What is This New Schedule D Form 8949?

You have all your tax documents in front of you and they look much the same as in prior years except for the report from your broker on those stock sales you had in 2011. There seems to be so much more information on it and all kinds of codes to look at and understand. Then you open up the tax forms to prepare your return and see that Schedule D – Capital Gains and Losses – has also changed and makes reference to information from Form 8949 and boxes A, B, and C, Part I and Part II.

Welcome to the new world of the IRS reporting and tracking! The IRS wants to know a lot more about each sale you had of a stock, bond, or mutual fund. So let’s see what all is being asked of you when you go to complete your tax return for 2011.

Form 8949 has been created to accumulate the information about each sale you had of various securities, much like what you reported on Schedule D in the past. Totals from this Form are then transferred to the new Schedule D in a summary fashion.

The Part I and Part II of Form 8949 are much the same as in the past. Part I tracks short term sales of securities and Part II is for long term sales. The definition of short and long term has not changed from the past. You still need to hold a security for more than one year to get the long term treatment of the gain to be taxed at the lower tax rate. So you will still want to be cognizant of which security you are selling and whether you held it for the required time to save those tax dollars by having long term gains.

When you look at Form 8949 you will see the box to check whether you are reporting an A, B, or C transaction. A separate form must be used for each type of transaction being reported. An A transaction is where your broker has reported a cost basis on Form 1099-B that goes to the IRS and you agree with that cost basis. A transaction that is going on the B schedule for Form 8949 is when the cost basis was not reported to the IRS on Form 1099-B. Finally, the C transaction is when you cannot code a sale as an A or B transaction.

The next thing to notice about this new form is the information that you will enter for each sale, starting with the column headed (b) –“Code for column (g)”. There are 10 different codes to choose from for this column. Several codes are to indicate that the information on cost basis or gain/loss on the 1099-B is incorrect or the sale is subject to the Wash sale rules.

So what is all this new information about? The IRS would probably say it is to improve accuracy of the tax return information and therefore the correctness of the reported income or loss. I would agree with that thought but I would add that the IRS may also be using this new information to help them in identifying transactions that they may want to do some further review and auditing.

The IRS has never had information available to them in the past about the cost basis on the sale of securities until you filed your return and provide that information. Now they are getting this information from investment houses as part of the 1099-B reporting. When you (or your tax preparer) enter codes on this new form that indicate the information is not correct on the 1099-B, it appears to me that you are indicating you have knowledge that your broker does not or that your broker has incorrect or incomplete information. Neither position appears to me to be what you necessarily want to be communicating to the IRS. So what do you do about this?

The answer lies in reviewing your records with the broker before you ever get to the point of selling the security you own. In this review, you want to be sure that the broker has the correct cost basis for every share you own of that security. If the broker does not have that information on file because maybe you moved the securities from another broker or adviser sometime in the past, then it behooves you to get this information to the broker long before you think of selling the security.

There is another reason to pull this information together now rather than later. These new rules also require you to provide timely notice to the broker of which “lots” of a security you are selling. For instance, you bought 100 shares of stock when you were very young and have been reinvesting the dividends every quarter for the last 20 years, so you actually have at least 81 “lots” of this stock. I am sure this stock may have also split several times during these 20 years, so you actually have more than 81 “lots” and may own like 3,000 shares of Stock A today. Each “lot” is also going to have its own cost basis and they may be all over the place in value.

Let’s say you decide you want to sell 500 shares of this stock at today’s price of $30.50 per share. In the past 20 years the stock has traded between $15 and $57 per share and dividends have been paid every quarter at these different prices. What lots are you selling – the highs or the lows? The highs give you a loss and the lows give you a huge profit. To do this correctly today, you need to let the broker know what you are selling when you sell, not when you do your tax return.

So, if you do not have this information readily available or do not want to do this work yourself, you need to decide who to go to for this not so easy and quick task. Maybe you start with your tax professional or financial planner to see what assistance they can provide, but you better not look for that to get done in the next few months. And be prepared to get a bill for that time and effort!