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New Cost Basis Reporting

Cost Basis is the key element in determining the amount of tax you owe on securities you sell. Cost basis reflects the original purchase price or value of an asset, such as a security or mutual fund, including fees and commissions, as adjusted for stock splits, return of capital, and other applicable adjustments. Cost basis (or tax basis) is used to determine the capital gain or loss of the asset when it is sold or disposed. The capital gain or loss is the difference between the cost basis of the asset and the current market value of the asset when sold or disposed.

The Emergency Economic Stabilization Act of 2008 included new tax-reporting requirements that dramatically changed how financial institutions and their clients think about cost basis. For the first time, financial institutions will report the adjusted cost basis of sold securities to the IRS. These new requirements are designed to help capture accurate reporting of investors’ gains and losses at tax time.

Covered Securities
Financial institutions, custodians, transfer agents and other reporting entities are required to report the adjusted cost basis of sold securities, including whether the gain or loss is short- or long-term, to the IRS and on the1099-B Tax Form. The applicable date of the reporting requirements depends on the type of specified security that is sold. 

  • For stock in or of a corporation (other than stock in a regulated investment company (RIC) or stock acquired in connection with a dividend reinvestment plan (DRP), the applicable date is January 1, 2011.

  • For stock in a RIC (RIC stock) or stock acquired in connection with a DRP (DRP stock), the applicable date is January 1, 2012.

  • The reporting rules related to options transactions apply only to options granted or acquired on or after January 1, 2013.

  • For any other specified security, the applicable date is January 1, 2013, or a later date determined by the Treasury Secretary.

Securities purchased on or after these effective dates are considered to be “Covered.” Securities purchased prior to the effective dates are considered to be “Uncovered”. The cost basis for “Uncovered” securities generally will not be reported to the IRS. Also, accounts which do not generate 1099-B forms, such as IRAs and other retirement plans, generally are not impacted by these changes.

Basis Determination Methods
This legislation also requires financial institutions to calculate gain/loss by using the first-in, first-out (FIFO) method as a default on sold securities that are not eligible for the average cost method. The average cost method may be applied as a default for mutual funds, but even if it is applied, lots are to be sold in a first-in, firstout manner.

For any position not using average cost, clients can choose lots using a specific identification method. This can be done either at the time of trade or by selecting a default basis determination method.

BB&T Scott & Stringfellow currently offers the following Default Basis Determination Methods:

LIFO–Last In First Out
HIFO–Highest Cost First Out
HCLT–Highest Cost Long Term
HCST–Highest Cost Short Term
LCFO–Lowest Cost First Out
LCLT–Lowest Cost Long Term
LCST–Lowest Cost Short Term

Specified lot decisions must be made before the trade settles. If you wish to specify a particular lot to sell, or to change the cost basis method for a sale, you will be able to do so only until the settlement date of the trade. Once the trade settles, the method used will be final. If a lot selection is not made, we will use the First In First Out (FIFO) method.

Tracking and reporting of wash sales
The new law requires financial institutions to report loss deferrals and other adjustments on the 1099-B forms. However, BB&T Scott & Stringfellow is required only to analyze identical securities within a single account to determine if a wash sale has occurred. Only identical securities are subject to wash sale deferral for purposes of cost basis reporting. Clients are still obligated to apply the wash sale rules across all of their accounts when preparing their tax returns.

Reporting of short sales
In the past, short sales were reported in the year the sale was made. Effective January 1, 2011, the gross proceeds and cost basis of short sales are now reported on the 1099-B forms in the year the position is closed. If backup withholding is required on the opening of a short sale, the withholding will be reporting on the1099-B form in the year of the sale, regardless of when the short is closed.

Additional Reporting Requirements
The new regulations require S-corporations, which had not received tax forms in the past, to now receive consolidated year-end 1099-B forms. All Corporate accounts were solicited during 2011 to certify their Federal Tax Classification.

If you have any questions on how these regulations affect your portfolio, please contact your BB&T Scott & Stringfellow Financial Advisor for assistance.