This price is used to determine capital gains or losses and therefore be able to assess tax liabilities. A new cost basis reporting law was issued by the U.S. Department of the Treasury and the Internal Revenue Service (IRS) in December 2009, and went into effect on January 1, 2011.
A new section of the Code reflects changes in the law made by the Energy Improvement and Extension Act of 2008, relating to reporting sales of securities by brokers and determining the basis of securities.
The regulations require brokers reporting the sale of covered securities to the IRS via Form 1099-B to include the customer's adjusted basis in the sold securities and to classify any gain or loss as long-term or short-term. A "covered security" is a specified security that was acquired through a transaction in the account on or after the applicable date, or was transferred to the account from an account where it was a covered security, but only if the broker received the required transfer statement from the transferor. A "specified security" includes stocks, mutual funds, debt instruments, options, commodities, derivatives, and any other financial instrument that the IRS determines that adjusted basis reporting is appropriate.
The effective dates for the new law vary by type of security:
- Stocks: January 1, 2011
- Mutual funds or shares acquired via a dividend reinvestment plan (DRIP): January 1, 2012
- Any other specified security: January 1, 2013 (or a later date determined by the Secretary of the Treasury)
- As of May 2, 2012, the IRS announced that it is extending the effective date for debt and options to January 1, 2014 from January 1, 2013
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Changes in the law also alter and expand the ability of taxpayers to compute basis when averaging the basis of shares acquired at different prices.
Changes in the law also alter how brokers report short sales of securities, which will now be 1099B reportable in the year they are covered.
