Industry Information: Cost Basis Legislation

3/14/2011 - By Staff Writer

Anyone who has sold investments knows that cost basis is important. Certainly, at one time or another most of us have been asked by our professional tax preparer to provide the acquisition date and cost basis on investments sold.

Cost basis is used to determine capital gains (gains) and losses (losses) of an investment for tax purposes. The Emergency Economic Stabilization Act of 2008 included new tax reporting requirements with significant implications for financial advisors and investors. The good news is brokers are now required to keep up with this information for you. The bad news is they will not be required to track cost basis for investments purchased prior to the new legislation.

For the first time, brokers will report the adjusted cost basis of sold securities to the IRS on Form 1099-B. The new requirements are designed to help capture accurate reporting of investors’ gains and losses at tax time. The new reporting requirements are being phased in over the next few years and apply to securities acquired on or after the effective dates as follows:

• Equities bought and sold after January 1, 2011

• Mutual funds, ETFs and DRIP shares bought and sold after January 1, 2012

• Other specified securities bought and sold on or after January 1, 2013

The legislation also requires that the new Form 1099-B indicate if the gain or loss is short-term or long-term, and the amount of any loss disallowed under the wash sale rules. The bottom line is that you will not be required to track basis on new investments. However, your tax preparer may still be calling for basis on purchases prior to the effective dates noted above.

The information and content provided is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a recommendation, or legal, tax, or investment advice, or a legal opinion. You should contact your tax advisor to help answer questions about your specific situation or needs prior to taking any action based upon this information.