New Cost Basis Reporting

The Emergency Economic Stabilization Act, commonly referred to as the “bailout bill,” was signed into law on October 3, 2008. Included in the $700 billion rescue package are new and stringent requirements on financial intermediaries to report adjusted cost basis to investors and the Internal Revenue Service (IRS) for securities transactions posted after January 1, 2011. A principal aim of the legislation is to provide investors with the means to accurately report gains or losses on the sale of securities for their annual tax filings. Though United States tax law has theoretically required full cost basis reporting for years, the Internal Revenue Service (IRS) has never had a broadly reliable way to confirm cost basis filings. Investors, issuers, mutual funds, brokers and banks have also lacked an efficient, dependable means to gather information on assets whose history may be clouded by corporate action events including takeovers, spin-offs, rights offerings, conversions, dividend reinvestment, cash allocations, and bankruptcies.

A study conducted by the IRS in 2005 estimated that the federal government was losing an estimated $11 billion in tax revenues by the failure of investors to accurately report adjusted cost basis information. This finding, coupled with recent budget-deficit issues, corporate accounting scandals and calls for broader changes to the tax code, fueled a push to close the cost basis compliance gap.

Schedule for implementation

The legislation establishes three stages of implementation for cost basis reporting:

  • All equity stock acquired on or after January 1, 2010.
  • All mutual funds and dividend reinvestment plans (DRiP) shares acquired on or after January 1, 2012.
  • Other specified securities types, such as debt issues, options, private placements acquired on or after January 1, 2013.

The new legislation remains vague on a number of issues regarding the administration and processing complexities of cost basis reporting, and the industry will need additional guidance.

Gill Capital Partners maintains cost basis information on behalf of its clients and coordinates with the client’s custodian to ensure accurate reporting to the IRS.