Cost Basis Reporting Resource Center Blog

On December 16, 2009, the IRS issued proposed regulations on cost basis reporting by brokers (the Proposed Regulations—REG-101896-09).  The Proposed Regulations address key details regarding cost basis reporting for stock, dividend reinvestment plan stock and mutual fund shares, including permitted lot selection methods, optional reporting of pre-effective date (uncovered) shares, wash sales and other basis adjustments and other important rules.

There is no de minimis rule or general exception for wash sales related basis adjustments under the Proposed Regulations.  And there is no exception from reporting for investors that have elected mark-to-market tax reporting.  Thus, brokers would need to process wash sales adjustments in almost all cases.  The Proposed Regulations do not address basis reporting for debt instruments or options and indicate that related guidance for these securities types will be released at a later date.  The regulations would permit brokers to optionally report on pre-effective date securities or optionally report other basis adjustments on covered securities.  It is notable that the Proposed Regulations would require brokers to provide corrected 1099’s (without any de minimis exception) if transfer or issuer corporate action information is corrected.  The regulations would also eliminate the double category averaging method of calculating basis presently available for mutual fund shares.

The Proposed Regulations also address transfer reporting and issuer reporting of corporate actions.  The Proposed Regulations are clear that issuers, transfer agents, professional custodians and other persons involved in the issuance and holding of securities are subject to transfer reporting regardless of whether such persons are involved in sales of securities. Special rules apply regarding the reporting of cost basis on the transfer of gifted or inherited stock.  The Proposed Regulations would permit issuers to report corporate action information on their primary public websites and do not contemplate a central repository for such information.

Along with the regulations, the IRS also issued a related press release and a draft Form 1099-B (both available at costbasisreporting.com).  Note that the draft Form 1099-B would require brokers to report disallowed wash sale losses.

Significantly, the Proposed Regulations do not include any delay in the effective dates for cost basis reporting.

The Proposed Regulations are not binding on taxpayers and generally provide for prospective effectiveness to transactions occurring after the date final regulations are published or the effective dates for cost basis reporting set forth in the law (Jan. 1, 2011 for stock acquired and Jan. 1, 2012 for mutual fund and DRP stock acquired).  Final regulations may not be published for several months or more and their provisions (including effective dates) could differ, possibly substantially, from the terms of the Proposed Regulations.  Brokers and others have expressed concern regarding the need for immediate guidance and the delay in the issuance of final regulations.

The IRS has solicited comments on the Proposed Regulations and will consider comments received in drafting final regulations.  Comments are due by February 8, 2010.

Stevie

DISCLAIMER: The information and views set forth in GainsKeeper Tax Topics are general in nature and are not intended as legal, tax, or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by GainsKeeper Tax Topics which may not take into account potentially important considerations to specific taxpayers. Therefore, the views and information presented by GainsKeeper Tax Topics may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.

On Wednesday, December 2, 2009, House Ways & Means Committee Chair Rangel (NY) and Ranking Minority Member Camp (MI) introduced H.R. 4169, the Tax Technical Corrections Act of 2009 (the “Act”).  The Act would make technical corrections to tax law provisions enacted under eight different prior pieces of legislation, including a few tweaks to the cost basis reporting law enacted last year.

The Act would replace a few references in Internal Revenue Code (IRC) Section 1012 from “fund” to “regulated investment company” to clarify that the cost basis reporting rules for lot relief method selection and averaging apply to open-end, closed-end mutual funds as well as exchange traded funds (ETFs) that qualify for federal income tax purposes as regulated investment companies.  Application of these new cost basis reporting rules to all of these types of funds had seemed clear so this clarification is no surprise.

The Act would also push back the starting date for eligibility for averaging cost basis for dividend reinvestment plans (DRIPs) from starting after December 31, 2010 to December 31, 2011 under IRC Sec. 1012.  This proposed change would bring the effective date for DRIP share averaging in line with the effective date for broker cost basis reporting for DRIP shares already set forth in the law (shares acquired after December 31, 2011).  The December 31, 2010 date had seemed out of place and likely a result of a failure to update it to reflect revisions to the proposed effective dates that occurred as the legislation moved through Congress.  The proposed update in the Act would simply fix this apparent glitch.  The Act also includes a provision that would clarify that if a broker makes a single account election to average both pre- and post-effective date acquired shares, the pre-effective date DRIP shares would be eligible for averaging.  This proposed change seems helpful given that the tax law does not generally permit the use of average basis for regular stock (including DRIP shares prior to the enactment of the cost basis reporting law).

Finally, the Act would clarify that brokers would not need to report the cost basis of pre-effective date DRIP shares on Form 1099-B unless they elected to do so.

Remember that this is merely proposed legislation and that it is unclear when or whether it will be enacted or what other possible amendments relating to cost basis reporting might ultimately be enacted.

Stevie

DISCLAIMER: The information and views set forth in GainsKeeper Tax Topics are general in nature and are not intended as legal, tax, or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by GainsKeeper Tax Topics which may not take into account potentially important considerations to specific taxpayers. Therefore, the views and information presented by GainsKeeper Tax Topics may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.

Tax season is still a few months away, but there are steps investors can take before the new year to help lessen their tax impact, according to experts at GainsKeeper and Capital Changes, both part of Wolters Kluwer Financial Services.

While the financial markets did begin to rebound this year, investors have faced struggles in the financial services sector and disappointing company earnings and profits. But tax-smart trading decisions can provide some relief, say Stevie Conlon, tax director for GainsKeeper, and John Kareken, senior analyst for Capital Changes. They say investors might want to consider the following:

• Don’t Miss Worthless Stock Tax Deductions
  You may be able to recognize a loss for securities that became worthless this year. However, you have to act quickly because you can only claim the loss in the same year the stock actually became worthless.

  “With dozens of failures in the financial sector this year, more investors may find they own worthless stock,” said Conlon. “Investors should consult with their broker or tax professional to determine if a particular security qualifies as ‘worthless’ under tax law and if a loss can be recognized. In order to avoid proving whether the stock is worthless, simply sell the stock to your broker to lock in the loss.”

• Sell Gains to Offset Losses
  Investors might also consider identifying and selling gains that could match up with previously incurred losses. Investors who sold stock at losses early in 2009 may now hold stocks that have built-in gains due to the market’s rebound later in the year.

  “If you already have capital losses this year and have tracked them, consider offsetting these losses by selling some of your built-in gain stocks to minimize your taxes,” said Conlon.

  But if you are going to sell stock with gains at the end of the year to offset losses, you need to know your cost basis, or the original value of the security, adjusted for corporate actions, such as splits, mergers and dividends.

  “Cost basis affects the amount of gain you have on the sale of your stock, including mutual fund and REIT shares, so you need to know your basis first,” said Kareken. “Investors should pay close attention to various basis adjustments triggered by corporate actions, including return of capital distributions, since they reduce your basis. Many companies have announced that their 2009 distributions will likely be return of capital.”

• Get Your Cost Basis House in Order
  While cost basis calculations are necessary to determine capital gains, getting your house in order now is also good preparation for the potential impact of the new cost basis reporting law on individual taxpayers. The law, which will require financial institutions to report adjusted cost basis information for covered securities to the IRS and to taxpayers, takes effect in 2011. The IRS will be looking closely at cost basis information provided by brokers, but the law will also likely increase the level of scrutiny on cost basis calculations made by investors on their individual tax returns.

  “With so much focus on accurate cost basis reporting, a natural inquiry from the IRS will be to look at investors’ records that establish basis in old holdings,” said Conlon. “Making a point to organize now when it comes to cost basis issues could help save you time down the road.”

Investors should take advantage of the last month of the year to organize their financial records and consult with their tax or financial advisor to discuss optimal tax strategies. Kareken also suggests that shareholders pay close attention to their 1099-DIV forms as they start arriving in January 2010 for dividend payments characterized as a return of capital.

On Friday, Feb. 6, 2009, the IRS released Notice 2009-17 (the Notice, copy attached). The Notice indicates that the IRS intends to issue guidance regarding a number of important details relating to the new cost basis reporting law that was enacted on Oct. 3, 2008 (Pub. L. No. 110-343). To assist, the Notice requests public comments regarding the new law, including comments on 36 specifically listed topics. The Notice provides that comments are due by Monday, Mar. 2, 2009.

The 36 specifically listed topics are divided into sections regarding the applicability of reporting requirements, basis method elections, dividend reinvestment plans, reconciliation with customer reporting, special rules and mechanical issues, transfer reporting, issuer reporting and broker practices and procedures. Some of the listed topics are very specific. For example, issue number five is “[h]ow to facilitate customer elections of acceptable basis determination methods, including average cost basis, for an account to maximize customer flexibility and minimize broker burden.” The fact that the Notice includes all of these detailed topics suggests that the IRS has already been focusing on many of the issues arising under the new law.

The specifically listed topics included in the Notice and the Mar. 2 deadline for comments indicate that the IRS intends to work diligently to release guidance that will help brokers and other affected persons comply with the new cost basis reporting law.

Brokers, mutual funds, transfer agents, return preparers, vendors and other affected industry groups may want to act quickly to prepare and submit comments to the IRS by the Mar. 2 deadline. For those who may choose to wait until IRS guidance is issued, the failure to assess concerns regarding the new cost basis reporting law now and provide comments to the IRS in response to the Notice could result in being left behind when it comes to being ready to comply with the new law.

Stevie

DISCLAIMER: The information and views set forth in GainsKeeper communications are general in nature and are not intended as legal, tax, or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by GainsKeeper communications which may not take into account potentially important considerations to specific taxpayers. Therefore, the views and information presented by GainsKeeper communications may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.

January 21, 2009

On Jan. 16, 2009, the IRS issued proposed regulations on the allocation of basis to stock in a range of corporate transactions (the Proposed Regulations—REG-143686-07). The Proposed Regulations principally address the allocation of basis to stock in connection with returns of capital when corporations distribute cash or property in excess of current and accumulated earnings and profits, redemptions treated as dividend distributions under Section 302 of the Internal Revenue Code (as well as certain other related transactions under Sections 304), and exchanges of stock or other distributions in connection with mergers, recapitalizations, spin-offs and other corporate transactions that are governed by Sections 351, 354, 355, 356 and 368. The Proposed Regulations would also make certain revisions to existing basis allocation regulations relating to mergers, spin-offs and related transactions under Section 358 in response to certain comments received.

The Proposed Regulations have general application to holders of stock issued by corporations and thus would be relevant to both corporations that hold stock as well as to individual investors. They would also appear relevant for computation of basis of stock for cost basis reporting purposes in connection with corporate actions.

In broad brush terms, the Proposed Regulations would require taxpayers to separately apply corporate transaction basis adjustments to each particular lot or block of related stock (on a share-by-share basis) rather than on an aggregate basis. Also, distributions with respect to stock, in connection with a redemption, would only affect shares of the related class of stock held on a pro-rata basis. And, the redemption of all of one class of shares of stock held would not result in shifting basis to outstanding shares of other classes of stock of the same corporation held by a taxpayer. This approach could require the recognition of gain on particular lots of stock even when, in the aggregate, corporate basis adjustments do not exceed the holder’s basis in all of his or her shares of the related stock. This result, along with other potential complexities, could make the Proposed Regulations controversial and subject to negative commentary.

The Proposed Regulations retain current law principles permitting a holder to select the particular shares redeemed. This is important in redemptions under Section 302 that are treated as sales or exchanges rather than dividends because the taxpayer can select the tax lot with the most favorable basis (high, low or otherwise) for purposes of computing gain or loss on the exchange. In reorganizations that are not treated as dividend equivalent, the Proposed Regulations generally provide that the holder can specify the receipt solely of cash or other property (known as “boot”) for particular shares if consistent with the terms of the exchange or reorganization. Thus, in a reorganization the exchange by a holder of one lot of stock for cash could result in taxable capital gain or loss (determined by reference to the basis in the lot exchanged for cash) while the exchange of another lot of stock by the holder solely for stock in the acquiring corporation could be tax-free and result in carry-over basis and holding period (based on the basis and holding period of the lot exchanged for stock).

The Proposed Regulations are not binding on taxpayers and generally provide for prospective effectiveness to transactions occurring after the date final regulations are published. Final regulations may not be published for at least a year or more, and their provisions (including effective dates) could differ substantially from the terms of the Proposed Regulations.

The IRS has solicited comments on the Proposed Regulations and will consider comments received in drafting final regulations. Comments are due by Apr. 21, 2009.

Stevie

DISCLAIMER: The information and views set forth in GainsKeeper Tax Topics are general in nature and are not intended as legal, tax, or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by GainsKeeper Tax Topics which may not take into account potentially important considerations to specific taxpayers. Therefore, the views and information presented by GainsKeeper Tax Topics may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.

Why Investors May Not Receive Their Form 1099 Information from Their Brokers Until February 17 This Year

January 13, 2009

On Monday, Jan. 12, 2009, the IRS issued Notice 2009-11, which addresses an important aspect of the new cost basis reporting law enacted in October 2008—the new deadline for the delivery of Form 1099-B by brokers to customers. The cost basis reporting law includes a provision that changed the delivery due date for information returns relating to gross proceeds reporting by brokers from Jan. 31 to Feb.15 (or the next business day if such days are on weekends or holidays).

This change was widely anticipated, and although many provisions of the cost basis reporting law do not become effective for several years, this change was effective for information returns due this year (2009). One point of consternation relating to this change was that it does not generally apply to other types of Form 1099s, such as Form 1099-INT (for interest payments), Form 1099-DIV (for dividend payments), etc.

Brokers often provide customers with a single consolidated reporting statement that includes the required information that would be provided on various different types of Form 1099 (including Form 1099-B, Form 1099-DIV, Form 1099-INT, etc.). The new cost basis law includes a provision that extends the customer delivery deadline for such a consolidated reporting statement from Jan. 31 to Feb.15. Unfortunately, the new law provided that the term “consolidated reporting statement” for this purpose would be defined in IRS regulations and there were uncertainties regarding whether the new Feb. 15 deadline was available. Because the law was enacted so recently and the issuance of IRS regulations can easily take several years, brokers needed interim guidance from the IRS to address uncertainties regarding the availability of this new due date. One reason for brokers’ unease regarding this issue was that Section 6722 of the Internal Revenue Code imposes tax penalties on persons that provide payees with incorrect or late Form 1099s.

For example, assume a broker provides a consolidated reporting statement to its customers. One customer’s statement reports interest, dividends and sales of stocks and securities. Another customer’s statement only reports interest and dividends because he or she did not sell any securities during the year. Brokers were concerned that the new rule could be interpreted as requiring the first customer’s statement to be delivered by Feb.15 and the second customer’s statement to be delivered by Jan. 31. Such an interpretation would make things very difficult for brokers and could create computer system, report generation, review and mailing complexities. In the simplest terms, such an approach could cause brokers and their related vendors to repeat the processes and essentially double the amount of work they would need to undertake each year in processing and delivering such statements to their customers.

In early November the IRS posted a reminder inferring a potentially narrow interpretation of the consolidated reporting statement rule on its Web site that raised concerns in the brokerage and mutual fund communities. Notice 2009-11 provides important relief and would permit a broker to take advantage of the new Feb. 15 deadline (Feb. 17 is the actual deadline this year because Feb. 15 is a Sunday and the Feb.16 is a holiday) for all of its customers (both customers in the example set forth above) if it provides them with consolidated information statements. The key sentence in the Notice is “such reporting entities have until February 17, 2009, to report all items that they customarily report on these annual composite form recipient statements to all customers whether or not each customer’s transactional history for 2008 triggered an obligation to furnish Form 1099-B to that particular customer.” Importantly, the Notice provides that penalties under Section 6722 would not apply in such a case. The Notice also provides a cross-reference defining a consolidated statement for this purpose as set forth in Section 4.2 of Rev. Proc. 2008-36. The Notice modifies the instructions for the related Form 1099s (and other related forms) for the 2008 tax year. The Notice does not by its terms relate to future tax years. Presumably the IRS will issue additional guidance in the near term.

Stevie

DISCLAIMER: The information and views set forth in GainsKeeper Tax Topics are general in nature and are not intended as legal, tax, or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by GainsKeeper Tax Topics which may not take into account potentially important considerations to specific taxpayers. Therefore, the views and information presented by GainsKeeper Tax Topics may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.

October 30, 2008

The clock is ticking down towards the initial January 1, 2011 effective date for broker reporting of adjusted cost basis and gain/loss information to the IRS and customers on Form 1099-B for certain covered securities.  Preparing for cost basis reporting is likely to be a significant challenge for brokers.

Because of the complexities of cost basis reporting, some brokers may be considering whether to wait for IRS guidance before taking action.  Budget and cost concerns could also cause brokers to chose to wait to take the necessary steps to prepare for cost basis reporting.

Unfortunately, there are several important factors that brokers should consider before making a decision.

It will likely be necessary for brokers to track additional data relating to customers purchases, sales and account holdings in order to correctly compute the new information that is required to be reported under the cost basis reporting law.  Changes to databases and software systems to track this information and make the needed calculations will be necessary.  These changes cannot be done overnight and making significant changes such as these to many computer systems can take years.

Waiting for IRS guidance or regulations before starting to develop a cost basis reporting system could be disastrous.  In some cases the IRS has done a good job of releasing important guidance to taxpayers before returns must be filed.  The IRS has tried to take into account the time it takes for updating information return systems.  However, if you ask your tax advisor, you are likely to discover that there are many examples of IRS guidance for which taxpayers have waited a long time.  For example, in many cases it takes over a year before the IRS issues proposed regulations and another year or more before final regulations are issued.  If proposed regulations are not issued until sometime in 2010, it may not be realistic to expect work on broker reporting systems to be completed in time to track the needed cost basis information for stock acquired on or after January 1, 2011.

It should also be noted that industry associations and other organizations had previously submitted comments to the Congressional staffs urging that the effective date of the cost basis reporting law be pushed back to two years after final IRS regulations are issued.  The law as passed did not adopt the suggested changes.  Thus, the effective dates for cost basis reporting as enacted into law could be interpreted strictly.

These factors weigh against waiting for IRS guidance before taking action.  It would generally seem easier to modify and adjust for future IRS guidance that interprets the law than to wait and start from scratch once IRS guidance is released, particularly given that IRS guidance is likely to be issued in a series of notices or proposed regulations before final regulations are ultimately published.

Stevie

DISCLAIMER: The information and views set forth in
GainsKeeper Tax Topics are general in nature and are not intended as
legal, tax, or professional advice. Although based on the law and
information available as of the date of publication, general
assumptions have been made by GainsKeeper Tax Topics which may not take
into account potentially important considerations to specific
taxpayers. Therefore, the views and information presented by
GainsKeeper Tax Topics may not be appropriate for you. Readers must
also independently analyze and consider the consequences of subsequent
developments and/or other events. Readers must always make their own
determinations in light of their specific circumstances.

Date: October 4, 2008

On Friday October 3rd, President Bush signed into law H.R. 1424, the Emergency Economic Stabilization Act of 2008 in response to the financial market crisis (the Act, Pub. L. No. 110-343).  The Act includes required cost basis reporting by brokers to the IRS and taxpayers.

Cost basis reporting is set forth in Section 403 of the Act and the details are essentially the same as previously described–the effective date for cost basis reporting for most stock would apply to stock acquired on or after January 1, 2011; for open-end mutual fund and dividend reinvestment plan stock acquired on or after January 1, 2012 and for debt instruments, options and other covered securities acquired on or after January 1, 2013.  The provision is expected to raise $6.67 billion over a ten year period.

Stevie

DISCLAIMER: The information and views set forth in GainsKeeper Tax Topics are general in nature and are not intended as legal, tax, or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by GainsKeeper Tax Topics which may not take into account potentially important considerations to specific taxpayers. Therefore, the views and information presented by GainsKeeper Tax Topics may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.

On Friday October 3rd, President Bush signed into law H.R. 1424, the Emergency Economic Stabilization Act of 2008 in response to the financial market crisis (the Act, Pub. L. No. 110-343).  The Act includes required cost basis reporting by brokers to the IRS and taxpayers.

Cost basis reporting is set forth in Section 403 of the Act and the details are essentially the same as previously described–the initial effective date for cost basis reporting for most stock would apply to stock acquired on or after January 1, 2011; for mutual fund and dividend reinvestment plan stock (or similar arrangements) acquired on or after January 1, 2012; and for debt instruments, options and other covered securities acquired on or after January 1, 2013.  The provision is expected to raise $6.67 billion over a ten year period.

Stevie

DISCLAIMER: The information and views set forth in GainsKeeper Tax Topics are general in nature and are not intended as legal, tax, or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by GainsKeeper Tax Topics which may not take into account potentially important considerations to specific taxpayers. Therefore, the views and information presented by GainsKeeper Tax Topics may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.

On Wednesday evening, October 1st, the Senate passed H.R. 1424, the Emergency Economic Stabilization Act of 2008 on a vote of 74 to 25 in response to the financial market crisis.  The bill includes required cost basis reporting by brokers to the IRS and taxpayers.  The bill now goes to the House where it is expected that it will be voted on either on this Thursday or Friday.

Essentially, the financial market bailout legislation was expanded to include other provisions that could be considered favorable for many taxpayers, thereby presumably making the expanded bill easier to pass.  The most notable provision is the increase in the maximum Federal Deposit Insurance Corporation (FDIC) customer deposit insurance amount from $100,000 to $250,000.  Also, the Senate’s version of energy and tax extender legislation that it passed last Tuesday, September 23rd (H.R. 6049) was added onto the bailout bill.  The tax extenders and energy provisions would provide benefits to a wide range of taxpayers.  As previously described, the Senate’s tax extender bill was only partially revenue offset and was subsequently rejected by the House of Representatives on Friday, September 26th when the House passed its own fully offset substitute version of the energy and tax extender legislation (H.R. 7060).

As you are probably aware, an earlier version of the financial market legislation failed to pass the House on Monday, September 29th and the U.S. and other world stock markets fell drastically in response.  Given this earlier failed vote, it is uncertain whether financial market legislation will pass the House.  Also, the House previously rejected the Senate’s tax extender bill because it was not fully revenue offset and certain members of the House have already expressed disapproval of its reappearance as part of H.R. 1424.  However, the urgency of the financial market crisis and other provisions such as the increase in the FDIC deposit insurance maximum to $250k could result in enough votes in the House to permit H.R. 1424 to be passed by the House and sent to the President for signature into law.  The President has already indicated that he approves of the expanded bill.

The details of the cost basis reporting provision are essentially the same as detailed in both last week’s Senate version in H.R. 6049 and the House’s previously passed version (H.R. 7060) of the energy and tax extender legislation–the effective date for cost basis reporting for most stock would apply to stock acquired on or after January 1, 2011; for open-end mutual fund and dividend reinvestment plan stock acquired on or after January 1, 2012 and for debt instruments, options and other covered securities acquired on or after January 1, 2013.  The provision is scored to raise $6.67 billion over a ten year period.

Stevie

DISCLAIMER: The information and views set forth in GainsKeeper Tax Topics are general in nature and are not intended as legal, tax, or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by GainsKeeper Tax Topics which may not take into account potentially important considerations to specific taxpayers. Therefore, the views and information presented by GainsKeeper Tax Topics may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.