Is a Brokerage "Redemption Fee" tax deductible?

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Sandtrap
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Is a Brokerage "Redemption Fee" tax deductible?

Post by Sandtrap » Fri Feb 16, 2018 10:45 pm

I got "dinged" a "redemption fee" at Schwab on the sale of a fund in Jan 2017.
(my error) It's called an "early redemption fee".

Is this "fee" deductible on my taxes?

Thanks everyone for you help.
j :D

clown
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by clown » Fri Feb 16, 2018 11:05 pm

I am no tax expert, but would think that you would get $X amount less in your net settlement because of the brokerage fee. Example: if you sold for a gross of $100 and had a brokerage fee of $5 and redemption off of $10, your net received would be $85. The amount received, compared to your cost, will either produce a capital gain or a capital loss.

If you have a capital gain, the gain will essentially be decreased by the amount of the redemption fee.

If you have a capital loss, the loss will essentially be increased by the amount of the redemption fee.

In either case, you receive some tax benefit from the existence of the redemption fee. But this would not be a line-item deduction of Schedule A.

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welderwannabe
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by welderwannabe » Sat Feb 17, 2018 7:40 am

The fees would increase your cost basis, reducing your 'profit' if any or increasing your loss.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

livesoft
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by livesoft » Sat Feb 17, 2018 8:08 am

IRS Publication 550, page 45, "redemption fees"

https://www.irs.gov/pub/irs-pdf/p550.pdf

The rest of the publication is also interesting. All US investors should read it in full at some point in their lives.
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Wagnerjb
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by Wagnerjb » Sat Feb 17, 2018 9:31 am

welderwannabe wrote:
Sat Feb 17, 2018 7:40 am
The fees would increase your cost basis, reducing your 'profit' if any or increasing your loss.
According to the IRS publication that Livesoft linked, a redemption fee reduces your sales proceeds.
Andy

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welderwannabe
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by welderwannabe » Sat Feb 17, 2018 9:50 am

Wagnerjb wrote:
Sat Feb 17, 2018 9:31 am
welderwannabe wrote:
Sat Feb 17, 2018 7:40 am
The fees would increase your cost basis, reducing your 'profit' if any or increasing your loss.
According to the IRS publication that Livesoft linked, a redemption fee reduces your sales proceeds.
While technically correct it is really potato or potatato :). Whether you raise the left side of the equation or lower the right, when subtracting, you get the same answer.

As stated by Fidelity:
How to treat the fee and service charges you incur when you sell shares of a mutual fund or individual security depends on how the sales are reported on your Form 1099-B. Fidelity's 1099-B deducts the fee from the proceeds. However, you can add the fees to the cost basis. Your gain or loss will be the same in either calculation.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

livesoft
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by livesoft » Sat Feb 17, 2018 9:53 am

welderwannabe wrote:
Sat Feb 17, 2018 9:50 am
As stated by Fidelity:
How to treat the fee and service charges you incur when you sell shares of a mutual fund or individual security depends on how the sales are reported on your Form 1099-B. Fidelity's 1099-B deducts the fee from the proceeds. However, you can add the fees to the cost basis. Your gain or loss will be the same in either calculation.
I imagine that most taxpayers and tax preparers would not modify the 1099-B information as reported to the IRS, so this is puzzling text from Fidelity to say that one can change the 1099-B info that appears on one's tax return. Yes, the gain or loss ends up the same unless you make a mistake and do both (add fees to cost basis when fees were already subtracted from the proceeds).
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Sandtrap
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by Sandtrap » Sat Feb 17, 2018 10:05 am

welderwannabe wrote:
Sat Feb 17, 2018 9:50 am
Wagnerjb wrote:
Sat Feb 17, 2018 9:31 am
welderwannabe wrote:
Sat Feb 17, 2018 7:40 am
The fees would increase your cost basis, reducing your 'profit' if any or increasing your loss.
According to the IRS publication that Livesoft linked, a redemption fee reduces your sales proceeds.
While technically correct it is really potato or potatato :). Whether you raise the left side of the equation or lower the right, when subtracting, you get the same answer.

As stated by Fidelity:
How to treat the fee and service charges you incur when you sell shares of a mutual fund or individual security depends on how the sales are reported on your Form 1099-B. Fidelity's 1099-B deducts the fee from the proceeds. However, you can add the fees to the cost basis. Your gain or loss will be the same in either calculation.
So, if it reduces sales proceeds then it is a deduction off the top, (like a business expense on profits?) in that tax year. . .

vs

If it is a reduction of cost basis, then that does not have to be claimed in that tax year but can be carried forward (indefinitely?)

Is this correct?
Confused.
Thanks everyone for your kind help.
j :D

Chip
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by Chip » Sat Feb 17, 2018 10:29 am

welderwannabe is correct, depending on the circumstances. The important issue is that the total sale proceeds reported to the IRS by the broker match what the taxpayer reports to the IRS.

If the broker reports GROSS proceeds and doesn't include the redemption fee in cost basis, taxpayer should report gross proceeds and increase basis via an adjustment on Form 8949 using adjustment code "E".

I would think this situation would be incredibly rare with covered assets. And extremely rare with noncovered assets. In 10 years of TaxAide tax prep I have yet to see a 1099-B that reported gross rather than net proceeds.

Wagnerjb
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by Wagnerjb » Sat Feb 17, 2018 10:49 am

Chip wrote:
Sat Feb 17, 2018 10:29 am
welderwannabe is correct, depending on the circumstances. The important issue is that the total sale proceeds reported to the IRS by the broker match what the taxpayer reports to the IRS.

If the broker reports GROSS proceeds and doesn't include the redemption fee in cost basis, taxpayer should report gross proceeds and increase basis via an adjustment on Form 8949 using adjustment code "E".

I would think this situation would be incredibly rare with covered assets. And extremely rare with noncovered assets. In 10 years of TaxAide tax prep I have yet to see a 1099-B that reported gross rather than net proceeds.
I just saw two of these this week, on my brother's 1099 from Scottrade. (I am also a TaxAide volunteer and I have seen only a few of these in my four years in TaxAide). The Scottrade 1099 statement had two "miscellaneous fees" of $20 each for two stocks that my brother owns. One was sold in 2017 and I applied the $20 adjustment just exactly as you mentioned. That sale was a short-term "covered" sale, with cost basis reported to the IRS. The other stock wasn't sold in 2017, so I may add that $20 to the basis when that stock is sold.

I realize this is all a bit academic, since the net gain or net loss is what matters. However, I am reluctant to report a cost basis or proceeds figure that differs from the 1099. In that case, using the adjustment column is probably the best answer.

Best wishes.
Andy

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welderwannabe
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by welderwannabe » Sat Feb 17, 2018 11:46 am

I'm sorry, some of this confusion is probably my fault. I was not intending to get into a debate as to which column a redemption fee goes on a 1099 or tax forms. The original OP question was asking if a redemption fee was 'deductible' or not, and what I was intending to convey was that it just reduced the profit (or increased the loss) of a sale, and it really doesn't matter whether something was a front-end or back-end load/fee with regards to how MUCH taxes you end up paying. It ends up being the same number at the end of the day either way. Sorry guys!
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

Chip
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by Chip » Sat Feb 17, 2018 2:10 pm

Wagnerjb wrote:
Sat Feb 17, 2018 10:49 am
The Scottrade 1099 statement had two "miscellaneous fees" of $20 each for two stocks that my brother owns. One was sold in 2017 and I applied the $20 adjustment just exactly as you mentioned. That sale was a short-term "covered" sale, with cost basis reported to the IRS. The other stock wasn't sold in 2017, so I may add that $20 to the basis when that stock is sold.
Thanks, Andy. What kind of fees were they? I guess I've never seen any fees other than commissions and SEC fees at TaxAide. So maybe the standard procedure for most brokers is to net those two in "Net Proceeds" but not other fees?

Wagnerjb
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by Wagnerjb » Sun Feb 18, 2018 8:43 am

Chip wrote:
Sat Feb 17, 2018 2:10 pm
Wagnerjb wrote:
Sat Feb 17, 2018 10:49 am
The Scottrade 1099 statement had two "miscellaneous fees" of $20 each for two stocks that my brother owns. One was sold in 2017 and I applied the $20 adjustment just exactly as you mentioned. That sale was a short-term "covered" sale, with cost basis reported to the IRS. The other stock wasn't sold in 2017, so I may add that $20 to the basis when that stock is sold.
Thanks, Andy. What kind of fees were they? I guess I've never seen any fees other than commissions and SEC fees at TaxAide. So maybe the standard procedure for most brokers is to net those two in "Net Proceeds" but not other fees?
These were fees for a reorganized company. One example was when DuPont and Dow merged, the broker charged this $20 fee. The fees were charged when the companies began trading under the new stock symbol, so this clearly isn't a redemption fee.

Best wishes.
Andy

Chip
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by Chip » Sun Feb 18, 2018 9:12 am

I see. Thanks, Andy.

I suspect part of the reason I've never seen anything like that at TaxAide is that, as you know, few of our clients keep records at that level of detail.

Wagnerjb
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Re: Is a Brokerage "Redemption Fee" tax deductible?

Post by Wagnerjb » Sun Feb 18, 2018 9:29 am

Chip wrote:
Sun Feb 18, 2018 9:12 am
I see. Thanks, Andy.

I suspect part of the reason I've never seen anything like that at TaxAide is that, as you know, few of our clients keep records at that level of detail.
That information was at the very back of a 16 page broker 1099 statement, although the fees were summarized in a table at the front of the document.

In my four years at TaxAide, I have found that maybe 5% of customers have a brokerage form 1099. However, when the customer has a brokerage form 1099 they always bring the entire document along.

But if a TaxAide customer had this kind of miscellaneous fee in 2017 and sold the shares in (for example) 2019, I can guarantee that they won't bring the record of the 2017 reorganization fee along....even though it is part of the net gain or loss. :D

Best wishes.
Andy

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