Pershing LLC will mail out their 1099's on or about February 15.  FTJ started mailing them last week.  Each year the receipt of the 1099 causes quite a few questions--especially if there were sales in a taxable investment account.  So lets try to get ahead of the curve and talk about them now. 

Each year the custodian, lets use Pershing as an example, must report to the IRS and you via the 1099 the sale of a stock or fund during the previous calendar year.  For example, if you sold 100 shares of Exxon (XOM) in December 2010 for $71.50 per share Pershing will send you and the Government a 1099 for that account showing a sale for $7,150.  Sometimes people look at that number in horror and think they owe taxes on $7,150--not true.  This is where the term "Cost Basis" comes in.  Cost basis is what it cost you to buy the 100 shares of XOM.  The difference between the basis price and the sale price is what may be taxable. 

If you bought those 100 shares of XOM for $64 per share in March of 2009 you only owe taxes on the profit, or in this case, $7,150 - $6,400 or $750.  And since you held the shares for more than a year you only owe Long Term Capital Gains tax on the $750--or 15% normally, depending on your income, or $112.50.  If however you held the shares for less than a year--look out because the profit is now considered ordinary income and you are taxed at your normal income tax rate for the profit which may be as high as 35% or $262.50.  It is for this reason that investors should try to hold highly appreciated stock for at least a year (if possible) to pay the lower tax rate on the gains.

Now as we all have painfully seen over the last couple of years, not all investments end up in profits.  In that case we often sell something at a loss because we can cancel out profits in another area. 

In our XOM example we earned $750 long term capital gains.  But lets say we owned another stock that had lost value since we bought it, then we might want to sell it during the same calendar year and invest in a similar asset class stock to harvest the tax loss.  If we sold for a loss in value of $750 or more we can effectively cancel out our capital gain in XOM and thus owe zero capital gains tax.  By moving out of the stock and into a similar asset class stock or some other like-investment we don't miss the opportunity to gain should the asset class turn around, but we take our paper-loss and earn ourselves $112 in tax savings.  We can buy back in to the prior investment in 31 days if we still like it.  

So when you receive your 1099 from your custodian the first thing you should look for is the cost basis for the stock sold--but don't worry, you don't have to find it, Jenna, Mike or I will.  Just give us a call and we will research our files and report to you your cost basis for the 1099 you have.  

Good luck, Marty