Can I Determine Cost Basis differently than my discount brokerage

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  • #8011
    ElroyTax
    Participant

    Hello, I have a large capital gain on a stock I’ve held for many years. I purchased the shares in different lots between 2010 and 2013. I accidentally day traded some of the shares this year, sold them in the morning, and bought them back in the afternoon. The broker assigned the cost basis from the years earlier buys in 2010 to 2013, giving me a large taxable capital gain. Can I report to the IRS in my 2020 tax filings the single day buy-sell day trades from this year as the cost basis of the trade, and not declare the large capital gain which would occur if I used the 2010 to 2013 cost basis? Can I report a cost basis and trade date to the IRS which is significantly different from that reported by my brokerage to the IRS? Thanks in advance.

    #8015
    kaneohe
    Participant

    You might want to talk to your broker to see what they can do. What is your default cost basis method? Do you specify before each trade? Perhaps if you don’t have a default method, they pick the non-covered shares first (?) FIFO. FWIW, they do not report cost basis on non-covered shares to IRS, only to you but you may be asked to justify the number you use .

    If you sold in AM and bought in PM, that is not the normal order of things…..usually you buy first.

    When you talk to the broker, you may find that the 1st line reps may not be very knowledgeable. Try asking for the cost basis group. At my broker, it’s like night and day.

    #8016
    kaneohe
    Participant

    This is what Vanguard does with non-covered vs covered shares:

    “The noncovered shares will also generally be sold before the covered shares. Vanguard won’t report the basis of noncovered shares to the IRS.”

    #8018
    ElroyTax
    Participant

    Thanks for your responses. Since posting the question yesterday I have learned an additional bit of information which is likely helpful. The shares which were accidentally sold were all purchased before Jan 1st, 2011. As a result, my brokerage will NOT report the cost basis to the IRS, I believe it will be up to me to report the cost basis. I’ll have to wait until I receive the 1099 to make sure that the broker does not report the cost basis, but information on the broker’s web site indicates they DO NOT report to the IRS the cost basis for shares purchased before Jan 1st, 2011. So now the question becomes….if I choose to report the 2020 day trade purchase as the cost basis, and ignore the pre-2011 purchase, is there any tax problem with that approach? I will have something like buying 1,000 shares of stock XYZ on March 12th, 2020 for $$30,000, and selling the same shares on March 12th, 2020 for $30,100. Both of those March 12th 2020 trades are verifiable in the account statements. And I will have the same number of shares that I have had since pre-2011 with a cost basis of about $3 still in the account. Since the broker will not report the cost basis of the trade, am I free to choose any lot which I like when I report, as long as I only choose each lot only once during the entire holding period?

    • This reply was modified 11 months ago by ElroyTax.
    #8020
    kaneohe
    Participant

    If you report the recent shares purchased, those will be covered shares and IRS may wonder why the basis is not reported or you will have to report fictional info like purchase date .

    In principle there is supposed to be some system that determines what shares you sold. Either you specify before the trade or the default system takes over.

    #8022
    ElroyTax
    Participant

    I agree there is normally a system which the brokerage follows if I don’t give instructions on which lot to sell. It is FIFO. However, in this case the broker views the sold shares as uncovered, and as a result will not report a cost basis to the IRS. So I’m curious if I can report my same day purchase of the shares (which is real, not fabricated) as the cost basis? For even more detail, here is a summary of exactly what has happened. Lets say I buy 1,000 shares of ABC for $4 each in 2010. What I actually did this year (I didn’t mention it earlier, wasn’t sure it was key) was sell 5 covered $30 March calls on ABC on March 10th 2020. On March expiration (say, March 20th, 2020) ABD is $40, so I know the 5 covered calls will get executed. So the morning of March 20th 2020 expiration day, I bought 500 shares of ABD for $40, giving me a total of 1,500 that day (1,000 from 2010, and 500 from today). In the afternoon of March expiration day I am forced by the short call position to sell 500 shares of ABC for $30 each. I end the day with the same 1,000 shares I have had for years and years, but I need to determine the affect on trading and taxes. Can I report my cost basis on that short call position as $40 (what I paid that morning) and my sales amount as $30 (the call strike) + the premium I received for selling the covered call? I would prefer to do that (delivering me a capital loss) rather than report the cost basis of $4 each for the ABC shares held since 2010 (giving me a big capital gain)? Since the broker has not reported any basis to the IRS< am I allowed to report a reasonable cost basis (being basically last in first out)? Thanks for any advice. PS – I’m in Hawaii 🙂

    • This reply was modified 11 months ago by ElroyTax.
    #8027
    kaneohe
    Participant

    I’m ignorant (lolo) about puts& calls but assume they’re just more detail here. Still think the best(cleanest) is if you could get broker to get reporting to match your intent. If not, you’ll have to navigate the lower road and sign the return which has “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true,
    correct, and complete. ………..”

    IRS did away w/ non-covered self-reporting for CGs for a reason and tho it’s likely they are undermanned, no telling what will happen.
    Pomaika’i

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