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Tax Statement FAQs
Please consult your tax advisor about using this information.
Tax Statement
Beginning in tax year 2011, the Internal Revenue Service (IRS) expanded the cost basis reporting requirements for the Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. As a result of these IRS requirements, your tax reporting statement has been redesigned reflecting additional information about realized gains and losses for transactions occurring in the most recent tax year. While this information will appear in the Form 1099-B, we will only send this information to the IRS for holdings it classifies as covered securities. To assist you, we specifically note covered securities and information provided to the IRS on the Form 1099-B.
Covered Securities (identified as "P" on your tax statement)
Generally, covered securities are
- Stock in a corporation purchased on or after January 1, 2011
- Registered Investment Companies, including open-end mutual funds, and stocks acquired in dividend reinvestment plans purchased on or after January 1, 2012
- Additional types of securities, as determined by the Treasury Department, purchased on or after January 1, 2013
Note: We identify covered securities on Form 1099-B with the letter, P (P=Information provided to the IRS).
These reporting changes do not mitigate the customer's responsibility to accurately complete all required tax forms, including Form 1040, Schedule D. In fact, the IRS is also asking customers to complete an additional IRS Form 8949, Sales and Dispositions of Other Assets, as part of the process of completing Schedule D.
Other changes include new rules governing reporting short sales (see the related FAQ, How are my short sales reported).
In order for the qualified dividends reported to you in Line 1b of Form 1099–DIV to be taxed at one of the lower 15% or 0% federal long–term capital gain tax rates, you are required to have held the dividend–paying security unhedged for at least 61 days out of the 121–day period that begins 60 days before the ex–dividend date. If you did not hold the security unhedged for the requisite period, the dividends should be taxable at ordinary income tax rates.
Mutual fund dividends attributable to (i) interest, (ii) dividends on stock issued by certain foreign companies, and (iii) dividends on stock not held by the mutual fund for the requisite holding period will not qualify for long–term capital gain tax rates at which qualified dividends are potentially taxed. All or a portion of mutual fund dividends attributable to short–term capital gains also may not qualify for long–term capital gain tax rates at which qualified dividends are potentially taxed. These dividends will likely comprise a portion of the total ordinary dividends reported in Line 1a of Form 1099–DIV. Mutual fund dividends that are reported as qualified dividends on Line 1b of Form 1099–DIV but for which a shareholder does not satisfy the requisite holding period for the dividend–paying mutual fund (see previous question) also will not qualify for the lower long–term capital gains tax rates.
Substitute payments in lieu of dividends may be generated where, for example, a security has been lent to a third party (such as a broker) over a dividend record date. If an investor has a margin account debit balance, securities in the account are often eligible to be lent to a broker. If the shares are lent over a record date, the investor should receive a substitute payment equivalent in amount to the dividend but taxable at ordinary income tax rates. Prior to the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), substitute payments and actual dividends were both taxed at the federal level as ordinary income. JGTRRA introduced lower federal rates for qualified dividend income; however, substitute payments are not taxed as qualified dividend income and are instead still taxed at ordinary income rates. Substitute payments in lieu of dividends are reported on Line 8 of Form 1099-MISC.
National Financial must adhere to IRS requirements when reporting on Forms 1099–DIV, 1099–INT, and 1099–B, which may result in differences between what is on your monthly and quarterly statements and what is reported to the IRS. For example, transactions on Form 1099–B must be reported based on the trade date even though your statements reflect sales based on the settlement date. Additionally, unlike dividends from individual securities, which are typically taxed in the year the dividends are paid, mutual fund distributions declared as payable to shareholders of record in October, November, or December and paid prior to February 1 of the following year are taxable to shareholders based on the record date, not when paid. For example, mutual fund distributions with a record date in December 2011, and paid in January 2012, are reported and taxed as 2011 dividend distributions.
Dividends and interest earned on foreign securities may be subject to withholding tax by the country from which they were paid. If you held securities that paid dividends or interest that was subject to foreign tax, Form 1099–DIV and Form 1099–INT report the gross amount of the dividends or interest (as applicable) and the amount of tax withheld at the source. You must report the gross amount of the dividend or interest on your tax return; however, you may also be able to claim a credit or deduction for the amount of tax paid to foreign countries.
If that mutual fund holds more than 50% of its assets in foreign securities at year-end, it may elect to permit shareholders to claim a credit or deduction on their federal income tax returns for their pro-rata portion of the foreign taxes paid. If the election is made, the amount of foreign tax that you may be able to claim as a credit or deduction will be reported on Line 6 of your Form 1099-DIV and that amount will also be included in the dividend amount reported in Line 1a (and if applicable, 1b) of your Form 1099 DIV (i.e., the dividend amount will be gross of the foreign taxes). Under these circumstances, you must report the gross dividend amount on your tax return; however you may be able to deduct or receive credit for the foreign taxes. If the mutual fund is not able to, or chooses not to, elect to permit shareholders to claim a credit or deduction for their portion of the foreign taxes paid, those foreign taxes will not be reported on Line 6 of your Form 1099-DIV and will not be included in the dividend amount reported in Line 1a (or Line 1b) of your Form 1099-Div (i.e., the dividend amount will be net of the foreign taxes). Under those circumstances, you may report that net dividend amount on your tax return but cannot otherwise deduct or receive credit for the foreign tax. For additional information, consult your tax advisor or see IRS Publication 514, Foreign Tax Credit for Individuals (PDF).
This section reports in United States dollars (USD) the estimated gain/loss on the foreign currency position that you disposed of in the security purchase. When you acquired that foreign currency position, a USD cost basis was established in that position (as described in the Currency Realized Gain/Loss section and in the footnotes on that section of your statement). Based on changes in exchange rates between that time and the time of the security purchase you experienced a gain or loss in the USD value of that foreign currency position which you realized when you used the foreign currency position to purchase the security.
National Financial is required by the IRS to report gross dividends and gross interest from unit investment trusts (before expenses have been deducted). These expenses are included in the dividend and interest amounts reported on Forms 1099-DIV and 1099-INT and in their associated supplemental detail information sections. The total corresponding expenses are reported on Line 5 of Form 1099-DIV or 1099-INT. Those expenses are itemized, by security in the detail sections. In addition, your reported gross dividends and gross interest could also include any foreign tax paid by the issuer of your security.
Due to IRS reporting requirements governing widely held fixed investment trusts, if you owned a unit investment trust (UIT), a security derived from a mortgage pool, or a real estate mortgage investment conduit (REMIC), we report your prorated share of proceeds from the sale of a security held by the trust or conduit as return of principal. We report your share of the gross proceeds, prior to making any deductions for expenses, whether or not you actually received a payment. For example, your UIT may have sold a security in order to cover redemption requests or other expenses. Since all gross income and expenses must be prorated among all unit holders, your share of such proceeds is reported, even if you did not receive any distribution. We are required to report gross return of principal, including expenses, as of the transaction date for the trust—this may often be considerably before the trust made any resulting distributions to individual trust holders. Please note that you must generally report on Form 1040, Schedule D, all transactions reported on Form 1099-B, including return of principal. Return of principal transactions may also result in realized gain or loss. Return of principal generally reduces your basis in the affected security.
The IRS requires you to use the trade date to determine your holding period. The "Date of Sale" on Form 1099–B is the trade date for each sale. Your monthly statement reports settlement date, which is the date by which payment is due.
National Financial is required to report these distributions to you and to the IRS. Nondividend distributions generally reduce your basis in your shares (but not below zero). This becomes important when you sell your shares and need to calculate your gain or loss. However, a nondividend distribution is taxable as (and must be reported as) a capital gain to the extent that it exceeds your adjusted basis in the shares.
If you held a limited partnership in 2011, the partnership (not National Financial) will provide a Schedule K–1 to you. If you held a CMO in 2011, you will receive a separate Form 1099–OID from National Financial in mid–March.
Starting in 2011, the IRS requires us to report short sales in a new way. Any short sale entered into in 2011 or later will not be reported on your 1099-B until you have closed the short sale. In most cases, your 1099-B will show the date that you closed the short sale, the acquisition date of the security used to close the short sale, and the adjusted basis of the security used to close the short sale. If you closed a short sale in 2011 that was opened in a prior year, this transaction will not appear on your 2011 1099-B, but it will appear in one of the supplemental Realized Gain/Loss sections. All gains and losses resulting from closing short sale positions should be reported on Form 1040, Schedule D for the year in which the short position is closed. For more information on short sales, see IRS Publication 550, Investment Income and Expenses (PDF) or consult your tax advisor.
With Nonqualified Stock Options (NQSOs), you will generally be taxed when you exercise the stock options and when you sell the stock acquired on exercise. (NQSOs do not meet certain IRS requirements that allow for special tax treatment, such as the treatment received by Incentive Stock Options and Employee Stock Purchase Program shares.) With an NQSO, two separate tax transactions take place. First, when you exercise your option, the difference between the fair market value of the option at the time of exercise and the exercise price is treated as ordinary compensation (wages), which is reported to you on the Form W–2 you receive from your employer. Second, when you sell the stock you acquired on exercise (even if sold at the same time in an "exercise–and–sell" transaction), the difference between the cost basis of the stock (which will include the exercise price and the amount included as your income at exercise) and the proceeds from the sale is taxable to you as a capital gain or loss. Those proceeds are reported on your 1099–B.
Here is a hypothetical example to demonstrate the tax treatment of: (1) exercising a Nonqualified Stock Option with an exercise price of $1,000 when the fair market value of the stock acquired at the time of exercise is $1,400; and (2) subsequently selling the stock (acquired upon exercise) for $2,000.
| Wages (Reported on W–2)
|
Capital Gains |
| $1,400 |
Fair Market Value |
$2,000 |
Sale Proceeds (Reported on 1099–B) |
| –$1,000 |
Exercise Price |
–$1,400 |
Cost Basis* |
| $400 |
Wages Reported |
$600 |
Capital Gains |
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*You can calculate cost basis by adding the exercise price to the excess of the fair market value of the stock on the day of exercise over the exercise price. If you rely instead on estimated cost–basis information provided by National Financial, bear in mind that such information may not reflect all adjustments necessary for tax reporting purposes. The general tax rules discussed above may not apply to NQSOs that have ascertainable market value at the time of issue, have restrictions at the time of exercise, and/or have other features.
Incentive Stock Options (ISOs) meet IRS requirements for special tax treatment. With ISOs, you do not have to pay ordinary income taxes, Social Security tax, and Medicare taxes at the time you exercise, as long as you hold your shares at least one year from the date of exercise and two years from the grant date. If you decide to sell your shares after meeting both waiting periods, the difference between the sale price and the exercise price is taxable to you as a capital gain or capital loss. The proceeds generated upon sale are reported on your 1099–B. If you sell your shares prior to meeting the specified waiting periods, you are deemed to have entered into a disqualifying disposition of the sold shares, which means you will be required to pay ordinary income taxes generally on the difference between the fair market value at exercise and the exercise price. ISOs may have other tax consequences, as well; in particular, you may need to consider the implications under the Alternative Minimum Tax (AMT).
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What are the new IRS Cost Basis Reporting Regulations?