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The Mindbending World of Wash Sale Calculations
March 2, 2013
By Kaye A. Thomas
If you’ve made multiple purchases and sales of stock in the same company (or shares of the same mutual fund) within the same year, you may have been surprised at what was reported on Form 1099-B. This report of the tax consequences of your sales may seem to bear little relationship to the actual activity in your account. If your trading activity includes wash sales, it may be all but impossible for you to determine whether the results reported on this form are correct. From what I’ve seen, there’s a good chance they aren’t.
March 2, 2013
By Kaye A. Thomas
If you’ve made multiple purchases and sales of stock in the same company (or shares of the same mutual fund) within the same year, you may have been surprised at what was reported on Form 1099-B. This report of the tax consequences of your sales may seem to bear little relationship to the actual activity in your account. If your trading activity includes wash sales, it may be all but impossible for you to determine whether the results reported on this form are correct. From what I’ve seen, there’s a good chance they aren’t.
Gaps in Cost Basis Reporting
February 6, 2013
By Kaye A. Thomas
Brokers and mutual fund companies are now required to report your cost basis and holding period in addition to sales proceeds when you sell shares. The requirement doesn’t apply to all shares, however. What’s more, even when they follow all the rules, brokers may report incorrect figures. Taxpayers can’t rely blindly on these reports.
(more…)
February 6, 2013
By Kaye A. Thomas
Brokers and mutual fund companies are now required to report your cost basis and holding period in addition to sales proceeds when you sell shares. The requirement doesn’t apply to all shares, however. What’s more, even when they follow all the rules, brokers may report incorrect figures. Taxpayers can’t rely blindly on these reports.
(more…)
Tax Rules Extended by ATRA
January 12, 2013
The American Taxpayer Relief Act of 2012 provides “taxpayer relief” primarily by extending tax benefits that were scheduled to expire. Here is a list of the extensions that are of most interest to individual taxpayers. Changes labeled “permanent” can be altered by an Act of Congress but will not expire automatically.
(more…)
January 12, 2013
The American Taxpayer Relief Act of 2012 provides “taxpayer relief” primarily by extending tax benefits that were scheduled to expire. Here is a list of the extensions that are of most interest to individual taxpayers. Changes labeled “permanent” can be altered by an Act of Congress but will not expire automatically.
(more…)
ATRA Tax Rates for Capital Gain and Dividends
January 12, 2013
The American Taxpayer Relief Act of 2013 (“ATRA”) made important changes in the way long-term capital gain and qualified dividend income are taxed. Here’s an explanation, in Q&A format.
January 12, 2013
The American Taxpayer Relief Act of 2013 (“ATRA”) made important changes in the way long-term capital gain and qualified dividend income are taxed. Here’s an explanation, in Q&A format.
American Taxpayer Relief Act
January 3, 2013
By Kaye A. Thomas
In a last gasp effort Congress passed legislation to avert the fiscal cliff and prevent tax increases on 98% of Americans. Key features of the American Taxpayer Relief Act of 2012 (“ATRA”) include the following:
- Existing income tax rates (including marriage penalty relief) are preserved for taxpayers with income up to $400,000 ($450,000 for couples filing jointly). A tax rate of 39.6% applies above that level.
- Qualified dividends will continue to be taxed at capital gain rates, but a 20% rate will apply to both of these beginning at the income thresholds mentioned above.
- The personal exemption phaseout and the Pease rule for reducing itemized deductions are revived, but at higher income levels than under prior law.
- The law permanently fixes the alternative minimum tax (“AMT”), eliminating the recurring need for an “AMT patch.”
- Seemingly out of nowhere, the law expands the availability of in-plan Roth conversions.
- The estate tax provisions are more generous than might have been expected, retaining the $5 million exemption and raising the rate by only 5 percentage points, to 40%.
January 3, 2013
By Kaye A. Thomas
In a last gasp effort Congress passed legislation to avert the fiscal cliff and prevent tax increases on 98% of Americans. Key features of the American Taxpayer Relief Act of 2012 (“ATRA”) include the following:
- Existing income tax rates (including marriage penalty relief) are preserved for taxpayers with income up to $400,000 ($450,000 for couples filing jointly). A tax rate of 39.6% applies above that level.
- Qualified dividends will continue to be taxed at capital gain rates, but a 20% rate will apply to both of these beginning at the income thresholds mentioned above.
- The personal exemption phaseout and the Pease rule for reducing itemized deductions are revived, but at higher income levels than under prior law.
- The law permanently fixes the alternative minimum tax (“AMT”), eliminating the recurring need for an “AMT patch.”
- Seemingly out of nowhere, the law expands the availability of in-plan Roth conversions.
- The estate tax provisions are more generous than might have been expected, retaining the $5 million exemption and raising the rate by only 5 percentage points, to 40%.
Demutualization Soup: Another Ruling
July 25, 2012
By Kaye A. Thomas
Nearly four years after the first ruling in a demutualization case we have another one—and it’s inconsistent with the first one. At issue is the proper treatment of taxpayers who receive shares of stock when a mutual insurance company that issued policies to them converts into a regular corporation. The IRS has long taken the position that these shares have zero basis, so that when they are sold, the entire proceeds must be reported as capital gain. The Court of Federal Claims rejected that position in 2008, and in addition found that the open transaction doctrine applied, so that the selling shareholders would report zero gain on the sale.
July 25, 2012
By Kaye A. Thomas
Nearly four years after the first ruling in a demutualization case we have another one—and it’s inconsistent with the first one. At issue is the proper treatment of taxpayers who receive shares of stock when a mutual insurance company that issued policies to them converts into a regular corporation. The IRS has long taken the position that these shares have zero basis, so that when they are sold, the entire proceeds must be reported as capital gain. The Court of Federal Claims rejected that position in 2008, and in addition found that the open transaction doctrine applied, so that the selling shareholders would report zero gain on the sale.
Coming Clean on Wash Sales
May 10, 2012
By Kaye A. Thomas
This tax season — the one that just ended for those lucky enough to have filed on time, and the one still painfully dragging on for those who filed for an extension — is the first for which brokers are required to report cost basis, in addition to gross proceeds, on Form 1099-B. An important part of the requirement is that brokers must apply the wash sale rule, which prevents you from claiming a loss on a sale of shares if you buy identical shares within 30 days before or after. Anyone who does a lot of buying and selling might wonder whether the broker applied this rule correctly. You may be surprised to learn that there’s no way to be sure. The wash sale rule is a lot more complicated than it appears, and there are unanswered questions about some aspects of its workings. (more…)
May 10, 2012
By Kaye A. Thomas
This tax season — the one that just ended for those lucky enough to have filed on time, and the one still painfully dragging on for those who filed for an extension — is the first for which brokers are required to report cost basis, in addition to gross proceeds, on Form 1099-B. An important part of the requirement is that brokers must apply the wash sale rule, which prevents you from claiming a loss on a sale of shares if you buy identical shares within 30 days before or after. Anyone who does a lot of buying and selling might wonder whether the broker applied this rule correctly. You may be surprised to learn that there’s no way to be sure. The wash sale rule is a lot more complicated than it appears, and there are unanswered questions about some aspects of its workings. (more…)
Taxation of ETF Options
May 31, 2011
There are two sets of rules for taxation of options. One set, which might be called the regular rules, applies to options to buy or sell stock in a company. Different rules apply when options qualify as section 1256 contracts. Section 1256 of the Internal Revenue Code offers unique treatment for these options:
- Capital gain or loss is treated as 60% long-term and 40% short-term without regard to how long you held the option.
- Any positions you hold at the end of the year are marked to market, which means you report gain or loss based on their current value even though you haven’t sold them.
If you use options in your investment strategy, it may be important to know whether options to buy or sell shares in exchange-traded funds, or ETFs, are treated as regular options or section 1256 contracts. The answer: it depends. (more…)
May 31, 2011
There are two sets of rules for taxation of options. One set, which might be called the regular rules, applies to options to buy or sell stock in a company. Different rules apply when options qualify as section 1256 contracts. Section 1256 of the Internal Revenue Code offers unique treatment for these options:
- Capital gain or loss is treated as 60% long-term and 40% short-term without regard to how long you held the option.
- Any positions you hold at the end of the year are marked to market, which means you report gain or loss based on their current value even though you haven’t sold them.
If you use options in your investment strategy, it may be important to know whether options to buy or sell shares in exchange-traded funds, or ETFs, are treated as regular options or section 1256 contracts. The answer: it depends. (more…)
IRS Heard it Through the Grapevine: Pay Up!
March 14, 2011
Suppose you sell a business for $10,000,000, claiming your basis is $10,000,000 when it’s actually closer to $1,000,000. You’ll have to pay tax on that $9,000,000 difference (plus interest and penalties) if the IRS catches you before the statute of limitations runs out. How long do they have to catch you? The Supreme Court will probably have to step in and resolve this question, which has divided the Courts of Appeals. (more…)
March 14, 2011
Suppose you sell a business for $10,000,000, claiming your basis is $10,000,000 when it’s actually closer to $1,000,000. You’ll have to pay tax on that $9,000,000 difference (plus interest and penalties) if the IRS catches you before the statute of limitations runs out. How long do they have to catch you? The Supreme Court will probably have to step in and resolve this question, which has divided the Courts of Appeals. (more…)
From Our Message Board
December 27, 2010
In a thread discussing broker reporting of basis, Sven offers the following:
Blessed are they who keepeth good records, for they shall prevail against the forces of darkness (their brokers) and evil (the IRS) on the day of final audit.
December 27, 2010
In a thread discussing broker reporting of basis, Sven offers the following:
Blessed are they who keepeth good records, for they shall prevail against the forces of darkness (their brokers) and evil (the IRS) on the day of final audit.
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