Saturday, March 31, 2012
Tax Filing on Trades: It May Pay to Wait
There’s confusion among our readers on how to file the newly revised 1099-B from brokers, especially those with multiple trading accounts. It’s worth getting an extension on your filing deadline to win time to work out the revised wash-sale and capital-gains regimen.
By now, you’ve probably received all the forms you need to prepare your 2011 tax return, including the recently revised 1099-Bs from your broker. If you bought a stock in 2011, and sold it during the year, you’ll see your broker’s calculation of your cost basis and your capital gain.
If this describes you, Robert Green, a certified public accountant at Green NFH (greentradertax.com), which focuses on high-frequency traders, says you should consider filing for an extension on 2011 tax returns, rather than risk filing an incorrect return and having to amend it later.
Why the crunch this year? The 1099-B’s new layout wasn’t made public until November, nor was the requirement to file an additional form to reconcile capital gains, IRS form 8949. Coming so late in the year, these changes have caused consternation for investors—especially frequent traders.
Some Barron’s readers have told us that they’ve already received corrected 1099-B forms—it is the clearing firms’ responsibility to send them to investors—or what they say are incorrect wash-sale calculations. A wash sale occurs when a trader sells a stock at a loss, then buys it back within 30 days. The IRS doesn’t let taxpayers claim write-offs for losses on wash sales.
Green is also urging brokers and investors to persuade the Internal Revenue Service to turn off tax audits based on capital gains for the tax year 2011, since there is a great deal of confusion, and lack of standardization in the industry.
Taxpayers who get a refund based on incorrect data will have to pay it back—with penalties and interest. But the 2011 situation is so messy, Green thinks that CPAs might shun investors with lots of wash sales, rather than deal with increased audits.
Brian Keil, Charles Schwab’s director of cost-basis and tax reporting, says that clients’ 1099-Bs were available online in PDF format Feb. 15, but the delay in mailing the paper forms until a week or so later has resulted in a much lower correction rate than in past years.
YES, THIS YEAR is different. Usually, “the single largest thing that generates corrections” is a restatement of dividends, notes Keil. He adds that interest payments from issuers also get restated, but that the corrections issued this year weren’t typically generated by capital-gains calculations.
Rather, it was the delayed 1099-B/8949 that caused the most investor anxiety. To help keep investors from being rattled by the IRS revisions, Keil says that Schwab (ticker: SCHW) invited all clients who had 2011 wash sales in their brokerage accounts to a Webinar on the topic in January (schwab.com/CBinfo). “We’ve spent a lot of time beefing up our educational opportunities, and we think there is an ongoing need,” he observes.
TD Ameritrade’s (tdameritrade.com) director of tax and retirement-account services, Becky Groves, says her firm has had no data issues related to cost-basis calculations. However, in anticipation of problems with wash-sale reporting, Groves says, “We have established multiple channels of written and electronic educational material to answer client questions, and instituted a specialized support team to assist clients.” She believes TD Ameritrade’s (AMTD) systems, tools, and educational offerings “essentially take the guesswork out of filing a tax return on covered securities.” (tdameritrade.com/costbasisreportingregulation/faq.html)
THE COST-BASIS REPORTING rules have been in discussion for more than five years, but implementation was delayed a year, and confusion reigns because, among other reasons: Your broker can account only for wash sales that took place at their own firms. But say you sell a stock at a loss in your Schwab account, then buy it again two weeks later in your E*Trade account. The computers tracking your Schwab activity haven’t been apprised of the transactions at E*Trade, and so can’t flag the resulting wash sale.
So, should you file for an extension—new deadline, Oct. 15, 2012—as Green recommends? The brokers we asked had mixed responses. Mike Gibbons, Scottrade’s (scottrade.com) senior manager for tax reporting and cost basis, believes that his firm’s customers are in good shape. Gibbons says, “A good rule of thumb would be to wait until the beginning of April to file tax returns this year, as corrections are issued.”
CPA Green’s concerns regarding corrections issued by brokers certainly accounts for a large part of his insistence on filing an extension, but he also points out that the 1099-Bs issued by brokers will rarely match up with the individual taxpayer’s trade accounting net gain or loss. He says, “The IRS gives brokers one set of rules for preparing cost-basis reporting 1099-Bs, then gives taxpayers an entirely different set of rules.” The rules for taxpayers are codified in the new IRS form 8949 for 2011.
Green’s blog contains several entries that detail issues with the new cost-basis calculations. In one, he calls on the brokerage industry to pressure the IRS to avoid auditing taxpayers for a year, due to cost-basis calculations. Several of the brokers we queried about this possibility responded that they would encourage their customers to write to their congressional representatives to request a delay in enforcement. Adds Green: “IRS regulations that are imposed on any industry should allow adequate time to be implemented and tested for accuracy prior to impacting the public.”
Since it’s impossible for a single broker to properly calculate a trader’s wash sales where there are multiple brokers, how can investors cope?
One way is to manually manage all of your transactions across multiple accounts, and make sure you’re not washing away potential capital losses. Sarah Place, CEO of PlaceTrade (placetrade.com), says that it’s not realistic for the brokerage industry to track all trades across all accounts, and that it’s unlikely that traders would be willing to disclose every account and holding to all of their brokers.
Says Place: “Since clients generally prefer their privacy, the burden falls on the industry to perhaps create a system such as DST Vision [used to view mutual funds held by investors] as a basis to start tracking trades across the industry.” But, she continues, creating such a system may not be feasible in the short term, even though it could solve the problem in the long term.
I think it’s smart for those of you who have capital gains or losses reported on a 1099-B to file an extension for your 2011 taxes, given all of the uncertainty. Then, ensure that what you file is correct. Good luck, and be careful out there.
Published in Barrons, March 26, 2012.