Recently I have been helping a couple of clients look at their retirement years. One of the most common issues that comes up is the tax implications of selling stock. Currently it is a pretty sweet deal at only 15% for capital gains tax the issue is that no body seems to know what they paid for the stock. It is a lot of paperwork to track over a lifetime of working! It is a common misconception that brokers track it. Actually they do track the cost of the stock they buy and sell for you. But when you get tired of your broker and decide to try a new one the new guy doesn’t usually bother to get the cost basis on the stock you transfer. Over the course of 40 years this can be a nightmare to figure out!
The IRS thinks that the missing cost basis is costing them billions of dollars! At the heart of the matter is the lack of a required reporting to the IRS by anyone other than the taxpayer. Therefore in an attempt to increase compliance the IRS has implemented a 3 stage phase in for reporting. Effective January 1 2011 stock acquired on or after January 1 2011 and then sold will be required to have its cost basis reported on the 1099 to the tax payer and the IRS. Mutual funds and dividend investment plans will be required as of January 1, 2012 and bonds and options as of January 1, 2013.
The IRS in its infinite wisdom has solved only part of the problem and has managed to create more problems in the solution. The biggest issue is what about cost basis BEFORE January 2011? What do they want me to do with the retired gentleman who began investing in 1965 and doesn’t have a clue what he paid for his stock options? What is up with the staggered phase in dates? Seems to me it just makes it harder for the brokerage firms to track what year they are supposed to do what.
Frankly I think it would have been a much better solution to say that as of January 1, 2011 for any stock sold there needs to be a cost basis reported. I am sure that with the assistance of computers and a couple of years of planning ahead for it the brokerage firms could have managed to track down and provide a cost basis for every stock they are handling for their clients. But that solution must have been too easy!