New Cost-Basis Concerns

After reading Maureen Lowe’s blog post earlier this week on the first phase of the new Cost-Basis Reporting law that is scheduled to go into effect this January 1st and the release of the IRS’s final requirements, I thought it might be beneficial to look into what all these new cost-basis requirements are all about! I have to admit, cost basis is not a topic I generally follow in the news, but over the past week it has been a hot topic in the industry and many are concerned about the regulations and time constraints that were presented. If you follow this news or read Maureen’s earlier post you should know that the IRS loses hundreds of millions of tax dollars every year due to investors inaccurately reporting the cost basis of their investments. The investors either understate their gains or increase their losses. Due to this fact the IRS is looking to raise $6.1 billion over the next ten years by pushing brokerages to provide accurate cost-basis reporting data directly to the agency. To ensure the IRS collects this additional $6.1 billion they have set up new cost-basis reporting rules.

These rules were released last Tuesday, October 12th, the evening before our 4th Annual Corporate Actions Processing Conference. The timing of this resulted in an interesting turn in the scheduled panel discussion titled “Benefits & Challenges of Implementing the New Cost-Basis Reporting Law”. Originally the session was going to discuss the “impending” regulations, but overnight the panelists were thrown for a loop and now had to present the “required” regulations. In the end, the panelists did great! They were on point and had a chance to review all IRS documents before speaking to the attendees. As for the attendees, many were very interested to hear about these new rules and how they would impact them directly. In the end, discussions at the conference and discussions since have proven that there is some concern that brokerage firms are going to have to scramble to prepare their systems by the January deadline. Also, advisors are waiting for the onslaught of questions from their clients regarding the implementation.

But do the brokerage firms and advisors have a need to be worried? Basically a major part of the new rules is keeping more accurate records. While I understand this will most likely add more time to their current processes, won’t it be helpful to the brokerage firms to have better records?

From what I have been reading, though, it seems that not much has been happening on the cost-basis front for some time. Now people are being forced to change their methods and are a bit scared about the threat of financial penalties if they don’t comply with the new regulations. It’s almost a shock to their systems!

Also, one of the biggest changes is that under the old rules financial advisors could wait until the end of the year to decide which lot to sell. This in turn allowed them to work out ways to lower their clients’ taxes. Now they have to make these decisions before the trade is settled. This means that now clients must have complete trust that their advisors are making smart decisions for them. Also, these are not rules that once implemented can be forgotten. These have to be put in place every time investments are made by brokerage firms.
I don’t know about you, but cost basis has always been a bit confusing to me. These new regulations are adding a lot to the mix as well. If you, like me, are interested in learning more you can check out the new rules here.

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