Reporting Proceeds From Broker and Barter Exchange Transactions

When you sell assets such as stocks, or if you exchange goods and services with someone else, you are engaging in transactions that likely have tax consequences. These activities can result in a gain or a loss, which must be calculated and reported to the Internal Revenue Service (IRS). The government requires reporting these events to ensure that any income earned is properly taxed.

Selling an investment through a financial services company involves a different process than trading your professional services for a product. Both scenarios, however, require you to determine the value of what you sold and what you received in return to figure out whether you have a taxable gain or a deductible loss.

Understanding Form 1099-B

When you sell securities like stocks or bonds through a brokerage firm, or participate in a barter exchange, you will receive Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions.” Brokers must send this form to you and the IRS by February 15 of the year following the sale. The form provides a summary of your transactions.

The form contains several pieces of information. Box 1d shows the “Proceeds,” which is the total money you received from the sale before any commissions or fees. Box 1e reports the “Cost or Other Basis,” the original amount you paid for the asset. The form also includes the dates you acquired and sold the security in Boxes 1b and 1c.

A checkbox on the form will indicate whether the cost basis information was reported to the IRS, which relates to whether the security is “covered” or “noncovered.” For covered securities, the broker is required to track and report the basis. For noncovered securities, often those acquired long ago, the broker may not have the purchase information, leaving Box 1e blank. In such cases, you are responsible for determining and reporting the correct basis.

Reporting Broker Transactions

To calculate your capital gain or loss for each transaction, use the formula: Proceeds – Cost Basis = Gain or Loss. The “cost basis” is your total investment in an asset for tax purposes. It is the purchase price plus other costs associated with the purchase, such as commissions.

The holding period of the asset, determined by the acquisition and sale dates on Form 1099-B, dictates whether the gain or loss is short-term or long-term. If you held the asset for one year or less, it is a short-term capital gain or loss. If you held it for more than one year, it is a long-term capital gain or loss, which is often taxed at a lower rate.

You will use the information from Form 1099-B to complete Form 8949, “Sales and Other Dispositions of Capital Assets.” On this form, you list each sale, reporting the proceeds, cost basis, and the resulting gain or loss. Form 8949 is divided into parts for short-term and long-term transactions, and you will check a box in each section to indicate if the basis was reported to the IRS.

After detailing all transactions on Form 8949, you transfer the summary totals to Schedule D, “Capital Gains and Losses.” Schedule D is where you net your total gains and losses to arrive at your final net capital gain or loss. If you have a net capital loss, you may use it to offset other income, up to an annual limit of $3,000 ($1,500 if married filing separately).

Reporting Barter Exchange Transactions

Barter transactions, where you exchange goods or services without using money, also have tax implications. In this context, the “proceeds” reported on Form 1099-B are not cash but the Fair Market Value (FMV) of what you received. FMV is the price that property would sell for on the open market.

If you and the other party agreed on the value of the exchanged items or services, that value is accepted as the FMV. For example, if a graphic designer creates a logo for a painter, and they agree both services are worth $1,000, then each person has received $1,000 of income.

How you report this income depends on the transaction’s nature. If the bartering was part of your trade or business, you must report the FMV of the property or services you received as gross income on Schedule C, “Profit or Loss from Business.” If the item you exchanged was a capital asset held for personal use or investment, you would report the disposition of your asset on Form 8949 and Schedule D, with the “proceeds” being the FMV of the asset or service you received.

Key Reporting Considerations and Adjustments

When calculating your capital gains or losses, certain rules and adjustments can alter the final figures. The wash sale rule prevents you from deducting a loss on the sale of a security if you buy a “substantially identical” security within 30 days before or after the sale. This rule is designed to stop investors from claiming a tax loss while maintaining their position.

If a loss is disallowed due to the wash sale rule, the disallowed loss is added to the cost basis of the new security you purchased. This adjustment postpones the loss deduction until you sell the new security. Your holding period for the new security will also include the holding period of the one sold at a loss.

You are also responsible for making other adjustments to the cost basis reported on Form 1099-B. For instance, the basis of a stock should be increased by any commissions paid at the time of purchase. Another adjustment involves reinvested dividends; since you already paid tax on them, they should be added to your cost basis to avoid being taxed again when you sell. These adjustments are made directly on Form 8949.