Cost Basis Rules Are Changing

Some big changes went into effect this year regarding the cost basis of your stock and mutual funds.  Last year (2011), for the first time, brokerages were required to file informational returns to the IRS that report the cost basis of stocks purchased after January 1, 2011.  You may not have received your 1099-B yet this year, but when you do, you will see a basis on it for it if the stock qualifies.

Starting this year, the rule applies to mutual fund and ETF purchases.  And starting in 2013, it will apply to debt securities, options, and private placements.

The basis reported will also include adjustments for commissions and fees, and events such as stock splits.

Your Tax Burden Could Change

The big impact to investors is that your tax burden could change.  Under the new law, sales of stocks, for the most part, are reported using a first-in-first-out (FIFO) method.  This means that if you sell a partial position, your gain or loss will be calculated based on the first shares.

Many investors in the past have preferred to use the lot method, where you could specify which shares at which bases were sold.  You can still do that, but it requires you to notify your broker at the time of the trade so that it can be documented and reported appropriately.

Overall, this should be a positive change for investors, as it makes keeping track of your investment positions much easier than in the past.  I know I have spent countless hours sometimes trying to figure out cost basis of complex option trades – now that burden will be shifted to my broker.

Readers, what are your thoughts on the new cost basis rules?

This post was written by...

Robert – who has written 317 posts on The College Investor.

Robert is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances. You can learn more about him here and connect with him on Twitter or Facebook.

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