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Jan, 2011
New Cost Basis Rule Takes Effect in 2011

A new federal law that takes effect on January 1, 2011, is designed to ensure accurate reporting of capital gains or losses on stocks, mutual funds, and other financial instruments.

Previously, when an investor sold a position in a security or a fund, the investor's financial firm was required to report only the sale proceeds to the investor and to the Internal Revenue Service (IRS). It was typically up to the investor to track the cost basis (i.e., how much the investor paid for the security) and to calculate the capital gain or loss, and the resulting tax liability, for income tax purposes.

What Will Change

Financial institutions will be required to report the cost basis of securities purchased on or after January 1, 2011, on Form 1099-B, which typically is made available to investors in January of the following year. The expanded Form 1099-B will specify whether a gain or loss was short term or long term, which influences tax treatment. Short-term gains are taxed at ordinary income tax rates. Long-term gains are taxed at 15% through December 31, 2012.

For 2011, the reporting requirement will not pertain to stocks acquired through a dividend reinvestment program (DRIP) or to regulated investment company (RIC) stocks.

  • Effective January 1, 2012, the cost basis reporting will be expanded to cover mutual funds, RIC stocks, and stocks acquired through DRIP programs that are acquired on or after January 1, 2012.
  • Effective January 1, 2013, the cost basis of bonds, options, warrants, rights, derivatives, and commodities purchased on or after January 1, 2013, will be covered under the new rule.
What You Can Expect

Most financial institutions will use first-in, first-out (FIFO) as the default tax lot identification method for equities and average cost for mutual funds and DRIP-eligible securities. But you should check with your provider before making this assumption.

The new reporting does have a number of benefits for investors. First, you'll gain a more complete picture of your cost basis, which may simplify your year-end tax preparation. You'll also gain greater flexibility in specifying the lots you're trading, and you'll be able to select the cost basis reporting method you prefer. Lastly, you'll be able to continue to track cost basis when you make a transfer.

Your financial professional and tax professional can help you understand the new law and its benefits.

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©2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement

Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.