped 1099-B may cause some consternation for investors when it arrives in mid-February.
Come mid-February, investors will receive a 1099-B from their brokers that has something new in it: the cost basis of stocks purchased and sold during 2011. Unfortunately, it’s likely to cause confusion and consternation as recipients try to figure out why only some sales are reported.
The mailing is actually another milestone in the first phase of the Internal Revenue Service’s rollout of the new cost-basis reporting that began back at the start of this year. If you purchased stock in 2011, the cost basis will be reported during the tax year of its sale. You will not see the cost basis of stocks purchased earlier than 2011, nor will you see the cost basis of other types of investments such as mutual funds or options. It will be years before your 1099-B tells the entire story of your portfolio’s trading activity.
“There will be a lot of questions this year because the 1099 will look really different, and not every security type is reported. Schedule D will look different, too,” says Cameron Routh, senior vice president, strategic products at Scivantage (scivantage.com), which publishes Maxit, a leading tax-management software package that many online brokers and their clients use. He worries that brokers have squandered an opportunity to educate customers effectively about the cost-basis reporting conundrum. “Investors may come up with a different cost basis number than the firm did. It will be confusing, for sure.”
The key change is that brokers will now have to report not just the total proceeds from a sale as they have in the past but also the amount paid for it.
Don’t blame us if you haven’t heard about this change. We’ve been talking about it virtually nonstop in the past year. In July we discussed a report issued by the consulting firm Celent, entitled, “Cost Basis Reporting: Where Are We Now?,” that detailed many concerns. ("Clearing Up Cost-Basis Confusion,” Barron’s, July 11.) The Celent report warned that “…firms are likely to experience an influx of inquiries from clients. Questions may include why some security types are showing [up], but others are not (as a result of later compliance dates for different securities).” Routh expects that brokers’ phone lines will be jammed on Feb. 15 when all those investors who have not been paying attention to the new rules are suddenly confronted with new forms.
Routh also is concerned that many brokers will have to issue corrected 1099-Bs because of wash sales. A wash sale occurs when a trader sells a stock at a loss, then buys it back within 30 days; you can’t write the loss off under that scenario. If an investor sells a stock in late December for a loss, then buys it back again before 30 days have passed, it’s highly likely that the 1099-B form that must be received by Feb. 15 will be incorrect. You can avoid this problem by delaying the repurchase of a stock you sold for a loss in December until you’re outside the wash-sale window, a 61-day period including the date of the trade plus the 30 days before and after.
Because the cost-basis reporting requirements are being phased in over several years, Routh believes it will be five years before the process becomes smooth. In 2012 brokers will have to report cost-basis data for mutual funds, while the 2013 tax year will bring options and fixed-income transactions into the mix. Routh says, “At that point, who knows? The IRS may think of something else to add.”
GOING BEYOND THE COST-BASIS issue, Routh also shared two other year-end tax tips for traders: Avoid creating a short-term gain if you’ve only got a few days to go before a gain would be considered long-term. Any investment held for less than one year is considered a short-term investment, and is subject to your marginal tax rate rather than the 15% capital gains tax. In addition, delay a sale for a large gain from the end of December into the first week of January so that the tax bill on that gain gets pushed off into 2013.
We’ve heard from the main consumer-software tax-preparation programs about their 2011 products, and we’re disappointed that they’ve paid very little attention to improving the preparation of Schedule D for capital gains and losses. Even more disappointing, nothing has been done to help options traders yet. If you are entering options transactions on either Intuit’s TurboTax (turbotax.com) or H&R Block At Home (hrblock.com), you have to take an extra step to locate the options input screen because it is hidden under “Other Investments.” Apparently these publishers aren’t aware of the huge numbers of options transactions that are taking place or of the explosive growth in the number of options traders.
There is no easy method of manually entering options-transaction data into either of these popular programs. If you only make a few options trades a year, that’s no big deal, but I imagine that the heavy options trader, who makes multi-leg trades, would be willing to pay a bit extra for an Options Edition. Right now the only program that helps generate a Schedule D for the heavy trader is Armen Comp’s TradeLog (http://www.tradelogsoftware.com). A one-year subscription ranges from $69 to $349, depending on the number of transactions you’re entering.
MOBILE APP UPDATE from optionsXpress: David Fisher, the president of optionsXpress, reports that trades placed via mobile devices have grown by more than 40% in the past year. As a result, the firm has launched an iPad app as well as a Website designed to be used by browser-equipped mobile devices, which can be found at http://www.oxwow.com.
I appreciate that the optionsXpress mobile apps feature streaming quotes for all users. Quite a few other brokers make streaming quotes available only to those who qualify based on trading volume or size of account. The iPad app incorporates the Website’s Dragon screener, which lets you search for gainers, losers and major volume movers. You can switch between accounts quickly and access global-market data and news.
The trade ticket is a mobile version of the Website’s All-in-One order-entry system and is easy to navigate. You get access to complete options chains, including the ability to place multi-leg trades.
The mobile browser page is a little clumsy to navigate, but it’s designed for devices that don’t have native apps available. You can find native apps for iPhone, Android devices, BlackBerry and Windows phones at m.optionsxpress.com.
Published in Barron’s, December 19, 2011