Tax Return Footnote: 2011 Form 8949 and Cost-Basis Reporting Rules

By Robert A. Green, CPA

Here is an example 2011 tax return footnote that we use for our TradeLog accounting clients. We use a modified version of this footnote for our tax preparation clients who use TradeLog software. For background information about the IRS cost-basis reporting issues and problems with 1099-Bs, see our

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Taxpayer files a Form 8949, which accounts for new IRS cost-basis reporting rules required on securities-broker-issued Form 1099-Bs. As an active investor, taxpayer has hundreds if not thousands of securities trades and compliance with the cost-basis reporting rules is a major undertaking as detailed below. This footnote is intended to explain how taxpayer handled the compliance on Form 8949.

The IRS continues to place the burden of accurate tax reporting on the taxpayer, as is evident by the requirement for brokers to include a reminder to taxpayers that "taxpayers are ultimately responsible for the accuracy of their tax returns (Pub. 1179 4.3.2)." The Information Reporting Program Advisory Committee noted this problem in its 2009 report to the IRS, stating: "Since it is impractical to require that financial institutions be responsible for tracking all possible events and taxpayer-level elections that affect basis, financial institutions should be treated as passive repositories of basis information, rather than guarantors as to its accuracy" (IRS Notice 2009-17).

Taxpayer used what is considered to be the most reliable securities trade accounting software program on the market, TradeLog by Armen Computing. TradeLog software generates a compliant IRS Form 8949. TradeLog properly accounts for trading activity with securities brokers and reports the activity on taxpayers' income tax returns. TradeLog imports the actual raw trade data of buys and sells from the brokers. TradeLog then accounts for trading gains and losses with short-term versus long-term capital gains holding periods, and it calculates wash sales in accordance with IRS law.

It's important to note that the IRS subjects securities brokers to different tax rules than taxpayers, so you can't prepare a tax return based on a Form 1099-B alone. For example, IRS rules for broker-issued Form 1099s call for wash sales to be calculated based on "identical positions," whereas the IRS requires taxpayers to use "substantially identical positions," which means wash sales between stocks and options, too. TradeLog is one of the only programs on the market that can handle substantially identical positions. Brokers don't have the means of calculating wash sales across different brokerage platforms, but the IRS requires taxpayers to do so.

IRS cost-basis reporting rules are new for 2011, and many brokers are interpreting and applying them in different ways, some of which are incorrect as of this date. Some brokers incorrectly adjust the sale proceeds of some trades for wash sales instead of the proper cost basis adjustment. Some brokers include 2010 cost basis of securities, whereas most brokers only report the required 2011 cost basis of securities purchased in 2011. Other brokers don't exclude open short sales from proceeds, as is now required by the IRS. For more examples of Form 1099-B errors, see

As stated above, the IRS has one set of rules for Form 1099-Bs (apples) and a different set of rules for taxpayers (oranges). TradeLog focuses on tax reporting for taxpayer's tax return filings and determining the correct taxable income or loss, whereas Form 1099-Bs focus on broker rules. Therefore, based on historical evidence we believe the TradeLog-generated Form 8949 is more complete and accurate than the broker provided Form 1099-B.

Many taxpayers have been finding errors on their Form 1099-Bs and have been requesting their brokers to correct them. While many have received corrected Form 1099-Bs, some brokers have not provided corrections yet, as it might require a major adjustment to their tax-reporting and accounting systems.

TradeLog provides a feature to reconcile Form 1099-B totals (proceeds and purchases), although it does not provide the means to reconcile Form 1099-Bs on a line-by-line, trade-by-trade basis, and the latter is called for in Form 8949 instructions. Without line-by-line reconciliation, if the broker-provided Form 1099-B is incorrect or incomplete, Form 8949 cannot be fully reconciled with it, especially if the results are based on different IRS requirements for the taxpayer versus the broker supplying the Form 1099-B.

If TradeLog finds a difference with Form 1099-B cost-basis, it enters one or more line items for "Adjustment to reconcile difference between accounting software and broker-provided 1099-B" on Form 8949.