2012 rules & cost basis


P

ps56k

Just wondering what's going to happen
when the new "cost basis" rules take affect in 2012,
and a ton of stocks are not tagged with a current cost basis.

A lot of my stocks are of course from years ago,
and I've never bothered updated the entries at Schwab
with the initial cost basis.

So - wonder how these are going to be "reported"
if/when I sell any of the shares ?
Also - wonder how big a dart board I need
to come up with a high cost basis so as to reduce any future cap gains ;)
 
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R

Rich Carreiro

ps56k said:
Just wondering what's going to happen
when the new "cost basis" rules take affect in 2012,
and a ton of stocks are not tagged with a current cost basis.
The same thing that happened from the beginning of the income tax
until 2011 -- the taxpayer has to compute and report basis.

Note also that even in 2011 and after you may have to compute basis.
There are many things that could happen (like a wash sale across
brokers) that would render incorrect and in need to revision by you
the basis reported by a broker.
A lot of my stocks are of course from years ago,
and I've never bothered updated the entries at Schwab
with the initial cost basis.
Well, you should start figuring it out.
So - wonder how these are going to be "reported"
if/when I sell any of the shares ?
They'll either be reported with a zero basis or an unspecified basis
(I don't recall what the law says) and it'll be up to you to compute
and substantiate (if challenged) that basis.
 
M

Mark Freeland

They'll either be reported with a zero basis or an unspecified basis
(I don't recall what the law says) and it'll be up to you to compute
and substantiate (if challenged) that basis.
Uncovered securities are those you're describing - ones for which the
broker had no obligation to track (e.g. stocks purchased before this
year, fund shares purchased before 2012, etc.). The broker is thus not
obligated to report a cost basis for uncovered securities.

The tax law change is primarily a reporting one for the brokers; as Rich
points out, the ultimate responsibility to get the figures right (as
with a wash sale) is yours.

With that in mind, an item I haven't seen commented on anywhere from the
taxpayer's perspective concerns average cost of covered and uncovered
shares.

Brokers are permitted to start averaging fund shares with 2012
purchases. As a courtesy, most will continue reporting your average
cost of earlier (uncovered) shares, as a separate average. For example,
you may have 100 shares purchased in 2011 @30 (so the broker tells you
your avg cost is $30 for those shares), and you purchase another 100
shares @35, and those are officially tracked at $35 (average).

But that seems to have little bearing on what you, the taxpayer, are
supposed to report. The average cost of your 200 shares is $32.50. Are
you supposed to report two different average share costs, just because
the broker did (which as we've seen, can easily be wrong for various
reasons), or are you supposed to report the true average?

I'd like to believe the latter - it would be consistent with the
taxpayer being the one ultimately responsible, especially for uncovered
securities. But I've seen nothing written on this.

Mark Freeland
 
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A

Alan

Uncovered securities are those you're describing - ones for which the
broker had no obligation to track (e.g. stocks purchased before this
year, fund shares purchased before 2012, etc.). The broker is thus not
obligated to report a cost basis for uncovered securities.

The tax law change is primarily a reporting one for the brokers; as Rich
points out, the ultimate responsibility to get the figures right (as
with a wash sale) is yours.

With that in mind, an item I haven't seen commented on anywhere from the
taxpayer's perspective concerns average cost of covered and uncovered
shares.

Brokers are permitted to start averaging fund shares with 2012
purchases. As a courtesy, most will continue reporting your average cost
of earlier (uncovered) shares, as a separate average. For example, you
may have 100 shares purchased in 2011 @30 (so the broker tells you your
avg cost is $30 for those shares), and you purchase another 100 shares
@35, and those are officially tracked at $35 (average).

But that seems to have little bearing on what you, the taxpayer, are
supposed to report. The average cost of your 200 shares is $32.50. Are
you supposed to report two different average share costs, just because
the broker did (which as we've seen, can easily be wrong for various
reasons), or are you supposed to report the true average?

I'd like to believe the latter - it would be consistent with the
taxpayer being the one ultimately responsible, especially for uncovered
securities. But I've seen nothing written on this.

Mark Freeland
The amended Section 1012 allows the financial institution to elect to
average the pre-effective date holdings with the post-effective date
holdings. So... I assume you have to call your broker or mutual fund
company and ask them what they are going to do. In addition, under the
old rules you could not average your cost in stock purchases. Cost
averaging only existed for mutual fund shares. Under the new rules, DRP
stock (shares purchased and held in a Dividend Reinvestment plan) can be
averaged. The companies can also elect to average the pre and post
holdings of DRP stock.

Even though non DRP stock can not be cost averaged, there is a minor
exception under the new rules. You may average the cost basis of
different lots of identical stock purchased on the same day as long as
it was a single trade order and you get a single confirmation with the
total cost. You may choose to not average the different lots.

The IRS has a whole bunch of FAQs at:
http://www.irs.gov/taxpros/article/0,,id=237099,00.html
 

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