Form 8949 & 1099-B Issues
Securities traders face challenges with Form 8949 and 1099-Bs over cost-basis reporting.
Securities brokers are making advances in tax-compliance reporting. It’s due to Congressional legislation and implementation of IRS cost-basis reporting regulations for which phase-in commenced in 2011. Phase-in is almost complete:
- Options and less complex fixed income securities acquired on Jan. 1, 2014 or later were reported for the first time on Form 1099-Bs for 2014.
- Options and less-complex fixed income securities transferred from another broker on Jan. 1, 2015 or later were reported for the first time on Form 1099-Bs for 2015.
- Complex debt instruments acquired on Jan. 1, 2016 or later shall be reported for the first time on Form 1099-Bs for 2016.
- Complex debt instruments transferred from another broker on Jan. 1, 2017 or later shall be reported for the first time on Form 1099-Bs for 2017.
Form 8949 issues
Taxpayers report proceeds, cost basis, wash sale loss and other adjustments, holding period and capital gain or loss – short term vs. long-term (held over 12 months) on Form 8949. According to the form’s instructions, taxpayers without wash sale and other adjustments to cost-basis may simply enter totals from broker 1099-Bs directly on Schedule D and skip filing a Form 8949. After all, the IRS gets a copy of the 1099-B with all the details.
But this Form 8949 instruction leads many taxpayers and tax preparers astray with taxpayers thinking they don’t have wash sales when in fact they do have many to report in compliance with IRS wash sale rules for taxpayers, which differ from IRS rules for brokers.
Form 1099-B issues
In accordance with IRS rules for brokers, a 1099-B reports wash sales per that one brokerage account based on identical positions. The wash sale rules are different for taxpayers, who must calculate wash sales based on substantially identical positions across all their accounts including joint, spouse and IRAs. With different rules for brokers vs. taxpayers, it’s expected that in many cases broker-issued 1099-Bs might report different wash sale losses than a taxpayer must report on Form 8949. A broker may report no wash sales when in fact a taxpayer may have many wash sale losses. A taxpayer may permanently lose a wash sale loss between a taxable and IRA account, but a broker will never report that on a 1099-B. In some cases, a broker can report a wash sale loss deferral at year-end, but the taxpayer may have absorbed the wash sale loss in another account, thereby eliminating this tax problem at year-end.
This problem of different rules on wash sales for brokers vs. taxpayers is still widely unknown by many taxpayers and tax preparers. Far too many continue to file an incorrect Form 8949 relying solely on broker 1099-B reporting when they should be using securities trade accounting software to properly calculate and report wash sale loss adjustments.
A predicament for some tax preparers who do understand the problem is that calculating wash sales correctly leads to un-reconciled differences between Form 8949 and 1099-Bs. Some tax preparers don’t want to draw attention to those differences, fearing IRS notices generated from IRS 1099-B automated matching programs. It’s ironic that the mission of Congress in cost basis legislation was to “close the tax gap” providing more opportunities for matching 1099-Bs, but it may lead to a mess of un-reconciled differences. To better close the tax gap, Congress should realign broker and taxpayer wash sale rules to be the same.
There is one scenario where a taxpayer can solely rely on a 1099-B and skip filing Form 8949 by entering 1099-B amounts on Schedule D: when the taxpayer has only one brokerage account and trades equities only with no trading in equity options, which are substantially identical positions. Plus, the taxpayer must not have any wash sale loss or other adjustments.
This problem is biggest for individuals who tend to have multiple accounts. There is a solution for traders who qualify for TTS. Trade in an entity and elect Section 475 MTM, which is exempt from wash sale rules. Keep investment accounts with far less wash sale loss activity on the individual level.
Many tax preparers, including CPAs, import or attach broker 1099-Bs to generate tax return Form 8949; they don’t account for wash sales based on IRS rules for taxpayers. It’s become a widespread industry practice, and I have not heard about the IRS challenging it to date. If you plan to use this industry practice (at your risk), it’s wise to avoid wash sale loss conditions in the first place, so there are few gaps in broker vs. taxpayer rules. The crucial period is Dec. 1 through Jan. 31, covering the 30-day window on each side of year-end for triggering wash sales among taxable accounts. (That includes both spouses’ accounts on a married filing joint tax return.)
Consider our trade accounting service for securities traders, which includes the generation of Form 8949 with wash sale loss adjustments.
There’s a good reason why the media has turned to us on cost-basis reporting on securities and that’s because we have great experience in this complex and nuanced area of tax law. We had a hand in the following:
- Barron’s (1/17/15) “The Latest IRS Changes,” Be aware of some important additions to your 1099 forms as they begin to arrive from your brokers. (Electronic Investor), By Theresa Carey.
- Wall Street Journal (3/1/13) “When Your Broker ‘Outs’ You” (Tax Report), By Laura Saunders
- Barron’s (10/20/12) “Taxing Start for Brokers” (Electronic Investor), By Theresa Carey
- Wall Street Journal Blog (5/3/12) “IRS Delays Cost-Basis Reporting for Bonds and Options” (Total Return), By Laura Saunders
- Wall Street Journal (3/30/12) “Last-Minute Tax Tips” (Tax Report), By Laura Saunders.
- Barron’s (3/24/12) “Tax Filing on Trades: It May Pay to Wait” (Electronic Investor), By Theresa Carey
- Active Trader (3/27/12) “Traders face new tax-reporting requirements and problems with 1099-Bs”
- Wall Street Journal (3/14/12) “Dodging a ‘Cost Basis’ Crisis” (Getting Going), By Karen Blumenthal
- MoneyShow.com: “Tax Flubs That Can Cost You Thousands”