Just wondering what's going to happen when the new "cost basis" rules take affect in 2012, and a ton of stocks are not tagged with a current cost basis.
A lot of my stocks are of course from years ago, and I've never bothered updated the entries at Schwab with the initial cost basis.
So - wonder how these are going to be "reported" if/when I sell any of the shares ? Also - wonder how big a dart board I need to come up with a high cost basis so as to reduce any future cap gains ;)
The same thing that happened from the beginning of the income tax until 2011 -- the taxpayer has to compute and report basis.
Note also that even in 2011 and after you may have to compute basis. There are many things that could happen (like a wash sale across brokers) that would render incorrect and in need to revision by you the basis reported by a broker.
Well, you should start figuring it out.
They'll either be reported with a zero basis or an unspecified basis (I don't recall what the law says) and it'll be up to you to compute and substantiate (if challenged) that basis.
Uncovered securities are those you're describing - ones for which the broker had no obligation to track (e.g. stocks purchased before this year, fund shares purchased before 2012, etc.). The broker is thus not obligated to report a cost basis for uncovered securities.
The tax law change is primarily a reporting one for the brokers; as Rich points out, the ultimate responsibility to get the figures right (as with a wash sale) is yours.
With that in mind, an item I haven't seen commented on anywhere from the taxpayer's perspective concerns average cost of covered and uncovered shares.
Brokers are permitted to start averaging fund shares with 2012 purchases. As a courtesy, most will continue reporting your average cost of earlier (uncovered) shares, as a separate average. For example, you may have 100 shares purchased in 2011 @30 (so the broker tells you your avg cost is $30 for those shares), and you purchase another 100 shares @35, and those are officially tracked at $35 (average).
But that seems to have little bearing on what you, the taxpayer, are supposed to report. The average cost of your 200 shares is $32.50. Are you supposed to report two different average share costs, just because the broker did (which as we've seen, can easily be wrong for various reasons), or are you supposed to report the true average?
I'd like to believe the latter - it would be consistent with the taxpayer being the one ultimately responsible, especially for uncovered securities. But I've seen nothing written on this.
Mark Freeland
The amended Section 1012 allows the financial institution to elect to average the pre-effective date holdings with the post-effective date holdings. So... I assume you have to call your broker or mutual fund company and ask them what they are going to do. In addition, under the old rules you could not average your cost in stock purchases. Cost averaging only existed for mutual fund shares. Under the new rules, DRP stock (shares purchased and held in a Dividend Reinvestment plan) can be averaged. The companies can also elect to average the pre and post holdings of DRP stock.
Even though non DRP stock can not be cost averaged, there is a minor exception under the new rules. You may average the cost basis of different lots of identical stock purchased on the same day as long as it was a single trade order and you get a single confirmation with the total cost. You may choose to not average the different lots.
The IRS has a whole bunch of FAQs at:
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