The House of Representatives (Image retrieved from kut.org)

We continue to monitor both the Senate and House tax proposals for changes impacting Cost Basis Reporting specifically or Tax Reporting in general. Two items worth noting under the Senate proposal are the elimination of Specific ID (VSP) security disposition (other than for securities held by regulated investment companies) and recognition of certain income under GAAP rules. See also, Manager Amendment.

The Senate proposal for elimination of Specific ID (it is not part of the House bill) would require that all securities not eligible for Average Cost would be required to use FIFO for disposition. As a result, in addition to the elimination of Specific ID, all default methodologies such as LIFO, HIFO, MinTax, etc, would also be eliminated.   While this would simplify back office processing for brokerages, the impact on investors would not be positive. Investors’ ability to actively manage portfolio tax-optimization would be greatly reduced. For example, Tax Loss Harvesting would no longer be allowable. The proposal applies to sales, exchanges and other dispositions after December 31, 2017.

Another proposal requires taxpayers to apply the revenue recognition rules under section 451 before applying the OID rules under section 1272. This would impact the timing of income recognition and, in turn, require additional adjustments to cost basis. This proposal would apply to tax years beginning after December 31, 2017.

We will continue to monitor the fluid details of competing tax plans and provide updates on proposals that could impact cost basis and tax reporting. We expect greater clarity the week after Thanksgiving.