New rule puts a wrinkle in figuring taxes on stock sales

[a kennedy]

By Matt Krantz

When investors check their brokerage websites or open their mailboxes over the next few days, they're about to find out who doesn't trust them anymore: the IRS.
As surprising as it sounds, investors have long been trusted to use the honor system when it comes to reporting the size of their gains and losses to the IRS when they sell an investment.

But all that changes now, due to the passage of the Emergency Economic Stabilization Act of 2008. For the first time, the annual tax forms investors receive, called the 1099-B, from their brokers will contain dramatic changes. Beginning with the just-completed 2011 tax year, it's up to brokers to track how much investors paid for stocks that were sold and report that information directly to the IRS.

This so-called cost basis is what determines how much tax investors pay.

The changes will be a huge shift for investors, who for decades have been used to tracking what they paid for stocks. Making things even more tricky, due to some nuances in the law as well as quirks in it being the first year of the new 1099-B form, investors should brace for some surprises in the forms that brokers must mail out by Feb. 15.

"The public at large has no idea what's about to come down the pike here. They're really going to be surprised," says Nico Willis, founder of NetWorth Services, which makes software to help investors track the information.

http://www.usatoday.com/money/perfi/taxes/story/2012-02-12/capital-gains-tax-statements/53061388/1

[Yupster]

1. That will be great going forward

It will be a nightmare now.

Lots of investors move their accounts to 3-4 different brokerage accounts over their lives as their brokers move or retire or quit.

Finding a cost basis right now is a nightmare. That's why the IRS has to trust investors. The IRS doesn't have any clue any more than the investor does.

Someone works for a company and buys $ 100 of their company stock every month for 30 years. He also reinvests dividends each quarter. Then he retires and 15 years later decides to sell $ 10,000 worth. So what is his cost basis? It would be a nightmare to figure it out even if you were able to. Many people have no idea at all.

The shares were gifted by Aunt Marge about 40 years ago who later died. With reinvested dividends and share splits, how in the world is the person supposed to know what she has in them? She owes tax on all the gain since Aunt Marge bought them, who knows when for who knows how much?

Another change I can predict is the loss of 401 k plans for small businesses.

Right now, brokerage companies are filling out huge amounts of new paperwork to keep their small business plans compliant for easy auditing under some new regulation.

These small business plans are very low profit items for brokers, and they take up a lot of time. With this extra paperwork, I predict it will get harder to get brokers interested in spending their time on them.