For many investors, one of the most frequently asked questions at the start of a new year is: “Where is my 1099?” And this is quickly followed by “Why does it take so long to get my 1099?” These simple questions mask a surprisingly complex process that financial institutions (custodians, brokerage firms, or other recordkeepers) must undertake to produce these essential tax documents. Below, we’ll explore some of the key reasons this process is time-consuming and why the custodians are at the mercy of the fund managers.
Certain asset types—such as mutual funds, Real Estate Investment Trusts (REITs), and Unit Investment Trusts (UITs)—often make periodic income distributions to holders throughout the year, usually based on estimated earnings of their underlying holdings. Mutual funds may distribute dividends or capital gains monthly, quarterly, or annually, which can come from interest, dividends, or realized capital gains within the fund’s portfolio.
REITs pay out most of their earnings as dividends to maintain certain tax advantages, although underlying real estate assets can complicate the estimation of actual annual income. UITs, even with a defined portfolio and end date, also distribute interest or dividends throughout the year. All of this is to say there are many payments throughout the year, and each of these payments may later be subject to reclassification if actual earnings differ from what was initially estimated.
After the calendar year closes, fund managers review actual earnings, expenses, and capital gains or losses. If it turns out that more income was distributed than was truly earned, the excess must be reclassified as return of capital (ROC) rather than income. A return of capital is not taxable as ordinary or dividend income in the year it’s received but instead reduces the investor’s cost basis in the shares.
Because reclassification details are often finalized and released by fund companies in January or February, custodians must wait for this information before accurately reporting your distributions on Form 1099.
When a portion of a distribution is later deemed a return of capital, it effectively reduces the cost basis of the eligible tax lots held at the time of the payment. For investors who sold any of those shares after the initial distribution but before the reclassification was announced, custodians must retroactively adjust realized gains or losses to reflect the new cost basis.
As you can imagine, this process can be incredibly time-consuming, as every affected tax lot and associated transaction must be recalculated to ensure that cost basis and gain or loss figures are accurate. Think of a representative account that holds 15-20 funds. Each fund will likely have many tax lots (it is not abnormal to have dozens per fund). Layer in all the different transactions and the custodian is undoubtedly working through millions of records.
Brokerage firms and custodians aim to provide 1099s by early February. However, the complexity of reclassifications can lead to the possibility of issuing corrected 1099s later (if updated information arrives after the initial mailing). In some cases, corrected 1099s can come in March, causing confusion and sometimes requiring investors to amend their tax returns.
Some firms opt to send the 1099s earlier and later follow up with corrections. Meanwhile, others (SEI included) choose to delay sending 1099s until they feel confident they have final data from fund companies. Both approaches work, but waiting for the final numbers is the best method, in my opinion.
Clearly, most investors would love to get their 1099s on New Year’s Day. And although that would be great, hopefully, you can see it’s not quite that easy. So next time you think, “Where is my 1099?” remember that creating these tax documents involves considerable effort, and custodians are usually not the bottleneck; getting the final data from the fund managers is what gums up works.
Markets / Economy
- Equity markets struggled again this week as earnings and uncertainty led the narrative. The S&P was down -1.0%, the Nasdaq was down -3.5%, and the small-cap Russell 2000 was down -1.5%.
- Initial jobless claims soared by 22K from the previous week to 242K in the third week of February, the most in over two months and well above market expectations that they would remain stable at 221K.
- Core PCE rose by 0.3% MoM, which aligned with market expectations. This translated to a 2.6% increase YoY.
- Headline PCE increased 0.3% MoM, which aligned with expectations. Services prices rose at a slower 0.2% versus goods up 0.5%.
Stocks
- U.S. equities were in negative territory. Technology and Utilities led the decline, while Financials and Real Estate outperformed. Value stocks led growth stocks, and large caps beat small caps.
- International equities closed lower for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased 19 basis points to 4.23% during the week.
- Global bond markets were in positive territory this week.
- Government bonds led for the week, followed by corporate bonds and high-yield bonds.
