Cost Basis Reporting

Cost Basis Legislation
— The Next Phase

Learn more about how to plan for the next phase of legislation:
Fixed Income Products and Options.
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New legislation impacts cost basis reporting for broker/dealers

Since January 1, 2011, Raymond James – along with all broker/dealers, banks, custodians and transfer agents – have been required to record and report more detailed information on securities sales to the IRS.

What is cost basis?

The concept of cost basis is simple – it’s the price at which a security was acquired. However, because that price must be adjusted for factors such as commissions, reinvested dividends, stock splits and any other corporate actions, determining cost basis can be complex.

Cost basis is essential in determining how much of a taxable profit you’ve made – or how much of a taxable loss you’ve incurred – on the sale of a security. That profit or loss, in turn, can have an impact on your total tax liability.

What is covered under the regulation?

The legislation is rolling out in phases, as shown in the chart below.

Covered securities are those acquired on or after the applicable dates outlined by the legislation. Securities acquired by clients before these dates are uncovered by the legislation. Broker/dealers are not required to report cost basis on uncovered securities to the IRS. However, taxpayers are responsible for accurate reporting of cost basis on covered and uncovered securities to the IRS on their tax returns.

COVERED SECURITIES UNCOVERED SECURITIES
Broker/dealer vs. Taxpayer responsibility Broker/dealers will report cost basis to IRS and taxpayer on Form 1099-B. Taxpayer will use Form 1099-B data in preparing their tax return filing for 2011 and following years. Taxpayer will report cost basis to IRS.
Equities1 Acquired on or after January 1, 2011 Acquired prior to January 1, 2011
Mutual funds, dividend reinvestment plan (DRP) shares 2 Acquired on or after January 1, 2012 Acquired prior to January 1, 2012
Bonds3 and Options4 Acquired on or after January 1, 2014 Acquired prior to January 1, 2014
Variable Rate Bonds, Convertible Debt, Foreign Issued Debt, and other Bonds & Options not outlined in 2014 requirements5 Acquired on or after January 1, 2016 Acquired prior to January 1, 2016

1 Equities include corporate stock, ADRs, UITs, ETFs, REITs (other than stock in a regulated investment company [RIC] or stock acquired in connection with a dividend reinvestment plan [DRP]). Internal Revenue Code section 6045(g)(3)(C)(i) provides that the applicable date is January 1, 2011.

2 For stock in a RIC (RIC stock) or stock acquired in connection with a DRP (DRP sock), 6045(g)(3)(C)(ii) provides that the applicable date is January 1, 2012.

3 Instruments for which yield and maturity may be determined under §§ 1.1272-1(b), (c), (d). **Factor bonds and short term debt will never be covered under cost basis legislation.

4 Select options to include options on specified securities (i.e. stock, index), on financial attributes of specified securities (i.e. interest rates or dividend yields), stock rights, warrants, and stock acquired through the exercise of compensatory option (i.e. incentive stock options and nonqualified stock options).

5 Bonds with stepped rates, STRIPs, instruments making payments in foreign currency, certain tax credit bonds, PIK bonds, foreign issues debt, bonds with terms unavailable for more than 90 days after a customer acquisition, debt issued as part of an investment unit and physical certificates held outside a clearing organization. Additionally contingent payment debt instruments and inflation indexed debt. Options that are issued as part of an investment unit.

What does this mean for investors?

The following changes went into effect in 2011:

  • Raymond James began reporting cost basis information for equities acquired on or after January 1, 2011, to the IRS on Form 1099-B. This reporting includes loss deferrals and other adjustments, including wash sales (when an investor sells or trades stock or securities at a loss and acquires substantially identical stock in some way within 30 days before or after the sale of the investment, regardless of whether or not the security sold was in the same account).
  • Unless otherwise specified by you or your financial advisor at the time of trade or transfer, Raymond James calculates your cost basis gains and losses using the first-in, first-out (FIFO) cost basis accounting method.
  • Gifted and inherited shares transferred between accounts must be identified, and applicable accounting rules must be applied to the gain/loss.

The following changes are applicable for Tax Year 2012:

  • Raymond James is reporting cost basis information for covered mutual funds (those acquired on or after January 1, 2012) to the IRS.
  • Average cost* is available for mutual funds, certain unit investment trusts and some exchange-traded funds. With average cost, mutual fund shares not covered by the legislation will be averaged separate from those covered by the legislation.
  • Average cost is not as flexible as the other accounting methods available, and specific guidelines should be reviewed with your financial advisor.

If you have any questions regarding the new IRS cost basis information reporting requirements, please contact your financial advisor for assistance.

*Changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.