Cost Basis

What does the new tax reporting law mean for me?

As a part of the Emergency Economic Stabilization Act of 2008, brokerage firms will be responsible for reporting their customers' cost basis and gains or losses to the IRS on their Consolidated Form 1099. This will ultimately simplify your year-end tax preparation because your 1099 will provide you a complete, accurate picture of your cost basis and gains/losses for the year.

When do the tax reporting changes take effect?

The IRS has implemented a phased-in approach over the next three years. Beginning Jan. 1, 2011, Scottrade will be responsible for reporting the cost basis of all equity positions you acquire from that date forward. Other non-equity investments will be phased in as follows:

Jan. 1, 2011 - Equities, REITs, ADRs

Jan. 1, 2012 - Mutual funds, ETFs

Jan. 1, 2013 - Options, fixed income and other securities

Scottrade will cover, or report to the IRS, all positions in the above investment types that are acquired on or after the date listed.

What does "cost basis" mean?

Cost basis is the original value of an asset that is used to calculate capital gain or loss for tax purposes. For most positions, your cost basis will be the purchase price plus any commissions, and it will be adjusted for stock splits, spinoffs and other corporate actions during the time you hold it.

How will Scottrade calculate my gains and losses?

There are five different methods by which Scottrade can calculate your gains and losses on equities, and you may select which one we use on a trade-by-trade basis or choose a single method to be applied to all transactions. The available methods for equities are FIFO (first in, first out), LIFO (last in, first out), HIFO (highest in, first out), Minimum Tax, Maximum Gain and Versus Purchase. Each one has advantages and disadvantages depending on your personal tax strategy, and you can learn more about them in the Knowledge Center. Unless you instruct otherwise, Scottrade will use FIFO to calculate your gains and losses.

What do I need to do to choose a calculation method?

To specify your calculation method, also known as your "tax lot relief" method, on a particular transaction, you will need to go into the Gain/Loss and Tax Center under the My Account tab in your account to make your selection. You will be able to make any changes you'd like from the day following execution up to and including the day when the trade settles. For equities, the settlement date is three market days following the date the order executes.

After the settlement date of your trade, you will not be able to make any further adjustments to your tax lot relief method. That's why it is in your best interests to understand the tax implications of your decision at the time of a transaction.

What if I don't do anything?

Many investors will do nothing at all. If you do not make any changes to your tax lot relief method, Scottrade will use FIFO.

Where can I learn more about the tax lot relief methods and when to use them?

You can learn more about cost basis and the tax lot relief methods available to you in the Knowledge Center. It's important to understand the tax implications of the tax lot relief method you select at the time of your trade because you will not be able to make any changes to your calculation method after the trade's settlement date.

Does the tax reporting law impact my 2010 taxes?

No. Scottrade will not report gain and loss information for any position acquired before Jan. 1, 2011, so you will need to report your gains and losses to the IRS in your 2010 taxes just as you have in past years.

Where can I go for help?

Your local branch office can assist you with any questions related to tax reporting, cost basis or tax lot relief. Or, call us at 1-800-619-SAVE or e-mail support@scottrade.com.

Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.