Cost basis is a funny thing. Every investor knows a little something about it. Since 1913 it’s been the foundation for taxes on capital gains (I’m not absolutely certain about that date; but, really, who’s going to check?). It has appeared on statements and brokerage websites for years. It was almost always incorrect.

The basic premise is simple: cost basis is the cost of an investment for tax purposes. What is often misunderstood is that this isn’t the same as the price that was paid for that investment. Those of us whose job it is to build products that calculate cost basis know how challenging it can be. There are many rules, exceptions and special circumstances that can make this mundane task a challenge even for just one tax lot. Doing it for 100 million tax lots, as Scivantage did last year, really proves your mettle. Most people responsible for ensuring that investors’ cost basis is accurate toil in underappreciated corners of operational centers. Often, the best sign of success for cost basis professionals is that nothing is said of their work. This is about to change.

Cost basis is getting sexy. (Don’t believe me? Read on.)

First, some recent history. Cost Basis Reporting became a requirement for brokers (and others) with the passage of the Emergency Economic Stabilization Act of 2008 (EESA). Many of us realized passage was inevitable. This was a bill every politician could love. It was intended to generate revenue without increasing taxes. Not to get political but, Democrats and Republicans: rejoice.

The GAO estimated that closing the capital gains “gap” – the difference between what individuals reported on their tax returns and what they actually owed– amounts to $11 billion. For most of us, that’s a lot of money.

Having accurate cost basis figures means tax payments should also be accurate and, at least in theory, close the $11 billion “gap.” But, knowing your cost basis also means that you have information that can help you (wait for it)… minimize taxes on investments.

That’s right. When savvy investors know their cost basis for every tax lot they own, they can time transactions or select one tax lot over another, to manage and, frequently, minimize their tax liabilities. In fact, in some cases, this could result in keeping as much as 30% more of the gains from an investment. That’s worth repeating: 30%.

How does an investor do this? Well, it’s easy if you have the right tools. And we do. I’ll explain in my next post.

As Chief Commercial Officer, Tax & Analytics, Cameron Routh is responsible for the overall vision, leadership and management of Scivantage Maxit®, and analytics products. Under his direction, Scivantage has developed the next generation of investment management applications, including pre-trade decision tools.