New Form 8949 and Schedule D Instructions

February 14, 2012— For those clients who will be reporting capital gains and losses from stocks, bonds, mutual funds and similar investments, the IRS has unveiled yet another tax form starting with the 2011 tax year. This newsletter summarizes the new form(s) and their impact on your tax return.

On October 3, 2008, in an effort to close the Tax Gap, Congress passed the Emergency Economic Stabilization Act. Section 403 of Division B of the act made cost basis reporting mandatory for brokers. Beginning in 2011, brokers are now required to keep track of cost basis for stocks; in 2012 for mutual funds, and in 2013 for options and other debt instruments. This information will be provided to the taxpayer (and the IRS) on form 1099-B. Form 1099-B shows the gross proceeds from stock sales as well as the cost basis associated with the sale. Also included is the date the shares were acquired, and whether the gain or losses are short or long term capital gains. Due to the added information on Form 1099-B, the IRS needed to change the way they report stock sales. This information will now be reported on Form 8949 along with Schedule D. Both of these forms will be filed with your Form 1040 tax return.

Why is the cost basis now required?

In 2006, the IRS reported to the Senate Finance Committee that 38% of individual taxpayers with securities transactions misrepresented their capital gains or losses in 2001. In that year alone - this misrepresentation accounted for $17 billion of the $350 billion total tax gap. Following this information, Congress enacted the above legislation in order to help close this gap and collect the missing revenue.

Previously, all that broker's provided to the IRS were the total proceeds from sales - only half of what is needed to calculate gains and losses. With the new requirements, the IRS will now receive two numbers for each trade in securities: total cost basis, and total sales proceeds. The difference will give the IRS an idea of what should be reported verses what is reported. This information will also aid as a red flag for audits - to identify "mistaken" capital gains and losses.

Why the new form?

Form 8949 - The Key Differences Between the New Form and Former Schedule D and D-1 Forms

New columns have been added.

Column (b) Code - the codes will be used for indicating if the transaction is a wash sale, section 1202 gain, or if the broker reported the cost basis is incorrect, and should correspond with an adjustment in column (g).

Column (g) Adjustments to gain or loss - this column will report if there is an adjustment to the transaction because of the wash sale rule, incorrect cost basis, or other tax rule adjustment.

Individual gain/loss is not calculated on this form. It is calculated on the new Schedule D form using the totals of sales, basis, and the new adjustments column.

Each transaction will fall into one of three categories:

  1. 1. Transactions which have cost basis reported on Form 1099-B,
  2. 2. Transactions that do not have cost basis reported on Form 1099-B,
  3. 3. Transactions not reported on 1099-B.

A separate Form 8949 will be required for each category. The appropriate box indicated on the top of the form will need to be marked (checked). In essence, this means that there will be one Form 8949 reporting capital gains and losses where cost basis is provided (Box A), with short term gains listed on page 1 and long term gains listed on page 2. There will be a separate Form 8949 reporting capital gains and losses with cost basis not provided (Box B) with short term gains listed on page 1 and long term gains listed on page 2. A third Form 8949 for reporting capital gains and losses where Form 1099-B was not received (Box C).

Totals from these separate Forms 8949 will be summarized on the newly revised Schedule D

Instructions on how to complete Form 8949 will be included in the 2011 Schedule D (Form 1040) instructions.

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