Easier Capital Gains Reporting

If you buy and sell stocks, mutual funds or other investments, reporting all your capital gains and losses can be a tedious process. For tax years before 2013, the IRS insisted on receiving details for each individual transaction. You weren’t allowed to report only the totals, even if you included a statement that “details are available upon request.” You had to list each individual transaction on Form 8949 (or on Schedule D in years before that form existed), or else enter totals and provide an attachment that includes all the same information you would have entered on the IRS form, in a similar format. For active traders, the forms or attachments could add many pages to the tax return.

The IRS quietly changed this rule in 2013 — so quietly that we didn’t notice until this year. It’s a change that grows out of the rules that require brokers to include cost basis and holding period in their IRS reports when you sell covered securities (that is, stocks and other investments that are covered by the cost basis reporting rules). They now say that for transactions meeting certain requirements you don’t have to provide details at all. You can simply enter the totals.

Not surprisingly, the transactions that can be handled this way are those for which your broker reports basis and holding period, with the further requirement that no basis adjustments are necessary. Here’s what the Form 8949 instructions say (tax year 2014):

Form 8949 is not required for certain transactions. You may be able to aggregate those transactions and report them directly on either line 1a (for short-term transactions) or line 8a (for long-term transactions) of Schedule D. This option applies only to transactions (other than sales of collectibles) for which:

• You received a Form 1099-B (or substitute statement) that shows basis was reported to the IRS and does not show any adjustments in box 1g, and
• You do not need to make any adjustments to the basis or type of gain or loss (short-term or long-term) reported on Form 1099-B (or substitute statement), or to your gain or loss.

If you choose to report these transactions directly on Schedule D, you do not need to include them on Form 8949 and do not need to attach a statement. For more information, see the Schedule D instructions. [The Schedule D instructions say essentially the same thing.]

You won’t be able to use this shortcut for sales of noncovered securities (such as stocks you bought before 2011 or mutual fund shares from before 2012), or for items requiring adjustments due to application of rules such as the wash sale rule. For transactions meeting these requirements, though, you can file a shorter, cleaner tax return.

Mark-to-market traders. Unfortunately, this approach doesn’t apply to traders who have made the mark-to-market election. Their gains and losses are reported on Form 4797, and details for each transaction are still required. The reason, we’re told, is that the IRS needs to know for each item whether its basis has been adjusted under the mark-to-market rules. We pointed out that in nearly all cases these adjustments would affect at most a tiny percentage of trades, and those could be carved out in the same way that transactions requiring adjustments are carved out from the rule for normal capital gain reporting. In response we received an informal indication that the IRS will consider making this easier method of reporting available to traders, but we can’t predict when if ever it will be available.