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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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About filling out stock transactions on Schedule D to show

Resolved Question:

About filling out stock transactions on Schedule D to show capital gain/loss, I have 1099 forms from my brokerage accounts, however, in terms of transactions against tax lot, they all use FIFO as the default order. To make it more tax efficient (there are batch of wash sale loss that I can adjust some transactions' cost basis), I would like to change the order of transactions to use "specific tax lot" instead of FIFO that is on 1099 forms. Just wonder, is it OK to do so on Schedule D ?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Lane :

Yes, most people choose to use the FIFO method because it is functional with most software packages, and it's convenient for tracking cost basis.

Lane :

But tax lot accont is another completely acceptable way of tracking your bsis

Lane :

Yet another way to go at this is the specific shares metnod

Lane :

If you do take advantage of the specific-shares method, make sure you receive a written confirmation from your broker or custodian acknowledging your selling instructions. You must determine the method that works best for you and stick with it.

Lane :

As a matter of fact. IRS requires that all firms establish a default tax lot relief method to determine cost basis on all accounts in the event a client does not determine a specific tax lot relief method. However, again, most brokerage firm no now offer a number of tax lot relief methods to assist clients with their tax strategies

Customer:

Yes, now the situation is that, my brokerage account also sets FIFO as the default and generates 1099 based on that. Now I would like to update these old transactions retrospectively by using "specific lot". Not sure whether I can do this or not.

Customer:

Or I have to report whatever is on 1099 form from my brokerage account

Lane :

I terms of IRS allowing it, yes you can, as long as you are accurate in specifying that actual shares ... no no you can do it any way you like

Customer:

if I want to do so, I do not need to get any written approval from my brokerage firm, right?

Customer:

it is just my own call to do it on Schedule D, right?

Lane :

sorry, was typing when I saw that last post ... but yes you can AND (probably stating the obvious, you should ask you broker to REPORT it that way going forward)

Lane :

Right,

Lane :

Many firms are now advertising the various ways they can report it for you

Lane :

that was just their default method

Lane :

(meaning what they do idf you don't specify)

Lane :

H.D. Vest is offering nine different tax lot relief methods:



  • First In First Out

  • Last In First Out

  • Highest In First Out

  • Lowest Cost First Out

  • Highest Cost Short Term

  • Highest Cost Long Term

  • Lowest Cost Long Term

  • Lowest Cost Short Term

  • Minimum Loss Minimum Gain (available later in 2011)

Customer:

ok. could you refer me to the IRS link that says that I can change the order of transactions of Schedule D rather than those on 1099 ?

Customer:

so I can forward to my tax preparer ?

Lane :

let me see what I can find ... typically there are not tax LAWS that would specify that, specifically. It will more likely be in the form ... "taxpayer may choose his/her own manner or tracking and reporting basis"

Lane :

Hang with me ... there's SOOO much out there about the new requirement that brokerages report cost basis and the schedule for applying it to various securities (MF vs Stocks for example) it's hard to separate the part that really hasn't changed ... that the taxpayer can track and report any way they choose as long as they stay with it

Lane :

I'm going top go to titie 26 (the internal revenue code) in westlaw ... just on more minute

Customer:

thanks. take your time

Lane :
a) Computation of gain or loss.--The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.


26 U.S.C.A. § 1001 (West) and
(a) In general.--The basis of property shall be the cost of such property


26 U.S.C.A. § 1012 (West)



Lane :

THat's the law itself ... written at the time when EVERYONE calculated gain on a security by security basis

Lane :

Npow, let me see if I cna find any IRS "guidance," in the form of treasury regs, etc. However, I'm quite certain that your accountant willunderstand that the specific identification method is actually the oldest method

Lane :

What i AM seeing is that you may need to ELECT this reporting as it represents a change in your "accounting method" (which your tax guy should also have the form for ) but let me see

Lane :

Nope usingtax lot account is NOT a change in acc**ting method .... the default method (what IRS assumes for all, unless you change it, it cash basis) and by specifying the actual tax lots as they happen this is the most basic and direct form of cash basis accounting

Lane :

DID just find IRS Notice 2009-17 - in which the answer is implicit they are asking for public comments on the following:

Lane :

How to ensure consistency between
customers making specific identification
of securities sold or transferred and broker
reporting

Lane :

The answers given were the following:

Lane :

Any form of broker communication sent to the investor after a sale
that reflects the specific allocation of the tax lots should be
considered appropriate confirmation of the sale of specifically
identified tax lots. This would include a monthly or quarterly
account statement, or a confirmation of the allocation which may
be part of the security's sale confirmation or made as a separate
communication to the investor. Communication medium should be
the same as now approved for 1099 statements, including E-
delivery.

Lane :

See this:

Lane :

Individual stocks and bonds



  • FIFO. "First in, first out" is the IRS's default accounting method. For a partial sale of a particular stock or bond, the IRS presumes you sold your oldest shares first—unless you gave different instructions to your broker.

    FIFO seldom provides the optimal result, and then only by accident. If the value of the shares you've held longest has declined since you bought them, FIFO will result in a capital loss. But if the price of your oldest shares has increased steadily since purchase, FIFO generally results in the biggest taxable gain.

  • Specific identification. Specific ID offers more flexibility than FIFO, giving you the opportunity to optimize results. However, it requires some up-front planning. You must identify the specific shares you're selling at the time of sale and have your broker confirm that identification in writing within a reasonable period of time contemporaneous with the sale.

    Typically, you can have your broker add a memo line to your confirmation statement, per your instructions. For example, if you're selling the 100 shares you bought on January 6, 2010, ask your broker to write on your confirmation that the transaction is a sale "vs. purchase 01/06/2010." For online trades, you should immediately follow up with a phone call to specify your instructions.

Lane :

Yep, everything just keeps pointing me back to § 1001, §1012 and §1221 (Whch is simplywhat I gave you before, that gain is sales price minus , that your tax basis on your property is your cost and the definition of a capital asset, respectively

Lane :

The law that started to be applied in 2011 is the first time brokers were forced to actually track tax lots by assigning a tax lot number ... but again, that is the MOST direct way to track gain and loss ... just like you would on parcels of land, based on when you bought that actual land ... things like lifo fifo and average cost came along as exceptions

Lane :

Here it is again with a little context, where you can see that direct recognition is where it all starts and then "by account, by plan, average cost, treating a fund as a stock, etc. etc. ... all come as exceptions to the GENERAL rule (I'l only give the first several lines the law is SEVERAL pages long here):

Lane :



(a) In general.--The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses).





(b) Special rule for apportioned real estate taxes.--The cost of real property shall not include any amount in respect of real property taxes which are treated under section 164(d) as imposed on the taxpayer.





(c) Determinations by account.--




(1) In general.--In the case of the sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by regulations under this section shall be applied on an account by account basis.





(2) Application to certain funds.--




(A) In general.--Except as provided in subparagraph (B), any stock for which an average basis method is permissible under section 1012 which is acquired before January 1, 2012, shall be treated as a separate account from any such stock acquired on or after such date.





(B) Election fund for treatment as single account.--If a fund described in subparagraph (A) elects to have this subparagraph apply with respect to one or more of its stockholders--




(i) subparagraph (A) shall not apply with respect to any stock in such fund held by such stockholders, and





(ii) all stock in such fund which is held by such stockholders shall be treated as covered securities described in section 6045(g)(3) without regard to the date of the acquisition of such stock.




A rule similar to the rule of the preceding sentence shall apply with respect to a broker holding such stock as a nominee.






(3) Definitions.--For purposes of this section, the terms “specified security” and “applicable date” shall have the meaning given such terms in section 6045(g).






(d) Average basis for stock acquired pursuan ....






26 U.S.C.A. § 1012 (West)

Lane :

Again, The Emergency Economic Stabilization Act of 2008 requires that brokerage firms and mutual fund companies report their customers' cost basis, gain/loss, and holding period to the IRS on their Consolidated Form 1099s when securities are sold. Prior to 2011, firms reported only sale proceeds. If you do the leg work of using the tax lots that are no being required to be reported, and stick with it, going forward (although you may get a request from IRS to reconcile this method to the default method that was reported) you'll never have another issue there as everything going forward will be based on the tax lots themselves ... IRS has done this in an effore to allow youto do exactly what you want to do

Lane :

OOOO KKKK just fund this:

Lane :

So sorry to take this long:

Lane :

Effective January 1, 2012, if you have not proactively elected a basis method and the fund’s default is average cost you may retroactively change the fund’s default to another method before the date of the first redemption or transfer. Whether you are changing from average cost to another basis method or changing to average cost from another basis method, that request must always be in writing. Once your shares have been sold, the cost basis method applied at the time of the sale cannot be changed. You may only elect another method for future sales.


 

Lane :

Are your investments individual stocks or funds?

Customer:

now the issue is that, I did not let my brokerage firm add those memo lines to my transactions in 2012, so those were executed as the default method FIFO

Customer:

These are only for individual stocks

Lane :

Yep ... SO sorry this is taking this long, but what I'm seeing about the election for SO FAR has been relating to Mutual funds ... if you can hang with me I'd like to pin this down to be sure... best practice at this point would be to assume the same thing applies to individual securities .... I WILL stay with this, just to get it added to "the library"

Lane :

Where I'm at now is looking at a technical directive:


See T.D.
9504, page 670

Lane :

from here:


Section 1012.—Basis of
Property–Cost
26 CFR 1.1012–1: Basis of property.
Rules are provided for determining the basis of
stock, including computing basis by averaging the ba-
sis of shares acquired at different prices. See T.D.
9504, page 670.

Lane :

See this:

Lane :

A commentator requested clarification
on whether a taxpayer is treated as elect-
ing the average basis method if the tax-
payer fails to affirmatively elect a basis de-
termination method and the average basis
method is the broker’s default method. In
response to this comment, the final regula-
tions clarify that a taxpayer’s failure to no-
tify a broker that the taxpayer elects a basis
determination method is not an election of
a method. Thus, a taxpayer that fails to af-
firmatively elect the average basis method
has not made an election that the taxpayer
may revoke. If the average basis method is
the broker’s default method, the taxpayer
may change from that method prospec-
tively.

Lane :

I know this is about average basis here, but it DOES deal with granting relief for not proactively making an election....

Lane :

The regulations permit taxpay-
ers to elect or change from the average ba-
sis method at any time during a taxable
year and to choose a method to identify
stock sold on a sale-by-sale basis. These
rules do not involve the elements of consis-
tency and regularity inherent in methods of
tax accounting, which generally apply on
the basis of a taxable year. Therefore, the
final regulations provide that a basis deter-
mination method for stock is not a method
of accounting and a change in a method of
determining basis for stock is not a change
in method of accounting to which sections
446 and 481 apply.

Lane :

iv. Basis Determination Method
The proposed regulations required
brokers to report basis using the basis
determination method a customer elects.
Commentators requested that brokers be
permitted to offer limited basis reporting
methods even if this practice would force
a customer that wanted a different method
to move his or her account to a broker that
offered reporting under that method. The
final regulations do not adopt this request
because section 1012 permits customers
to report basis by a different permissible
method than the default method selected
by the broker and section 6045 requires
brokers to follow instructions from cus-
tomers regarding this selection.

Lane :

There it is .. right back to IRC §1012

Lane :

And the other shoe drops:

Lane :

g. Customer Identification of Securities
The proposed regulations required bro-
kers to report the sales of securities on a
first-in, first-out basis within an account
unless the customer notified the broker by
means of making an adequate and timely
identification of the securities to be sold.
Commentators asked that, for reporting
purposes, brokers be permitted to rely on
customers’ standing orders or instructions
for the sale or transfer of shares of stock.
The proposed rule by cross reference to
§1.1012–1(c) already permitted standing
orders to serve as an adequate identifica-
tion for both sales and transfers of stock.
Therefore, the final regulations adopt the
proposed rule.
Commentators asked how to apply
the first-in, first-out reporting rule when
the broker does not know the acquisition
date of some shares of the security within
the account. The final regulations clar-
ify that brokers must report the sale of
any shares or units of a security in the
account with unknown acquisition dates
first. Customers are expected to report
basis consistently with broker reporting.

Lane :

FOr emphasis

Lane :

The final regulations clar-
ify that brokers must report the sale of
any shares or units of a security in the
account with unknown acquisition dates
first. Customers are expected to report
basis consistently with broker reporting.

Lane :

SO what I'm seeing out there is consistent with this. You can specify, but must report as reported, if you did not

Lane :

SO very sorry it took me this long, but I wanted to be sure that this very new area was finalized ... what I'm quoting from here is Internal Revenue Bulletin No. 2010-47, which clarifies some of the things that have been evolving as to this new area of the law

Lane :

I would take this to your tax guy and have him verify. I'm sure he/she can pull it up ... From a purely LEGAL perspective ... if you could identify specific parcels of ANY property and the price at which it was bought and then report exactly when it was sold and assign the accurate price and cost that will be LEGAL, but from a tax administration perspective... this new law that DOES protect the public from getting those 1099Bs that make an active trader look like ever single sale was all profit ... has as a price, the procedural requirement that you must notify your broker of the method that you want to use, so that THEY can then, in turn, comply with this new law to report basis

Lane :

Questions?

Lane :

I'm guessing I've take so ling with this that you've stepped away ... I'll move us to the "Q&A mode, which will allow you to ask any follow-ups

Lane :

Thanks

Lane :

Lane

Lane :

Again, bulletin 2010-47 clarified that the final regulations require the tax payer to report as the broker has reported.

Expert:  Lane replied 1 year ago.
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Customer: replied 1 year ago.

In my situation, because I did not tell my brokerage firm to change the basis method in 2012, then does this mean that, for those transactions in 2012, I have to report the same as that on 1099 form from the brokerage firm and can NOT change the order on Schedule D?

Expert:  Lane replied 1 year ago.

Yes, I believe so.

Lane
Expert:  Lane replied 1 year ago.

Bo,

I just received an assist from a colleague here ( who is an EA, - Enrolled Agent) and he confirmed that you cannot choose specific tax lot identification, after the fact, without having directed the broker to use that method.



Just wanted to add some certainly for you.

Lane

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4379
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks Much!

DO take a look at doing it for next year (probably stating the obvious)

IF it makes sense

Saw a great article on this:

www.investopedia.com/articles/05/taxlots.asp

Lane

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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986