If you have purchased and sold stocks in 2011 in your taxable investment account, look for a significant change on the 1099-B form this year.

For the first time, your broker will supply cost basis information to you and the IRS. The cost basis is the amount you have paid for the shares. The proceeds above your cost basis are taxable as capital gains. This change does not affect traditional or Roth IRAs, or other tax-deferred investments.

Before this year, you were legally on your own in determining cost basis. While investment companies would send information on the gross proceeds of sales, estimated gains and losses were not provided to the IRS.

Leaving this task to the individual taxpayer led to chronic underreporting of gains on tax returns, costing up to $10 billion per year by IRS estimates.

The new law took effect for individual stocks purchased in 2011. Mutual fund shares acquired this year are also covered.

One wrinkle is that there are many different legal ways to track cost basis. The default method is average cost, but there are also FIFO (first in first out), LIFO (last in first out), specific identification and other methods.

When you open a taxable investment account you now specify which method to use. If the broker uses one method (usually average cost by default) and you use another, then when you sell your investments, the gain or loss reported will not be the same as your calculation.

The difference can mean thousands in capital gains taxes. You can change the cost basis method after you open an account and purchase the shares, but you once you sell the shares the decision becomes final.

Let’s say your version of cost basis is different than your broker’s. You can put an explanation in your tax return about your alternate calculation. But if you take that step, you may be flagged for an audit.

So which option should you choose? Average cost is very straightforward and has been tracked by most investment companies for years. The FIFO method, if used in normal markets, will generally result in the highest gains as you will be selling shares that were purchased first and most likely at the lowest cost.

The LIFO method could be a good option, as the most recently purchased shares are sold first (presumably for the least gain), but you can run afoul of higher short-term capital gains tax rates if you hold shares for less than a year. Specific identification permits you to choose the exact shares you are selling and can be the best of all worlds, but it requires careful recordkeeping.

One positive step with the new law is that when you change brokers, the cost basis information must transfer with covered investments. Before this year, you were often left to your own devices chasing down basis from your old broker.

Update

The Laid Back portfolio turned in the best quarter of the year with a 6.89 percent gain finishing 3.37 percent up for 2011. It was a below average year in terms of returns (and quite a bit above average in volatility), but many investors made money last year.

It was fortunate that Laid Back did not stray into international investments in 2011, as indices of developed and emerging markets were down from 12 to 20 percent for the year. Ouch!

As it’s a new year, we will rebalance to 60 percent S&P 500 and 40 percent bonds.