GainsKeeper Blog

On December 16, 2009, the IRS issued proposed regulations on cost basis reporting by brokers (the Proposed Regulations—REG-101896-09). The Proposed Regulations address key details regarding cost basis reporting for stock, dividend reinvestment plan stock and mutual fund shares, including permitted lot selection methods, optional reporting of pre-effective date (uncovered) shares, wash sales and other basis adjustments and other important rules.

There is no de minimis rule or general exception for wash sales related basis adjustments under the Proposed Regulations. And there is no exception from reporting for investors that have elected mark-to-market tax reporting. Thus, brokers would need to process wash sales adjustments in almost all cases. The Proposed Regulations do not address basis reporting for debt instruments or options and indicate that related guidance for these securities types will be released at a later date. The regulations would permit brokers to optionally report on pre-effective date securities or optionally report other basis adjustments on covered securities. It is notable that the Proposed Regulations would require brokers to provide corrected 1099's (without any de minimis exception) if transfer or issuer corporate action information is corrected. The regulations would also eliminate the double category averaging method of calculating basis presently available for mutual fund shares.

The Proposed Regulations also address transfer reporting and issuer reporting of corporate actions. The Proposed Regulations are clear that issuers, transfer agents, professional custodians and other persons involved in the issuance and holding of securities are subject to transfer reporting regardless of whether such persons are involved in sales of securities. Special rules apply regarding the reporting of cost basis on the transfer of gifted or inherited stock. The Proposed Regulations would permit issuers to report corporate action information on their primary public websites and do not contemplate a central repository for such information.

Along with the regulations, the IRS also issued a related press release and a draft Form 1099-B (both available at costbasisreporting.com). Note that the draft Form 1099-B would require brokers to report disallowed wash sale losses.

Significantly, the Proposed Regulations do not include any delay in the effective dates for cost basis reporting.

The Proposed Regulations are not binding on taxpayers and generally provide for prospective effectiveness to transactions occurring after the date final regulations are published or the effective dates for cost basis reporting set forth in the law (Jan. 1, 2011 for stock acquired and Jan. 1, 2012 for mutual fund and DRP stock acquired). Final regulations may not be published for several months or more and their provisions (including effective dates) could differ, possibly substantially, from the terms of the Proposed Regulations. Brokers and others have expressed concern regarding the need for immediate guidance and the delay in the issuance of final regulations.

The IRS has solicited comments on the Proposed Regulations and will consider comments received in drafting final regulations. Comments are due by February 8, 2010.

Stevie

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