Let me explain.  For any investment account outside of a retirement plan, such as individual or jointly owned mutual fund and brokerage accounts, the owner is supposed to keep track of every transaction and report gains or losses – each and every year.  That means every purchase (“buy”), redemption (“sell”), dividend, merger, or split that happens from January through December that year needs to be tracked and any taxable gain or loss has to be reported on Schedule D of Form 1040.

If you own just a few stocks or bonds that you bought or inherited and hold them for a long time, it may or may not be a big deal. This is commonly referred to as “buy-and-hold” strategy or “passive management”.

In the financial and estate planning world, however, many individuals and families tend to have more complex holdings that require active attention and frequent rebalancing.  This is the world of actively managed accounts and it can be a useful strategy to help larger investment accounts and trust assets gain more diversification, produce less risk, and actually reduce taxes.

So, before 2011, if an account had 200 trades in a year, which was certainly possible, they would receive a 1099-B for the trades and then report each of the 200 trades, line by line, showing the original purchase price (“basis”) and the sale price.   The difference would be the gain or loss, all manually calculated, one by one.

In 2011, the IRS quietly changed the rules and introduced Form 8949, which simply allows a taxpayer to summarize all of their trading activity for the whole year in just a few boxes.  Since 2011, the mutual fund and brokerage custodians should be reporting your “basis” on each transaction with every 1099-B they send you.  Because the IRS also gets a copy of the same 1099-B, the need to report each transaction line by line should now be a thing of the past.  Of course there are a few exceptions, but they tend to be rare.

How bad can it get?  Two years ago, a client called in a panic and said they had received a 1099-B that contained 250 pages, each page containing multiple line items for trades during the prior year!   Since they were filing their own taxes, the were using a popular piece of software that couldn’t even handle that number of transactions, let alone have the time to enter them.  They did contact a CPA that a friend had suggested and of course, the quote they received was exorbitant.

Fortunately, after the very brief phone call, we reassured the client of two things: 1) the way their managed account was set up, they were not being charged a separate fee for each trade, and 2) it was time to go find a different CPA.

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Jeff Turner is a registered representative of and offers Securities, Investment Advisory and Financial Planning Services through MML Investors Services, LLC, Member SIPC, 12 Cadillac Drive, Suite 440, Brentwood, TN  37027 (615) 309-6300.  Continuum Planning Partners is not an affiliate or subsidiary of MML Investors Services, LLC or its affiliated companies.  CRN201903-206439

Continuum Planning Partners Post Author
Jeff Turner, CFP®, CLU, ChFC, AEP®

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