January 24, 2011
On October 12, 2010, the Internal Revenue Service (IRS) released final guidance on the cost basis reporting requirements that became effective on January 1, 2011.
What Your Investors Need to Know Now
The first phase of the new cost basis provisions of the Emergency Economic Stabilization Act of 2008 (the "Act") took effect for stocks acquired on or after January 1. Investors need information now regarding this major shift in tax reporting and how the new tax rules affect the accurate reporting of gains and losses for U.S. taxable accounts in 2011 and later years.
The final government tax regulations require U.S. brokers and other affected industry participants, including Pershing LLC, to report cost basis to the IRS and to U.S. taxable investors for certain trades for the first time on IRS Form 1099-B. The new tax rules aim to provide investors with the means to accurately report cost basis and capital gains and losses—the most significant change to calculating cost basis and cost basis reporting in the history of financial services.
The new tax rules require U.S. brokers and other affected industry participants to provide detailed gain or loss information, holding period and other tax information as part of cost basis reporting. These new requirements also require brokers to provide detailed information on transfer statements for securities transferred between firms and for issuers to report on the quantitative effect of corporate actions on cost basis. These changes will be phased in for different security types through 2013.
What Financial Professionals Need to Do Now
This legislation brings many changes to investors starting right away in 2011. Investment professionals and advisors should communicate with their investors today.
Under the new cost basis reporting requirements, investment professionals and registered investment advisors need to provide their investors with the ability to elect and change tax lot disposition methods at the time of trade or transfer. These include electing or changing first-in, first-out (FIFO), which is the federally mandated default method for stocks, tax lot selection or standing instructions.
In the past, since brokers were required to only report to the IRS the proceeds of sales, and not cost basis, some investors opted to select tax lots after the settlement date. Under the new regulations, investors must decide which tax lots they want to apply to a sale or a transfer at the time of trade or transfer. After the settlement date, no changes in tax lot selection can be permitted.
It is important for financial professionals to speak to their clients about all available, acceptable tax lot disposition methods for stocks as soon as possible. Unless otherwise instructed, the sale and delivery of stocks will be completed using FIFO. There are, however, other acceptable methods that can be used to comply with the law.
At Pershing, we have been working diligently to assist our broker-dealer and RIA customers in communicating these coming changes. We are committed to delivering cost basis guidance and education about how the new requirements will impact the industry and investors on an ongoing basis. Our customers can also find a consolidated view of Pershing’s cost basis communications in our professional workstation, NetX360™.
For more information please visit the IRS’s website, http://www.irs.gov/newsroom/article/0,,id=228907,00.html
- Kevin McCosker
Director
Pershing LLC