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Take heart because here's what you don't need to know: The price per share, the actual commissions, the dividends received over the years (they are reported elsewhere), or even the number of shares you bought and sold, although you might need that if you have to keep track of multiple transactions involving the same stock. Tracking the number of shares and noting any splits that occur is a good idea, but not required on Schedule D. You just have to figure out the right costs basis for the stock you sold.
And there is paper everywhere! I decided that now was a good time to get the last five years worth of brokerage reports in archivable condition. What was I thinking? Actually, it's been kind of fun, once I figured out what I needed to keep and what I could toss.
If all of your investing is done through IRA accounts, you can skip today's article, unless you just want to gloat. One of the unsung beauties of IRAs is that you don't have to report anything about them to the IRS except when you are putting money in or taking money out. In between, the IRS has no interest in what goes on in IRA accounts. You don't have to track your trades at all as far as the IRS is concerned. Of course, a good Fool would want to know how his portfolio is doing.
Today I propose an exchange of information. I will tell you what I've learned about record keeping and you can share with me any of your favorite tricks, the best of which I will share with everyone next week. Deal? And tomorrow we will discuss tracking your portfolio for performance reasons, which may interest IRA investors as well.
First, let's talk about the purpose of tracking your taxable investments. The immediate and most important purpose is because you gotta. The IRS is very picky about this. They wrote a guide that basically tells you to keep everything for three years unless you are filing fraudulent tax returns or forgetting to file at all, in which case you you'd better keep everything forever (Publication 552, Recordkeeping for Individuals).
The way I look at it, though, the reason you keep records is so that you know how you are doing. Are you actually meeting your investment goal? If you are tracking your portfolio well enough to do that, it's actually a simple matter to extract the information you need to fill out your Schedule D, Capital Gains and Losses. So let's start with the easy part.
In order to fill out next year's Schedule D you will need to know just a few very basic things about each stock transaction. For a Foolish Four investor, this can be accomplished with just a few pieces of paper, as long as they are the right pieces. You need to know:
But what exactly do you need to keep out of all that paper the broker sends you every month? Should you keep everything? Not in my opinion. Publication 552 does say to keep all brokerage statements, but for an inactive trader, brokerage statements are not very useful. You could develop a very elaborate filing and tracking system and spend several hours each month on it, but I tend to go for simplicity and low maintenance. It's much easier to find information you need when it isn't buried under a whole bunch of paper that you don't need.
I'm a lazy record keeper and I think that is a good thing. Here's what I do. I toss every piece of mail from my broker (except the junk mail that I open just in case and then throw away) into a file. That's it. That's my system for most of the year. Of course I am tracking my investments online at My Portfolio and the Ameritrade website. That's why I can resist opening the statements -- they are always out of date.
When tax time comes, I sort the envelopes in chronological order and open them up. The monthly statements I put in one pile and the trade confirmations (buys and sells) in another. For every sales confirmation, I locate the original buy confirmation. Any buy confirmations for stocks I am still holding go into a file where they sit until they are sold. I don't usually hold more 10 or 12 stocks so it's easy to manage.
I staple the sell confirmations on top of the corresponding buy confirmation. Voila, I have #1-5 above right there in one spot. The stapled confirmations will eventually be filed by the year sold, because that is when a taxable event occurs. Then I scan each brokerage statement for events of significance, like a stock split. If a split occurs, I highlight it and staple that one page to the buy confirmation sheet. (Once, I had two of those in one month so I just made a note about the splits on one of the buy confirmations. You could just do that every time, I suppose.)
I also check every brokerage statement to make sure I have trade confirmations for each buy and sell during the year. If I've lost them, I save the page of the brokerage statement that has the transaction information in place of the confirmation slip. Otherwise, I keep the last brokerage statement of the year, and any that show cash deposits or withdrawals and toss the rest.
Your brokerage is required by law to send you (and the IRS) a 1099 statement(s) every January listing interest paid on cash balances and the dividends received from each dividend-paying stock. That's good enough for me, and good enough for the IRS. I don't bother with interest and dividends during the year. You will also get a 1099 listing the proceeds from each stock sale, but my broker -- and I hope this is not true of all brokerages, I'll find out next year -- lists only the date, a stock tracking number, and total amount received. It's about as useless for Schedule D as you can get. I use it just as a check to make sure I have a trade confirmation for all sales. It doesn't seem like it would be that difficult for a brokerage to at least give you the stock name and number of shares sold. It would be even better if they could list the costs basis, but that would be considerably more difficult in some cases, so I can understand why it isn't done.
So, basically, to fill out schedule D and support it, you just need the 1099s and the trade confirmations for each sale, matched up with the trade confirmation for the corresponding buy. This is a considerably smaller stack of papers than I started with, but it has all of the information I need for tax purposes.
Of course there are always complications. April is the month during which I contemplate the virtue of simplicity in stock transactions and vow that I will never add to an existing position, or ever sell a partial position. That leaves me with 11 months in which to forget those vows, and there are times when financial prudence dictates that one do exactly that. But my brokerage statements from several years ago are filled with choppy trades that were done for no good reason. Inevitably those are the ones that I spent the most time on.
As I said, this is a simple system for a relatively simple portfolio. It has worked rather nicely for me for the last several years. I haven't been audited, yet, but I know that I have the information to support each transaction I have made.
I also maintain a spreadsheet with each stock transaction listed and a running list of any deposits or withdrawals to the account. I use it mainly to track portfolio performance, but it serves as an easy way to list all stock transactions in one place, which makes filling out Schedule D even easier. Tomorrow I will share it with you and also show you how to maintain a paper version that is (almost) just as good.
Fool on and prosper! Zddmsf ./fnkjweao`1