New Rules for Reporting Capital Gains, Losses

Dear Tax Talk,

I heard the brokers will report my capital gains and losses to the Internal Revenue Service. Do I still need to include those on my tax return?

- Nat

Dear Nat,

While there are new rules that require your brokers to report capital gain and loss on your traded accounts, the IRS will not automatically bill you for the tax on the gains. While brokers have for years reported the gross proceeds from the sale of securities, that information alone does not help the IRS determine if you're correctly reporting net gains and losses. The IRS hopes to narrow the tax gap by comparing what brokers determine to be your net gains and losses with what is actually reported by you.

For 2011, you'll need to complete form Schedule D and the new Form 8949 to report your capital gains and losses. Form 8949 looks like the old Schedule D or D-1, and I'm kind of baffled why they just didn't call it Schedule D-1. In any event, the main difference is that there are new columns, (b) and (g), on Form 8949. There are no separate Form 8949 instructions, but instead they're included in the 14 pages of Schedule D instructions.

While I can't possibly begin to summarize the instructions here, there are a few key observations. Brokers are not required to report basis for any stock in a corporation acquired before 2011. Stock sold is treated on first-in, first-out basis (longest-held shares sold first) unless you tell the broker to sell a particular lot of shares (specific identification).

A separate Form 8949 is required for three distinct types of short- or long-term gain and loss: No.1, those reported by the broker with basis, No. 2, those transactions reported by the broker without basis and No. 3, those not fitting either of the foregoing. A broker would have basis information if they made the purchase of the shares originally, but probably would not if you had the shares previously. If you sold a rental property, then you would have a No. 3 transaction.

Over the years as these basis rules are implemented, brokers will become better at recording basis for new and transferred shares, so there should be little need for reporting under No. 2. If you have capital gains and losses in 2011, then you have some new reading to do before filing your tax return. Good luck.

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