Is Cost Basis Reporting a Done Deal?
On Friday October 3, President Bush signed the Emergency Economic Stabilization Act (H.R. 1424) into law. What started out as a three page bill grew quickly into a massive 451 page behemoth.
The bill includes an array of revenue offsets located in the tax extenders portion of the bill. One of the offsets of potential interest to FPPad readers is found in Section 403 (on page 244 in the PDF file linked above). It’s a requirement for brokers to report a customer’s basis in securities transactions.
The basis reporting requirements are scheduled to phase in over a three-year period as follows:
- First to any stock acquired on or after January 1, 2011,
- To open-end mutual funds and dividend reinvestment plan stock acquired on or after January 1, 2012,
- To debt instruments, options and other covered securities acquired on or after January 1, 2013.
The emphasis on basis reporting is aimed to reduce the tax gap of taxpayers allegedly over-reporting basis in securities sold to either underreport capital gains or overreport capital losses.
Currently many brokers already provide cost basis reporting for clients as a convenience, but the basis information is not communicated to the IRS by way of Form 1099 (traditionally used to identify gross proceeds from securities transactions). Also, basis information is typically only provided for securities that are purchased while under custody of the broker.
Securities purchased elsewhere that are later transferred to a broker do not normally have their basis information carry over as well. These transfers usually require a manual update using basis information provided by the client (that arguably could be unreliable). However, the Emergency Economic Stabilization Act includes provisions where “applicable persons” (e.g. clients) must furnish a written statement that identifies basis information when transferring securities to a broker.
While the ink has yet to dry on this legislation, I wonder how the basis reporting requirement will affect the operations of the various brokers and broker-dealers.
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January 8th, 2009 at 9:32 am
[...] Is Cost Basis Reporting a Done Deal? [...]
December 16th, 2009 at 4:27 pm
[...] Back in October 2008 I wrote about a passage in the Emergency Economic Stabilization Act signed into law that requires cost basis reporting by securities brokers (see the original FPPad post). [...]
February 21st, 2010 at 10:44 am
Just wondering if any active traders are starting to trade the ETFs? After reading the book by Larry Connors – High Probability ETF Trading – I switched and I would say overall my results have improved but there are fewer trading opportunities because of the small number of ETFs he writes about. ETFs seem to be a little less erratic in their price movement so that’s good but some of them have poor results using the systems he describes in the book.