Under new regulations effective in 2011, Investment companies will be required to report on the 1099-B adjusted cost basis as well as gross proceeds to the IRS, and whether the holding period of the disposed security was short-term or long-term. The objective of the new requirements is to help ensure that investors accurately report gains and losses of securities in their annual tax filings.
Right now, a taxpayer who tells a broker to sell shares in a stock often doesn't specify which lot to draw from. The person may own hundreds of shares of the stock, with groups purchased in separate lots at different times, for different prices. The choice of lot has a direct bearing on cost basis so it is important for the taxpayer to know exactly which lot he is selling in order to plan for the taxes on the sale.
Except for securities(mutual funds) eligible for and using average cost, most investment companies are required to set a default relief method of first in, first out (FIFO) to determine cost basis. Both of these methods however may not always be the most tax advantaged. Taxpayers will now need to provide adequate notification to their investment companies if they wish to use a method other than these defaults.
What does this mean for the taxpayer? It means the IRS is attempting to increase scrutiny of gains and losses as a result of you selling your investment assets. The IRS intends to match the newly required information to what you report on your return. Therefore, ensure that you keep adequate records and at the time of sale, communicate to your investment broker your cost basis choices if they are different from what the investment company is using.
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