Preview of Updated Form 1099-B with Cost Basis

July 27, 2011

Brian J. KeilCharles Schwab

For institutional audiences and educational purposes only. This information is not intended to be a substitute for specific individualized compliance, legal or tax advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with professionals in these fields.

Schwab Advisor Services™ serves independent investment advisors and includes the custody, trading and support services of Schwab.

© 2011 Charles Schwab & Co., Inc. (“Schwab”). Member SIPC. All rights reserved. (0711-4849)

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Agenda

• Review of 2012 requirements

• Schwab's plans to comply

• Form 1099 Review

– Review IRS requirements

– Review changes and considerations

• Resources for advisors

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Cost Basis Legislation: Multi-Year Effort

Congress passed the Emergency Economic Stabilization Act on October 3, 2008, which requires custodians to report adjusted cost basis to the IRS and our clients via Form 1099-B.

Acquired prior toJanuary 1, 2013

Acquired on or afterJanuary 1, 2013

Fixed Income

Options

Other securities

Acquired prior toJanuary 1, 2012

Acquired on or afterJanuary 1, 2012

Mutual Funds

ETFs

DRIPs

Acquired prior toJanuary 1, 2011

Acquired on or afterJanuary 1, 2011Equities

Uncovered SecuritiesCovered Securities

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2012 Requirements More Complex than 2010

Average Cost Method• Available for 2012 covered securities

• Affects the cost basis of position and uses FIFO to select the lot on closing transactions

• The legislation creates two average cost positions: one covered and one uncovered

• Moving to or from Average Cost requires a written letter of authorization

• New gifting rules for securities using average cost method

DRIPs and ETFs• Introduce the need to handle security-level accounting method

• Include the following new information on the Form 1099-B for covered transactions: cost basis, acquisition date, holding period, covered/uncovered indicator and wash sale disallowed loss

S Corps• Eligible for 1099-B reporting starting with tax year 2012

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Legislative Compliance: High Priority at Schwab

• Upgrading of our accounting engine to comply with new 2012 requirements

• Enhance cost basis reporting service to send/receive data directly from mutual fund companies

• System changes to identify S Corp accounts (remediate all existing corporate accounts)

• Educating and communicating advisors and their clients

• Training our client-facing reps

• Redesigning our year-end reporting documents

– Redesign Form 1099 Composite

– Include cost basis information Form 1099-B for both covered and uncovered securities

– Introduce new Year-End Summary which includes:

• Realized Gain/Loss information

• Summary of fees

• Amortization and Accretion information

– Retirement of the Year-end Gain/Loss Report for taxable accounts only

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Additional Data Required on the Form 1099-B

Brokers are required to report the following on the 1099-B:• Gross proceeds for all securities (except option sales)• Cost basis for covered securities (includes acquired date, cost basis, ST/LT,

covered/uncovered, wash sale disallowed loss)

Brokers are permitted but not required to report the following on the 1099-B:• Cost basis for uncovered securities (includes acquired date, cost basis, ST/LT,

covered/uncovered, wash sale disallowed loss)• Cash in Lieu under $20

Brokers are not permitted to report the following on the 1099 but can report on it in a supplemental section:

• Zero proceeds• Negative proceeds• Worthless securities• Bankruptcy• Option Sales (covered in 2013)

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Schwab will Provide Covered and Uncovered Cost Basis on 1099-B

Provide reporting for the following items on the 1099-B:• Gross proceeds for all securities (except option sales)• Cost basis for covered securities• Cost basis for uncovered securities when available

Provide reporting for items not included on 1099-B in the Realized Gain/Loss section:

• Zero proceeds• Negative proceeds• Worthless securities• Bankruptcy• Option sales (covered in 2013)• Adjusted cost basis for certified fixed income assets

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Redesign of Form 1099 Composite

For illustrative purposes only

No room to add new required data elements

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Objective is to help make clients’ tax preparation easier

New Information

• 1099-B now contains cost basis information for both covered and uncovered securities

– Cost Basis

– Date Acquired

– Holding Period (LT or ST)

– Wash Sale

– Covered or Uncovered (cost basis provided for uncovered securities as long as we have it)

• Reorganized Year-End Summary section now includes:

– Calculation of realized gain/loss in RGL section

– Amortization and Accretion Info for Fixed Income Assets

– Summary of Fees

New Organization

• Landscape presentation allows for easy inclusion of newly required data fields

• New format aligns the Form 1099 Composite with:

– Schwab Customizable Statement

– Trade Confirm

• Year-End Summary section has been reorganized

– Data is now grouped by Form 1040 Schedules

– Includes a table of contents to help clients find their information easier

Redesign of Form 1099 Composite

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New Format Allows for Newly Required Data Fields

Landscape Format

For illustrative purposes only

New Organization

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Form 1099-B: Most Updated Section

Holding Period

Default Method

Date Acquired

Wash Sale

X=non-covered

Cost Basis

For illustrative purposes only

New Information

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Year-End Summary: Organized to Assist with Tax Forms

New data added to report

For illustrative purposes only

New Information

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New Realized Gain/Loss Section

Realized Gain or Loss calculation

For illustrative purposes only

New Information

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Proactive Steps Advisors Can Take to Minimize Confusion

Data synchronization and reconciliation• If you maintain cost basis in your PMS and do RGL reporting to your clients, it’s

imperative that you get your data reconciled with ours prior to end of this year if you haven’t already done so

Develop a communications and training strategy• Schwab will communicate via statement insert in October about the 2012

requirements and the redesigned 1099 Composite • Schwab will send over 800k redesigned Form 1099s to clients of advisors and we

anticipate many of them will turn to you with questions

Develop an educational summary sheet for your clients reminding them what they are responsible for reporting

• Explain covered vs. uncovered• What is Schwab reporting to the IRS?

Reach out to clients’ CPAs and tax advisors directly• Make sure they understand how Schwab will report cost basis information

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Cost Basis Legislation Resources

schwabadvisorcenter.com/costbasis

Schwab’s cost basis website is your primary resource for up-to-date information how Schwab is preparing to comply with the legislation.

• New white paper titled “Cost Basis Reporting: Preparing for 2012”

• Ongoing webcast series designed to keep you up-to-date on the legislation, our plans to comply and technology enhancements.

• Several downloadable references such as the covered/uncovered securities and cost basis methods charts.

• Easy access to information to provide to third-party CPAs and tax attorneys.

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New white paper focuses on 2012 requirements:

• Background on 2012 requirements• Two advisor case studies on proactive

communication and data synchronization and reconciliation.

• 4 key steps advisors can take now to prepare your back offices and clients

• Available at schwabadvisorcenter.com/costbasis

Cost Basis Legislation Resources

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Cost Basis Webcast Series

Webcast TopicDate

Live Demo: New Cost Basis Technology ToolsDecember 14th

Cost Basis Changes for Advent® and PortolioCenter®November 15th

Preview of Technology Enhancements for Cost BasisOctober 25th

Educating Your Client About the New Form 1099-BSeptember 29th

Register at schwabadvisorcenter.com/costbasis

PortfolioCenter® is a product of Schwab Performance Technologies (SPT). Schwab Performance Technologies®and Schwab are subsidiaries of The Charles Schwab Corporation.

Helps you stay up to date and preview key changes.

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SOLUTIONS: Cost Basis Session

SOLUTIONS:• One-day, live Advisor Services event series offered in 12 cities throughout July and

August (7 are remaining)

• It offers education sessions on Schwab's and other third party technologies used in the advisors' day-to-day operations.

Cost Basis Session:• Recap of 2011 regulatory requirement

• Live demonstrations of:– Cost Basis tab on Schwab Advisor Center

– Lot trading on Web Trading Applet

– Cost Basis download files

• 2012 CBL requirements review

Register at solutions.schwab.com/SOL2011