Money Power Sandra Block: New tax form set for stocks, mutuals
BY SANDRA BLOCK Money Power
Sunday, February 24, 2013
2/24/13 at 4:01 AM
If you sold stock or mutual fund shares in 2012, the Form 1099-B provided by your fund company or brokerage may have a new look.
A new IRS rule requires financial service firms to track the cost basis of their customers' shares. Your cost basis is the price you paid for your shares, plus any reinvested dividends, capital-gains distributions, sales commissions and transaction fees. When you sell shares, your cost basis determines the amount of taxable gain or tax-saving loss.
The requirement is being phased in gradually. For stocks, the new rule affects shares purchased on or after Jan. 1, 2011; for mutual funds and most exchange-traded funds, it's limited to purchases on or after Jan. 1, 2012.
When it comes time to report a sale of shares, you'll no longer have to hunt through old documents to figure out how much you paid for the shares. But the new rule is likely to cause some confusion. Most investors with taxable accounts will have two types of securities: covered shares, which are subject to the new rules, and uncovered shares, which were purchased before the rules took effect.
If you sold shares in a fund you purchased before 2012 that included dividends and capital gains reinvested in 2012, you could end up with covered and uncovered shares in the same investment.
Taxpayers, or their preparers, will have to distinguish between covered and uncovered shares on their tax returns by filling out separate Form 8949s for the two types of securities. Then they can use the information from these forms to complete Schedule D. Your brokerage or mutual fund firm may already have sent a notice asking you to select a preferred cost-basis method. The notice should explain the firm's default accounting method, along with a description of other options offered by the company.
For most investors, the method known as specific share identification offers the most flexibility and potential tax savings. You could sell the shares for which you paid the highest price, thus generating the lowest possible tax bill.
You have two other choices: First-in, first-out, or FIFO, lets you sell shares in the order in which you bought them. Average cost instructs the company to add up everything you've invested in the fund and divide the total by the number of shares you own to come up with your cost basis.
Original Print Headline: New tax form set for stocks, mutuals
Sandra Block is a senior associate editor at Kiplinger's Personal Finance magazine. To send her a question or comment, go to tulsaworld.com/kiplingerfeedback.
