IRS Announces Rules for Stockbrokers Required to Report Basis

Stockbrokers have long been required to report the "gross proceeds" from stock sales to the IRS.  That's how the IRS knows you sold that 100 shares of Apple and the amount you received on the sale.  However, the IRS has not had a way to know your basis (and therefore your gain or loss) on that Apple stock.  Did you buy it at $8 per share or $208?

 The Energy Improvement and Extension Act of 2008, enacted on October 3, 2008, provides that, in the case of a "covered security," every broker required to report the gross proceeds from the sale of the security must also report the customer's adjusted basis in the security and whether any gain or loss with respect to the security is long-term or short-term. The reporting is generally done on Form 1099-B, "Proceeds from Broker and Barter Exchange Transactions." A covered security includes most stock acquired in 2011 or later.  This will allow the IRS to match the basis reported on a return, and therefore, know if the taxpayer correctly reported the gain or loss.

The law requires the taxpayer to give the broker a "transfer statement" when stock is transferred to a broker and imposes a penalty on any transferor that fails to timely furnish a correct transfer statement to the receiving broker. In order to promote industry readiness to comply with the reporting requirements, the IRS just announced it will not assert penalties for a failure to furnish a transfer statement in 2011.  In effect, this means brokers will be reporting basis only for stock purchased through that broker.