Tag Archives: cost-basis

Form 8949 & 1099-B Issues

August 10, 2014 | By: jparasole

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 and was completed in 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 merely 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. Congress skipped this issue with the “Tax Cuts & Jobs Act.”

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.

Industry Practice

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.)

For more in-depth information on Form 8949 & 1099-B Issues, see Wash Sale Losses and reaGreen’s 2018 Trader Tax Guide.

Consider our trade accounting service for securities traders, which includes the generation of Form 8949 with wash sale loss adjustments.

Caution, downloading securities Form 1099-Bs into TurboTax often leads to incorrect tax filings

March 4, 2013 | By: Robert A. Green, CPA

By Robert A. Green, CPA and Darren Neuschwander, CPA

April 10, 2013 postscript: A securities Form 1099-B often has an amount listed in box 5 “wash sale loss disallowed.” For an active trader, it’s typical to see a large number in box 5, but don’t be alarmed by that amount. The box 5 amount represents wash sale losses disallowed throughout the entire year. It’s not the amount of 2012 wash sale losses that are deferred to 2013, which amount is generally far less or even zero. This latter amount is what taxpayers are most interested in as it’s the amount that affects their tax liability. The box 5 number may count the same deferred wash sale loss over-and-over again as the wash sale loss is kicked down the road in active trading throughout the year. The same wash sale loss is added to cost basis over-and-over again, too. The box 5 amount is like the below example for “wash sale loss disallowed for the year.” 

March 12, 2013 postscript: We added new content under the heading “Potential wash sales” toward the bottom of the blog to better explain this term.

March 13, 2013 TradeLog Blog Tip: Important Functions for Option Traders

We were quoted on this topic in the Wall Street Journal article ”When Your Broker ‘Outs’ You” (Tax Report), By Laura Saunders (March 1, 2013). Excerpt: Check 1099-Bs for mistakes. Robert Green, an accountant who heads GreenTraderTax, a tax preparer for more than 1,000 investors, urges taxpayers to double-check brokerage cost-basis reports against their own records. “Often the 1099-Bs don’t match trading logs,” he says, especially for frequent traders. In some cases, he has seen income over- or understated by $10,000 or more. Problems arise most frequently with wash-sale reporting, he says. Investors subject to the new reporting should think twice before filing early, says Mr. Green’s partner, Darren Neuschwander. Last year, some clients received five corrected versions of the same 1099-B, he says. Early indications are there will be many corrected forms this year, too, he adds. 

Many taxpayers and tax preparers are taking a dangerous short cut on their 2012 tax return preparation. They are downloading brokerage firm “profit and loss” reports used to prepare securities Form 1099-Bs into TurboTax and other consumer tax preparation software programs. While this sounds like it would ease the tax preparation process and lead to better tax return accuracy, it’s actually a bad idea.

Securities 1099-Bs are apples and your tax return is oranges
Securities brokerage firm profit and loss reports and their Form 1099Bs are prepared by brokerage firm accountants and IT people to meet the brokerage firm’s tax compliance rules with the IRS. As it turns out, the IRS rules for taxpayers are very different from brokerage firm rules. Doesn’t that sound incredulous? Aren’t 1099s supposed to be tax information statements sent to clients and the IRS — statements taxpayers can rely on for their tax preparation? It turns out that is not always the case. While it is with Section 1256 contracts, W-2s and 1099-INT (interest), it’s not with 1099-Bs for securities. There were many errors on 2011 securities Form 1099-Bs; we are waiting to see if 2012 1099-Bs are better. Stay tuned for our updates coming soon.

How did this mess happen?
Before 2011, Form 1099-Bs for securities reported proceeds on equities to the IRS, and nothing else (including but not limited to cost-basis, wash sales and options). Lots of taxpayers conveniently omitted options and wash sale loss deferrals at year-end, and they overstated cost basis on appreciated stock received by gift where they need to use the donor’s cost basis.

In 2008, Congress instituted mandatory “cost-basis reporting” for brokers to implement on their 1099-Bs starting with 2011, with phase-in through 2014. Now brokers report a lot more tax information to the IRS, which will rein in the tax cheats. But where does that leave honest taxpayers who need to comply with these onerous cost-basis reporting rules written for tax cheats? Honest taxpayers are stuck between a rock and a hard place! They can either rely on 1099-Bs and potentially botch their taxable income/liability, or consider the 1099-B probably incorrect and report accurate taxable income. Even if brokers followed all the IRS rules, their 1099-Bs would in many cases be wrong for taxpayers because of apples and oranges in the rules. Shouldn’t these IRS rules be recalled and fixed?

Online brokers botched 1099-Bs in 2011
Full-service Wall Street bank brokers have handled realized gain and loss reports reasonably well for decades, but they did not account for wash sales in the past. They weren’t caught on their heels with the IRS cost-basis reporting rules. Even now, they still can’t calculate wash sales across multi-brokerage firm accounts.

But online brokers are struggling with IRS cost-basis reporting and many are still botching the rules. To be fair, we haven’t seen a large crop of 1099-Bs yet for 2012, but we aren’t expecting huge strides of improvement over 2011. We think many brokers are still going their own way with their IT people and we expect vastly different reporting and layout from different online brokers causing confusion for taxpayers and tax preparers.

Wash sales are one of the biggest culprits
One of the biggest causes of divergent reporting are wash sale losses. If you reenter trade 30 days before or after selling a trade at a loss, it’s a wash sale loss deferral. You need to report that wash sale on Form 8949 and also add it to the cost basis of the position that triggered the wash sale.

Brokers report wash sales based on “identical positions” on a “per account” basis. Due to the phase-in rules starting in 2011, many brokers only picked up wash sales on 2011 securities purchased, not wash sale deferrals carried over from 2010.

But the IRS requires taxpayers to calculate wash sales based on “substantially identical positions” which means between stocks and options, and options at different strike dates across all accounts in the tax identification number. Notice the glaring differences here. Identical positions vs. substantially identical positions and per account vs. across all accounts with the same id number. Taxpayers have a much broader universe to consider on wash sales and no one 1099-B can do that.

When you download into TurboTax, TurboTax doesn’t do it either. TurboTax merely relies on taxpayer input and downloads; it doesn’t calculate wash sales on its own. If the broker pushes bad 1099-B data into TurboTax and TurboTax runs with that data as is, where does that leave you, the taxpayer, on your proper tax compliance?

Substantially identical means between Apple stock and Apple options, including different strike dates. Apple stock and Google stock are not substantially identical. Its one symbol and the derivatives of that symbol, but even that’s not the full story.

Across all accounts with the same taxpayer identification number means the husband’s accounts, wife’s accounts, joint accounts and husband or wife’s IRA accounts. Many taxpayers still don’t know that an IRA can trigger a wash sale loss deferral in a taxable account, and that realized loss will be permanently lost. No broker can ever calculate wash sales across multiple brokerage accounts and they don’t even do it across various husband and wife accounts within their same brokerage firm. Wash sales aren’t always bad, though. A business trader with a capital loss limitation can convert a year-end 2012 wash sale loss deferral into an ordinary business loss on Jan. 1, 2013 by making a Section 475 MTM election for 2013.

File a correct 8949 and match the totals to 1099-Bs
Some clients want to download from their broker into TurboTax just to generate a Form 8949 with cost-basis reporting that will better match their 1099-B. They figure it will reduce the chance of audit or IRS questions. But that’s a problem for accuracy of taxable gain or loss. (The problem we are talking about is downloads of profit and loss reports, otherwise referred to as downloads of Form 1099-Bs. They are one in the same.)

We prefer to use TradeLog to handle all taxpayer rules correctly, including cost-basis reporting, downloading items not yet covered on 1099-Bs like options and much more. TradeLog downloads from brokers, but they download the actual trade history — the debits and credits matching trade confirmations on a trade date basis. TradeLog’s Form 8949 often has material differences with the 1099-B, so we enter an adjustment number so the Form 8949 totals match the 1099-B and it doesn’t awaken IRS computers. Our firm’s policy is we can’t rely on 1099-Bs for accurate tax information and we can’t rely on a TurboTax generated Form 8949. Some clients don’t like an adjustment number on Form 8949 with footnote explanation and they want to try the 1099-B download into TurboTax. In these cases, we run TradeLog too to point out differences.

Most brokers haven’t issued their 2012 1099-Bs
Most brokers have not yet issued their 2012 Form 1099-Bs for securities. They had to wait until the end of January to be certain about wash sale losses as Dec. 31, 2012, due to the 30-day rule. 1099-Bs should come late again this year and we expect many corrected 1099-Bs to be issued afterward as well. Brokers issued up to five corrected 1099-Bs for 2011 all the way up to the extended tax deadline of Oct. 15, 2012.

There is no “hard deadline” for when a corrected Form 1099-B must be issued. This IRS documenthttp://www.irs.gov/pub/irs-pdf/i1099gi.pdf (page 5) provides that “if you file a return with the IRS and later discover you made an error, you must correct it as soon as possible.”

In some cases, the securities 1099-B will be okay
In one case recently, we noticed a leading online broker did a better job on the 2012 1099-B than they did in 2011. They did wash sale calculations during the year and added wash sales to cost basis. There were no open wash sales at year-end 2012.

While the line-by-line reporting appeared reasonable — and it could be entered to a Form 8949 as such — the totals at the bottom could cause confusion and errors. The online broker showed total “wash sale loss disallowed” at the bottom of the 1099-B in the amount of $1.3 million. The realized gain and loss total showed a loss of $1.6 million. There was no guidance saying to combine all those numbers for the correct $300,000 loss for the year, and there were no open wash sale deferrals at year-end. Plenty accountants still use summary reporting (even though they should not), and these accountants could be confused with the above 1099-B totals.

TradeLog did a better job. It clearly showed the net $300,000 loss and no open wash sales at year-end. Its wash sale calculations were different during the year and that’s not an issue for this client because both the online broker and TradeLog got it right for the year overall.

For files with open wash sales and other issues, the minefield of problems just begins.

“Potential wash sales”
In our guides, blogs, videos and webinars we often use the term “potential wash sales.” For 2012 tax compliance, it’s more appropriate to paraphrase what one leading online broker writes on the bottom of its 2012 Form 1099-Bs: “total disallowed wash sale losses during the tax year.”

See the example under the heading “In some cases, the securities 1099-B will be okay” above. The Form 1099-B displays total wash-sale loss deferrals during tax year 2012 and labels it “wash-sale loss disallowed.” This total may be correct in that it adds up all wash-sale loss disallowances during the year, and the broker added wash-sale losses to cost-basis on subsequent or prior purchases within the 30-day window.

We think the large wash sale totals are deceiving to some accountants and taxpayers because brokers don’t explain it. For example, highly active traders could easily generate a total wash-sale loss deferral amount over $1 million on a small trading account. While the actual realized capital gain or loss might be small along with year-end wash sale losses, the total wash-sale loss disallowed during the tax year may be very high. In these cases, focus on the line by line details on the 1099-B and not the summary numbers.

Don’t believe us? Pin down your broker
Ask any online broker if they are willing to indemnify you for misreporting wash sales based on importing their Form 1099-B information. We would be shocked if they said they would. Ask them to give their answer in writing. They will confirm much of what we write above and lay off the tax compliance responsibility to you and your tax adviser. Well, we are your tax advisors and we just told you we have a big problem here!

Why are brokers encouraging their clients to use TurboTax to download their 1099-Bs? 
It’s a very simple answer: Brokers want clients to import their tax information rather than find unreconciled differences and potential errors through TradeLog or other software using trade history. This happened a lot in 2011 and clients overwhelmed the online brokers’ customer support lines asking for investigation and corrected 1099-Bs.

Some differences may be legitimate like corporate actions (i.e., stock splits), which TradeLog asks you to enter manually. Others are due to differences in the IRS cost-basis rules for brokers vs. clients. Other questions are about the confusing Form 8949 with covered, non-covered and other parts and boxes. Online brokers are working off tight margins with rock bottom commissions and they aren’t set up to handle this onslaught of questions on beefed up tax compliance.

Where does this leave you? 
Once again, on your own. Don’t take the short cut and download your Form 1099-Bs — with all its problems, differences and errors — into TurboTax or another consumer tax preparation solution.

Download trade history into TradeLog and consult with our TradeLog accounting experts when the results appear confusing. Run the TradeLog 1099-B reconciliation, show the gross reconciliation differences with 1099-B proceeds and cost-basis at the bottom of the Form 8949 and explain it all in the tax return footnote we provide on our blog and in Green’s 2013 Trader Tax Guide.

For all of these reasons, we are filing extensions for our securities traders. S-corporation extensions are due March 15, 2013 and individual and partnership extensions are due April 15, 2013. If you have any questions about this problem, visit our cost-basis reporting section, read Green’s Trader Tax Guide and consider a 30-minute consultation with Robert Green, CPA. You can also sign up for one hour of TradeLog accounting time with one of our TradeLog accounting experts.

Visit our cost-basis reporting section for more information.

Disclosure and disclaimer: 
TradeLog is a third-party software product owned by a third-party company Armen Computing Ltd. Green & Company, Inc. features TradeLog on its Website GreenTraderTax.com and is the number one reseller of TradeLog, for which it receives a sales commission. Green NFH, LLC CPAs prefer to use TradeLog because they want to be sure Form 8949 or Form 4797 is correct when they sign tax returns. While Green NFH, LLC CPAs and tax attorneys help Armen Computing with TradeLog, Armen Computing is the sole owner of TradeLog and is responsible for the product. Green NFH, LLC is working with TradeLog and other software companies to find a better solution to the problems laid out here. 

Cost-Basis Reporting Problems and Solutions

November 20, 2012 | By: Robert A. Green, CPA

If you trade or invest in securities, you need to learn about “cost-basis reporting,” a new set of IRS rules for taxpayers starting with 2011 tax filings. Previously, taxpayers could simply enter their capital gains and losses (proceeds, cost basis and holding period) onto Schedule D of their individual income tax return. That’s no longer allowed, so 2011 and 2012 tax returns are proving to be a challenge.

Under the new cost-basis reporting regime, taxpayers must decipher broker-provided Form 1099-Bs. In tax years prior to 2011, taxpayers and their accountants could easily use a Form 1099-B to enter proceeds from each securities sale on their Schedule Ds. Taxpayers then entered their own record of cost-basis information and they were finished. Investors often looked up the original purchase price in an earlier brokerage statement and considered stock splits or other corporate actions, which are rare. Active traders generally used software like TradeLog, which downloaded all trade executions and provided an easy-to-use Schedule D-1 attachment.

You would think that when brokers entered the picture providing cost-basis information to taxpayers and the IRS on Form 1099-Bs, taxpayer compliance would be easier. You would be very wrong! (I explain this problem in an interview for MoneyShow.com: “Tax Flubs That Can Cost You Thousands“.)

Take one look at your 2011 Form 1099-B and you will see the problem. While stock proceeds may look the same as prior years, the new cost-basis information is extremely confusing. Some brokers mark cost information with quirky new codes like P (provided to the IRS), N (not provided to the IRS) and W (wash sales). Some brokers do not provide totals for the amounts they are reporting. Plus there are covered securities, non-covered securities and other. All individual trades must be entered on the new 2011 tax form 8949, which includes Parts A (proceeds and cost basis both reported to the IRS), B (proceeds reported to the IRS but not cost basis) and C (other or not reported on a 1099). Separate Form 8949s must be filed for short term and long term. Add it up: That’s up to six different categories on the Form 8949s instead of the single Schedule D required in the past. This is a huge burden and is very confusing for taxpayers.

That’s just a fraction of the problem. Many brokers are using back-office accounting solutions that may botch wash-sale reporting, since they have not focused on it much in prior years, and some are omitting 2010 wash sale cost basis deferred into 2011. Also, most brokers rushed 1099-Bs to the printer before doing an end-of-January wash-sale calculation. In addition, the rules brokers are required to follow for 1099-B reporting are different from the rules for taxpayers: Most brokers report wash sales between “identical positions” (the same symbol only), whereas taxpayers are required to report wash sales between “substantially identical positions” (such as between stocks and options). How can the IRS ask brokers and taxpayers to report wash sales differently? Even if brokers get everything right, broker-provided wash sales would still be wrong because they only report wash sales in one account, whereas a taxpayer must report them across all taxable accounts, including IRAs.(For more details, see our March 20 blog.)

Using a 1099-B for wash sale reporting is a big mistake. IRS cost-basis reporting rules state that taxpayers should not rely on 1099-Bs for tax reporting purposes. What? (Read more about this concept on our Aug 16 12 blog - Why do forex forward dealers issue 1099s, yet retail spot forex brokers do not?) 

Phasing in the rules seems to be part of the problem. While the IRS phased in the new rules for brokers, it did not do so for taxpayers. The IRS is giving taxpayers the difficult job of deciphering all the inevitable discrepancies between 1099-Bs and Form 8949 results.

What should you do?
We suggest reading our blogs on this saga to understand the new IRS rules, how 1099-Bs are constructed and how you should handle Form 8949. We recommend using software like TradeLog and filing an extension.

For the 2011 tax-filing season — which ended on the extension deadline of Oct. 15, 2012 — IRS relief never came, and most brokers were not able to sufficiently correct their 1099-Bs. We filed 2011 tax returns as explained in our blogs below, and attached a suggested footnote explanation.

  • Aug 29 12 An update note to tax preparers and traders about incorrect 1099-Bs and 2011 tax filings
  • Aug 17 12 Tax Return Footnote: 2011 Form 8949 and Cost-Basis Reporting Rules
  • Jul 11 12 Cost-Basis Reporting Update: How To File Form 8949 With 1099-B Differences

Ways to avoid Form 8949
Business traders qualifying for trader tax status are entitled to elect Section 475 mark-to-market(MTM) accounting on a timely basis (by April 15, 2013 for the 2013 tax year). Section 475 business trades are reported on Form 4797 Part II (ordinary gain or loss) and not on Form 8949. Although Section 475 extricates traders from the compliance headaches of Form 8949, it does not change their preferred solution. Either way, traders should use TradeLog software to download their trades and calculate their required trade-by-trade gain or loss. Another way out of Form 8949 is to use an entity, which we recommend for business traders to reduce red flags on trader tax status. The IRS does notcurrently use Form 8949 on entity tax returns.

We recommend a Section 475 MTM election for business trading in securities only. We don’t recommend Section 475 MTM for Section 1256 contracts – which you are permitted to exclude from the Section 475 MTM election – so traders don’t lose lower 60/40 tax rates (currently up to 12% less). Don’t worry, Section 475 MTM is not permissible on segregated investments, so traders can enjoy tax deferral at year-end, and also hold for 12 months to generate lower long-term capital gains rates (currently up to 15%). Section 475 MTM reports both realized and unrealized gains and losses at year-end.

Be prepared for similar problems for 2012 returns
More cost-basis reporting items will be phased in for 2012 returns. Per Fidelity’s “Frequently asked questions about cost basis”: “On January 1, 2012, the second phase of the cost basis tax reporting requirements goes into effect. This next phase impacts reporting of securities eligible for average cost including mutual funds, exchange-traded funds (ETFs) classified as registered investment companies, and dividend reinvestment plans (DRIPs).” We are working on mutual fund bifurcation tax issues, and we plan to publish a separate blog on that subject soon.

We expect some brokers to compound wash sale loss problems from 2011 into 2012. If brokers only report potential wash sales in 2011 and 2012, they may not connect the years and related wash sale loss reporting problems, although that reporting is basically useless to taxpayers. Conversely, if brokers report overstated 2011 wash sales as part of 2012 cost basis, it will lead to overstating cost-basis in 2012, which then will lead to understating taxable income. We won’t know if this will happen until our CPAs start seeing 2012 Form 1099-Bs. Stay tuned. 

An update note to tax preparers and traders about incorrect 1099-Bs and 2011 tax filings

August 29, 2012 | By: Robert A. Green, CPA

Many tax preparers and traders have put 2011 tax return filings on hold, awaiting corrected 1099-Bs from securities-broker clearing firms. Unfortunately, many clearing firms are struggling and they simply can’t provide a 1099-B that tax preparers can rely on. How should preparers and traders proceed, considering that 2011 extended tax returns are due Sept. 17 for pass-through entities and Oct. 15 for individuals?

Taxpayers can’t hold out for corrected 1099-Bs any longer; they probably will never come. By law, taxpayers are responsible for reporting their securities trading gains and losses correctly on Form 8949, no matter what shape their 1099-B is in. If the broker has botched the 1099-B, it may help a taxpayer seek abatement on late-filing and late-payment penalties, but it won’t excuse taxpayers from reporting their trading gains and losses and paying the taxes they owe, including interest if late.

When taxpayers receive an incorrect Schedule K-1, they can file a Form 8082 “Notice of Inconsistent Tax Treatment” when they report a different amount or different tax treatment. But Form 8082 is not necessary with botched 1099-Bs in connection with the new IRS cost-basis reporting rules.

Our firm ended the tax-filing bottleneck a month ago. It’s time to start filing 2011 tax returns and to go with the army you have. That means using TradeLog software for trade accounting and any available broker profit and loss reports if they are in good shape and they can help you double-check TradeLog.

We work with the most recent “corrected” Form 1099-B our clients received, but mostly just to reconcile the totals and explain the differences on Form 8949 and in our tax return footnote. We published an example tax return footnote for TradeLog accounting on our blog dated Aug. 17, 2012.

We know key departments of the IRS are aware of the cost-basis reporting problem, and the AICPA has asked the IRS not to issue tax notices and exams when Form 8949s and 1099-Bs don’t match up. We asked the IRS for this same relief in our Petition to Congress. But we don’t know if it will honor this request. So, in the TradeLog tax return footnote, we explain that Form 8949 totals do reconcile with Form 1099-Bs after making the adjustments. That’s why we want the last corrected 1099-B available.

Tax preparers: We suggest you use TradeLog and our footnote, and consult with us if you have questions. Otherwise, you need to resign your account. It’s not fair to keep a client waiting, because they could be hit with large penalties, interest and tax bills that don’t make any sense. See our cost-basis reporting resources for more background information.

Cost-Basis Reporting Update: How To File Form 8949 With 1099-B Differences

July 11, 2012 | By: Robert A. Green, CPA

Join noted trader tax CPAs Robert A. Green and Darren Neuschwander, Managing Members of Green NFH, LLC for their “Webinar on July 17, 2012″ (or watch the recording afterward) as they discuss the latest IRS cost-basis-reporting developments for securities traders. Green and Neuschwander will discuss the below FAQs, show tax return examples, explain our rationale, and show traders and professionals how best to proceed on this challenging issue.

The background
Many securities traders filed 2011 tax extensions and they are awaiting our guidance on how to file their tax returns containing differences between trading profit and loss on Form 8949 and broker-issued 1099-Bs. The differences are sparking IRS tax exams. Most clearing firms struggled to issue multiple corrected 1099-Bs, and many of those still got it wrong. See our recent Webinar on ““Botched 1099-Bs, Form 8949 Differences, Tax Prep Tips, Extensions & MTM Elections”” (Mar. 28, 2012).

Many traders already filed their 2011 tax returns based on 1099-B reporting and overpaid their taxes by thousands of dollars. They should learn how to fix the errors and file amended tax returns to get refunds.

Wash sales are a big problem
1099-Bs grossly overstating wash sales seem to be the biggest culprit for errors — we saw this to the tune of millions of dollars on one taxpayer’s Form 8949. Oddly, many brokers inappropriately adjusted gross sales proceeds for wash sales adjustments, when they should have only adjusted cost basis. Many brokers reported ““potential” wash sales” in cost-basis, rather than actual wash sales, which are much lower.

FAQ this Webinar will address:

1. Question: Is it safe to file a 2011 individual income tax return/Form 8949 containing differences between your own trading profit and loss and amounts reported on Form 1099-Bs?

Answer: Instructions for Form 8949 ask for trade-by-trade reconciliations of proceeds and cost-basis, comparing your own accounting results with Form 1099-Bs. That’s almost impossible to do for active traders with botched 1099-Bs, which seems to be par for the course on 2011 tax filings.

The only good securities trade-accounting solution that we know of is TradeLog. While TradeLog can reconcile total proceeds and cost-basis from Form 8949 to Form 1099-B amounts, it does not have the capability to reconcile each line-by-line or trade-by-trade amount to Form 1099-B. TradeLog shows the total reconciliation difference for gross proceeds and cost-basis on Form 8949. It’s the “plug” number the IRS’s computerized 1099-B matching programs look for.

These Form 8949 unreconciled amounts vary greatly. Some are under $1,000 and others are in the millions, especially when potential wash sales versus actual wash sales are involved.

While we often have some good clues or ideas on what contributes to material unreconciled differences, we can’t be certain since it’s only a total difference rather than a line-by-line difference. It can take weeks of work to figure it out. Plus, it’s often a wild goose chase with no concrete results generated.

Rationale for our answer: Since Form 8949 instructions ask for a reconciliation of differences, we display them — no matter how big or small — on Form 8949. We use the reconciliation feature in TradeLog. Some clients and tax preparers may decide to skip the TradeLog step to avoid showing a huge reconciliation item on Form 8949, thinking that may reduce the chances of an IRS exam. We disagree, as the Form 8949 instructions ask for the reconciliation, and with that plug number, the Form 8949 will match the 1099-B when the IRS runs the computerized matching program. Not showing the reconciliation may indicate the preparer is unaware of the rules and that may cause the IRS to think the return is otherwise flawed, too.

We believe it’s a mistake to delete the plug number reconciliation difference from Form 8949. The IRS could construe it to mean a tax preparer is obstructing IRS oversight and disrespecting its new cost-basis reporting rules. That’s unwise. Bottom line, leaving in the reconciliation amount helps with matching and it complies with the rules.

2. Question: What happens if the IRS audits the trader over Form 8949?

Answer: If you’re examined by the IRS, plan to give the agent your TradeLog reports, brokerage statements, and Form 1099-B. Let the agent spend weeks comparing these documents. They will see TradeLog is correct and the 1099-Bs are sliced and diced with errors. This won’t cost the client much money or time, since the CPA does little work during the exam. The IRS can fool around on its dime and time.

If you get this type of tax notice, contact us for help. We will try to get the exam “reconsidered” and point the IRS back in the direction of the broker, who it should examine instead of the trader. This only takes a few hours of our time, so it doesn’t cost much.

3. Question: How should I deal with these unreconciled differences throughout the tax return filing?

Answer: You should highlight the differences from Form 8949 vs. 1099-B footnotes, and perhaps supporting worksheets. There’s no reason to try and bury them. The taxpayer and tax preparer should clearly state what steps they took in: doing their securities trade accounting; how they prepared Form 8949; how they reconciled with the 1099-B; and what the unreconciled differences might be — as best as they can explain it. Accountants would be foolish to try and cover up a problem or not comply with these rules. We suggest that tax preparers obtain representation or acknowledgement letters from clients about this problem and process, too, so there are no misunderstandings about scope and outcome later on.

If the unreconciled difference is under $1,000, you can probably skip long-form footnote explanations; a simple note on how you used TradeLog or other software should suffice. (TradeLog offers a footnote to use as well, explaining what it does and does not do in this regard.)

4. Question: How do I e-file a tax return with a Form 8949?

Answer: If you e-file your individual income tax return, we generally paper file the Form 8949s with attachments of the TradeLog reports and related footnotes. The transmittal form is Form 8453.

E-filings for individuals currently don’t permit PDF attachments, making the separate Form 8453 filing necessary. Although we can import TradeLog files into our software, we choose not to because there are other complications that can arise.

5. Question: Does the IRS require taxpayers and tax preparers to investigate unreconciled differences between Form 8949 and 1099-Bs? If yes, do they need to explain those differences on their tax return?

Answer: The IRS cost-basis rules call for taxpayers and tax preparers to “verify” Form 8949 to their 1099-Bs. But, verifying information like inaccurate wash sales perpetuates tax problems. The term “verify” indicates taxpayers and preparers should be sure the underlying trade information is correct, like comparing Form 8949 to actual trade confirmations. Unfortunately, 1099-Bs rarely agree with trade confirmations for 2011.

6. Question: Where do we find more information on known issues on Form 1099-Bs?

Answer: Both TradeLog and GreenTraderTax provide resources on known issues with various brokers on their 1099-Bs. “Click here”. Do your best to explain as many difference in general that you can and include that in a few sentences in the footnote. We may show some examples on the Webinar.

7. Question: Do traders have to keep pressing their brokers to correct 1099-Bs?

Answer: No, but they should try their best to do so — that earns points with the IRS.

One of our clients spent 40 hours of his time finding every individual difference and he presented all the evidence to his online broker. He forced his broker to fix every error on the 1099-B. That client’s Form 8949 now has no differences.

Few clients have the time to do this. If you find some errors, try to get your broker to issue a corrected 1099-B to narrow the unreconciled differences. But, in the end, it could prove to be frustrating, time consuming, and the broker may not cooperate. Make an attempt and document it in your footnotes.

8. Question: How can I avoid this Form 8949 mess in the future?

Answer: Consider forming an entity for business trading and investing in securities. Currently, entities don’t file a Form 8949. See our recent Webinar on ““The Best Entities for Traders and Investment Management Businesses.””

Individual business traders who elect Section 475 MTM file their trades on Form 4797, not on Form 8949. That solves the problem for business trades, but you still need Form 8949 for segregated investments. You can house both in an entity. Section 475 MTM is exempt from wash sale loss treatment. Caveat: It must be elected by April 15 of the current tax year. New taxpayers can elect it within 75 days of inception.

Or, trade futures and other Section 1256 contracts which are reported in summary fashion on Form 6781, rather than on Form 8949. Futures are not subject to wash sale treatment. See our recent Webinar on ““Tax Benefits from Trading Futures & Section 1256 Contracts.””

Commentary
Is this an example of government overreach and regulation with poor thinking? Why ask brokers to spend time and money compiling more information for IRS consumption when the aggregated information is going to be incorrect (wash sales)? Aggregation is for the old economy with manual work, not the new high tech world. The IRS could have simply asked brokers to include an annual statement in the same manner as a monthly statement, containing all debits and credits for buys and sells of capital assets. It wouldn’t have needed to phase-in the rules, causing great additional confusion.

Are local tax preparers, including CPAs, subjecting themselves to professional liability claims and IRS preparer penalties? Shouldn’t their professional liability insurance carriers insist they not take the apparent easy way out by relying on 1099-Bs? We hear most accountants start tax preparation by importing 1099-Bs into their tax software after scanning them with OCR recognition. They are baking inaccurate tax information into their cake. Verifying afterward that their tax software used the 1099-B correctly misses the point because the ingredients are wrong to begin with. We help accountants select and use the proper solutions — TradeLog and more — for this filing crisis. We are currently evaluating another software solution for finding differences and we should report on this soon.

Who should attend the Webinar?
If you trade securities, or have a client who does, don’t miss this important Webinar. This crisis is huge and most accountants, tax attorneys, brokerage firms, software providers and the media are short changing and under-reporting it. The IRS wants to close the tax gap, but, causing taxpayers to overpay taxes by perhaps a billion dollars in connection with these inaccuracies isn’t the answer. We see this huge crisis as an ethical issue for the IRS, Congress, brokers, and accountants.

Please sign our petition
We will update our Petition to Congress soon calling on the IRS to recall or repeal these poorly crafted rules. We’ll suggest that the IRS ask brokers for an annual statement of all buys and sales. Don’t ask taxpayers to file a Form 8949 until brokers have filed the annual statement on the 1099-B correctly for several years and the IRS has consumed it properly. This is a very simple data dump, and we don’t need the extra cost and confusion. The cost-basis crisis is a microcosm of the entire government vs. private section economy. Use computers to exchange data and take all the people — middle men accountants and rule makers — out of it.

We asked Congress for IRS relief in our last Petition ““Securities Traders Need Tax Relief on IRS Cost-Basis Reporting Rules”” on RallyCongress.com and through other initiatives. Please sign it today. The IRS recognizes only a fraction of the problem, and it provided fractional relief. Specifically, to delay the 2013 phase-in rules one year to 2014 for cost-basis reporting on options and debt instruments. We’re urging the IRS to rethink the rules and start over right. Is this why our tax code is an abomination of complexity?

Watch a MoneyShow video interview with Robert A. Green, CPA on this subject from the June 2012 Traders Expo Dallas: “Tax Flubs That Can Cost You Thousands”.

Consultations
If you have further questions or need our help in addressing your personal situation, consider a consultation with us. We have a summer promotion on “consultations” and “entity formation services”.

TradeLog Accounting Services
We offer “TradeLog accounting services” which include preparation of your Form 8949, dealing with the unreconciled differences as best we can in short order, and preparation of your related footnotes. If you have a local CPA, engage us to handle this difficult part of your tax return — your local CPA will really appreciate it.

Bottom line
Don’t file an incorrect tax return and over pay your taxes by thousands of dollars, due to botched wash sale reporting, or other 1099-B errors. And, don’t cause yourself an unnecessary IRS exam, either. Get informed, use the right software solutions, and get help from trader tax experts who understand the nuances of cost-basis reporting.

Form 8949: What To Do About Tax Problems For Reporting Securities Trades

June 28, 2012 | By: Robert A. Green, CPA

P.S. We expanded on this blog to include Questions and Answers for our upcoming Webinar on this subject. See our blog dated July 11, 2012.

This is an important update on the cost-basis reporting crisis, Form 8949 and dealing with botched 1099-Bs.

Join noted trader tax CPAs Robert A. Green and Darren Neuschwander, Managing Members of Green NFH, LLC for their Webinar on July 17, 2012. (or watch the recording afterward) as they discuss the latest developments and solutions for the continuing IRS cost-basis-reporting filing crisis.

The background
Many securities traders filed 2011 tax extensions and they are awaiting our guidance on how to file their tax returns containing material unreconciled differences between trading profit and loss on Form 8949 and broker-issued 1099-Bs. The IRS is very keen on these differences and it can cause tax exams. Most clearing firms struggled to issue multiple corrected 1099-Bs, and many of those still got it wrong.

Many traders already filed their 2011 tax returns based on 1099-B reporting and overpaid their taxes by thousands of dollars. They should learn what’s wrong and file amended tax returns to get refunds.

1099-Bs grossly overstating wash sales seems to be the biggest culprit for errors — we’ve seen this to the tune of millions of dollars. We may have found a tax law inconsistency in regulations versus code; the cost-basis regulations require wash sale reporting, but the Internal Revenue Code 6045(g) does not don’t require wash sale reporting, only to adjust basis for wash sales. It’s better for brokers to skip wash sales entirely, rather than report them grossly wrong on 1099-Bs. Only taxpayers have access to all of their brokerage accounts and know their own elections, which are required to calculate wash sales correctly.

Questions this Webinar will address
Is it safe to file a 2011 individual income tax return containing material unreconciled differences in cost-basis reporting? How should you present those differences on Form 8949? Should you highlight the differences with good tax return footnotes and supporting worksheet explanations, or should you try to bury the differences in the return? How should you comprise those footnotes and supporting worksheets?

Does the IRS require taxpayers and tax preparers to investigate unreconciled differences between 1099-Bs and Form 8949 and explain them on the tax return? The IRS cost-basis rules call for taxpayers and tax preparers to verify Form 8949 to their 1099-Bs. But, doesn’t verifying information like inaccurate wash sales perpetuate tax problems? Shouldn’t the term “verify” indicate taxpayers and preparers need to be sure the underlying information is correct, like comparing it to actual trade confirmations?

Is this an example of government overreach and regulation with poor thinking? Why ask brokers to spend time and money compiling more information for IRS consumption when the aggregated information is going to be incorrect (wash sales)? Aggregation is for the old economy with manual work, not the new high tech world. The IRS could have simply asked brokers to include an annual statement in the same manner as a monthly statement, containing all debits and credits for buys and sells of capital assets. They wouldn’t have needed to phase-in the rules, causing great additional confusion.

Are local tax preparers, including CPAs, subjecting themselves to professional liability claims and IRS preparer penalties? Shouldn’t their professional liability insurance carriers insist they not take the apparent easy way out by relying on 1099-Bs? We hear most accountants start tax preparation by importing 1099-Bs into their tax software after scanning them with OCR recognition. They are baking inaccurate tax information into their cake. Verifying afterward that their tax software used the 1099-B correctly misses the point because the ingredients are wrong to begin with. We help accountants select and use the proper solutions for this filing crisis. It’s TradeLog for preparing Form 8949 and some other solutions for finding and explaining 1099-B differences.

If you trade securities, or have a client who does as a tax preparer, don’t miss this important Webinar. This crisis is huge and most accountants, tax attorneys, brokerage firms, software providers and the media are short-changing and under-reporting it. The IRS wants to close the tax gap, but, causing taxpayers to overpay taxes by perhaps a billion dollars in connection with these inaccuracies is not the answer. We see this huge crisis as an ethical issue for the IRS, Congress, brokers, and accountants. Yes, we have an excellent business in fixing these problems, but we wish we didn’t have to.

We will update our Petition to Congress soon calling on the IRS to recall or repeal these poorly crafted regulations and rules. We’ll suggest to the IRS that they just ask brokers for an annual statement of all buys and sales. Don’t ask taxpayers to file a Form 8949 until brokers have filed the annual statement on the 1099-B correctly for several years, and the IRS has consumed it properly. This is a very simple data dump, and we don’t need all the mis-aggregation, confusion, red tape and extra cost. The cost-basis crisis is a microcosm of the entire government vs. private section economy. Use computers to exchange data and take all the people —middle men accountants and rule makers — out of it.

We asked Congress for IRS relief in our last Petition ““Securities Traders Need Tax Relief on IRS Cost-Basis Reporting Rules”” on RallyCongress.com and through other initiatives. The IRS recognizes only a fraction of the problem, and it provided very fractional relief. Specifically, to delay the 2013 phase-in rules one year to 2014 for cost-basis reporting on options and debt instruments. We’re urging the IRS to rethink the rules, see the flaws, recall the rules and start over right. Is this why our tax code is an abomination of complexity?

Watch a MoneyShow video interview with Robert A. Green, CPA on this subject from the June 2012 Traders Expo Dallas: Tax Flubs That Can Cost You Thousands.

See smoking guns on botched 1099-Bs from securities brokers in our Mar. 28 Webinar recording

March 28, 2012 | By: Robert A. Green, CPA

Our March 28 Webinar shows smoking guns on botched 1099-B reporting from brokers, apples and oranges in the rules between brokers and taxpayers and why it’s irresponsible to file a complete tax return based on these 1099-Bs. Any accountant who signs a tax return with these unreconciled differences is skirting on the edge of malpractice. Don’t rush to file a return with these errors and problems. The early bird won’t get the worm; he may get audited by the IRS.

See our three important Webinars on cost-basis reporting herehttp://www.greencompany.com/EducationCenter/Trader-Tax-Center/Cost-Basis-Reporting.shtml#webinars

In the March 28 Webinar, our TradeLog chief accountant shows a 1099-B reporting more than $50 million of incorrect wash sale loss deferrals because the broker reported potential wash sales rather than actual wash sales. TradeLog, however, reports the correct wash sales amount of under $20,000. TradeLog prepares Form 8949 and shows this $50 million plus net “adjustment,” really an overall difference, including the wash sale errors. We think it’s foolish to file a tax return with that type of large difference — it will surely attract undue attention from the IRS. Why not force the broker to fix the wash sale reporting first? Few brokers will reply to these requests before April 15.

See how a second broker’s 1099-B doesn’t match TradeLog’s cost-basis reporting information. We simply can’t trace the broker’s cost basis amounts to any correct raw data in TradeLog — which downloads actual trades — and we can’t imagine what the broker did wrong here. We know brokers sliced and diced raw data into all sorts of categories in an attempt to comply with new IRS rules and we’ve seen several cases of bad accounting, where brokers adjust proceeds when they should adjust cost-basis and vice versa. Watch us demonstrate how this same broker provided the client with a “Realized Gain or Loss Report” in his 1099-B Supplemental Information (a section that is not sent to the IRS). This report continues a perpetuation of the unexplained errors stated above. If the client relies on this report, his tax return will be very wrong.

We usually don’t name names, but we do for these two large online brokerage firms. It’s time they fess up.

While TradeLog software is the best solution in most cases, you need to teach it how to handle your broker’s 1099-Bs. There are many switches to turn on or off so TradeLog can simulate how your broker handled the cost-basis reporting rules. If you find differences, this is the first place to revisit. For example, did your broker report all ETFs or just securities ETFs (RICs)? The latter is correct. As we explain on the Webinar, it’s not uncommon to find download errors which require correction. Plus, TradeLog doesn’t calculate corporate actions — you need to calculate those by hand.

This year more than ever before, you need a trained TradeLog accountant and CPA firm like Green NFH, LLC to review your TradeLog data files, your accompanying Form 1099-Bs and other Supplemental Information provided with 1099-Bs. On almost every file to date, we’re finding incorrect accounting items that require our assistance, investigation and adjustment. Don’t waste days or weeks pulling your hair out; get the help you need from a person highly experienced in finding the differences.

File a valid extension by April 17 to give us six more months to get this right. We can help with your extension if you sign up for our tax preparation service very soon. Otherwise, Robert Green CPA can consult you on your extension before April 17. Don’t forget about the very important Section 475 MTM election due by April 17 with the extension filing, too. For information on extensions and Section 475, see our March 10th blog.

Our Petition to Rally Congress is having impact! 559 People Have Sent 1,323 Letters and Emails. We need 20,000 signers and 50,000 letters and emails. Please sign, and also share it with others. 

Petition: Securities Traders Need Tax Relief on IRS Cost-Basis Reporting Rules

March 26, 2012 | By: Robert A. Green, CPA

Green’s Forbes blog version: Time For Congress To Iron Wrinkles Out Of IRS Cost-Basis Reporting Rules.

Please read, sign and send our petition posted on RallyCongress.com. To get relief from Congress and the IRS, we need your help. Please spread the word with all traders and investors.

Overview:
New “cost-basis reporting” rules for 2011 are not functioning properly. Botched implementation is unfairly causing millions of taxpayers to significantly overpay their tax bills. The IRS should have issued the same set of rules for brokers and taxpayers, but did not. How can the IRS now send tax notices and audits to hundreds of thousands of taxpayers over 1099-Bs prepared under one set of rules, while holding taxpayers accountable to another set of rules? Taxpayers did not sign up to be deputy accountants for this mess!

Full Petition:

Dear Congressman:

As an investor in securities, I need your help on my 2011 tax return. The IRS has phased in “cost-basis reporting” rules on broker-provided Form 1099-Bs, in accordance with Section 403 of “The Emergency Economic Stabilization Act of 2008” enacted by Congress on Oct. 3, 2008.

Implementation of the cost-basis reporting law has turned into a huge mess for honest taxpayers. Leading CPA firms for securities traders have reported that the new 1099-Bs are very hard for taxpayers and even CPAs to decipher.

I’m asking you to please direct the Treasury and IRS to:

• Not match 2011 individual tax return filings to flawed Form 8949s and botched 1099-Bs, prepared under a different set of rules than what taxpayers must follow;

• Reconcile cost-basis reporting rules for brokers and taxpayers;

• Waive tax notices for Form 8949 reconciliation differences with 1099-Bs for 2011 returns; and

• Grant valid extensions prepared in good faith dealing with these problems.

For example, many brokers incorrectly calculate wash sales on 1099-Bs by reporting “potential wash sales” rather than actual wash sales. Often a potential wash sale goes away when a trader eventually does not buy the position back at year-end or within a 30-day window, or absorbs the loss on subsequent profitable trades. With these error-prone 1099-Bs, many taxpayers are reporting nonexistent wash sale loss deferrals and that raises their tax bills considerably.

For 1099-B preparation, the rules are not the same for brokers and individuals, either. Brokers report wash sales based on “identical positions” (stocks only), whereas taxpayers must report wash sales based on “substantially identical positions,” which means between stocks and options, too. Tax year 2011 is the first that many brokers are making an attempt to report wash sales, and the IRS may be relying on 1099-Bs to match tax returns. The wash sale issue is extremely botched and worthy of hitting the reset button.

Look at a bunch of 2011 Form 1099-Bs and you will see the scope of this tax-reporting crisis. Brokers are adjusting cost-basis when they should adjust proceeds and vice versa. Congress and the IRS should have required “standardization” in application of the new rules and they should have also used the same rules for both brokers and taxpayers. It’s not fair to blame the brokers completely, as they were under great pressure to deal with guidance which came late from the IRS. Wash sale analysis must be cut off on Jan. 31, so how can brokers issue Form 1099-Bs by Feb. 15? There isn’t time. These rules need to be rethought.

Phasing in the rules for brokers but not for taxpayers has also made the tax compliance gap greater. Brokers only report cost-basis for purchases of securities in 2011, which leaves out wash sale losses deferred from 2010, again short-changing taxpayers who rely on 1099-Bs.

The new individual tax form 8949 is a nightmare for taxpayers and preparers. It has Parts A, B and C and covered vs. non-covered and reportable vs. non-reportable items. All brokers handle them differently. For example, ETFs that are Registered Investment Companies (RICs) are reportable, whereas commodities ETFs that are publically traded partnerships (PTP) are not. I imagine you can’t even prepare your own tax return based on these rules.

I thought a 1099-B was a “tax information” statement to help me prepare my tax returns. Why does the cost-basis legislation state a taxpayer should not rely on a 1099-B?

I’m using reputable trade-accounting software, which downloads my transactions and calculates correct trading gains and losses, including wash sales across all my accounts. But, it’s almost impossible to reconcile that correct trade accounting to the botched 1099-Bs and Form 8949. I am filing an extension, so I can wait until Oct. 15 for your help here.

For more background on the scope of this problem, I suggest visiting http://www.greencompany.com/EducationCenter/Trader-Tax-Center/Cost-Basis-Reporting.shtml

Thank you for your cooperation and help.

Sincerely, 

Brokers are only reporting potential wash sales, not final wash sales

March 20, 2012 | By: Robert A. Green, CPA

Postscript March 4, 2013. Important update about the term “potential wash sales.” We explain this term in a better way on our updated blog dated March 4, 2013 Caution, downloading securities Form 1099-Bs into TurboTax often leads to incorrect tax filings. Look for the heading “Potential wash sales” towards the bottom of the blog.

See our Cost-Basis Reporting area in our Trader Tax Center for more content, blogs, Webinars, Video and our Petition to Congress.

During our March 20 Webinar, we realized that many brokers only seem to report “initial wash sale loss deferrals” (potential wash sales), rather than final “wash sale losses.”

Brokers’ 1099-Bs list individual wash sale losses and then total wash sale loss amounts, often in the hundreds of thousands, or even millions. That’s simply impossible in most cases, because many traders have far less money in their accounts to begin with. Final wash sales can’t be higher than the account size. We now have a better understanding of how this problem arose.

Potential wash sales are only half the story. Trade-accounting software like TradeLog follows a wash sale condition from beginning to end. Often, when a wash sale loss is triggered, it goes away when the trader sells replacement positions at a large enough gain to absorb the deferred wash sale losses. Wash sale losses are added to cost basis on the replacement position. Another way to make wash sale losses go away is to “break the chain” on a string of wash sale losses, by not buying back a substantially identical position for 30 days before, or after.

Here’s an example: A trader day trades X stock every trading day of the year and loses money on most of those trades. He stops trading on Dec. 15 and does not trade again until Jan. 25. The trader triggered wash sale loss conditions on most days of the year. This trader broke the chain of wash sales on Dec. 15 by selling all his positions, and not buying any of them back until after 30 days. The result is zero wash sales for 2011 taxes. Unfortunately, his broker will probably report every one of the potential wash sale losses and total them up, too. A trader cannot use this 1099-B wash sale information as it’s only half the story on wash sales.

See our last blog for more information on cost-basis reporting, and several other problems with wash sale losses on 1099-Bs. 

IRS, why force taxpayers to reconcile securities-broker 1099-Bs to tax returns, when your rules are apples vs. oranges?

| By: Robert A. Green, CPA

See our Cost-Basis Reporting area in our Trader Tax Center for more content, blogs, Webinars, Video and our Petition to Congress.

Green’s Forbes blog version: Who Can’t Count, The IRS Or Your Broker?.

Contrary to public perception, securities brokers’ cost-basis reporting on 1099-Bs rarely matches taxpayers’ net trading gain or loss generated from their trade accounting program. This is because the IRS gives brokers one set of rules for preparing 1099s and gives taxpayers an entirely different set of rules.

Why the difference? The IRS does not ask securities brokers to report net taxable gain or loss on 1099-Bs, but they require taxpayers to do that on the new Form 8949 for 2011 tax returns.

The apples and oranges in the rules are counterintuitive to taxpayers, causing great confusion and extension filings. Historically, the IRS led taxpayers to believe the idea of 1099s was to confirm a taxpayer’s income or loss and to provide a means for IRS computers to check up on taxpayer compliance. Sometimes, the IRS matches net income — one example is with Section 1256 contracts. And other times it reconciles with proceeds — such as with securities. But the new 2011 rules require brokers to report cost basis on 1099-Bs, too.

Some of the problem is due to phase-in and transition. Securities brokers report 2011 cost basis on stocks only. (A few brokers elected to report 2010 cost basis on 2011 1099-Bs, too, even though it wasn’t required.) In doing so, brokers’ systems left out wash-sale deferral cost basis from 2010. That means out of the gate, 1099-B 2011 wash sale reporting is incorrect. If 1099-Bs botch wash sales, how can cost-basis reporting be correct for 2011? It can’t. This issue may be better in 2012, when brokers report 2011 and 2012 cost basis.

A wash sale example
If you bought and sold stock symbol X on Dec. 22, 2010 for a material loss, and you repurchased that same stock symbol on Jan. 18, 2011, it’s a wash sale. But, your broker probably did not report the deferred wash sale loss cost basis; it likely only reported the actual purchase price on Jan. 18, 2011. If you report on your taxes the figures from your broker’s 1099-B, you will overstate your 2011 capital gains and that wash sale loss from 2010 will be lost forever.

1099Bs were rushed out too early, yet too late for tax season
Proper wash-sale reporting must have a cut-off date of the end of January, which is 30 days after year-end. How else can you tell if there is a wash sale on Dec. 31? 1099-Bs must be issued by Feb. 15. That leaves just 15 days to do the accounting, make corrections, send PDFs to printers, mail them on time, and deal with great confusion on the new cost-basis reporting rules.

For 2011 1099-Bs, many brokers filed for a 30-day extension until March 15. But S-Corps file by March 15, and there’s only one month left until the April 15 individual tax deadline. Sure, individuals can file extensions, but they owe 90 percent of their taxes on that date for valid extensions. Otherwise, they are subject to penalties.

There simply isn’t enough time to get this all right. Something has to give.

Corrected 1099s are not the answer
Some brokers issued their 1099-Bs by Feb. 15, knowing they will likely have to issue corrected 1099-Bs later on. It takes more time to figure out wash sales and income allocations — like return of capital vs. dividends. We don’t like this practice, since corrected 1099-Bs cause confusion with taxpayers. Too many taxpayers wind up using the wrong 1099-Bs on their tax filings. Some taxpayers rush to file early for refunds, and have to return the money later on with amended tax returns.

Who is at fault? 
Cost-basis reporting is a major new initiative from the IRS, and a new demand on securities brokers. In prior blogs, I pointed out many discrepancies on Form 8949 trying to reconcile trade accounting with 1099-Bs. The differences are large, and I was quick to blame securities brokers for botching some reporting, especially wash sales. But, many of the differences are attributable to brokers following one set of rules written for 1099-Bs, and taxpayers dealing with another set of rules. Plus, the IRS causes more confusion with “covered” vs. “non-covered” securities and brokers confuse things by including some non-covered items in covered. In retrospect, I think it’s more the fault of the IRS system than the brokers, who themselves are struggling with these new demands. It’s one thing to make an error and another to follow the rules and then have problems over apples and oranges.

While the IRS may have a laudable goal in mind, due to the phase-in transition, mixed-up cut-off dates, and apples and oranges between brokers and taxpayers, it’s a minefield of confusion. Instead of improving taxpayer compliance, it could get worse for 2011 with these new rules.

IRS, please don’t require taxpayers to reconcile differences
The IRS caused this mess, so it should not force taxpayers to explain the line-by-line differences on Form 8949. We ask that the IRS simply accept trade accounting as is, and only match proceeds on securities as it has done in prior years. Don’t try to match the unmatchable cost basis for 2011. If the IRS doesn’t waive matching, it will send hundreds of thousands of nasty tax notices to taxpayers. That will lead to great expense and very upset taxpayers. Perhaps, matching will get easier for 2012 tax returns, so we can reassess at that time.

Why are 1099B rules different? 
Brokers prepare 1099-Bs based on detailed rules from the U.S. Treasury. While these rules might resemble tax-filing rules for taxpayers, they are often very different. In my next blog, I will explain how some forex dealers issue 1099s for Section 1256 contracts on forex forwards. Yet, taxpayers must start with Section 988 ordinary gain or loss and they are only entitled to Section 1256g lower 60/40 tax treatment if they file a contemporaneous internal election, and with other conditions as well. This Section 1256 contract 1099 is prepared by the broker with realized and unrealized gains and losses, but taxpayers only report realized ordinary gain or loss if they remain in Section 988. If you ask brokers about this problem, they will explain they are not responsible for a taxpayer’s tax return filings — they only need to follow detailed 1099-B rules for a default investor, without any regard for their client’s facts, circumstances, tax and accounting treatment, or elections. How would a broker know about internal elections, anyway?

Wash sales are bound to be wrong
When it comes to wash sales, there are a multitude of things that can and will go wrong, and that messes up cost basis and reconciliations for securities traders (unless they use Section 475 MTM and are exempt from wash sales).

First, many brokers are using back-office tax-accounting solutions that may botch wash-sale reporting, since they have not focused on it much in prior years. Second, there is the cost-basis rules transition problem mentioned earlier, with brokers omitting 2010 wash sale cost basis deferred into 2011. Third, most brokers rushed 1099-Bs to the printer before doing an end of January wash sale calculation (covered earlier). Fourth, most brokers report wash sales between “identical positions” (the same symbol only), whereas, taxpayers are required to report wash sales between “substantially identical positions” (such as between stocks and options). How can the IRS ask brokers to calculate wash sales according to identical positions only and taxpayers by substantially identical position? Even if brokers could get all the above right, broker-provided wash sales would still be wrong because brokers only report wash sales in one account, whereas a taxpayer must report wash sale analysis across all taxable accounts, including IRAs.

TradeLog is the answer for tax reporting
Don’t get side tracked with broker-provided 1099-Bs and other reports for your tax return preparation. Securities traders need TradeLog to download and match all their trades. TradeLog generates a Form 8949 attachment, but don’t be alarmed by a large discrepancy between this and your 1099-Bs. Those differences are due to the problems mentioned here and many more not listed in this blog. TradeLog calculates wash sales correctly.

Full disclosure, we sell TradeLog on our site and receive a commission. We sell TradeLog because it’s the only program on the market that our CPAs trust, and we have to sign tax returns, subject to preparer penalties, too. TradeLog works well because it’s a third-party solution that downloads trading transactions directly from your broker through a filter.

Broker accounting
Back-office system providers — like Scivantage Maxit (for ScottTrade and others), Broadridge Aspire (for Penson), and Sunguard — integrate their enterprise solutions into their brokerage firm clients’ platforms. Enterprise solutions are part and parcel with brokerage firm reporting; they’re set up to generate 1099-Bs for the firm, not the taxpayer’s net trading gain and loss reports.

We spoke with Cameron Routh of Scivantage. Mr. Routh has been involved with securities trade accounting software and brokers for a long time, and he is a wealth of knowledge when it comes to these problems. Mr. Routh explained that Scivantage and other enterprise solutions integrate with brokerage data systems to generate brokers’ 1099-Bs and other reporting, based on brokerage firm rules, not a taxpayer’s rules. While traders can retrieve a Sciadvantage utility to generate a 2011 Form 8949, it won’t have 2010 cost-basis information and that means it won’t have wash sale deferral carryovers, either.

Even Mr. Routh agrees that the best solution for a trader in 2011 is TradeLog, run separately from the broker.

Single account election
Mr. Routh pointed out that brokers were given the choice to make a “single account election” to report cost basis more accurately, including prior year cost basis. Most brokers declined this election, because they don’t want to bite off more than they can chew. Brokers don’t have sufficient information on hand for prior year accounting method (FIFO, special identification, average cost basis) and more. With older positions, firms would have to go back a very long time and that’s asking for trouble.

Phase-in problems will continue
More items become covered securities in 2012 (mutual funds) and 2013 (stock options). So, expect the same types of transition problems with these items in the future.

Bottom line
In the spirit of “closing the tax gap,” Congress asked the IRS to do cost-basis reporting. Like all things legislative, it looked much easier on the design board. Regulations were difficult and late, and implementation uncovered the poor design. Like all major undertakings, this one needs some tweaking. But, please IRS, don’t take this out of the hide of taxpayers. Waive the matching for a few more years, until this is in better shape. There shouldn’t be so many huge gulfs; please don’t force taxpayers to be the accountants when dealing with this mess.