Each year the IRS receives millions of Form 1099 information statements that allow it to check whether investors are reporting the correct amounts of interest and dividends. Starting next year, the IRS will also be able to check to see that investors are reporting the correct amount of profits and losses on stock sales.

Currently, when stock is sold, brokers report to the IRS only the amount of proceeds from the sale. But to figure profits and losses, another figure is needed: the basis of the stock being sold (generally this is the original cost of the stock with certain adjustments). The IRS has not historically had automatic access to this basis figure; but, for stock acquired and sold after 2010, it will. Brokers will have to report to the IRS (with a copy going to investors) on the basis of the stock being sold as well as the sale proceeds. 

If the profits and losses reported on your return are not consistent with what your broker reports, you can expect to hear from the IRS. Fortunately, there are some things you can do to control what the broker reports.

For example, suppose you bought shares of a particular stock at different times and at different prices. Now you want to sell some of the shares. If you want to minimize your taxable profit (or maximize your deductible loss), you should sell those shares purchased at the highest price. If you give written instructions to your broker to that effect, the IRS says that broker will have to use those instructions in calculating the basis amount reported to the IRS. If you don’t provide instructions, the broker will simply use a “first-in, first out” (or FIFO) method to treat the shares sold as those you purchased first.

The IRS recently issued detailed guidance about the new reporting rules. If you would like more information, please contact our office.

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