With the 2010 tax season right around the corner, it's not easy to start thinking about your 2011 taxes. But, with a new tax reporting law taking effect on Jan. 1, 2011, the trading decisions you make starting Jan. 1 will directly impact your taxes next year. Note that the new law has no effect on your 2010 taxes.

As a part of the Emergency Economic Stabilization Act of 2008, Scottrade will begin tracking and reporting to the IRS your cost basis and gain/loss information for all equity positions you enter into beginning Jan. 1, 2011. You can choose which method we use to calculate your gains and losses, but you need to make your selection before your trade settles.

Why does it matter? The calculation method used to determine your gains or losses on an individual transaction can impact the taxes you are responsible for paying. For example, short-term gains are taxed at a higher rate than long-term gains, and capital losses can offset capital gains for tax purposes. It is in your best interests to understand the tax implications of your decision at the time of a transaction. Unless you elect otherwise, Scottrade will calculate your gains and losses using the FIFO (first in, first out) method. On Jan. 1, 2011, your account will be re-set to FIFO, and you can make your desired changes in January before your first trade settles.

Let's take a look at your choices for equities and when you might use each:

• FIFO - First In, First Out. The shares you acquire first are the shares that are sold first. FIFO is well suited for accounts with few individual tax lots and limited differences in price per share for basis. Investors with various lot positions bought over an extended period of time at different prices should consider the tax consequences of using FIFO when selling those positions.
• LIFO - Last In, First Out. The most recently acquired shares are sold first. LIFO creates shorter term transactions with potentially lower gains or losses as the current sale price may be closer to the purchase price of the most recently acquired shares. The tendency to being taxed at ordinary rates (tax rate of short-term gains) tends to impact investors' choice when using LIFO.
• HIFO - Highest In, First Out. HIFO is specifically designed to limit your gain amounts, which creates lower taxable capital gains, but it also maximizes the losses you will incur. Because HIFO doesn't distinguish between long-term and short-term positions, HIFO is attractive to investors who have positions that have roughly the same duration (all short-term or all long-term), but should be monitored in portfolios with a mix of position lengths.
• Minimum Tax - The Tax Center system will determine the best lot to sell to minimize your after-tax gains, thus lowering your tax burden. Lowering your tax burden often means lower realized gains, which can be a downside for investors looking for the maximum cash flow from their sales.
• Maximum Gain - The Tax Center system will sell lots first that would realize the largest taxable gain. This strategy is designed to maximize gain and is most often used to take advantage of available realized losses that can offset gains.
• Versus Purchase - Match a specific buy transaction with a specific sell order prior to the settlement date of the trade. You choose exactly which shares at which purchase price to sell to achieve your desired tax impact. Say, for example, you own three different 50-share lots of the same stock, all bought at different times for different prices. If you want to sell 50 shares, you can choose which 50 you want to sell to fit your tax strategy. This can potentially allow you to control whether your gains are long-term or short-term and higher or lower.

Making Your Selection

You can choose your calculation method, also called a "tax lot relief method", in the Gain/Loss and Tax Center in your account. You'll find the Gain/Loss and Tax Center under the My Account tab.

Some things to remember when selecting your relief method:

• Your selection for a particular transaction can only be made from the day following execution up to the day when the trade settles.
• Once a trade settles, you cannot make any changes to the relief method.
• If you choose not to specify a different relief method, Scottrade will calculate your gains and losses using FIFO.
• Scottrade is responsible for reporting your cost basis, gain and losses on equity positions opened Jan. 1, 2011, or later. While you can specify lot relief methods for other types of investments, including ETFs and mutual funds, Scottrade will not report your gains and losses on these investments to the IRS in the 2011 tax year. For details on when other investment types will be covered by Scottrade, view the printable Cost Basis Guide.

Note that because this law takes effect Jan. 1, 2011, your 2010 taxes will not be impacted by it.

If you have questions about the lot relief methods or how to select them in your account, please contact your local branch office.