Identification of correct basis for assets sold by taxpayers is a perpetual problem of Enrolled Agents. Individuals seldom realize the importance of keeping a handy record showing the cost and acquisition date for an item they eventually sell at a profit. Some Enrolled Agent jobs regarding sold securities have become easier this year. That’s because brokers and mutual fund companies now convey cost basis and holding period when reporting annual sales. However, brokers may have incorrect or incomplete information. The rules that apply to them are different than the documentation requirements placed on taxpayers.
Unfortunately, the aid given by financial institutions with basis tracking has the potential downside of making investors more complacent about record keeping. Complete and accurate tax reporting of investment transactions is still a taxpayer responsibility. Preparation of tax forms according to Enrolled Agent training is only possible when taxpayers supply the factual data. Broker reporting of cost basis and holding period goes a long way toward solving this difficulty. Nevertheless, taxpayers must provide any information missing from the broker’s report and make necessary changes to incorrect numbers from the broker.
One of the seldom mentioned facts about broker reports of cost basis is that the mandate only applies to some securities. For instance, brokers are only required to track cost basis for stock shares purchased after 2010 and for mutual fund shares bought after 2011. Solutions to EA problems involving sales of securities acquired in older periods necessitate inquiry into the taxpayer’s records.
One of the strongest recommendations an Enrolled Agent can make for clients is locating all cost basis figures for long held securities and presenting those amounts to their brokerage firms. Taxpayers will be most grateful upon selling the securities in future years, after memory fades and records are easily misplaced. If individuals only remember a cost per share, they must exercise caution by adjusting for stock splits. As long as they know how many original shares they purchased, calculating the correct total basis is a simple exercise.
A few other rules about cost basis records for taxpayers don’t apply to the actions of brokerages. For example, brokers don’t have to consider straddle rules that can affect basis and holding period for a stock acquired with an option transaction. Also, brokers are not required to adjust the basis of gifted shares for the amount of gift tax paid. These are among the considerations understood from an Enrolled Agent course. They apply to basis calculations on investor tax returns, but not basis reporting by brokerage firms.
In addition, brokers are not required to adjust basis for the impact of wash sales and repurchases prior to 2010. Moreover, brokers only apply wash sale rules when the sale and replacement purchase occurs in the same account. That standard does not apply to the records maintained by taxpayers, who must account for every wash sale. Further complicating matters is applicability of a wash sale to every mutual fund share when the average basis method is utilized.
For transferred securities, the complexity is even greater. The key rule from Enrolled Agent study materials about property transfers is that gifts retain the same basis as the giver, but the basis of inherited property is the value on the date of death. Brokerage firms will not have the original cost for gifted shares transferred into an account. They also lack information about stepped up basis for inherited shares. Helping deliver basis information to brokers of individuals holding gifted or bequeathed securities therefore becomes an important EA service.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.