Harvesting Investment Losses – Get Your Documentation In Order
As we get to the end of the year, many of you may be making adjustments in your investment portfolio. Your financial advisor may be telling you to rebalance your portfolio to get it back in line with your overall investment allocation strategy. Your advisor may also advise you to sell some of your investments to “harvest tax losses” to offset some of your taxable gains. Or, you may have had to sell some investments to cover some expenses. Whatever your reason for selling your investments, you need to be aware of the information you will need for your tax return next spring.
When you prepare your tax return, you will be required to account for the sales proceeds. If you are not able to also account for the cost of the stocks, you will be taxed on the entire proceeds, not just your profit, if there is any. Without the cost basis information, you also will not be able to take advantage of any losses to offset gains.
The broker will provide a Form 1099-B, or multiple Forms, to report the transactions to the IRS and to you. Although your broker will provide cost basis information on the Form 1099-B for certain purchases and transfers into your account in 2011 and later, the broker is not required to provide cost basis information for all transactions prior to 2011. For example, if you purchased some stock in 2009 that you sold in 2013, the broker is not required to include the cost basis information in the Form 1099-B.
That means you must have your cost records for these older purchases available to provide to your tax return preparer. In addition, it is a good idea to have your records available to check the information on the Form 1099-B from the broker. You should check this information as soon as you receive the Form 1099-B so you have time to get it corrected if it is incorrect.
You will need the cost basis information now as you make your year-end investment decisions. After you have made those decisions and taken the appropriate actions, keep those records and notes in good order to save yourself time and aggravation next spring. That way you do not have to rely solely on the broker’s records.
If you have any specific questions about the records you will need, talk to your tax return preparer or other tax professional sooner rather than later.