Earlier this morning the IRS issued the proposed regulations for cost basis reporting. There were no major surprises in the regs. Some of the interesting points include, no extensions to effective dates, clarification on the timing of Specific ID elections, requirements for issuers, confirmation that there won’t be exceptions for high volume accounts, and a lot of guidance on transfer reporting issues. In all, the IRS has provided 141 fun-filled pages. Download the entire document, put up your feet in front of the fire and enjoy.

It should be noted that these are not the final regulations. The IRS has asked for public comments, due February 8th. There is also a public hearing scheduled for February 17th. So it’s clear that it will be a few months before we’ll have the final (final) regs.

In the following weeks we’ll post comments on specifics topics addressed in the regs.  Be sure to check back often.

To download a copy of the proposed cost basis reporting regs or see to a draft of the 2011 1099B form, visit our Basis Reporting Knowledge Base at basisreporting.com 

Mandatory reporting guidelines apply to both investment management companies and brokerages. While fund companies are not singled out specifically, security-specific rules and the current state of cost basis offerings create unique, often challenging, problems for mutual fund companies - starting with wash sales and lot relief methods, for instance. Fortunately for investment management firms, legislation doesn’t impact pure mutual fund providers until Jan. 2012 (firms with brokerage arms will be required to cover equities beginning in 2011). 2012 may seem like a long time from now, but considering all the changes basis reporting requires, that effective date is a lot closer than it seems. More over, there are many reasons that investment management firms may not want to wait any longer before implementing a cost basis solution.

Historically, mutual fund providers have used Average Cost as the default lot relief method (LRM). The legislation requires that firms support any lot relief method desired by investors.  This presents two challenges for investment management firms:  the first is the business logic required to support FIFO and Specific ID. Legacy systems that were only designed to support average cost will be very difficult to modify in such a way to efficiently support other LRMs. In most cases, the results will be systems which require substantial manual (e.g. expensive) support. The other issue, which is often over-looked, but can be very difficult to resolve and will actually change the nature of the relationship between firms and shareholders, is addressing the requirement that shareholders be allowed to select the LRM of their choice. Satisfying this requirement means opening a communications channel with the shareholders. If this is executed poorly, the result is a confusing and unsatisfying experience for clients and a costly exercise for firms.

Another consideration for introducing a cost basis solution well before 2012 is that clients will begin receiving adjusted cost basis data from their brokerages in 2011. This means customers will receive tax reporting assistance, in the form of adjusted cost, from their brokerage, but not their fund company. At a minimum, this will lead to client confusion and a spike in help desk traffic; but in some cases, it also could result in dissatisfaction leading to a shift in assets. Those companies that introduce cost basis systems next year will not only  get ahead of the legislation, they will be perceived as innovators within the industry and potentially be rewarded with in-flows from firms that are slow to respond.

The bottom line is that investors have always struggled with tax reporting. Mandatory reporting or not, providing adjusted cost basis to shareholders improves the overall investment experience and increases customer loyalty.

One leading investment management firm that has already moved to tackle the cost basis challenge is Vanguard, which recently selected Scivantage Maxit to track cost basis for its client base.  By addressing the basis reporting challenge now Vanguard once again has distinguished itself as an innovator among peers.

Beyond Basis Reporting: Leveraging Accurate Cost Basis to Create a Competitive Advantage

Tuesday April 28, 2009

10:45 AM - 11:45 AM

Atlantic Ballroom 3 - Westin Diplomat, Hollywood, FL

With mandatory cost basis reporting deadlines on the horizon, operations executives are being challenged to formulate new cost basis strategies to support this new era of reporting. The impact of mandatory reporting will go far beyond reporting itself, changing many ways in which firms interact with clients. From major system upgrades to business process reengineering, learn what leading firms are doing to prepare and gain insight into how they plan to use accurate cost basis information to support the ever-changing demands of the retail investor and networks of financial advisors. Moderated by Scivantage, this interactive panel discussion will explore cost basis best practices and new technology innovations that can help to provide a sustainable competitive advantage for your firm.
Panelists:

Martin Bentsen
Chief Operating Officer
Computer Research Incorporated (CRI)

Brian Godfrey
Vice President Client Reporting Operations
Charles Schwab & Co. Inc.

Cameron Routh
Senior Vice President, Strategic Products
Scivantage

Benjamin C. Van Vort
Manager, Tax Reporting and Information Management
PricewaterhouseCoopers

Moderator:

Joe Stensland
Senior Vice President,
Products & Marketing
Scivantage

Don’t forget to stop by the Scivantage booth #308 at the SIFMA Operations Conference!

Next Monday (March 2) is the deadline for submitting comments to Note 2009-17, which is seeking feedback on some of the lingering issues with mandatory basis reporting. Based on comments received, the Department of the Treasury and Internal Revenue Service will issue guidance on the new basis rules and reporting requirements. The Note invites public comment on 36 issues ranging from specific lot identification to account transfers. The Note in its entirety can be found here.

To help financial institutions stay current on the latest news surrounding the cost basis reporting law, Scivantage has launched an online knowledge base at www.basisreporting.com.  

This interactive community offers insight into our products, services and thoughts on the cost basis issues impacting your business. Here you will find a range of resources including the latest happenings with the mandatory reporting legislation, industry expert blogs, best practices, customer success stories and self-service support tools to help your firm navigate the changing regulatory landscape. 

Be sure to visit the new site for the latest updates and to download a complimentary copy of our cost basis reporting white paper, “Cost Basis Reporting: What financial institutions need to know about the new mandatory reporting rules”.

Changing Regulatory Landscape: Requirements Every Financial Institution Must Address to Comply With Mandatory Reporting Rules

Live Webinar Event: Wednesday, Nov. 19 @ 4:00 PM EST

In just a short time, brokerage firms and mutual fund companies will be required to track and report adjusted cost basis to both their clients and the IRS. Doing so will require major system upgrades to support corporate action adjustments, wash sale treatment, and proper lot relief methodologies. Failure to properly address even a single component of cost basis will result in significant penalties and disgruntled clients. 

Scivantage, a leader in providing automated, adjusted cost basis solutions to the financial services community, will host an in-depth discussion on the new legislation and provide insight into how the latest technology innovations can help ensure your firm is ready to comply.

Register today for this free, live webinar to take a closer look at how Scivantage’s Maxit solution can help reduce operational costs, deliver a substantial competitive advantage and ensure compliance in a rapidly changing regulatory environment.

Key topics covered during this webinar will include:

To pre-register for this event, click here.

On Friday, President Bush signed into law, as part of the Emergency Economic Stabilization Act of 2008 (H.R. 1424), mandatory basis reporting for brokerages and mutual fund companies. Beginning with stocks purchased after January 1, 2011, brokerages and mutual fund companies will be required to provide adjusted cost basis to both investors and the IRS. Mandatory reporting will be extended to shares in mutual funds purchased after January 1, 2012, and for debt instruments, options and other securities purchased after January 1, 2013.

After bouncing from one bill to another over two years, basis reporting was finally enacted when the extenders bill it was tied to was included in H.R. 1424, partially as a political maneuver. However, it happened, brokerages and mutual fund companies now must find serious solutions to the complex issue of maintaining accurate cost basis. Maxit’s clients are leading firms that recognized the need of providing fluid cost basis to clients and advisors. Many other firms, however, fail to recognize the strategic value of providing accurate adjusted cost basis and have settled for the “estimated” version of cost basis offered by back offices and other vendors. These firms will need to revisit their existing strategy as they decide whether to upgrade cost basis services to the bare minimum of the basis reporting requirements, or whether to truly make cost basis and tax management tools a key strategic differentiator for their firms.

After being tied to such disparate bills as farming, military and energy, basis reporting has now been added to HR 1424, the finance bill most will simply refer to as “the bailout”. It’s worth noting that basis reporting was not added as either increased regulation or a spending offset (scored at $6 billion over 10 years, it wouldn’t be much of an offset to the $700B bailout anyway). It was attached to the finance bill when an extenders package was tacked on following the House defeat last weekend. The finance bill has passed the Senate (74-25) and it’s now back to the House for a vote on Friday. Insiders say it will pass, but after this week nothing is certain. If the bill does pass, and basis reporting isn’t removed, all investors will benefit from a huge record-keeping relief.

 Most of us ended our summer vacations months ago, but Congress just returned yesterday.  Before they hit the beaches, Basis Reporting had been included in the “Jobs, Energy, Families, and Disaster Relief Act of 2008″ (S 3335). Speculation now is that Basis Reporting will still likely pass, but possibly not until after the November elections.

It’s been a hard twelve months for investors. As if the stock market hasn’t caused enough pain, the IRS issued two opinions that close loop holes for investors. Back in December the IRS put investors on notice that a wash sale does occur when a security is sold for a loss in a taxable account and repurchased in an IRA within 30 days (a particularly painful thought, since the deferred loss can never be recovered from an IRA).

And now it’s going to be even harder to file taxes as a professional trader. On August 11th, Judge Vasquez of the US Tax Court issued an opinion that could impact many investors. A Florida couple set up Alpha Trading Company and filed taxes as professional traders. Professional traders have the advantage of being able to write-off many expenses (they also use mark to market accounting, can take more than the individual limit of $3,000 in losses, but can not take advantage of the 15% long-term tax rate). Alpha Trading made approximately 300 trades per year. The Tax Court cited another ruling that suggests over 1,100 trades must be made for an investor to be considered a trader. The court also determined that the bulk of the trades were not made to take advantage of market swings. In fact, many trades were held over 31 days and the investors rarely purchased and sold stocks on the same day. The court also found the couple traded on only 63 days (a relatively small percentage of market days).

This case further demonstrates that the IRS will be giving much more stringent strutiny to tax filings by investors.