Bush Push for Basis Reporting
More complete information for investors
By Kaye A. Thomas
Posted February 6, 2008
Reporting change would increase government revenues without raising tax rates.
As we reported last June (see Covering All the Basis?), the idea of having brokers report basis when you sell shares is popular with both parties, as it offers a way to increase government revenues without raising tax rates. What's more, many investors will welcome the change, as it will make it easier to determine the amount of gain or loss to report when selling stocks or other investments. The White House budget proposal released February 4 includes basis reporting as one of its compliance initiatives, providing added impetus to the idea.
One hand clapping
Under current law, an investor who sells stock or mutual fund shares receives Form 1099-B reporting the gross proceeds of the sale (usually net of the brokerage commission, if any). That's only half the information needed for your tax return. You also need to know the basis of the shares, because you subtract this amount to determine the amount of gain or loss on the sale. Basis can be difficult to determine because it may require a search through records of stock purchases made over a period of many years. Knowing the sales proceeds without knowing the basis is like hearing the sound of one hand clapping.
Problems abound
There are many difficulties in implementing a basis reporting requirement. Normally, the basis of an investment is simply the amount paid to acquire it — in other words, its cost. Yet various events can cause basis to deviate from cost. Some of them could be tracked by your broker, although perhaps with some difficulty. For example, in a corporate spin-off, shares of the newly spun off company acquire some of the basis of shares of the parent that made the spin-off. Mergers and other corporate transactions can also affect basis. It's possible, in theory at least, for brokers to incorporate this information into their basis records, but the task is daunting.
It's also possible for basis to change as a result of an event unknown to the broker. For example, you might enter into a wash sale in which you sell shares at a loss in one brokerage account and buy replacement shares in a different one. The basis of the replacement shares would be increased by the amount of the disallowed loss, but the broker maintaining that account would have no way of knowing the purchase was part of a wash sale.
Based on experience with the complexities that can arise from the wash sale rule, it seems doubtful that brokers could handle these adjustments accurately even when all the trading takes place in the same account.
Despite these difficulties, many investors will welcome a requirement for brokers to report basis along with gross sale proceeds. The information provided in those reports won't be a complete substitute for good recordkeeping, but would be a godsend in many situations where records are missing or incomplete.
Related
- Bush Proposal: Expand AMT (previous feature)
- Tax Help Center (information on tax filing in general)
- Fairmark Fast Form Finder (finds IRS publications, too)
- Fairmark Forum (message board for questions and comments)
