Surprisingly, the e-mail from Fidelity is misleading. The amount of contribution recharacterized was $8,000, not $8,698.73. $8,698.73 was the gain-adjusted amount transferred. When TurboTax asks for the amount recharacterized, enter $8,000. The $698.73 simply becomes investment gains within the traditional IRA.
Assuming that the resulting traditional IRA contribution is nondeductible, your Form 8606 will show $8,000, not $8,698.73, on line 1. TurboTax will do this automatically when you enter the $8,000 Roth IRA contribution and tell TurboTax that you "switched" the $8,000 to be a traditional IRA contribution. Telling TurboTax that you "switched" the contribution will cause TurboTax to prompt you to complete the required explanation statement. As it turns out, you do have the information necessary to provide all of the details, including the exact amount of attributable investment gains included in the transfer.
You'll want to convert the entire amount to Roth, so the taxable amount of the conversion will be somewhere around $698.73 depending on how the share value changes between now and when you do the converison.
