Cost basis legislation

Accurate Cost Basis Reporting Now the Law

Summary of Emergency Economic Stabilization Act of 2008
What the New Legislation Means to Individual Investors
What the New Legislation Means to Brokers/Financial Intermediaries
What the New Legislation Means to Financial Professionals
What the New Legislation Means to Software Companies
What the New Legislation Means to Academic and Non-Profit Institutions

Summary

The Emergency Economic Stabilization Act of 2008 – popularly known as the “bailout bill” – was signed into law on October 3, 2008 to address the mounting global financial crisis. Section 403 of the Act contains provisions that place significant cost basis-related requirements on individual investors, who must report the correct cost basis on the Schedule D Form, and brokers and other intermediaries who report their clients’ adjusted cost basis on Form 1099.

Under the new legislation, brokers, banks and other financial intermediaries must report accurate adjusted cost basis information to both investors and the IRS for:

  • Equities acquired on or after January 1, 2011
  • Mutual fund and dividend reinvestment plan (DRiP) shares acquired on or after January 1, 2012
  • Financial instruments such as debt securities, options and private placements acquired on or after January 1, 2013

Additionally, a broker who transfers a client account to another intermediary must provide information necessary for cost basis reporting within 15 days of the account transfer.

Tax payers and individual investors are held responsible for ensuring that the cost basis reported on their Schedule D form is correct, regardless of the cost basis provided by the broker on the 1099-B Form. If the cost basis is not correct, tax payers may be subject to fines of up to $1,000 for under reporting capital gains taxes and up to $5,000 for willful disregard of the law or reckless conduct in reporting capital gains taxes.

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What the New Legislation Means to Individual Investors

Fines

As a tax payer and an individual investor, you are ultimately responsible for the correctness of the cost basis figure that you report on your Schedule D form, regardless of the cost basis amount provided to you by your broker on the 1099-B Form. You may wish to double-check your broker’s cost basis calculation just to make sure it’s correct!

Netbasis provides a simple way to accurately calculate the cost basis figure that you must report on your Schedule D form calculates gains and losses.

Your broker may not report the cost basis for all your securities

Brokers are required to report cost basis on stock purchased on or after January 1, 2011. These are called “covered” securities. They are not obligated to report the cost basis on stock purchased before January 1, 2011. These are called “uncovered” securities. However, you are still responsible for reporting the cost basis for all securities purchased before that date, even if your broker does not provide you with the cost basis amount.

If you purchased your stock years ago and even if the stock has a long and complicated history of corporate events, mergers and stock splits, Netbasis will quickly, easily and accurately calculate your cost basis,

Identify gains as short or long term

On your Schedule D, you need to identify whether the gains on the sale of a security are long or short term. Long term gains are taxed at regular capital gains rates, while short term gains (securities held one year or less) are taxed at the higher ordinary income tax rate.

In addition to calculating your gain and loss amounts on sales, Netbasis will tell you whether the gain is short term or long term.

Use the best sales calculation method

Under the new law, your broker will calculate the cost basis of your security using the FIFO (First In, First Out – oldest shares sold first) sales calculation method as the default, which may not always be in your best interest. However, you can specify to your broker which sales calculation method you would like to use! You should familiarize yourself with the various sales calculation methods and their ramifications on your gains and losses (and ultimately your taxes) as the onus is on you to inform your broker as to which method to use!

Netbasis allows you to input sale transactions using various sale calculation methods, and provides a Tax Optimization function to help you make educated tax decisions.

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What the New Legislation Means to Brokers and other Financial Intermediaries

Although intermediaries are not obligated to report the cost basis on equities acquired before January 1, 2011, those who do not report the cost basis on all of their clients’ equities can expect confused clients to question the missing data, creating the potential for a customer service nightmare. Intermediaries need to develop a compliance plan now, since penalties for non-compliance are stiff – up to $350,000 per year for incorrect Form 1099-B cost basis reporting, and unlimited penalties for intentional disregard of the new requirements.

Immediate, Cost-Effective Compliance with Netbasis

An automated cost basis solution should be an essential part of any intermediary’s compliance plan. But not all automated solutions offer the same functionality or efficiency. Netbasis provides easy access to decades of historical pricing and corporate actions data and uses a powerful combination of proprietary algorithms, rigorous data scrubbing and automated calculation to deliver the highly accurate cost basis information the new regulations demand. It’s a cost-effective way to begin complying with new regulations immediately.

Netbasis provides all the capabilities needed for regulatory compliance, including the ability to:

  • Report investor gains/losses as either short-term or long-term
  • Accommodate complex new wash-sale and short-sale accounting rules
  • Support multiple lot relief methods
  • Provide information necessary for cost basis reporting within 15 days of transferring customer accounts to another financial intermediary
  • Verify and correct cost basis information of older share lots received from counterparties
  • Provide cost basis for positions acquired both before and after the effective date specified in the legislation

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What the New Legislation Means to Financial Professionals

Tax preparers will receive cost basis information from brokers on sales of stock purchased on or after January 1, 2011. These are called “covered” transactions. However, if the sale was of stock purchased before January 1, 2011, brokers are not obligated to report the cost basis. These are called “uncovered” transactions. As a tax preparer you may still have to calculate the cost basis on uncovered transactions in order to complete your customers’ Schedule D form.

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What the New Legislation Means to Software Companies

New markets can open up for your company, as potential customers search for a complete tax preparation, accounting or financial software solution, one that includes cost basis reporting and helps them comply with new regulations. Make sure you are ready by offering Netbasis as part of your solution.

Your clients that must report cost basis to their customers, may be looking at outsourcing the cost basis reporting component to other service providers. This option can open your clients to issues of inaccurate reporting and security concerns. Offer your clients the accurate and secure solution to in-house cost basis reporting by offering Netbasis as an add-on to your current financial software solution.

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What the New Legislation Means to Academic and Non-Profit Institutions

New cost basis reporting regulations are unfolding over the next three years. Business students can learn the ramifications of the new regulations using the same real world tool used by financial service providers, brokers and other business professionals.

Academic and other non-profit institutions who must report the cost basis of donated securities will come under increased government scrutiny to ensure their calculations are correct. Universities and other non-profits use Netbasis to ensure that their cost basis calculations are accurate.

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* Note that these examples highlight selected aspects of the new legislation, and are not meant to provide a complete view of the compliance issues facing any specific organization.

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