Cost Basis Reporting – New Requirements for your 2011 Return

As of January 1, 2011, cost basis reporting — the identification of the actual costs of a security for income tax purposes — became mandatory as per the Emergency Economic Stabilization Act of 2008 – popularly known as the “bailout bill”.

Under the new legislation, financial intermediaries must report accurate adjusted cost basis information to both investors and the IRS for:

  • Equities acquired on or after January 1, 2011
  • Mutual fund and dividend reinvestment plan (DRiP) shares acquired on or after January 1, 2012.
  • Financial instruments such as debt securities, options and private placements acquired on or after January 1, 2013

Taxpayers are subject to penalties of up to $1,000 for under-reporting capital gains taxes, and up to $5,000 for willful disregard of the law or reckless conduct in reporting capital gains taxes.

When you receive your Form-1099B’s from your brokerage firms, you will notice that cost basis information will be available for any equities that were acquired and sold after January 1, 2011. You will no longer be able to modify the cost basis method used for each trade. Contact your brokerage firms in case you have questions about how the cost basis for your equities are calculated.