Bear market clients
Does anybody else have a problem with clients who've built up huge cap loss cfs and want some way to use them? any thoughts on amending to take the basis adjustment election?
Considering the influx of negative earnings/industry pronouncements, the proliferation of news headlines regarding the tense geopolitical standoff with Iraq and North Korea, and the dollar's mid-afternoon slump against the yen and euro, the major indices ended the day noticeably lower.
Re: Bear market clients
The problem, at least from a tax preparer's point of view is not the fact that they lost money, or even short term losses, it's the long term losses (or gains?) from stocks which have been held *really* long term.
What do I mean? Ok, suppose someone bought 200 shares of AT&T in 1981, before the split-up of good old Ma Bell. That person, today, if they hadn't sold any off before now, could have stocks in as many as 13 different companies (this is from an article in the Wall Street Journal). My now ex-husband works for a plant that just in the last 8 years has been AT&D, LucentTechnologies and is now Celestica. As the Baby Bells have bought and sold companies, split and merged, it's become a nightmare of bookkeeping, if they even bothered to keep all those peices of information.
Now, with the downturn in the market, many of those long-term investors have sold their stocks. Some did it in fear that if they didn't offload, their stocks would become worth nothing. Some did it because dividends had gotten so low, that earnings were no longer able to support them and they had to sell off some shares.
Whatever the reason, how in the hell are we EVER to find the basis of said stocks?
For a quick lesson in what I'm talking about, try this....
Let's say, in 1995 I bought 20 shares of WalMart stock and paid... oh, let's say $1000, making my per-stock basis $50/share . Let's pretend that in 1997, there was a 2-for-1 stock split, meaning that for every share of stock I owned before, I now own two. That means I now have 40 shares of WalMart stock. But my basis, what I invested, is the same. Meaning I've still got $1000 invested, making my per-share basis a mere $25.
Now, let's complicate this even further.... Let's say that I never took a dividend check and let the earned dividends buy new shares of stock at the current market value when the stock dividend was earned.
Now, in my above example, it's 2002, July, the stock market's at an all time low and I want to sell those stocks. I know have 57 shares of WalMart stock and the price they bring at sale is (let's make up numbers) $2100. What do I have to pay taxes on? I originally invested $1000. Do I pay taxes on the whole $1100 profit? No. Because I *bought* more shares with my re-invested dividends. But how much were those dividends? What was the market price of the shares those dividends bought? How many shares did I buy with those dividends and what was the purchase date (making them long or short-term investments)?
Now, complicate this with mergers, splits, buy outs, new companies, etc and you see what I'm getting at.
I think I'm going to need some Excedrin this tax season.
Re: Tracking long basis trails
Actually, according the Wall Street Journal article I mentioned earlier, estimates are no longer "ok."
Why? The Infernal Revenue Service has a nice little database that tells them *exactly* what those stocks are worth. I don't know when they did it, but sometime in the last couple years, they've gotten a computerized database of all stock splits, payoffs, dividend percentages, stock prices per day, etc. So THEY can figure exactly what those stock basises would be. We aren't so fortunate.
Which means, that estimates are no longer acceptable. We are *supposed* to find the exact amount. Which, as I stated ealier, is impossible. I've already seen one of these this year. A gentleman bought a life insurance policy (he says, but from the discription, it sounds more like an annuity) over 30 years ago. Some of the paid premiums were invested into stock in the company. Or else, the earnings on the paid-premiums (whole life insurance I guess) bought stock in the company. Last January, he sold $10,312 dollars worth of stock. All dividends had reinvested.
He's not kept a single peice of paper on those dividends, he's 78 years old and can't understand how I can prepare his return while he waits, just doesn't understand computers. It simply amazes him. How can I ask him to go to his records, or call the insurance company and ask for 30 years worth of records? That's before computers so it'd be searching through books and records they may no longer even HAVE!
What did I do? Took a best guess, sold him an extended "error" insurance we put on iffy returns and am crossing my fingers for the next three years!
Re: Tracking long basis trails
We manage assets and have pretty good basis tracking, so it may not be typical, but I've never seen a notice from the IRS questioning basis. It could happen anytime, but for now I don't think they even record the details of the big photocopied attachments we use for people with lots of trades in any form they could use for computerized matching. They'd have to change the format of schedule D, ask for ticker or cusip symbols, and record numbers of shares in separate boxes to have any chance of success.
All I meant by "estimates are OK" was to quote the AICPA tax practice standards, where exact information is unobtainable. You do the best you can, and don't pretend to have done better, and you're at least safe from preparer penalties.
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