Effective January 1, 2011, brokers and transfer agents will be required to report the costs basis of a security in which was sold during the reporting year on Form 1099-B. Previously, only the sales proceeds received in connection with the sale of a security was included on Form 1099-B. The new requirement is intended to ease the burden on the investor and result in more accurate reporting to the IRS. However, the potential for confusion exists. For instance, assume an individual receives a compensatory grant of stock from an employer. On the date of issuance, the fair market value of the stock is $100 resulting in taxable income to the employee of the same amount. Assuming the individual sells the stock for $200, the broker or transfer agent would most likely report the transaction at a sales price of $200 and a $0 basis. The broker or transfer agent did not take into account the taxable income of $100 already recognized by the individual. Thus, individuals will have to critically review their copy of the 1099-B to ensure completeness.
The IRS has the opinion that the institutions tracking this information are more sophisticated than most investors and thus, the reporting should be more accurate. The IRS has noted in the past, since the investor was responsible for the reporting, there was room for error and interpretation. Accordingly, the IRS believes that they lose out on billions in tax revenue annually due to misreporting.