In an effort to reduce the number of “tax cheats”, the Federal government has been significantly increasing the reporting requirements on individuals and business. In a continuation of this strategic initiative, a new law imposed on Brokerage Firms (and other such custodians) went into effect on January 1, 2011.
Under this new tax law, brokerage firms and other custodians of investments are required to calculate and report your gains or losses on certain trades to the IRS. This means that you need to pay close attention to not only your cost basis (the amount that you paid for the security), but also the method in which the gain is calculated. Most custodians are using “first-in, first-out” for equities and the average cost method for mutual funds to determine your cost basis. However, under the law you can elect to report on the “first-in, first-out” method, average cost or by identifying specific stocks. You can select the mthod on a per security basis. We are not, yet, certain how the custodians are planing to allow taxpayers the ability to keep track of the specific methods on a per secuirty basis. The first time the custodians will report to the IRS is in early 2012.