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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 (, 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 ( “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 ( 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.” (

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 ( 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 (, 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. 

Posted by twcarey on 03/31 at 01:03 AM
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Saturday, March 17, 2012

Online Investors Cut the Cord (2012 Online Broker Review)

In Barron’s 17th annual ranking of online brokers, Interactive Brokers gets the highest marks.

“In many ways, the iPad is reinventing portable computing and outstripping the wildest predictions,” Apple chief Timothy D. Cook said last week while unveiling the tablet computer’s latest upgrade. A bit of hyperbole? Yes, but Cook won’t get any argument from online brokers. Barely a year after the first real investment-related applications were designed for it, the iPad has become a viable platform for buying stocks and bonds and is driving gains in mobile-trading activity.

Big brokers like TD Ameritrade, E*Trade and Fidelity, as well as smaller rivals like MB Trading and OptionsHouse, have all rushed to serve iPad-based customers with new apps. Although no industry-wide figures are available, there’s lots of evidence the iPad and other mobile devices are having an effect. Ameritrade says the number of transactions taking place on mobile devices has more than doubled in each of the past two years. E*Trade reports an average of 200,000 unique monthly mobile log-ins and that 5% of its retail trades took place on a mobile device at the end of 2011. OptionsHouse CEO George Ruhana says mobile apps now account for over 15% of the firm’s core customer activity.

The entire article, plus accompanying tables, can be found at:

Cover story in Barron’s, March 12, 2012. 

Posted by twcarey on 03/17 at 03:11 PM
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Friday, March 16, 2012

Making Sure Your Mobile Transactions Are Safe

Use password protection, question your broker and avoid the free public airwaves to keep iPad data out of harm’s way.

It’s tempting to slip your iPad out of your purse to check on your brokerage account while enjoying a cappuccino. But is it a good idea to send your data out over the public airwaves provided free of charge by your favorite coffee shop? Do you risk having your information intercepted by miscreants who want to use it for their own purposes?

Frankly, the most pressing security issue usually isn’t the airwaves so much as theft or loss of the device itself. The ne’er-do-wells who make off with your gear, or those who simply find a wayward iPhone in a restroom, have instant access to your e-mail accounts, log-ins to corporate data systems and social-networking sites, as well as more personal items like photos.

YOUR FIRST SECURITY MEASURE should be to password-protect your mobile device. The iPhone and iPad can be set up with a four-digit passcode lock, which you should do as soon as you take it out of the box. The passcode can be created so that all the data the device holds, including contacts, text messages, and e-mail login, are erased if someone enters the wrong code 10 times.

What if your devices are safe and sound, but your wi-fi connection isn’t? It’s obvious when your iPad is missing. It’s not so easy to tell when your data transmissions are being intercepted by bad guys. Thieves use such strategies as packet sniffing, phishing, and pharming–all ways of intercepting data or tricking you by spoofing a financial-services Website.

Ever since 2006, when customers of several online brokerages discovered that their passwords had been stolen and their accounts used to inflate the prices of some thinly traded stocks (called “pump and dump” schemes), financial-services firms have made mobile security a high priority.

If you’re conducting any financial business from a mobile device, make sure the firms you’re working with employ encryption for transmitted data, and that they monitor transactions for unusual behavior. Most banks and brokers are now on the lookout for activity that comes from geographical areas that they know are hotbeds of cyber-criminal activity, and have been successful at stopping the great majority of these intrusions.

Even so, mobile-security experts recommend avoiding open wi-fi, and going with EVDO (Evolution Data Optimized, learn more at or GPRS (General Packet Radio Service). It’s faster, far more secure and not that much more expensive when you realize you won’t be wasting time looking for signal or worrying about what you can and can’t do on the connection.

TO USE EVDO, you just purchase a device from Sprint, Verizon or AT&T and pay a monthly fee for data access. You are your own hot spot when you have one of these, and they work with any mobile device you own, including a laptop. There are some that plug into your tablet’s USB port and others that are battery powered and stand alone. GPRS is built in to many smartphones, and is much more secure than open wi-fi. Your mobile device’s 3G and 4G connections are secure, though they’ll draw on your data usage.

So hang on tight to your mobile devices, and make sure that when you transmit sensitive data that you are doing so safely. If you’re not sure a wi-fi connection is safe, just enjoy the coffee.

Sidebar to Survey of Online Brokers, published in Barron’s Online, March 10, 2012. 

Posted by twcarey on 03/16 at 03:17 PM
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