As many of you are aware, new cost basis reporting rules were phased in over the past few years. In an attempt to find missing tax revenue, new rules require brokerage firms to include cost basis information on 1099-B’s on certain securities. These rules drastically change the way cost basis is reported to the IRS and affect brokers, financial advisors and investors in a major way. We never expected this transition to happen smoothly, and it hasn’t so far.
Two very important terms to understand are covered verses uncovered securities. Covered securities are those that brokerage firms are required to track and report cost basis on and uncovered are those they are not. Equities purchased on or after 1/1/11 (Phase 1), mutual funds or ETFs purchased on or after 1/1/12 (Phase 2) and “less complex” bonds and options purchased on or after 1/1/14 (Phase 3 ½?) are considered covered securities. Debt instruments and options were supposed to be considered covered if they were purchased on or after 1/1/13, but in May of 2012, the IRS announced that it would postpone the effective date for these categories until 2014 as the financial services industry was still trying to understand and figure out a way to comply with the new rules from phases I and II. Then in 2014, cost basis reporting rules were introduced for “less complex” bonds and most options purchased starting on 1/1/14. These bonds include corporate, treasury and municipal bonds with a fixed interest rate, payment schedule and maturity. We purchase asset backed bonds as well as adjustable rate bonds in many of our client portfolios which without a doubt fall in the “more complex” category. As of now, “more complex” bonds will be covered in January of 2016, but we’re not sure the cost basis on these will ever be accurately tracked by brokerage firms.
For our clients, part of my job is maintaining our portfolio management software, which among other things, accurately tracks cost basis for every security we purchase, regardless of whether they are considered covered or uncovered by the IRS. For this reason, the Gain/Loss report we provide our clients with at the beginning of each year will always be the most complete and accurate source for calculating your cost basis.
