2011 Form 1099-B and Capital Gains and Losses Reporting Changes

By: William J. Harmatuk, CPA (Jan, 2012)
Beginning with the 2011 tax year, the Emergency Economic Stabilization Act of 2008 included new reporting requirements for brokerage firms and financial institutions. The new IRS regulations requires every broker to file an information return reporting the gross proceeds of a "covered security" such as corporate stock , and must include in the form the customer's adjusted basis in the security and whether any gain or loss with respect to the security is short-term or long-term. The adjusted basis is the original value of the security (typically the purchase price) plus the impact of any dividends, stock splits, or other organizational actions. Effective Jan. 1, 2011, issuers of "covered securities" must file a return describing any organizational action (e.g., stock split, merger, or acquisition) that affects the basis of the covered security, the quantitative effect on the basis of that security, and any other information required by the IRS. The reporting is generally done on Form 1099-B, "Proceeds from Broker and Barter Exchange Transactions" and is required to be mailed to clients by February 15, 2012.

A covered security includes all stock acquired beginning in 2011, except stock in certain regulated investment companies (i.e., mutual funds) and stock acquired in connection with a dividend reinvestment plan (both of which are covered securities if acquired beginning in 2012) and debt securities, options and all other financial instruments acquired on or after January 1, 2013. Securities purchased or acquired prior to the above effective dates are considered "noncovered" securities and will continue to be reported as they have been in the past (typically with no detailed cost basis reporting to the IRS, only gross proceeds). It is the taxpayers' responsibility to report the transactions on their tax returns with the proper cost basis in connection with "noncovered" securities. The brokerage firms and financial institutions will not report the cost basis information to the IRS on noncovered securities.

The 2011 Form 1040, Schedule D, Capital Gains and Losses, has been reformatted and Form 8949 has been added. The new Form 8949, Sales and other Dispositions of Capital Assets, replaces Schedule D-1. Taxpayers must complete the new Form 8949 before completing Schedule D. Taxpayers will use Form 8949 to summarize three categories (A, B, and C) of short-term capital gains and losses (Part I) and three categories (A, B, and C) of long-term capital gains and losses (Part II). A separate Form 8949 should be completed for each category type. The capital gains and losses will be included in category A if the investment's cost or other basis is shown in box 3 of Form 1099; category B if no investment basis is shown in box 3 of Form 1099; and category C if no Form 1099-B was received for the transaction. Form 8949 also contains columns (b) [Code] and (g) [Adjustments to gain or loss] to identify the transaction type and reconcile actual and reported gains and losses. If more than one Code applies for the transaction, they should all be shown. When completed, the summarized Form 8949 information is transferred to Form 1040 Schedule D (Capital Gains and Losses).

The taxpayer uses Form 8949 to report:

  1. The sale or exchange of a capital asset not reported on another form or schedule,
  2. gains from involuntary conversions (other than casualty or theft) of capital assets not held for business or profit, and
  3. nonbusiness bad debts.

The taxpayer uses Schedule D:

  1. To figure the overall gain or loss from transactions reported on Form 8949 mentioned above,
  2. to report gains for Form 2439, 6252 or Part I of Form 4797,
  3. to report gain or loss from Forms 4684, 6781 or 8824,
  4. to report gain or loss from an estate, partnership, S corporation or trust,
  5. to report capital gain distributions not reported directly on Form 1040, line 13 (or capital gain distributions not reported directly on Form 1040NR, line 14.), and
  6. to report a capital loss carryover from 2010.

You can deduct capital losses to the extent you have capital gains plus $3,000 or $1,500 (if married filing separate). Capital losses that exceed these limits can be used in future years. 

As you can see, despite calls for simplifying the tax laws and reporting, they have actually been made much more complicated. We realize that this can be quite overwhelming so we suggest you consult your Dermody, Burke and Brown advisor.

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