(Dow Jones) Life is going to get easier for investors-and more demanding for advisors-to report capital gains on stocks.
Stockbrokers and mutual-fund companies will soon be obliged to provide investors with the cost basis of stocks they cash in, a calculation that is used to determine capital gains. While investors themselves will no longer have to do the math, they also lose any leeway in reporting-or fudging-the numbers.
As a result, investors may seek more advice about the tax consequences of buying and selling securities. Then again, it will "put an additional level of due care on tax advisors," when they answer clients' questions, says Tim Speiss, partner and chairman of personal wealth advisors for EisnerAmper LLP.
Under a 2008 law, brokers and others will have to report the cost basis of securities to investors and the Internal Revenue Service on Forms 1099-B, in some cases as soon as January 1.
Cost basis, generally, is the price paid for a stock, along with commissions and other fees. Right now, it is up to an investor or his accountant to keep track of it. That can be tough to do, especially when a stock is old or has a tangled lineage.
A taxpayer who doesn't know the exact cost basis of a stock can end up estimating it on the tax return. Estimating high means capital gains will be lower. With the IRS now able to see cost basis on the tax return, taxpayers will be held to a stricter standard.
Good accountants and tax advisors have always taken pains to make sure cost basis is reported accurately. But many now are "going to be more scrutinizing of your cost basis, because it has to be disclosed on the 1099-B," says Speiss.
Another way the new reporting is likely to change the conversation between an investor, his advisor and his broker has to do with which shares of a stock are sold.
Right now, someone who decides to sell 100 shares of a stock may tell his broker to unload the shares, but not specify which lot to draw from. The person may own hundreds of shares, bought in separate lots at different times, for different prices and different cost bases.
Until now, an investor who decides some time after the sale that his broker sold from the wrong lot might decide to report a more advantageous one on his return. While that's against the law, it does happen. The new 1099-B reports will make the real tax situation transparent.