As brokers and investors are all too aware by now, IRS Form 1099-B, on which brokerage transactions are reported, has a new look this year.
“With respect to the cost basis shown on trades, clients are often confused by wash sale/disallowed losses and the resulting basis adjustments to replacement securities,” Susan Hartman, an attorney and senior tax and estate planning consultant with Raymond James & Associates, says.
Hartman, who is responsible for educational and technical financial planning support, says, the 2012 version of Form 1099-B—reporting transactions from 2011—is “definitely causing a stir.” This year’s 1099-B contains information on the cost basis of some stocks sold, for the first time. Hartman is hearing from Raymond James financial advisors, asking how to respond to clients’ queries as well as their complaints.
That is, clients who sold a security at a loss but repurchased it too soon may not understand why an expected capital loss will not be reported on their 2011 tax return. “They might have been counting on using the loss to offset the tax on capital gains,” says Hartman. “Some have even asked their advisors to reimburse them for the extra tax they’re having to pay.”
What can advisors tell such unhappy clients? Advisors can point out that the disallowed loss is added to the basis of the replacement security, Hartman explains. The higher basis, in turn, will add to the capital loss or reduce the taxable gain when the replacement security is sold without a wash sale. Thus, the capital loss is not “lost” by the wash sale, but merely deferred.
“Of course, we advise clients to chat with their tax professional about these changes,” Hartman told On Wall Street. “However, clients still expect their investment advisors to be able to explain all the changes.”
“Advisors and clients are also questioning FIFO [First-In, First-Out] as the default method for dispositions,” says Hartman. If part of a position is sold, the oldest lots will be the ones treated as sold, for tax purposes, under this first-in, first-out method. If those old lots were low-cost lots, the tax may be substantial.
“FIFO will be used unless the client has instructed us, in writing, at the time of the sale, to sell other tax lots,” says Hartman. With such instruction, a high-cost lot can be sold, for a smaller gain or a larger loss. If the new Form 1099-B is causing advisors to make such explanations, more clients may be likely to follow through with written instructions to specifically make tax-efficient decisions on future sales.
Donald Jay Korn writes for On Wall Street.