Broker Transition (Tax Question, TXF, Etc.)

Froglet · May 24, 2012

Hello,

I am wanting to switch brokers because I've started to trade more actively. I've looked at IB, Light Speed, Speed Trader as some of the potential brokers.

My biggest problem and question is the TAX ASPECT of it.

With my current broker, I am able to just download the TXF and have it fill in my trades. I've only had to back fill a couple of trades as those positions were opened a few years ago.

My question is, has anyone switched brokers like this and can anyone chime in on TURBO TAX and the TXF file that's used to populate the trades? I currently am carrying a capital loss.

Say for EXAMPLE, if I change from Broker A to Broker B, what will happen to my current positions, etc etc. Must I find a broker that uses the same clearing house?

I hope you guys know what I mean. The biggest headache is the tax part.

JackR · May 25, 2012

Quote from Froglet:[B if I change from Broker A to Broker B, what will happen to my current positions, etc etc. Must I find a broker that uses the same clearing house?[/B]

Froglet:
As you are probably aware, the transaction reporting process imposed on the brokerage firms changed last year and new changes are being made both this year and next. Simplified, the changes require that the brokers report both sides of our transactions to the IRS, rather than just the close of a trade as had been the case through 2010.

If you have never changed brokers before, the transfer process used to move accounts between brokers is referred to as ACATS (Automated Customer Account Transfer Service). Almost all brokers use ACATS. It is my guess that the new law requires that any issues you purchased last year or this year must have both the issue and your basis info transferred. So it will not matter who clears, the law requires the basis info be given to the new firm.

If you do transfer be aware that most firms will not do an ACATS until all trades have settled. Thus, if you trade equities you need to be prepared to stop trading for three days.

Jack

Froglet · May 25, 2012

Quote from JackR:

Froglet:
As you are probably aware, the transaction reporting process imposed on the brokerage firms changed last year and new changes are being made both this year and next. Simplified, the changes require that the brokers report both sides of our transactions to the IRS, rather than just the close of a trade as had been the case through 2010.

If you have never changed brokers before, the transfer process used to move accounts between brokers is referred to as ACATS (Automated Customer Account Transfer Service). Almost all brokers use ACATS. It is my guess that the new law requires that any issues you purchased last year or this year must have both the issue and your basis info transferred. So it will not matter who clears, the law requires the basis info be given to the new firm.

If you do transfer be aware that most firms will not do an ACATS until all trades have settled. Thus, if you trade equities you need to be prepared to stop trading for three days.

Jack

Thanks. I guess I'm concerned about tax reporting in the event that this happens. More so, for active trading, position building and that type of stuff, which or what can I do to better help me during tax reporting season?

I've used turbo tax for many years, and even for 2011's reporting where I had to enter the cost / date of stocks. I got my refund, so I'm expecting things to check out.

I used the TXF and had to back fill some items. I guess I want to find a broker that'll provide me something similar. Would that be a better question to ask?

So for 2012 reporting, would the 'new' broker's TXF file include everything I did w/ the old broker? Or would the burden rest on me in terms of back filling those trades? It would SUCK for me to have to manually adjust/ fix everything.

Thanks Jack.

Froglet · May 29, 2012

JackR · May 29, 2012

Quote from Froglet:So for 2012 reporting, would the 'new' broker's TXF file include everything I did w/ the old broker?[/B]

Froglet:

THIS IS A GUESS at what you would see - A guess.

The new rules require that your broker report both sides of any trade that you made with them in 2011 and 2012. So if you had an open stock or option position at the end of 2011 that you initiated in 2011, then Broker A will have the basis for that position. If you close the position will Broker A during 2012 your 1099-B (and 8949 Worksheet that your TXF file supports) from Broker A will show both sides of that trade.

If you transfer positions opened in 2011 and 2012 from Broker A to Broker B, Broker B will be given the basis information for those open positions. If you close any of those positions with Broker B, Broker B's 1099-B (and 8949 worksheet) will reflect both sides of the trades.

Your Turbotax will import both TXF files and should combine both broker's TXF info. BUT, I'm making three assumptions:
1- Turbotax has things organized for the 2012 tax year (this year was a mess)
2- Both Brokers have gotten their TXF acts together so that Turbotax can handle them.
3- The industry and the IRS will have gotten some definitions and reporting terms clearly defined for wash sales and short sales insofar as 1099-B/8949 worksheet inputs are required.

In the past Turbotax could not handle more than 3000 transactions. H&R Block@Home could handle more, but I don't remember how many.

You'll still have to manual handle stuff open from before 2011.

Remember, what you are reading above is my best guess.

Jack