IRS delays new broker reporting of debt instruments and options to 2014

Brokers as defined by Code Sec. 6045 are subject to certain reporting requirements that have been expanded incrementally over the past three years. The IRS has delayed the latest expansion, which on January 1, 2013 would have required brokers to report the cost basis of debt instruments and options to the IRS.

In May 2012, the IRS released Notice 2012-24, which announced that January 1, 2014 will be the new effective date for final regulations on the subject. Therefore the final regulations will not apply to a debt instrument acquired before January 1, 2014, nor to an option granted or acquired before January 1, 2014.

Background

In 2008, Congress passed the Emergency Economic Stabilization Act (EESA), which revised the broker reporting rules under Code Sec. 6045. The EESA requires brokers also to report a customer's adjusted basis in the security sold and identify whether any gain or loss is long-term or short-term. The expanded reporting requirements applied to most stock acquired on or after January 1, 2011; stock in a mutual fund or dividend reinvestment plan acquired on or after January 1, 2012; and prior to Notice 2012-34 would have applied to options and other securities (such as debt instruments) acquired on or after January 1, 2013.

In 2011, the IRS issued proposed regs (NPRM REG-102988-11) to implement broker reporting of debt instruments described in Reg. §1.1275-1(d) and including any instrument or position treated as a debt instrument under a specific provision of the tax code. Additionally, the proposed regulations added certain options to the definitions of a security, specified security, and covered security.

Delayed Effective Date

The announced delay means that if a debt instrument is acquired on or after January 1, 2014, a broker is now required to determine and account for original issue discount, bond premium, acquisition premium, market discount, and principal payments to determine the adjusted basis of the debt instrument and whether any gain or loss upon the sale of the debt instrument is short-term or long-term. Further, a broker is required to report the amount of any market discount that has accrued as of the date of a sale or transfer of a debt instrument. In any sale or other closing transaction with respect to an option that is a reportable security, a broker is required to report gross proceeds, adjusted basis, and whether any gain or loss is short-term or long-term.

Caution. The extended effective date of January 1, 2014 only applies to debt instruments and options. It is the exception to the general rule on broker reporting that is now in effect. Beginning January 1, 2011, brokers who sell securities, commodities, or futures contracts, including short sales, must file a return for each sale affected. The broker's return is filed on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions.