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.
But tax lot accont is another completely acceptable way of tracking your bsis
Yet another way to go at this is the specific shares metnod
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.
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
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.
Or I have to report whatever is on 1099 form from my brokerage account
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
if I want to do so, I do not need to get any written approval from my brokerage firm, right?
it is just my own call to do it on Schedule D, right?
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)
Many firms are now advertising the various ways they can report it for you
that was just their default method
(meaning what they do idf you don't specify)
H.D. Vest is offering nine different tax lot relief methods:
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 ?
so I can forward to my tax preparer ?
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"
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
I'm going top go to titie 26 (the internal revenue code) in westlaw ... just on more minute
thanks. take your time
THat's the law itself ... written at the time when EVERYONE calculated gain on a security by security basis
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
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
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
DID just find IRS Notice 2009-17 - in which the answer is implicit they are asking for public comments on the following:
How to ensure consistency betweencustomers making specific identificationof securities sold or transferred and brokerreporting
The answers given were the following:
Any form of broker communication sent to the investor after a salethat reflects the specific allocation of the tax lots should beconsidered appropriate confirmation of the sale of specificallyidentified tax lots. This would include a monthly or quarterlyaccount statement, or a confirmation of the allocation which maybe part of the security's sale confirmation or made as a separatecommunication to the investor. Communication medium should bethe same as now approved for 1099 statements, including E-delivery.
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
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
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):
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
OOOO KKKK just fund this:
So sorry to take this long:
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.
Are your investments individual stocks or funds?
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
These are only for individual stocks
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"
Where I'm at now is looking at a technical directive:
See T.D.9504, page 670
Section 1012.—Basis ofProperty–Cost26 CFR 1.1012–1: Basis of property.Rules are provided for determining the basis ofstock, including computing basis by averaging the ba-sis of shares acquired at different prices. See T.D.9504, page 670.
A commentator requested clarificationon 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 basismethod is the broker’s default method. Inresponse to this comment, the final regula-tions clarify that a taxpayer’s failure to no-tify a broker that the taxpayer elects a basisdetermination method is not an election ofa method. Thus, a taxpayer that fails to af-firmatively elect the average basis methodhas not made an election that the taxpayermay revoke. If the average basis method isthe broker’s default method, the taxpayermay change from that method prospec-tively.
I know this is about average basis here, but it DOES deal with granting relief for not proactively making an election....
The regulations permit taxpay-ers to elect or change from the average ba-sis method at any time during a taxableyear and to choose a method to identifystock sold on a sale-by-sale basis. Theserules do not involve the elements of consis-tency and regularity inherent in methods oftax accounting, which generally apply onthe basis of a taxable year. Therefore, thefinal regulations provide that a basis deter-mination method for stock is not a methodof accounting and a change in a method ofdetermining basis for stock is not a changein method of accounting to which sections446 and 481 apply.
iv. Basis Determination MethodThe proposed regulations requiredbrokers to report basis using the basisdetermination method a customer elects.Commentators requested that brokers bepermitted to offer limited basis reportingmethods even if this practice would forcea customer that wanted a different methodto move his or her account to a broker thatoffered reporting under that method. Thefinal regulations do not adopt this requestbecause section 1012 permits customersto report basis by a different permissiblemethod than the default method selectedby the broker and section 6045 requiresbrokers to follow instructions from cus-tomers regarding this selection.
There it is .. right back to IRC §1012
And the other shoe drops:
g. Customer Identification of SecuritiesThe proposed regulations required bro-kers to report the sales of securities on afirst-in, first-out basis within an accountunless the customer notified the broker bymeans of making an adequate and timelyidentification of the securities to be sold.Commentators asked that, for reportingpurposes, brokers be permitted to rely oncustomers’ standing orders or instructionsfor the sale or transfer of shares of stock.The proposed rule by cross reference to§1.1012–1(c) already permitted standingorders to serve as an adequate identifica-tion for both sales and transfers of stock.Therefore, the final regulations adopt theproposed rule.Commentators asked how to applythe first-in, first-out reporting rule whenthe broker does not know the acquisitiondate of some shares of the security withinthe account. The final regulations clar-ify that brokers must report the sale ofany shares or units of a security in theaccount with unknown acquisition datesfirst. Customers are expected to reportbasis consistently with broker reporting.
The final regulations clar-ify that brokers must report the sale ofany shares or units of a security in theaccount with unknown acquisition datesfirst. Customers are expected to reportbasis consistently with broker reporting.
SO what I'm seeing out there is consistent with this. You can specify, but must report as reported, if you did not
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
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
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
Again, bulletin 2010-47 clarified that the final regulations require the tax payer to report as the broker has reported.
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?
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