Beginning January 1, 2011, broker-dealers will have to track the cost basis of their customers's equities purchases.  They also will be required provide cost basis information (which they've been tracking) for those years in which the customers sell their equities positions.  An annual form will be sent to both the customers and the IRS.  Brokerages already are required to report the proceeds from sales of securities to the IRS. 

"We’ve been really hammering it home with our clients.  We expect our clients are going to get a Form 1099-B in 2012 [for 2011 tax year] and they could have an outcome that they don’t expect."  - -  Brian Keil, director of cost basis and reporting, Charles Schwab.

    Cost Basis Options.   Customers who purchase equities positions on different dates and/or at different prices, will be permitted to identify which shares they're selling.  Firms like Schwab, Fidelity and TD Ameritrade will offer investors choices for reporting cost basis including using the last stock bought or highest cost.  Investors may tell the company to always sell shares minimizing gains, for example, or specify shares for a particular trade before it settles, according to the IRS.  In any case, they’ll need to identify which shares are being sold before the sale settles - typically within 3 days for stocks.

    Phase-In Implementation.   The regulations take effect at later dates for other trades.  Starting 1/1/12, brokers will have to record the cost basis for mutual funds and stocks held in dividend reinvestment plans, which require investors to reinvest at least 10% of dividends paid.  The 2012 start date applies to the majority of ETFs.  Starting on 1/1/13, the rules take effect for options and fixed income securities acquired on or after that date.  the IRS.

     Default Cost Basis.   For taxpayers who don’t choose, the brokerage must record the purchase price of the first shares bought - FIFO - according to the IRS.  The firm may choose cost averaging as its default for mutual funds and stocks held in dividend reinvestment plans, the IRS said.

    Transferring Records, Erroneous Reporting.   Brokerages will be required to transfer cost-basis information captured under this program for investors who switch firms.  When a firm sends an incorrect annual form to the taxpayer, it will be charged a $100 penalty;  a separate $100 penalty will be charged for sending an incorrect form to IRS.

For a complete read, click onto:  [Bloomberg, 12/21, "Brokerages Will Have to Tell..."]

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