Investment Cost Basis

Starting 2011 brokerage firms will have to report to Uncle Sam what clients paid for their stocks. In the past this was between the investor and the tax man and brokerage firms did not have to report purchases . No longer will the IRS allow a ‘Gentleman’s Word’, and it is expected this bit of reporting will create billions of new dollars for the IRS. This year it is only stocks but beginning in 2012 it will extend to mutual funds and most exchange traded funds and those shares acquired through dividend reinvestment plans. In 2013 fixed income investments will be added to the reporting rule.

Most importantly the new rules can impact those stocks that were acquired through gifts. Assume a person received a stock that was originally purchased for $100 but at the time of the gift the market value was $80.00. If the recipient sells the stock for $90.00 he/she will not be able to write off shares as a loss since the price was above the price when they received them. Brokerage firms will need to keep track of carry-over cost basis value as well as its market value.

Most investors and their tax professionals are good at understanding how cost basis works and the reporting of gains and losses. The most important aspect is the original price of the investment shares plus any subsequent dividends and capital gains that have been reinvested and added to the original shares.

The problems in the past has been when investors change advisors or brokerage firms and expected the cost basis to automatically follow them. It did and does not.

Tax professionals occasionally have tossed out or shredded original brokerage statements under the misunderstanding that they can always request the same from the investment firm and why clutter up their own files. They soon discover that brokerage firms go out of business; brokers die, move and retire and this may not be so easy going forward. Then there are a few accounting firms who want brokerage firms to do the actual cost basis calculation and provide them with the finished product. Unless shares were held direct at a fund company this often turned into a paperwork and relationship nightmare.

The rule is fairly simple for all taxpayers who have investment accounts and that is to keep the original buy statement in a separate file just in case you move to another brokerage firm or the current firm shuts its doors or the broker dies or retires. The accountant can traces back dividends and capital gains to add to your cost basis completing that part of your tax form in relatively short order.

But remember this changes for all investors by 2013 and for all stock investors this year. As always  this concept is shared with you by someone who is not a tax professional and you should always talk to your tax advisor first to get information that fits your needs.

Questions call Paul@ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.