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IRS Form 8949: Sales and Other Dispositions of Capital Assets

A focus on asset managers

Overview

The IRS recently released the tax year 2012 version of Form 8949, Sales and Other Dispositions of Capital Assets. The form which formerly only applied to individuals now also applies to partnerships and corporations. The form requires taxpayers to reconcile gross proceeds reported on Forms 1099-B, Proceeds From Broker and Barter Exchange Transactions, to the amounts reported on Form 8949.

Specific issues for asset managers

The Form 8949 will likely add an increased amount of reporting complexity for partnerships and corporations, primarily those that are regulated investment companies and hedge funds that have a heavy volume of trading securities and/or who hold multiple brokerage accounts.

Form 8949 requires taxpayers to provide the following with respect to the sale or disposition of capital assets:

  • Detail of both long-term and short-term capital asset transactions segregated by gains and losses on a transaction-by-transaction basis
  • Segregation of transactions based on whether the taxpayer received:
    1. Forms 1099-B that reported both gross proceeds and cost basis,
    2. Forms 1099-B that reported gross proceeds but not cost basis, or
    3. No Forms 1099-B.

Taxpayers are now required to file separate Forms 8949 for each of the applicable categories listed above. This new reporting may be complicated for taxpayers (funds) actively trading securities for several reasons:

  • Although taxpayers must track gains, losses, wash-sales, constructive sales, etc., for all transactions across all accounts and brokers, the funds' brokers are required to calculate wash sales and adjust the basis of the security for which a wash sale loss disallowance was calculated. As a result, the wash sales calculated by the brokers will affect the cost basis reported on the Forms 1099-B they file. Because each broker generally only has information regarding activity taking place in accounts maintained with it, wash-sale calculations may be incomplete if the taxpayer uses multiple brokers, and even if correct, may complicate the reconciliation process.
  • Many taxpayers may use a tax lot relief method that is maintained and tracked internally or by a third party administrator which differs from the tax lot relief method used by the brokers.
  • Per IRS instructions, taxpayers may not enter "available upon request" descriptions and summary totals in lieu of reporting the details of each transaction on Form 8949 Part I or II.
  • Electronic fling may become more complex. The taxpayer must either:
    1. Include Form 8949 as a PDF attachment to its income tax return, or
    2. Attach Form 8949 to Form 8453 (or appropriate form in the Form 8453 series) and mail the forms to the IRS.
      • To alleviate some of the filing burdens, the IRS is allowing taxpayers to attach one or more statements containing all the detailed information required on the Form 8949, instead of attaching the Form 8949, if the statements are in a format similar to Form 8949.

Any differences in cost basis reflected on the tax return and the broker's Form 1099-B will need to be reconciled as required on the new Form 8949.

As previously indicated, it will not be permissible to simply enter "available upon request" descriptions in Part I or II of the form or attachments.

The detailed information on the Form 8949 will essentially be summarized on the re-configured federal form Schedule D, Capital Gains and Losses.

Please look for future Tax Alerts should the IRS provide clarification on reporting requirements.

The new reporting requirements may take a substantial amount of effort for taxpayers to accurately complete, and will likely require close coordination between fund managers and their tax advisors.

For additional information or questions, please contact:

Ted Dougherty
National Managing Partner, Asset Management Tax
Deloitte Tax LLP
+1 212 436 2165
edwdougherty@deloitte.com

This alert contains general information only and Deloitte is not, by means of this alert, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This alert is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this alert.

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