Cost basis reporting

Cost basis reporting

Cost Basis Reporting is a term used in the financial services industry that refers to identifying the actual cost of a security for income tax purposes. Cost basis reporting became mandatory on January 1, 2011. 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. [1] 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 IRS Form 1099. [2] 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. Financial 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, [3] 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.

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.

References

  1. ^ "Bush signs financial bailout package", Reuters, October 3, 2008, accessed April 14, 2011
  2. ^ Kearney, Helen "Advisers must gear up for cost-basis angst", Reuters, September 30, 2010, accessed April 14, 2011
  3. ^ "Complying with new cost basis legislation: What brokers, banks, transfer agents, mutual funds and issuers need to know" , DTCC (The Depository Trust and Clearing Corporation), page 15 (section titled Penalties for Inaccurate Reporting), December 2008, accessed April 15, 2011

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