Friday night at midnight is your final chance to file your 1998 tax return.
With Y2K around the corner, it seems crazy that we're even talking about 1998. But if you're still facing a tax deadline, it means you've filed twice for an extension. Now you need to travel back in time for a few hours and get that tax return finished.
If you need help, check out the
Tax Forum we did for late filers just before the Aug. 15 deadline. It'll help you figure out everything from reporting your Roth IRA contribution to determining whether you qualify for the new-for-1998 education credits. Then check below to see if the answers to any of these last-minute questions apply to you.
And, as always, send your tax questions to
firstname.lastname@example.org, and please include your full name.
Call Basis Review
How is income treated when you write sell a call option? Example: I bought 100 shares of Knight/Trimark (NITE) at 40 in February 1999 and wrote an October call option with a 60 strike for $1,800. The stock was never called away. How is the $1,800 treated? -- S.L. Kramer
If the stock was never called away, the option basically expired. So report the premium you received on the call as a short-term gain.
In your case, your $1,800 proceeds should be reported on
-- Capital Gains and Losses
in column (f). Enter the expiration date in column (b) as the date acquired and write "expired" in column (e) as your cost basis. Check out last Saturday's
Tax Forum for a graphic example involving a similar transaction, an options purchase. And be sure to read
-- Investment Income and Expenses
for more details.
How Honest Must You Be?
I had a friend ask me how the Internal Revenue Service verifies our honesty on Schedule D. What I mean is this: Since the sales proceeds are reported to the IRS, but the purchase price is not reported, my friend asked me (since I am a certified public accountant) what keeps him from "fudging" (artificially inflating the basis) on sales. I told him that, aside from being audited, there was no other IRS verification. It was up to him to be honest. I also told him that I could not prepare a return for him with falsified figures -- that he would have to do the return on his own -- if I saw any cheating. Did I miss anything in my response? -- Kelly Campbell
You did not miss anything in your response.
The only way the IRS will know if your friend is lying about his cost basis is an audit. Then he'll have to prove his original basis by showing his original trading tickets and statements, says Shawn Samperi, manager in the investment advisory division of
in New York. So remind your clients to keep all their paperwork, just in case.
The only other people keeping record of stock purchases are the folks in the accounting departments of the broker/dealers. But they don't report individual trades to the IRS.
So when a client provides data to his accountant, it is all on the honor system. As you said, if you suspect the numbers are fudged, you ethically can't use them and must ask for proof.
Using Carry-Forward Losses
A friend of mine has a $13,000 stock loss going into the 1998 tax year. On his 1998 tax return, he deducted a $3,000 loss, carrying over $10,000 to the 1999 tax year. Assume he gains $20,000 in 1999. Can he subtract the entire $10,000 loss brought over from 1998, making his final taxable capital gain $10,000? -- Jim Tranman
Typically, your losses are limited to the amount of your capital gains, plus an additional $3,000 a year. Since your friend only reported $3,000 of the $13,000 loss, I am assuming that he had no gains in 1998.
Fortunately, the amount of carry-forward loss he can claim each year is not limited. So, using your example, if your friend has a $20,000 gain in 1999, he can use the entire $10,000 loss carried over from 1998 to offset it. Then he'll owe tax only on the remaining $10,000 gain for 1999.
Help, My Stock Went Bankrupt
If a stock is not trading because of a bankruptcy filing, is there any way to "sell" the shares to enable a short-term tax loss? -- Martin Melnick
Just because a company goes bankrupt doesn't mean its shares are worthless. But if the stock has stopped trading, that generally is a sign it has no value. In that case, you can take a loss on the shares, but there is no change in your holding period, says Clarence Kehoe, partner and director of employee benefits at
Anchin Block & Anchin
, a New York accounting firm. So if you've held the stock since 1980 and it stopped trading last month, you'll report a long-term capital loss.
To justify your loss, it's important to have evidence the stock has stopped trading. "To take a loss, you want to be able to point to an event in time," notes Kehoe. So get your broker to write a letter stating that there is "no market for stock," he suggests. Then you'll have written proof of the day the stock became worthless.
If the shares still are worth a few pennies, they still have value. In that case, you could not report a loss until you actually sold the shares.
TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.