TradeLog

The #1 tax-prep software for active traders and their CPAs.

[tradelogusa-blog]

The problem is that many stock traders use their 1099-B reports to estimate their taxes and may have underestimated what they really owe.

The culprit is that most broker 1099-Bs are not adequate for filing an accurate tax return, nor were they designed for that purpose. How can that be? The simple fact is that there are different IRS rules for taxpayers than there are for the brokers, mostly related to the wash sale rules.

[tradelogusa-blog]

When certain cash settled Section 1256 contracts are exercised, some brokers report in the trade history what appears to be shares of an index being bought and sold on the date of exercise. However, since these contracts are cash settled no such shares exist or are traded. TD Ameritrade is one broker known to use this method of reporting.

[tradelogusa-blog]

Some major brokers have taken a troubling position in the way they report wash sales on the 1099-B for short sales. This caused big problems when taxpayers tried to reconcile and understand their 2011 1099-B reports. But it appears some brokers continue to use this baffling and incorrect method, which will cause more tax reporting problems for 2012 tax year.

[tradelogusa-blog]

Recently we have been inundated with support requests asking for help with brokerage account 1099-B reconciliation. The reality is that very few of the 2014 1099-Bs will reconcile with TradeLog due to the different ways brokers are interpreting what should be reported, and what should not be reported. There is simply no standardization from one broker to the next.

[tradelogusa-blog]

Why IRS Reporting Regulations Have Failed to Meet Cost-Basis Reporting Needs

When cost basis legislation was first passed by Congress in 2008 we wondered what the end result would be for active traders. Here at TradeLog we have known for many years that the 1099-B was problematic.

Prior to the new legislation brokerage firms were not required to provide anything more than sale proceeds for certain types of trades. In order to accurately generate tax reporting, traders and investors need both sale proceeds and cost basis information. Therefore, we applauded the intention of the legislation to require brokers to report cost basis information.

Reality: 1099-B Has Major Problems

But there were troubling aspects of the legislation and subsequent IRS regulations. Besides reporting cost basis and sale proceeds brokers would also be reporting adjustments to cost basis including wash sales.

Many questions arose: how would brokers account for wash sales in multiple accounts and between other brokers? Would the IRS finally provide clearer guidance on the many vague aspects of the wash sale rules? What about the many other complex rules involving trader taxes, would these be accounted for on the 1099-B?

By the time the new 1099-B reports started to be sent out for 2011 it was obvious that the IRS had made a bigger headache for active traders. The answer to some of the questions about wash sales was simple: brokers would not need to report all wash sales as is required by taxpayers.

So the taxpayer would be responsible for verifying the 1099-B reports and making additional adjustments. However, brokers varied in their interpretations of wash sale rules, method for adjustments, even in which securities they reported!

Worse yet, the 1099-B reports provided such limited information that it was impossible to understand what adjustments were made to the cost basis (and sometimes the sale proceeds) that was reported.

Added Challenges With Form 8949

To add to the challenges, the IRS introduced Form 8949 and the concept that taxpayers could simply take their 1099-B information and fill out the 8949, then make any needed corrections or adjustments to each trade. That sounds great, until you have hundreds or thousands of trades.

And as we stated, since the 1099-B does not provide enough information to be able to verify what the broker reported, how is the taxpayer supposed to make corrections or adjustments needed? Did anyone at the IRS sit down and try following these instructions with an active trader?

Of course, there was also the problem of broker reporting. As we already mentioned, the brokers had varying interpretations on some aspects of the rules. But then there were major errors in reporting that surfaced with many brokers.

Most brokers struggled to meet the February 15th deadline for providing the 1099-B - some were months late with no penalty from the IRS. Many taxpayers received several revisions to their 1099-B.

Unexplainable anomalies and inaccuracies on the resulting reports were baffling and added to the challenges faced by taxpayers. Brokers have struggled, and understandably so since they are being asked to provide more than just a reporting of trade history but tax accounting adjustments as well.

Result: Increased Tax Burden

The 2012 tax year was no better. While the IRS did make a few changes to help standardize the format of 1099-B and brokers improved in some of their weaknesses the underlying problems still exist.

Brokers and taxpayers have two different sets of rules for reporting. The 1099-B fails to provide sufficient detail needed to be a verifiable and objective report. The IRS continues to provide misleading information about how to use reports and file taxes accurately.

It is clear to us that, instead of making tax reporting easier for active traders and investors, the IRS has increased the tax burden - particularly for those who want to file accurate tax reporting.

In addition, the main objective of Congress, to close the tax gap for those traders who try to evade taxes or simply file inaccurately, has not been met. In fact, the new "system" the IRS has created may actually make it easier for some to evade taxes!

While some groups have simply thrown in the towel and are embracing the regulations and trying to make the best of them, we here at TradeLog feel that things need to change. Our special report, The 1099-B Problem, not only explains some of the major problems with the new 1099-B and IRS regulations, but it also provides recommended solutions.

For over a decade TradeLog has been generating trader tax reporting and we know what is needed to do so: accurate trade history. Using accurate trade history makes it possible to calculate taxable gains and losses and adjust for all wash sales.

We published this special report to help active traders, investors, CPAs, tax experts, as well as legislators, regulators, brokerage firms, and advocacy groups to understand that the current 1099-B is a problem. The IRS can get this right, but they need to change direction.