New Cost-Basis Reporting Rules

Short of an audit, the IRS has no way to know whether taxpayers calculated gains and losses on investment sales correctly, which prompted Congress to draft new requirements. Starting in 2011, investment providers have to report customers’ cost bases to the IRS on a 1099 form.

The new law takes effect at different times for different assets. Some must be reported beginning January 1, 2011, some beginning on January 1, 2012, and others beginning January 1, 2013. Further, the new law only applies to sales of investments that were purchased after January 1 of 2011, 2012, or 2013, depending on what type of asset it is.

If you don’t tell your broker which shares you would like to sell first, the law will choose for you, and it typically chooses FIFO (first-in, first-out). LIFO (last-in, first out) or HIFO (highest-basis-in, first-out) may be more beneficial standing orders for your situation, so make sure to share your preferences with your broker.

See Laura Saunders, New IRS Rules for Investors, W.S.J., Oct. 23, 2010.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this to my attention.