Review the information below to gain a better understanding of concepts relating to cost basis, FIFO & LIFO, and wash sales. Some of the topics covered include tax lots, legislation, reporting of dividends, and securities that are not considered substantially identical. A wash sale example is also included to help you gain a better understanding of these concepts.
What is cost basis?
Cost basis is the original purchase price you paid for an investment.
What is the difference between cost basis and adjusted cost basis?
Cost basis is the original purchase price you paid for an investment. Adjusted cost basis is the original cost basis and any adjustments due to wash sales, corporate actions, and any other transactions that affect cost basis.
What is the new cost basis legislation?
Congress passed the Emergency Economic Stabilization Act on October 3, 2008, which requires firms like Firstrade to report adjusted cost basis for taxable accounts to the IRS via Form 1099-B beginning for the 2011 tax year. The final ruling was issued by the IRS on October 12, 2010.
When will the new cost basis legislation be implemented and what is covered?
- Equities purchased or acquired on or after January 1, 2011
- Mutual funds, DRIPs and all other Registered Investment Companies purchased or acquired on or after January 1, 2012
- Options, Bonds, and all other securities purchased or acquired on or after January 1, 2014
What are FIFO and LIFO?
- FIFO stands for first in first out, shares you bought first are sold first.
- LIFO stands for last in first out, shares you bought last are sold first.
What is Firstrade's default cost basis method?
Your cost basis method will be the default FIFO (first in first out).
What is a lot?
- A tax lot is a grouping of a security that has the same price and trade date. In most cases, a trade represents a tax lot.
- As lots are sold or short sell lots are covered, the system will break up the lots if the amount of shares being sold or covered does not equal the existing lots they are matching to.
When will I receive my tax forms (1099) from Firstrade?
Tax documents (1099 Forms) will be available by February 15.
What is 1099 tax form?
This form is provided to investors who have received at least $10.00 in interest or dividends, or sold securities during the tax year. It is provided to investors who have a valid social security number and can also be used to report other sources of income to the IRS.
What information will be on the [Consolidated] 1099 form?
Information on this form includes ordinary (qualified) dividends, non-qualified dividends, interest, capital gain distributions, foreign tax withheld, and sales of securities.
What are trade confirmations and where can I find them?
- A trade confirmation is a written statement which is provided to investors with the transaction details when an order to purchase or sell a security is executed.
- Trade confirmations can be found on the website under E-documents.
- Investors are encouraged to maintain good records of their transactions so that they can properly calculate their taxes. This includes maintaining all account statements.
How do I report dividends?
- Stock Dividend: Some companies may issue additional shares of stock to their shareholders. In this event, the new shares must be factored in to the original cost basis. The holding period for these newly issued shares will be calculated from the original purchase date of the stock.
- Cash Dividend: These must be reported on your 1099-Div. They can be classified as qualified or non-qualified, depending on the company/fund and the length of time the security was held.
What is wash sale and what should I know about wash sales?
- A Wash Sale occurs if you sell securities at a loss and buy substantially identical replacement shares within 30 days before or after the sale.
- The Wash Sale Period is 30 days before and 30 days after the sale date, totaling 61 days (including the sale date).
30 days before < DATE YOU SELL > 30 days after
What securities are not considered "substantially identical"?
- Bonds issued by one institution, but with different maturity dates and different interest rates
- Common stock and preferred stock of the same company
- Stocks of different companies even if they are in the same industry
Example of a Wash sale:
You have 500 loss-generating shares of Fiko Steel, Co. that you bought at $40/share and you want to sell at $25/share to take a loss for the deduction. About 15 days after the sale, you hear some good news about Fiko Steel, Co. and buy back 500 shares at $30. Even though you experienced a loss of $15 per share, you are not allowed to claim the loss since it was repurchased within the Wash Sale Period. In addition, since you have a Wash Sale, you have to adjust the cost basis of the new purchase by adding $15/share, resulting in a cost basis of $45/share.