Reporting Capital Gains on Assets Acquired After 2011
Understand how IRS cost basis reporting requirements for assets acquired after 2011 affect the way you calculate and report your investment gains and losses.
When you sell an asset for more than you paid, you have a capital gain, while selling for less results in a capital loss. These capital assets include investments like stocks, bonds, and mutual funds. This article details the tax reporting process for assets acquired after December 31, 2011, a date that changed how these transactions are reported to the IRS.
The Significance of the Post-2011 Acquisition Date
The date January 1, 2012, is notable for capital gains reporting due to a 2008 law that changed how financial institutions handle investment data. This law mandated that brokers report the cost basis of securities to both investors and the Internal Revenue Service (IRS), a rule designed to simplify tax reporting.
This requirement introduced “covered securities,” which are assets subject to these mandatory reporting rules. The rule applied to stocks acquired on or after January 1, 2011, and to mutual funds, exchange-traded funds (ETFs), and shares from dividend reinvestment plans (DRIPs) acquired on or after January 1, 2012. Because of this, for these assets acquired after 2011, your broker is required to report their cost basis.
Understanding Your Form 1099-B
After the tax year, your broker sends Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which summarizes your investment sales. It includes the gross proceeds from each sale, the acquisition date, and the sale date. These dates determine if a gain or loss is short-term (held for one year or less) or long-term (held for more than one year).
The cost basis of the securities you sold is also on Form 1099-B. For assets acquired after the 2011 cutoff, this basis is reported to the IRS by your broker. You can confirm this by checking Box 12 on the form, which will be marked if the basis was reported to the IRS, indicating it is a covered security.
If the cost basis is not provided, the security is considered “noncovered,” meaning it was acquired before the mandatory reporting rules took effect. In this situation, you are responsible for determining and reporting the cost basis from your own records.
Calculating and Reporting on Form 8949 and Schedule D
You report the sales from your Form 1099-B on Form 8949, “Sales and Other Dispositions of Capital Assets.” The structure of Form 8949 is designed to align with your 1099-B, separating transactions based on whether the cost basis was reported to the IRS.
Transactions with a cost basis reported to the IRS are entered on Part I for short-term sales or Part II for long-term sales. For these entries, you check Box A (short-term) or Box D (long-term) and then list the details for each sale, including the property description, dates, proceeds, and cost basis.
If the cost basis on Form 1099-B is incorrect or needs adjustment, you can correct it on Form 8949. A common reason is the wash sale rule, which disallows a loss if you buy a substantially identical security within 30 days of the sale. In such cases, you report the information from the 1099-B, use column (f) for an adjustment code like “W” for a wash sale, and enter the adjustment amount in column (g).
After listing all transactions on Form 8949, you total the columns for proceeds, cost basis, and adjustments. These totals are carried to Schedule D, “Capital Gains and Losses,” which summarizes the information to calculate your net capital gains or losses. The final net amount from Schedule D is then transferred to your main tax form, Form 1040.
Choosing a Cost Basis Method
The method used to calculate cost basis can impact your capital gain or loss. For covered securities, your broker will apply a default method unless you specify otherwise. The most common is First-In, First-Out (FIFO), which assumes the first shares you purchased are the first ones you sell.
Another method is Specific Identification, which allows you to choose which specific shares to sell. This can be advantageous if you purchased shares of the same security at different prices. To use this method, you must notify your broker of the specific shares you wish to sell at the time of the sale, and this instruction must be documented.
For mutual funds, an additional option is the Average Cost method. This calculates the average cost of all your shares by dividing the total cost by the number of shares you own. When you sell shares, you use this average cost to determine your basis. Once you elect to use the average cost method for a fund, you must continue to use it for all future sales of that fund.