This is one of the primary causes of delay in tax return filing. Every time you sell any type of listed security, be it an option, commodity contract, stock or mutual fund, the government requires the dealer through whom you made the transaction to report the sale and the gross proceeds you received from that sale.


Don't think that because you had a loss, or did not make a profit on the sale of securities that you won't have to report it. The IRS is only told by the broker about one side of the transaction - the part where you were sent money. Unless you report the other side of the transaction - what it cost you - the IRS will assume every dollar you were paid was taxable gain. Failing to report these transactions will result in an anpensive and time consuming notice about a year after you file a tax return.


You must prepare for the completion of your taxes by making sure you have this information. It is usually easy to obtain if it is not already in your position. We will charge you for the extra time to calculate this information at our regular rate of $350 per hour.


For example, if you bought stock XYZ in 2000 for $2000 and sold it in 2002 for $1000, the broker who did the sale for you will issue you a Form 1099-B which states you received gross proceeds of $1000.


Wait, you say, sure I received $1000 but I took a $1000 loss on the sale! This is true, and this is why obtaining all the information about the sale is so important. You see, the government only requires the broker to tell them how much money you received. It is up to you to tell the government how much you spent acquiring those securities. The term for what you paid for the security is called “basis.” It is straightforward for most securities, being the price paid. For mutual funds, however, it may be considerably more complex. I will discuss this later.


In our example, therefore, you must know and report the fact you bought stock XYZ on a certain date in 2000 and that you paid $2000. How do you know this? DO NOT RELY ON THE BROKER TO GIVE YOU THIS INFORMATION! Many brokerages include this information with the required gross proceeds information as a courtesy, but many brokers simply do not. In that case you will have to come up with this information yourself. Your own records are the best source, but frequently online accounts will have this information under some type of “tax” category.


In the next few years, from the 2012 tax year on, brokers will be required to provide much of this information, and your burden will be much less.


But do not assume all the required numbers have been provided! There are many exceptions which excuse the broker from providing the information you will need. For example, if you transferred securities from another account and the cost basis information was not also transferred, the broker is allowed to report the cost basis as "Not Available." This leaves you hanging and you will have to exercise due diligence to determine what the cost of the securities were.


Mutual funds present a special problem. Each year, a taxable mutual fund may spin off dividends, which are reinvested in additional shares of the fund automatically. You will pay taxes on these dividends in the year they are earned. Consequently, your “basis” in the funds is not only the initial purchase price but the amount of dividends earned each year upon which you have paid income tax.

  Another difficult situation requiring preparation is where a block of stock purchased at the same time is broken up and sold at different times. In this case, the cost basis must be divided between the multiple blocks sold. For example, if stock XYZ is purchased for $2000, followed by two sales, each consisting of half the stock, you will have to do some math to calculate the basis. Because the sales price will probably be different for each sale, the basis ($2000) must be divided in half and each half then applied to each sale separately to determine gain or loss.


It is very important to be aware of this information. Without it you will not be able to complete your tax return in a timely manner. If you want us to do it for youe, it will cost our regular hourly rate of $350 per hour. We do not like to waste my clients’ money, so we want to give you every opportunity to have this information available.


When you believe you have all the required data, you must be able to look at it and accurately determine the purchase price/date and the sales price/date of each security. This is the exact information required by the IRS!