Your client’s sales proceeds and cost basis on their 1099-B may be much higher than their balance ever was at any given time in their Betterment account. That’s because these numbers represent the total amount of cash proceeds from the sale of securities, even if the proceeds were then used to buy securities again. This can happen many times over the course of the year.
The cost basis is amount of money they paid to purchase the shares that are being sold, with possible adjustments for wash sales and nondividend distributions. The sales proceeds figure, as defined in your tax forms, is simply “the amount of money you received in exchange for selling their shares this year.”
Let me give you an example to illustrate. Let’s say they made a $100 deposit and then withdrew it after they gained $10. For this transaction, their cost basis is $100, and their proceeds are $110.
Now imagine they reinvested the same $110 and sold it for $120. For this transaction, their cost basis is $110, and their proceeds are $120.
However, their total cost basis for the year is $210 and their total proceeds are $230, even though their balance never exceeded $120.
Rebalances, allocation changes and tax loss harvesting can all increase your aggregate proceeds and cost basis to many times what your balance was during the year, but it’s really the same funds being used, and the important number, for tax purposes, is the difference between their overall cost basis and proceeds, not either of those numbers on their own.
