New rules about brokerage firm reporting of cost basis have mostly increased the complications for tax professionals dealing with securities sales. Casual investors are often confused about the tax implications of selling stocks or mutual funds. Lax records of cost basis are a typical cause of trouble. With taxpayers now expecting brokers to report cost basis, Enrolled Agent jobs are more difficult than ever.
In most cases, brokers are reporting only partial cost basis figures. Long held investments are still a mystery for tax practitioners to unravel. These tasks are especially troubling when investors have made incremental purchases using dividend reinvestment. For the next several years, Enrolled Agents are dealing with “covered” and “uncovered” securities sales. Understanding the distinction is crucial for EA problems involving completion of Form 8949. This form is a necessary first step before preparing Schedule D capital gain and loss calculations.
Discussions between Enrolled Agents and their taxpayer clients are probably more challenging because of the covered and uncovered securities. A simplification of the concept is vital for individuals to comprehend their tax results. Describing the scenario to taxpayers must often begin with the standard Enrolled Agent course definition of capital gain determination by subtracting basis.
Although basis is usually the original purchase cost, alternative methods identify basis for securities received as gifts, inheritance, or employee benefits. The best way for an EA to describe the importance of basis is pointing out that reporting insufficient basis either increases reported gain or decreases deductible loss. Both of these positions cause the investor to pay more tax.
Many individuals who acquire shares of stock over an extended period have a chronological listing of all purchases. When a sale finally occurs, the longest held shares are sold first. This is the standard rule from study for the Enrolled Agents exam. Mutual funds may follow an alternative basis measure using average cost.
A single sale of one security that was acquired over multiple years is not too difficult for an EA possessing the record of purchases. Only the separation of short-term holdings creates a slight hurdle. However, instances of numerous sales interspersed with ongoing purchases are more cumbersome Enrolled Agent tax work than routine corralling of historical buying alone. Software is available to help in the process. But most EAs dump these issues back on the taxpayers.
Regardless of who identifies basis, taxpayers must ultimately agree with the results. They are confronted with the burden of having accurate records. Brokerages furnish basis information on sold stocks if the purchases occurred after the start of 2011. Mutual funds covered by brokerages began with purchases in 2012. Unfortunately, this does not alleviate the entire responsibility for taxpayers. EAs should warn their clients to check covered sales very closely. Many exceptions exist for brokers when reporting covered transactions.
For the next several years, Enrolled Agents are stuck with having to make adjustments to certain covered sales and dig for basis on uncovered sales. Some of the biggest difficulties are mutual fund sales. When average cost basis is used, part of the sale is recently purchased covered transactions and the remainder is older uncovered shares. Taxpayers still need their own records of basis – particularly for shares transferred to a new brokerage or inherited. Perhaps in future decades, calculating capital gains and losses will become easier. But an era where all securities sales have broker-covered basis will probably arise only for the next generation of Enrolled Agents.
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.