Accurate Cost Basis Reporting Now the Law

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. The Act also had important cost basis ramifications, because Section 403 contained provisions that place significant cost basis-related requirements on brokers and other intermediaries who report their clients’ adjusted cost basis on Form 1099.

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

Although the regulations do not take effect for several years, 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.

Under the new law, taxpayers are also subject to penalties of up to $1,000 for underreporting capital gains taxes, and up to $5,000 for willful disregard of the law or reckless conduct in reporting capital gains taxes.

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

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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