Tax & Accounting Blog

New Cost Basis Rules May Be Lost on Many

1042-S, 1099, 6050W, Cost-Basis Reporting, Information Reporting for Wealth Management, ONESOURCE, Tax Information Reporting, TIN Compliance, Trust Tax, W-8 & W-9 Foreign Reporting, Withholding Management April 9, 2012

cost basis reportingWith taxpayers in the throes of planning their 2011 income tax returns, now’s a good time to remind filers not to overlook new cost basis reporting rules governing securities sales. In the past, they had the option of specifying which shares they sold when computing their cost basis.

But as of 2011, taxpayers’ account custodians were required to track and report both purchase and sales prices for transactions. The rule change, which goes into effect for mutual funds and some dividend reinvestment programs this year, was designed to help the IRS collect an estimated $6.6 billion in additional taxes over the next decade.

Early evidence suggests that a sizable proportion of account custodians have not accounted for the change, according to InvestmentNews. Advisers at one major financial services firm specified which shares to sell for their clients in less than half the trades they executed last year, and investors who traded on their own were even less likely to specify a particular lot, the report says.

Here are the IRS’ key takeaways for brokers and other custodians:

  • If a customer sells less than their entire position of a security in an account, the broker must report the customer’s adjusted basis in the security using the first-in, first-out (FIFO) method, unless the customer provides the broker an adequate and timely identification of the shares or units they sold.
  • When a broker transfers securities to another broker before the sale, the transferring broker must furnish to the receiving broker a statement containing sufficient information about the transferred securities for the receiving broker to determine the customer’s adjusted basis.
  • Issuers of securities must file a return with the IRS and furnish a statement to holders of the securities after taking a corporate action that affects the basis of the security to explain the action and its quantitative effect upon the basis of the security.
  • Starting this year, taxpayers who elect to average the basis of mutual fund shares will compute separate averages for fund shares held in different accounts.