Cost Basis Reporting Takeaway: Identifying & Reporting Transferred Debt Securities

The New Year traditionally marks a time when businesses look to reignite their company’s outlook and build momentum towards another successful and prosperous year. In 2015, however, brokers will once again be faced with a new wave of cost basis reporting mandates, and this isn’t something that many institutions are celebrating.

For the first time, brokers will be forced to identify and report transferred debt securities as they tackle Phase III of this complex regulation. Industry expert Bob Linville, Director of Product Management, Scivantage, highlights these challenges as part of a recent Cost Basis Reporting video series: Calculating Accruals on Transferred Debt Securities for 2015 Tax Season and How to Differentiate Bonds Covered by Cost Basis Reporting Regulations in 2016.

An important area of focus for Linville is the new process for reporting gains and losses on transferred debt, as brokers must now take into consideration two sets of data points: original cost and adjusted basis cost. According to Linville, the broker receiving a transfer must calculate not only the original cost based on the acquisition date, but also the adjusted basis cost and reporting income by picking up where the prior broker left off.

The second set of challenges comes from new reporting guidelines issued by the IRS that place debt securities into one of the following three categories:

  • Less complex and reportable in 2014
  • More complex and not reportable until 2016
  • Not reportable under any circumstance

According to Linville, the immediate challenge for brokers in the coming months is recognizing which securities fall into each category. While some of the distinctions are easy to make, others are far more difficult. The following list can be used to help identify which debts are not reportable until 2016:

  • Variable rate, inflation indexed and contingent payment debt
  • Debt with a stepped interest rate
  • Convertible debt
  • Stripped bond or stripped coupon subject to section 1286
  • Debt that requires payments of either principal or interest in a currency other than USD
  • Certain tax credit bonds
  • Debt with a payment-in-kind  feature
  • Debt issued by a non-U.S. issuer
  • Debt in terms that are not reasonably available to a broker within 90 days of acquisition
  • Debt that is issued as part of an investment unit
  • Debt evidenced by a physical certificate unless such certificate is held (whether directly or through a nominee, agent or subsidiary) by a securities depository of a clearing organization in section 1.1471(b)(18)

Even with these guidelines, Linville notes that some categories are still hard to recognize. “For example, in the case of contingent payment bonds, there are additional payments and income that must be considered in calculating the yield of these instruments, and there are many ways to incorporate a contingent payment into a debt instrument,” says Linville.

Therefore, one of the biggest challenges for brokers in 2015 lies in understanding a given instrument’s characteristics and then identifying which reporting category it falls into.

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