Frequently Asked Questions

Simply click on any of the questions to view the answer, or if you want to review the whole list, just scroll down the page.

Tax FAQs

When will 1099 forms be mailed?

1099 forms are mailed out at the end of January. If you are concerned about missing forms, please contact Customer Service at (888) 280-8020 or through Live Help on our website.

What types of 1099 forms will I receive?

You will receive a single 1099-Combined Tax Statement, which will be comprised of your 1099-INT, 1099-DIV, 1099-B, and 1099-Misc. forms (as appropriate).

IRA accounts that have reportable activity for the applicable tax year (e.g. a distribution was taken from the IRA), the clearing firm will send a Form 1099-R. This 1099-R will consist of all reportable activity for the applicable year.

Can I file my taxes if I have already received a 1099-Consolidated Tax Statement?

Please note that some investments, including mutual funds and REITs, may reallocate payments after 1099s have been distributed, and will thus require a re-issuance of corrected forms.

Note: optionsXpress is not responsible for payment reallocations that result in the issuance of corrected 1099 forms, and will not be liable for any re-filing costs incurred.

Are money market proceeds included in the 1099-DIV from the clearing firm?

If you received dividends from your investment in Reich and Tang Money Market Funds, these are shown in summary with the ordinary dividends on the 1099-DIV section of the Consolidated 1099 form. Keep in mind that if your account accrued less than $10 during the applicable tax year, the amount will not be reported.

How are foreign company dividends reported?

Any gross dividends from foreign corporations and tax withheld on them will be reported as separate entries on your 1099-DIV. For additional information, please refer to Internal Revenue Service Publication 514, "Foreign Tax Credit for Individuals."

How are dividends paid out of an account reported?

If a dividend is paid on a short position maintained in an account, the resulting dividend charge will not be reflected on a 1099-DIV. You may, however, use a monthly account statement as proof that a dividend charge occurred.

Why are there no option sales shown on the 1099 I received?

Brokerage firms are not required by the IRS to report option sales. However, an assignment or exercise of index options which generates a cash payment may need to be reported on a Form 1099-B accordingly.

Are short sales reported?

Yes, short stock sales will be shown on a Form 1099-B.

What if a short sale is not yet closed out?

Even if the position is not closed out, the account owner is responsible for determining whether the short sale must be reported to the IRS. If reportable, you should record the short sale on Schedule D (Form 1040), line 1, and explain in writing that the amount is from a short position that has not yet been covered.

Does margin interest get reported to the IRS?

Margin interest is not reported to the IRS. This information is available on monthly account statements or account activity online.

Will I receive a 1099 if I have a W-8BEN on file?

All non-resident aliens will receive a Form 1042-S instead of a 1099. This form will show total gross proceeds and the percentage of tax withheld (as determined by your country‘s tax treaty with the U.S.).

Note: Form 1042-S will be mailed out in March.

What if I find an error on a 1099?

To correct an error on a tax form, or for general inquiries about a 1099, contact Customer Service at (888) 280-8020 or through Live Help on our website. Please have all relevant documents available. We will research the matter as quickly as possible and issue corrected forms if necessary.

Why does a 1099-B show such a large number?

The 1099-B reflects gross proceeds, not profit. Gross proceeds from security sales are calculated by subtracting any commissions paid from cash received. You can add in dividends earned and reduce the total by the purchase price to determine the net profit or loss on the transaction.

Stock sold December 31st does not settle until January 3rd. When is this transaction reported?

A sale is reportable in the year of execution, not settlement. This means any trade executed on or before December 31st in one year will be reported on the 1099 for the next year.

Will I receive a 1099 if I trade futures?

A separate 1099-B will be issued that will reflect your futures transactions.

Why do the details on my 1099 differ from my statement and online activity?

Certain distributions of income may be reclassified after they are posted to your account. For example, a payment reported as an ordinary dividend may later be reclassified by an issuer as a capital gain or a qualified dividend. Reclassifications are shown on the tax reporting documents and not on the monthly statements or online activity as these entries affect the reporting of the 1099, but no money entries are actually made to your account.

What portion of an investment will be taxed as ordinary income?

Dividends and interest are treated as ordinary income. Qualified dividends, however, are eligible to be reported as long-term capital gains (please consult a tax advisor for more information).

What is a capital gain or loss?

Any asset held as an investment is a capital asset. When a capital asset is sold for a profit, the result is a capital gain. Conversely, selling a capital asset at a loss creates a capital loss. Keep in mind that capital gains or losses are not generated until capital assets are actually sold.

How are capital losses or gains calculated?

The amount realized from the sale of a security reduced by its cost basis (purchase price plus commission) is capital gain. To determine capital loss, subtract any sale proceeds from the cost basis.

How are capital gains taxed?

Short-term capital gains are taxed at the same rate as ordinary income. Most long-term gains have a special rate of 15%, which is reduced to 5% if your tax bracket is below 25%.

How is a long-term or short-term gain determined?

If the asset had been held for more than one year before it was sold, then the gain is a long-term capital gain. If the asset for one year or less, then the resulting gain is short-term.

Can capital gains be used to offset capital losses?

Yes, capital gains may be used to offset capital losses. If gains exceed losses, the difference is reported as a net capital gain. If losses exceed gains, the difference may be deducted as a net capital loss (up to $3,000) from ordinary income. Net capital losses (in excess of $3,000) may be carried forward and deducted in subsequent years.

How does the "wash-sale rule" work?

The wash-sale rule prevents an investor from claiming a loss on a security sale if the investor bought an identical (or substantially identical) security within the period that begins 30 days before the sale and ends 30 days after the sale.

How long must an investor hold a stock to qualify for the lower dividend tax?

The investor must hold the dividend-paying stock for more than 60 days during the 120-day period that begins 60 days before the ex-dividend date.

Will the paying company communicate if dividends are qualified?

No, it will be your responsibility to determine if any of the dividends received will qualify for the lower tax rate.

Keep in mind that a 1099 may represent dividends as qualified. The "qualified" designation is only an indication that the dividend may be treated as qualified. The 60-day rule still applies to determine whether the dividend is actually qualified for your reporting purposes or not.

Do dividends from foreign corporations qualify for the lower tax rate?

Foreign corporations only qualify if they are incorporated in a U.S. possession or country that currently has a tax treaty with the U.S. However, a foreign corporation that does not meet either requirement will still be treated as a qualified foreign corporation if the stock of the corporation on which the dividend was paid is readily tradable on an established securities market in the United States. Please see IRS bulletin 2003-42 for further information.

Does every dividend qualify?

No. For example, the following dividends are not "qualified":

Dividend payments on short sales
Dividends taken as investment income (e.g. dividends paid on preferred stock)
Dividends paid to policyholder by insurance companies
Patronage dividends that a cooperative pays to their patrons
Dividends received from scientific, charitable, and religious organizations (or other corporations exempt from tax under Code Section 501)
Any amount allowed as a deduction for dividends paid by a mutual savings bank
Dividends paid and held by an employee stock plan

What if a mutual fund company receives dividends?

If qualifying dividends are passed on from the fund company, these can be taxed at the new lower rates.

What is a substitute payment?

Substitute payments (rather than dividends) may result when a security is on loan from the holder's account during its dividend record date. Securities in margin accounts with debit balances are often eligible for broker lending. The "substitute payment" received by the account holder on a loaned security will equal the dividend amount owed the actual holder on its record date, but will be taxable as ordinary income. These payments may also be categorized as "manufactured income."

How will substitute payments be reported?

Substitute payment transactions will be shown on a 1099-MISC.

What are the economic consequences for receiving a substitute payment?

If you receive a substitute payment, you may be provided a credit, known as a "gross-up" entry, to assist with the federal taxes. Generally, gross-up entries are only eligible for non-margin, non-retirement accounts. Keep in mind that payments may be refused to any client determined not to be entitled to receive the lower dividend tax rates.

optionsXpress offers no investment, tax or legal advice. Investors should discuss tax treatment of their transactions with a qualified tax advisor.

Content is provided by optionsXpress for educational and informational purposes only. Products and services are intended for U.S. customers and may not be available or offered in other jurisdictions.

FAQs

Subject Index

Resources

Frequently Asked Questions

Tax FAQs

1099 FAQs

Capital Gain and Loss

Qualified Dividends