The 2008 Emergency Economic Stabilization Act (commonly referred to as TARP) set out new rules for cost-basis reporting. The changes are in three phases with the first starting on 2011 tax filing. Broker-dealers must now send a 1099-B to every client and the IRS for all transactions purchased after January 1, 2011. The form has details on the purchase date, cost basis, holding period, whether it is covered, and any disallowed losses.
Since this is a new form there will be a tremendous amount of confusion for investors. Brokers are gearing up for a rash of questions. Charles Schwab has already written a paper about the new form. The hope is to help investors navigate the new rules.
The first phase sets the default method for calculating cost-basis as first in-first out. The investment can set up the accounting with an alternative method at purchase but it can not be altered at the time of the sale. This will require advisers and investors to consider their tax strategy at the time of purchase.
Next year in phase two, brokers must report cost-basis information for all dividend investment and mutual funds purchased after January 1, 2012. The third phase begins on January 1, 2013 and required cost-basis reporting for fixed income and options investments.
If you have any questions on the new forms you should contact your accountant or broker. The changes are significant and you will need to consider the tax implications when new investments are made.