What Is IRC 6045 and How Does It Apply to Brokers and Intermediaries?
Understand IRC 6045 reporting requirements for brokers and intermediaries, including applicable entities, transaction types, and compliance obligations.
The IRS requires financial institutions and intermediaries to report certain transactions to ensure tax compliance. A key regulation governing this process, IRC Section 6045, mandates reporting requirements for brokers and other entities facilitating sales of securities and other assets.
Applicable Entities
Entities subject to IRC Section 6045 include financial intermediaries responsible for tracking and reporting asset sales. These organizations range from traditional brokerage firms to barter exchanges and other intermediaries.
Brokerage Firms
Brokerage firms executing buy and sell orders must report gross proceeds from securities sales, including stocks, bonds, mutual funds, and options. This applies to full-service and discount brokerages, including online platforms.
The Emergency Economic Stabilization Act of 2008 introduced cost basis reporting requirements, phased in starting in 2011. Brokerages must track and report cost basis for certain securities, helping taxpayers determine capital gains or losses. They must also verify taxpayer identification numbers (TINs) to prevent backup withholding. Transactions involving foreign clients may require additional reporting under the Foreign Account Tax Compliance Act (FATCA).
Barter Exchanges
Barter exchanges, which facilitate trade without cash, must report transactions meeting IRS thresholds. Under IRC Section 6045, these exchanges must issue Form 1099-B to members, detailing the fair market value of trades.
Barter transactions are treated as taxable income, requiring participants to report gains and losses. Noncompliance carries similar penalties to traditional brokers. Digital barter exchanges operating across jurisdictions face additional regulatory challenges.
Other Intermediaries
Auction houses, peer-to-peer investment platforms, and certain payment processors may also be subject to Section 6045 reporting if they facilitate asset sales.
Auction houses handling high-value assets, such as fine art and collectibles, may need to report proceeds. Crowdfunding platforms enabling equity sales could be classified as brokers. Payment processors handling cryptocurrency transactions may also fall under these regulations if they facilitate asset sales.
Regulators continue evaluating whether emerging financial intermediaries should face expanded reporting requirements.
Transactions Subject to Reporting
Brokers and intermediaries must report sales and exchanges of capital assets. Securities transactions are the most common, but other financial instruments also fall under these rules.
Corporate actions triggering taxable events, such as mergers, stock splits, and spin-offs, require reporting when they affect an investor’s cost basis or result in a gain or loss. If a shareholder receives cash or new shares due to a corporate reorganization, the broker must determine tax implications and report accordingly.
Redemptions of debt instruments, such as callable bonds and structured notes, must be reported if they result in capital gains. Sales of regulated futures and options contracts require reporting, particularly when closed or exercised. Short sales must be reported when the position is closed.
Required Forms and Data Elements
Brokers and intermediaries report transactions under IRC Section 6045 using Form 1099-B, which includes the date of sale, gross proceeds, and whether the holding was short-term or long-term. This form is sent to both the taxpayer and the IRS to ensure accurate reporting of capital gains and losses.
Cost basis reporting is required for certain securities, providing investors with adjusted basis information for tax calculations.
Additional reporting may be necessary for specific transactions. Brokers handling real estate investment trusts (REITs) or publicly traded partnerships may need to issue Schedule K-1, detailing income, deductions, and credits. Sales of debt instruments with original issue discount (OID) require Form 1099-OID to report taxable interest income.
Brokers must accurately record and verify taxpayer identification numbers (TINs). Mismatches between reported TINs and IRS records can trigger backup withholding, requiring brokers to withhold 24% of proceeds. Failure to report transactions correctly can result in penalties ranging from $60 to $630 per form, depending on the delay in correction.
Exceptions and Exclusions
Certain transactions and entities are exempt from reporting under IRC Section 6045. Issuers redeeming their own stock directly from shareholders do not need to file Form 1099-B, as no third-party intermediary is involved.
Dividend reinvestment plans (DRIPs) that automatically buy additional shares using dividends may not trigger reporting unless shares are sold.
Transactions involving tax-exempt securities, such as municipal bonds, require reporting only for capital gains, as interest income is generally exempt from federal taxation. Short-term U.S. Treasury bills with maturities under one year may also be exempt from detailed cost basis reporting.
Penalties for Noncompliance
Failure to comply with IRC Section 6045 reporting requirements results in financial penalties. The IRS imposes fines based on the severity of the violation, with higher penalties for intentional disregard.
Penalties apply for failing to file required forms with the IRS and for failing to provide copies to taxpayers. As of 2024, missing a Form 1099-B deadline by up to 30 days results in a $60 penalty per form, increasing to $310 per form for failures extending beyond August 1. Intentional disregard carries a penalty of at least $630 per form, with no maximum cap.
Noncompliance can also trigger backup withholding. If a broker fails to obtain a valid taxpayer identification number (TIN) or submits incorrect information, they may be required to withhold 24% of proceeds from reportable transactions and remit them to the IRS.
Repeated failures can lead to audits or enforcement actions. To mitigate risks, brokers should implement automated reporting systems and conduct periodic audits of transaction data to ensure compliance.