Cost Basis Reporting History and Overview

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

  1. 2011 - Stocks purchased this year and later.

  2. 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.

  3. 2013 - fixed income, futures and options purchases in 2013 and later (Options reporting was later delayed and didn't start until 2014).

Note that the new law did not change the information that you had to report. It only changed the amount of information brokers had to provide to the IRS. The increased information they now provide gives the IRS an easier way to check that you have reported what you need to correctly.

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