Reporting my own cost basis and/or lots

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taxthrowaway1
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Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

Howdy all,

So Schwab [expletive removed by admin LadyGeek] my mutual fund sale. They were supposed to sell my most recent lots (for a loss), but sold my oldest lots (for a large gain). They have some very confusing rules about changing the cost basis method for lots purchased going forward vs existing lots, and also how they report to the IRS, and their CS rep gave me bad info apparently.

So now a Schwab rep is trying to do two things for me: (1) change the reported lots sold to be the newest ones, and (2) report their actual cost basis instead of the average (across _all_ lots I own, which comes out to a large gain). He thinks they may be able to do (1), but probably not (2).

Two questions:

(1) If Schwab reports the oldest lots being sold, can I still report to the IRS that this is wrong and the newest lots were actually sold?
(2) If Schwab corrects this to the newest lots but still shows the average cost (across all my lots, not just the sold ones), can I tell the IRS the actual cost?

I'm pretty sure the answer to (2) is yes, but not sure on (1).

Thanks!
Last edited by taxthrowaway1 on Wed Jan 12, 2022 1:52 pm, edited 4 times in total.
jebmke
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Re: Reporting my own cost basis

Post by jebmke »

Do you have any documentation that your order requested that the newer lots be sold?
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

I have the document that I sent them a few days earlier requesting that their Tax Lot Optimizer be used (which would have picked the correct lots).

Edit: And an email from the rep saying that they will use TLO.
Last edited by taxthrowaway1 on Wed Jan 12, 2022 12:32 pm, edited 1 time in total.
jebmke
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Re: Reporting my own cost basis and/or lots

Post by jebmke »

If you can demonstrate that the TLO would have selected them (which it seems it would), you should be able to make an adjustment on Form 8949 to adjust the cost basis to what should have been reported [I'm assuming these are covered shares - if non-covered you don't have to do anything more than put in the basis you think is correct]. Of course, unless CS fixes the basis on the remaining shares, this condemns you to making adjustments on all future sales.
When you discover that you are riding a dead horse, the best strategy is to dismount.
JoeNJ28
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Re: Reporting my own cost basis and/or lots

Post by JoeNJ28 »

You can tell the IRS whatever you want but when they compare what you input vs what Schwab sends them you will have an issue. You have to have Schwab fix it on their end.
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

Okay, the rep just told me that they can't do anything for me. IRS rules require that my existing lots (which were purchased with Average Cost selected) be reported at Average Cost, and even though TLO is technically being used, they're considered to all have the same cost, so it has no preference and reverts to FIFO.

I have records of all purchases, and I'm really hoping I can override Schwab's reporting with the IRS. Otherwise this is going to hurt bad.
Last edited by taxthrowaway1 on Wed Jan 12, 2022 1:54 pm, edited 1 time in total.
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

jebmke wrote: Wed Jan 12, 2022 12:34 pm If you can demonstrate that the TLO would have selected them (which it seems it would), you should be able to make an adjustment on Form 8949 to adjust the cost basis to what should have been reported [I'm assuming these are covered shares - if non-covered you don't have to do anything more than put in the basis you think is correct]. Of course, unless CS fixes the basis on the remaining shares, this condemns you to making adjustments on all future sales.
Thanks. Please see my most recent comment. Schwab thinks that TLO would still pick the oldest lots, since it treats them all as having the same cost (and therefore defaults to FIFO). I don't think it's a stretch to tell the IRS that TLO should have picked the most recent, but it's also possible that they won't allow this if they're following the same logic as Schwab. Any thoughts?

Edit: Oh, and I'm pretty sure they're covered :(
an_asker
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Re: Reporting my own cost basis and/or lots

Post by an_asker »

taxthrowaway1 wrote: Wed Jan 12, 2022 12:48 pm
jebmke wrote: Wed Jan 12, 2022 12:34 pm If you can demonstrate that the TLO would have selected them (which it seems it would), you should be able to make an adjustment on Form 8949 to adjust the cost basis to what should have been reported [I'm assuming these are covered shares - if non-covered you don't have to do anything more than put in the basis you think is correct]. Of course, unless CS fixes the basis on the remaining shares, this condemns you to making adjustments on all future sales.
Thanks. Please see my most recent comment. Schwab thinks that TLO would still pick the oldest lots, since it treats them all as having the same cost (and therefore defaults to FIFO). I don't think it's a stretch to tell the IRS that TLO should have picked the most recent, but it's also possible that they won't allow this if they're following the same logic as Schwab. Any thoughts?

Edit: Oh, and I'm pretty sure they're covered :(
I cannot help you because I have no clue what a TLO is.

That said, when I sold specific lots via the Schwab website a few years ago, I got to pick exactly which lot I wanted to sell. I wonder if they have taken away this feature or if you wanted to be hands off and use the TLO instead.
SlowMovingInvestor
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Re: Reporting my own cost basis and/or lots

Post by SlowMovingInvestor »

JoeNJ28 wrote: Wed Jan 12, 2022 12:35 pm You can tell the IRS whatever you want but when they compare what you input vs what Schwab sends them you will have an issue. You have to have Schwab fix it on their end.

Form 8949 allows adjustment of basis and gives several reasons why you might want to do so (you have to specify a letter code for reason). I've done it for ESPP shares several times. I'm sure lots of people do that.
Last edited by SlowMovingInvestor on Wed Jan 12, 2022 1:15 pm, edited 1 time in total.
Topic Author
taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

an_asker wrote: Wed Jan 12, 2022 1:02 pm I cannot help you because I have no clue what a TLO is.
Sorry, TLO = Tax Lot Optimizer. It picks lots with losses (short- and then long-term) then gains (long- and then short-term)
yeah
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Re: Reporting my own cost basis and/or lots

Post by yeah »

Schwab customer here..., my understanding is that you can select the cost basis method for equities, options and fixed income. Mutual Funds are dollar cost averaged - you have no other option.
an_asker
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Re: Reporting my own cost basis and/or lots

Post by an_asker »

taxthrowaway1 wrote: Wed Jan 12, 2022 1:09 pm
an_asker wrote: Wed Jan 12, 2022 1:02 pm I cannot help you because I have no clue what a TLO is.
Sorry, TLO = Tax Lot Optimizer. It picks lots with losses (short- and then long-term) then gains (long- and then short-term)
Sorry I should have been more specific - "I have no clue what a Tax Lot Optimizer is" ;-)

After you had introduced the abbreviation, I was too lazy to retype it all lol

PS: I mean to say, I understand the term, but I don't know how it does its job.
an_asker
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Re: Reporting my own cost basis and/or lots

Post by an_asker »

yeah wrote: Wed Jan 12, 2022 1:29 pm Schwab customer here..., my understanding is that you can select the cost basis method for equities, options and fixed income. Mutual Funds are dollar cost averaged - you have no other option.
I was pretty sure I had picked lots for a mutual fund once. Maybe I am mistaken - it has been a few years...
Topic Author
taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

an_asker wrote: Wed Jan 12, 2022 1:38 pm
taxthrowaway1 wrote: Wed Jan 12, 2022 1:09 pm
an_asker wrote: Wed Jan 12, 2022 1:02 pm I cannot help you because I have no clue what a TLO is.
Sorry, TLO = Tax Lot Optimizer. It picks lots with losses (short- and then long-term) then gains (long- and then short-term)
Sorry I should have been more specific - "I have no clue what a Tax Lot Optimizer is" ;-)

After you had introduced the abbreviation, I was too lazy to retype it all lol

PS: I mean to say, I understand the term, but I don't know how it does its job.
Ah. Sorry, thought I had explained it: it picks lots with losses first, then gains. But apparently if the lots were purchased while "average cost" was selected, then at sale, it treats all of those lots as having the same (averaged) cost, and thus has no preference. In that case, it falls back to FIFO. (And then if new lots are purchased while TLO is selected, it gets more complicated...)

But regardless of all of those details, I guess the underlying question is: will it raise any red flags with the IRS if I use 8949 (code B), and if audited, are they likely to buy the explanation that I intended to sell the latest lots (and that a reasonable person would assume that Schwab, using TLO, would have picked them)?
ivgrivchuck
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Re: Reporting my own cost basis and/or lots

Post by ivgrivchuck »

taxthrowaway1 wrote: Wed Jan 12, 2022 12:48 pm
jebmke wrote: Wed Jan 12, 2022 12:34 pm If you can demonstrate that the TLO would have selected them (which it seems it would), you should be able to make an adjustment on Form 8949 to adjust the cost basis to what should have been reported [I'm assuming these are covered shares - if non-covered you don't have to do anything more than put in the basis you think is correct]. Of course, unless CS fixes the basis on the remaining shares, this condemns you to making adjustments on all future sales.
Thanks. Please see my most recent comment. Schwab thinks that TLO would still pick the oldest lots, since it treats them all as having the same cost (and therefore defaults to FIFO). I don't think it's a stretch to tell the IRS that TLO should have picked the most recent, but it's also possible that they won't allow this if they're following the same logic as Schwab. Any thoughts?

Edit: Oh, and I'm pretty sure they're covered :(
So you chose to use Schwab algorithm (Tax lot optimizer) and the optimizer chose Average cost.

If the transaction has been settled, and the optimizer worked as specified (no bugs), then it sounds like that you might have a hard time convincing IRS about the alternative basis method...
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

ivgrivchuck wrote: Wed Jan 12, 2022 1:56 pm So you chose to use Schwab algorithm (Tax lot optimizer) and the optimizer chose Average cost.
Sort of. It "optimized" by considering all lots to be of equal cost, because they were purchased while "Average Cost" was selected.

Perhaps this question is too technical to expect a solid answer online, and I have to call a tax accountant and pray they've dealt with this kind of issue before.
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Re: Reporting my own cost basis and/or lots

Post by ivgrivchuck »

taxthrowaway1 wrote: Wed Jan 12, 2022 2:05 pm
ivgrivchuck wrote: Wed Jan 12, 2022 1:56 pm So you chose to use Schwab algorithm (Tax lot optimizer) and the optimizer chose Average cost.
Sort of. It "optimized" by considering all lots to be of equal cost, because they were purchased while "Average Cost" was selected.

Perhaps this question is too technical to expect a solid answer online, and I have to call a tax accountant and pray they've dealt with this kind of issue before.
My hunch is that you are out of luck, but if there is a lot of money on the line, it may be the best to consult with an expert.
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yeah
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Re: Reporting my own cost basis and/or lots

Post by yeah »

I spoke to Schwab last week about this, and was told Average Cost method on mutual funds and no other option is available. This thread has peaked my interest and I called Schwab again. The customer rep I spoke with stated that Schwab does offer a "form" that allows you to change the Cost Basis Accounting Method from Average Cost Method to Identified Cost Method.

I know this doesn't answer the original poster's question(s), but this might be beneficial for other Schwab customers on this website.
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

yeah wrote: Wed Jan 12, 2022 2:13 pm The customer rep I spoke with stated that Schwab does offer a "form" that allows you to change the Cost Basis Accounting Method from Average Cost Method to Identified Cost Method.
This is the form I filled out, and Schwab confirms that they received and applied it. What they didn't tell me was that it has no effect on lots that were purchased with Average Cost selected. TLO still gets used for the sale, but the ridiculous reasoning I mentioned earlier gets applied: TLO sees all existing lots as having the same cost, and so has no preference and falls back to FIFO.
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

taxthrowaway1 wrote: Wed Jan 12, 2022 2:15 pm
yeah wrote: Wed Jan 12, 2022 2:13 pm The customer rep I spoke with stated that Schwab does offer a "form" that allows you to change the Cost Basis Accounting Method from Average Cost Method to Identified Cost Method.
This is the form I filled out, and Schwab confirms that they received and applied it. What they didn't tell me was that it has no effect on lots that were purchased with Average Cost selected. TLO still gets used for the sale, but the ridiculous reasoning I mentioned earlier gets applied: TLO sees all existing lots as having the same cost, and so has no preference and falls back to FIFO.
The more I think about this, the less sense it makes. That form gives no indication of this nonsensical reasoning. I'm on hold with their cost basis team, and although Schwab is unlikely to admit to messing up, I'm hoping the IRS sees the problem.
ivgrivchuck
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Re: Reporting my own cost basis and/or lots

Post by ivgrivchuck »

taxthrowaway1 wrote: Wed Jan 12, 2022 2:28 pm
taxthrowaway1 wrote: Wed Jan 12, 2022 2:15 pm
yeah wrote: Wed Jan 12, 2022 2:13 pm The customer rep I spoke with stated that Schwab does offer a "form" that allows you to change the Cost Basis Accounting Method from Average Cost Method to Identified Cost Method.
This is the form I filled out, and Schwab confirms that they received and applied it. What they didn't tell me was that it has no effect on lots that were purchased with Average Cost selected. TLO still gets used for the sale, but the ridiculous reasoning I mentioned earlier gets applied: TLO sees all existing lots as having the same cost, and so has no preference and falls back to FIFO.
The more I think about this, the less sense it makes. That form gives no indication of this nonsensical reasoning. I'm on hold with their cost basis team, and although Schwab is unlikely to admit to messing up, I'm hoping the IRS sees the problem.
Your argument is that the "tax lot optimizer" didn't work as specified.

You might also consider approaching them in writing, where you can clearly state your case (Based on how the TLO is described here and here, this is what should have happened, but this is what happened), and also request a reply in writing.
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

Okay I've gotten more clarification. Whew, this stuff is complicated.

https://www.irs.gov/pub/irs-pdf/p550.pdf
"You can revoke an election to use the average basis method for your covered securities by sending written notice to the custodian or agent holding the stock for which you want to revoke the election. The election must generally be revoked by the earlier of 1 year after you make the election or the date of the first sale, transfer, or disposition of the stock following the election. The revocation applies to all the stock you hold in an account that is identical to the shares of stock for which you are revoking the election. After revoking your election, your basis in the shares of stock to which the revocation applies is the basis before averaging."
https://www.ecfr.gov/current/title-26/c ... n-1.1012-1
"The taxpayer must notify, in writing by any reasonable means, the custodian or agent holding the stock to which the change applies. Unless paragraph (e)(9)(iii) of this section applies, the basis of each share of stock to which the change applies remains the same as the basis immediately before the change."
https://www.irs.gov/pub/irs-drop/n-11-56.pdf
"Section 1.1012-1(e)(9)(i) provides that, beginning in 2012, a taxpayer elects the average basis method by notifying a broker in writing. Under § 1.1012-1(e)(9)(iii), a taxpayer that wants to revoke its average basis method election must revoke the election within one year after making the election or, if earlier, by the date of the first disposition of the stock. A broker may extend the one-year period but not beyond the first disposition of the stock.

After a revocation, the basis of the stock reverts to the cost basis.
After the revocation period has expired, a taxpayer may change from the average basis method to the cost method at any time, but only for stock acquired after the date of the change (the change is prospective). After the change, the basis of the stock that was averaged remains averaged. Section 1.1012-1(e)(9)(iv)."
So basically, because I did not make the election to switch to Spec ID within one year of first making the Average Cost election, Schwab is not required to honor it retroactively. All of the existing shares have the same (averaged) cost basis.

I think my only hope is to request Schwab to say that they revoked the election for me before the sale, which is a very long shot. Especially because of this wording in the form I sent: "Changes are on a “go forward” basis."

Either that or pretend this is what happened (and hope I don't get audited).
MarkNYC
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Re: Reporting my own cost basis and/or lots

Post by MarkNYC »

taxthrowaway1 wrote: Wed Jan 12, 2022 12:48 pm
jebmke wrote: Wed Jan 12, 2022 12:34 pm If you can demonstrate that the TLO would have selected them (which it seems it would), you should be able to make an adjustment on Form 8949 to adjust the cost basis to what should have been reported [I'm assuming these are covered shares - if non-covered you don't have to do anything more than put in the basis you think is correct]. Of course, unless CS fixes the basis on the remaining shares, this condemns you to making adjustments on all future sales.
Thanks. Please see my most recent comment. Schwab thinks that TLO would still pick the oldest lots, since it treats them all as having the same cost (and therefore defaults to FIFO). I don't think it's a stretch to tell the IRS that TLO should have picked the most recent, but it's also possible that they won't allow this if they're following the same logic as Schwab. Any thoughts?
Schwab's account disclosure form indicates there are 2 components to their Cost Basis Accounting procedures:

1) Cost Method
---- Average cost, or
---- Specific identification
2) Lot Selection Method
---- FIFO
---- LIFO
---- HCLOT
---- LCLOT
----TLO

For Cost Method, their default for mutual funds is Average Cost, and if Average Cost is used then LIFO is the default. If you select Specific Identification, then you must also choose a Lot Selection Method.

So if you did not select Specific Identification as your Cost Method upfront, it seems that your request for TLO doesn't do you much good. You should confirm with a Schwab representative if this is how it works.
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

MarkNYC wrote: Wed Jan 12, 2022 3:46 pm Schwab's account disclosure form indicates there are 2 components to their Cost Basis Accounting procedures:

1) Cost Method
---- Average cost, or
---- Specific identification
2) Lot Selection Method
---- FIFO
---- LIFO
---- HCLOT
---- LCLOT
----TLO

For Cost Method, their default for mutual funds is Average Cost, and if Average Cost is used then LIFO is the default. If you select Specific Identification, then you must also choose a Lot Selection Method.

So if you did not select Specific Identification as your Cost Method upfront, it seems that your request for TLO doesn't do you much good. You should confirm with a Schwab representative if this is how it works.
Yeah I just got off the phone with them, and then read the relevant IRS code. The issue is that once you make the election for Average Cost (usually on first purchase), you must change it within one year to Spec ID if you want it to be applied retroactively (i.e., to existing lots). After that, it only applies prospectively (unless the brokerage explicitly extends this deadline). In the case of Schwab, not only do they not extend it, it seems they don't even honor the one year timeline (though it wouldn't have helped me anyway).
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Re: Reporting my own cost basis and/or lots

Post by LadyGeek »

taxthrowaway1 wrote: Wed Jan 12, 2022 3:39 pm ...So basically, because I did not make the election to switch to Spec ID within one year of first making the Average Cost election, Schwab is not required to honor it retroactively. All of the existing shares have the same (averaged) cost basis.

I think my only hope is to request Schwab to say that they revoked the election for me before the sale, which is a very long shot. Especially because of this wording in the form I sent: "Changes are on a “go forward” basis."

Either that or pretend this is what happened (and hope I don't get audited).
This is a frustrating situation, but pretending it didn't happen is not the way to go. We'll be happy to work with you to fix this the right way. If you don't understand something, please let us know and we'll try again.

For the record, discussions of dishonest behavior or bypassing the law are totally unacceptable.

The intent is to understand how to do this within the existing legal framework; in which case this discussion can continue.

The approach is to educate members on how to do things legally. State your points in a factual manner. If the intent strays from this objective, please report the post and we'll investigate.
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Re: Reporting my own cost basis and/or lots

Post by Dale_G »

taxthrowaway1 wrote: Wed Jan 12, 2022 3:39 pm Okay I've gotten more clarification. Whew, this stuff is complicated.

https://www.irs.gov/pub/irs-pdf/p550.pdf
"You can revoke an election to use the average basis method for your covered securities by sending written notice to the custodian or agent holding the stock for which you want to revoke the election. The election must generally be revoked by the earlier of 1 year after you make the election or the date of the first sale, transfer, or disposition of the stock following the election. The revocation applies to all the stock you hold in an account that is identical to the shares of stock for which you are revoking the election. After revoking your election, your basis in the shares of stock to which the revocation applies is the basis before averaging."


So basically, because I did not make the election to switch to Spec ID within one year of first making the Average Cost election, Schwab is not required to honor it retroactively. All of the existing shares have the same (averaged) cost basis.

I think my only hope is to request Schwab to say that they revoked the election for me before the sale, which is a very long shot. Especially because of this wording in the form I sent: "Changes are on a “go forward” basis."

Either that or pretend this is what happened (and hope I don't get audited).
I am reading this as an 'or":
The election must generally be revoked by the earlier of 1 year after you make the election or the date of the first sale, transfer, or disposition of the stock following the election.

Dale
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Re: Reporting my own cost basis and/or lots

Post by Semantics »

I had a very similar issue. Schwab's front line reps don't really know how to deal with these more complicated situations, and I was also given wrong information. I recommend that you escalate to someone more senior, they may be able to work with you to find an alternative remedy if they indeed made a mistake they need to correct. They seem very hesitant to do retroactive cost basis changes to avoid running afoul of IRS rules. In my case I thought it should be clearly allowed, based on IRS Notice 2011-56, which clarifies how to interpret the rules, but they still pushed back. It ended up being possible to "undo" the most recent purchase, which was all I wanted to achieve, so they did that instead. (Caveat: my original call they handled incorrectly was before that transaction settled, if that fact is salient then your situation may be more difficult to resolve.)
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

Dale_G wrote: Wed Jan 12, 2022 5:23 pm
taxthrowaway1 wrote: Wed Jan 12, 2022 3:39 pm Okay I've gotten more clarification. Whew, this stuff is complicated.

https://www.irs.gov/pub/irs-pdf/p550.pdf
"You can revoke an election to use the average basis method for your covered securities by sending written notice to the custodian or agent holding the stock for which you want to revoke the election. The election must generally be revoked by the earlier of 1 year after you make the election or the date of the first sale, transfer, or disposition of the stock following the election. The revocation applies to all the stock you hold in an account that is identical to the shares of stock for which you are revoking the election. After revoking your election, your basis in the shares of stock to which the revocation applies is the basis before averaging."


So basically, because I did not make the election to switch to Spec ID within one year of first making the Average Cost election, Schwab is not required to honor it retroactively. All of the existing shares have the same (averaged) cost basis.

I think my only hope is to request Schwab to say that they revoked the election for me before the sale, which is a very long shot. Especially because of this wording in the form I sent: "Changes are on a “go forward” basis."

Either that or pretend this is what happened (and hope I don't get audited).
I am reading this as an 'or":
The election must generally be revoked by the earlier of 1 year after you make the election or the date of the first sale, transfer, or disposition of the stock following the election.

Dale
I am also reading it that way 1 year after I made the election is 2014, which is before the sale (2022).
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

I will restate the question as I understand it now:

Schwab is within their rights (and probably requirements) to treat all the lots prior to my TLO change as having the same cost basis (which is the average of all of them) per IRS rules. So TLO did the "right" thing by selling the earliest lots (because from its perspective, they are all the same).

If I had asked them to apply Spec ID (using TLO to pick lots) *retroactively*, and thereby preserve individual cost bases, they would have been allowed to do that. But once any sale is made using average cost, all future sales of those lots must use average cost.

The question is, does the IRS care if I override Schwab in terms of which lots I report as sold, and using their actual prices? I'm not breaking any rules about what the IRS allows in theory, I'm just contradicting what Schwab says happened. As long as I keep track of these details from now on, I'm not actually giving the IRS less than I should be, so in that sense it seems kosher. But I don't know what the IRS actually cares about in this kind of situation.
Last edited by taxthrowaway1 on Wed Jan 12, 2022 6:45 pm, edited 1 time in total.
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

I mean, shares are fungible, right? It's not like they actually sold these shares and not those. It's all about keeping track so that I don't underpay in taxes, and I'm not doing anything shady like that. The only question is, is the IRS okay with me overruling what my brokerage says. It's possible that the answer is "no" because they implemented these rules specifically to make it easier for them to detect funny business.
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Re: Reporting my own cost basis and/or lots

Post by H-Town »

taxthrowaway1 wrote: Wed Jan 12, 2022 6:24 pm I will restate the question as I understand it now:

Schwab is within their rights (and probably requirements) to treat all the lots prior to my TLO change as having the same cost basis (which is the average of all of them) per IRS rules. So TLO did the "right" thing by selling the earliest lots (because from its perspective, they are all the same).

If I had asked them to apply Spec ID (using TLO to pick lots) *retroactively*, and thereby preserve individual cost bases, they would have been allowed to do that. But once any sale is made using average cost, all future sales of those lots must use average cost.

The question is, does the IRS care if I override Schwab in terms of which lots I report as sold, and using their actual prices? I'm not breaking any rules about what the IRS allows in theory, I'm just contradicting what Schwab says happened. As long as I keep track of these details from now on, I'm not actually giving the IRS less than I should be, so in that sense it seems kosher. But I don't know what the IRS actually cares about in this kind of situation.
If your tax return (Form 8949) reports different amounts (basis or proceeds) for covered shares from Form 1099 that the brokerage also sent to the IRS, you will get an automatic letter requesting additional information, and/or a demand to pay additional tax. It's just a computer comparing the amounts and if it sees difference, the software will generate a letter.

If you provide documentation and argument to the IRS agent, they will review and make their determination. This is not necessary an audit that the IRS agent will look at everything at your return, but it *could* open door for a full-on audit.

Work with Schwab to correct the issue. If not successful, and if you're willing to deal with the IRS, be prepared to deal with the IRS. Sometimes the amount of tax in question is worth your effort. Sometimes it doesn't

Just curious: if you deviate from Schawb tax basis method (avg cost vs. spec ID), how do you plan to keep track of tax basis and gain/loss moving forward?
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

H-Town wrote: Wed Jan 12, 2022 6:52 pm If your tax return (Form 8949) reports different amounts (basis or proceeds) for covered shares from Form 1099 that the brokerage also sent to the IRS, you will get an automatic letter requesting additional information, and/or a demand to pay additional tax. It's just a computer comparing the amounts and if it sees difference, the software will generate a letter.

If you provide documentation and argument to the IRS agent, they will review and make their determination. This is not necessary an audit that the IRS agent will look at everything at your return, but it *could* open door for a full-on audit.

Work with Schwab to correct the issue. If not successful, and if you're willing to deal with the IRS, be prepared to deal with the IRS. Sometimes the amount of tax in question is worth your effort. Sometimes it doesn't
Thanks, this is helpful. It appears Schwab isn't willing to help out here. The amount in question ($17k or so in taxes) certainly stings enough that I'm willing to go to some pain for it. A full audit? Maybe not.
Just curious: if you deviate from Schawb tax basis method (avg cost vs. spec ID), how do you plan to keep track of tax basis and gain/loss moving forward?
I have a record of all lot details, and I don't plan to purchase any new lots. I guess I would have to file a contradictory 8949 every single time I make a sale from now on. It sounds like each of these would raise a flag to the IRS?
SlowMovingInvestor
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Re: Reporting my own cost basis and/or lots

Post by SlowMovingInvestor »

H-Town wrote: Wed Jan 12, 2022 6:52 pm
taxthrowaway1 wrote: Wed Jan 12, 2022 6:24 pm I will restate the question as I understand it now:

Schwab is within their rights (and probably requirements) to treat all the lots prior to my TLO change as having the same cost basis (which is the average of all of them) per IRS rules. So TLO did the "right" thing by selling the earliest lots (because from its perspective, they are all the same).

If I had asked them to apply Spec ID (using TLO to pick lots) *retroactively*, and thereby preserve individual cost bases, they would have been allowed to do that. But once any sale is made using average cost, all future sales of those lots must use average cost.

The question is, does the IRS care if I override Schwab in terms of which lots I report as sold, and using their actual prices? I'm not breaking any rules about what the IRS allows in theory, I'm just contradicting what Schwab says happened. As long as I keep track of these details from now on, I'm not actually giving the IRS less than I should be, so in that sense it seems kosher. But I don't know what the IRS actually cares about in this kind of situation.
If your tax return (Form 8949) reports different amounts (basis or proceeds) for covered shares from Form 1099 that the brokerage also sent to the IRS, you will get an automatic letter requesting additional information, and/or a demand to pay additional tax. It's just a computer comparing the amounts and if it sees difference, the software will generate a letter.
That's not correct. I've changed basis on 8949 several times for covered shares that I acquired via ESPP (and needed basis adjustments). I filled in the code for adjustment as 'incorrect basis'. I've never had the IRS request additional information.

Now if you change basis without filling in reason for the adjustment, you might get a computer generated notice.
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gobel
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Re: Reporting my own cost basis and/or lots

Post by gobel »

taxthrowaway1 wrote: Wed Jan 12, 2022 12:25 pm So now a Schwab rep is trying to do two things for me: (1) change the reported lots sold to be the newest ones, and (2) report their actual cost basis instead of the average (across _all_ lots I own, which comes out to a large gain). He thinks they may be able to do (1), but probably not (2).
This Schwab issue was discussed in a long thread before viewtopic.php?f=1&t=270543 Bottom line, they are following their filing requirements to a tee and will not be retroactively changing anything for you.

However, the 1099b can be adjusted on your 8949 and the instructions even describe how to specify your own basis: For non-covered shares, you just enter your own basis. For covered shares, you must enter the basis from the 1099b into column e, then code B in column f, and the delta into column g. https://www.irs.gov/instructions/i8949# ... 3400302768

But I think what you can't change is the actual lot that was sold. You can only do that before settlement date. E.g. if your 1099b says you sold a lot purchased 5 years ago, then you can't just change the date to a few months ago, so you must use the actual basis from 5 years ago or accept the average basis on the 1099b.
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

SlowMovingInvestor wrote: Wed Jan 12, 2022 8:05 pm That's not correct. I've changed basis on 8949 several times for covered shares that I acquired via ESPP (and needed basis adjustments). I filled in the code for adjustment as 'incorrect basis'. I've never had the IRS request additional information.

Now if you change basis without filling in reason for the adjustment, you might get a computer generated notice.
Thanks, this is also very helpful! Were the amounts large? In my case, it will change the gain by around $70k. I have no idea if this is large enough for a flag.

But perhaps more importantly, I can't tell if the IRS is okay with me doing this.
SlowMovingInvestor
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Re: Reporting my own cost basis and/or lots

Post by SlowMovingInvestor »

taxthrowaway1 wrote: Wed Jan 12, 2022 8:46 pm
SlowMovingInvestor wrote: Wed Jan 12, 2022 8:05 pm That's not correct. I've changed basis on 8949 several times for covered shares that I acquired via ESPP (and needed basis adjustments). I filled in the code for adjustment as 'incorrect basis'. I've never had the IRS request additional information.

Now if you change basis without filling in reason for the adjustment, you might get a computer generated notice.
Thanks, this is also very helpful! Were the amounts large? In my case, it will change the gain by around $70k. I have no idea if this is large enough for a flag.

But perhaps more importantly, I can't tell if the IRS is okay with me doing this.
The amounts were in the 30K range in a return. But other than paperwork, I knew there was no issue at all with what I was doing, changing ESPP stock basis is very standard.

For potential difference on 70K of gains, you might find it worthwhile to consult a CPA or even a tax lawyer.
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Re: Reporting my own cost basis and/or lots

Post by AlohaJoe »

JoeNJ28 wrote: Wed Jan 12, 2022 12:35 pm You can tell the IRS whatever you want but when they compare what you input vs what Schwab sends them you will have an issue.
I highly doubt you'll have an issue. I've done this several times. The IRS will accept whatever you say. They don't care what Schwab says. You're the one filing taxes, not Schwab. In my experience the IRS doesn't even ask for any evidence. You just check a box saying "my broker reported the wrong information". It's there on the form for a reason, I imagine.
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

gobel wrote: Wed Jan 12, 2022 8:37 pm But I think what you can't change is the actual lot that was sold. You can only do that before settlement date. E.g. if your 1099b says you sold a lot purchased 5 years ago, then you can't just change the date to a few months ago, so you must use the actual basis from 5 years ago or accept the average basis on the 1099b.
Oh, right. This may be the death knell. Not only can I not change the acquisition date of the lot, I almost certainly can't show that it's actually six recent lots instead of one old one.

Or maybe I'm misunderstanding form 8949 and can actually list all the lots and indicate that the cost basis is wrong for all of them?
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

taxthrowaway1 wrote: Wed Jan 12, 2022 9:16 pm Oh, right. This may be the death knell. Not only can I not change the acquisition date of the lot, I almost certainly can't show that it's actually six recent lots instead of one old one.

Or maybe I'm misunderstanding form 8949 and can actually list all the lots and indicate that the cost basis is wrong for all of them?
Actually, if all six new lots were of one type (short- or long-term), I might be able to lump them into one "various" acquisition date line and make this work. But it's three short-term lots and three long-term lots. Yeah, it sounds like I need a CPA to answer this.
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

AlohaJoe wrote: Wed Jan 12, 2022 9:12 pm The IRS will accept whatever you say. They don't care what Schwab says. You're the one filing taxes, not Schwab.
If this part is true, I may be saved (assuming I can fill out 8949 with different lots)! Now to figure out who can confirm if this is true. Any CPAs or tax lawyers around? :happy
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taxthrowaway1
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Re: Reporting my own cost basis and/or lots

Post by taxthrowaway1 »

Okay, after countless calls and emails with Schwab, here's what they can offer me: they can show the correct lots, but they can't change the (averaged) cost basis. The problem now is that three of those lots are short-term, which would obviously result in a much bigger tax liability if the IRS won't accept my adjusted cost basis.

I probably still need to speak with a CPA, but this may be a better position to be in. Maybe.
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