Form 1099-B

Form 1099-B, officially titled “Proceeds from Broker and Barter Exchange Transactions,” is a tax form you'll receive from your brokerage firm after the end of the year. Think of it as a report card for your investment sales. It diligently lists every stock, bond, mutual fund, or other security you sold during the tax year. This isn't just for your records; a copy also goes directly to the IRS. Its primary job is to provide the critical numbers you need to calculate your capital gains and losses, which is the difference between what you sold an asset for (the proceeds) and what you originally paid for it (the cost basis). For any investor, understanding this form is not just a tax-time chore—it's a key part of seeing the financial outcome of your investment decisions.

At first glance, a 1099-B can look like a spreadsheet sent from another planet. But it's actually quite logical. Your broker summarizes all your sales, usually separating them into short-term (held for one year or less) and long-term (held for more than one year) transactions. This distinction is crucial because the tax rates for each are very different.

While the form has many boxes, a few are the stars of the show. Your broker will typically provide a summary or a detailed list for each sale, covering these key data points:

• Box 1d - Proceeds: This is the total cash you received from a sale before any commissions or fees were taken out. It's the gross amount, not your net profit.
• Box 1e - Cost Basis: This is, in theory, the original price you paid for the security, including any commissions or fees. This is the number you subtract from the proceeds to find your gain or loss. Always double-check this figure, especially for shares you've held for a long time or transferred from another broker.
• Box 2 - Date of Sale & Box 3 - Date of Acquisition: These two dates determine whether your transaction is short-term or long-term. The one-year-and-a-day mark is the magic line that separates higher tax rates from lower ones.
• Box 1g - Wash Sale Loss Disallowed: If you see a number here, pay close attention. It means you've triggered the wash sale rule, and the IRS won't let you deduct this specific loss right now.

For a value investor, the 1099-B isn't just about taxes; it's a reflection of your strategy. Our philosophy preaches patience and long-term thinking, and this form is where that discipline pays off—literally.

The tax code rewards patience. Profits from investments held for more than one year are considered long-term capital gains, which are taxed at significantly lower rates than short-term capital gains. Short-term gains are taxed at your ordinary income tax rate, the same as your salary, which can be much higher. A value investor who buys a wonderful company at a fair price and holds it for years isn't just following Buffett's advice; they are positioning themselves for a much smaller tax bill when they eventually sell. Your 1099-B is the official document that proves your long-term discipline to the tax authorities.

Value investors sometimes sell a losing position to re-allocate capital to a better opportunity, a practice known as “tax-loss harvesting.” However, you must be aware of the wash sale rule. A wash sale occurs if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale. If you do this, the IRS disallows the loss on your tax return for that year. Instead, the disallowed loss is added to the cost basis of the new shares you bought. Brokers are required to track and report these on your 1099-B, but the final responsibility is yours. Being mindful of this rule prevents unpleasant tax surprises.

So, you have your 1099-B in hand. What now? The information doesn't get copied directly onto your main tax form. Instead, it follows a two-step journey.

1. Step 1: Form 8949: The details for each individual sale from your 1099-B are first listed on IRS Form 8949, “Sales and Other Dispositions of Capital Assets.” This is where you report the proceeds, cost basis, and gain or loss for every single transaction.
2. Step 2: Schedule D: The totals from Form 8949 (total short-term gains/losses and total long-term gains/losses) are then carried over and summarized on Schedule D, “Capital Gains and Losses.” This final summary figure from Schedule D is what ultimately affects your total tax liability.

While good tax software automates this process, understanding the flow empowers you. It allows you to spot-check the numbers, verify your cost basis, and ensure that the story your tax return tells is the correct one.