Cost Basis Reporting Rules Change

Section 403 of the Energy Improvement and Extension Act of 2008 will require cost basis, gain or loss and the classification of the sale as short-term or long-term to be reported along with the sales price on Form 1099-B.
For transactions beginning in January 2011, the cost basis reporting rules apply to purchases and transfers of stock in a corporation.  Beginning in January 2012, these rules apply to mutual funds shares and stocks in dividend reinvestment plans.  Other types of securities will be under the new rule starting in January 2013.
Form 1099-B is used by your tax preparer to prepare your return, so it is very important that the cost basis information is correct.  The IRS also uses Form 1099-B to cross check the information reported on your tax return.  Since the new rules only cover purchases or transfers after the January date, only the cost of shares purchased after the inception is required to be reported on Form 1099-B.
Cost of investments purchased before the inception date are not required to be reported on Form 1099-B, but it is still necessary to present this information to your CPA for accurate tax return preparation.
You have the option to choose between different methods of allocating your cost in the securities sold.  The default (if you do not specify a cost basis method) for stock sales is first-in, first-out (FIFO).  The other acceptable methods that can generally be used are high cost, low cost, last-in, last-out (LIFO), and specific identification.  You must specify the method in an adequate and timely manner, (usually determined by the financial institution) if you wish to have other than FIFO as your cost basis.
The mutual fund cost basis methods available are generally specific share identification and average cost method.  Average cost is generally the default method but if you wish to use specific share identification, you must request that in an adequate and timely manner as determined by your financial institution.
Your investment firm will advise you of their specific rules and options for this reporting requirement.
Since cost basis can dramatically affect your tax return, it is important that your investment firm have the correct information, and you can often save considerable tax dollars if you plan wisely before executing your securities sales.
If you need assistance in determining your cost basis, we can assist you with that.  If you need planning to determine the best identification method, we can also help you.  Remember that tax planning begins before year end, so call us for a consultation.
/posted by Suzan Ross CPA/PFS