Brokers are now four years into the initial phases of required cost basis reporting—rule changes that forever altered the days when we simply revealed to the IRS each investor’s proceeds on market positions sold and that was pretty much it. Folks just starting their investment journey may not yet have a basis for comparison. Get it? No reason taxes can’t be funny.
So, for starters, what's cost basis? It's the original price of an asset, such as stocks, bonds, mutual funds, property, and more, after all applicable basis adjustments have been calculated. The most common basis adjustments occur due to return of capital, wash sale adjustments, corporate action and merger calculations, inheritance, gift adjustments, to name a few. The original purchase amount will include any commissions or fees associated with the purchase.
Depending on what types of securities you get into and how long your positions are held, you may have cost basis reporting on all of your transactions, or you may have absolutely no basis reporting, or some combination.
Let’s take a quick look at the implementation schedule for required reporting.
- January 1, 2011: Equities
- January 1, 2012: Mutual Funds and Dividend Reinvestment Plans
- January 1, 2014: Fixed-Rate Debt Instruments and Options
- January 1, 2016: Variable-Rate Debt Instruments and Other Complex Securities
There’s a big difference between “required not to” and “not required to.” Selling an equity that you purchased in 2010 or earlier will not have a basis reported to the IRS by your broker. This isn’t because your broker doesn’t want to; it’s because they are required not to. The IRS doesn’t want the purchase records from 2010, which can be deemed unreliable since the regulations specifically stated January 1, 2011.
My Firm Doesn’t Have My Basis Information. Why?
You used to have Broker A and transferred all (or part) of your portfolio to Broker B. If you did that before brokers were required to send basis information back and forth for securities that were transferred, Broker B is not likely to have your original purchase data. In this case, you would need to provide Broker B with your basis information.
Brokers are required to retain records for a minimum of six years. If you are holding positions that are aged beyond this, they may not have this information. Granted, most firms are keeping data longer and have systems in place that will track indefinitely, but purchases from long ago may not have made it into the system to begin with. Fortunately, TD Ameritrade clients have access to GainsKeeper®*. It’s been tracking most investments since 2007, in addition to roughly 10 years of previous statements.
In addition to troubles tracking cost basis through transfers, you may experience issues if your original brokerage firm merges with, or is acquired by another firm. Older mergers and acquisitions were not as purchase history friendly as they are now, so it may be that the original firm did not give historical information to the new firm.
If Your Broker Reports, You Don’t Have To? Not True
Some investors get into a wee bit of trouble with the IRS. Even though your broker is reporting to the IRS, that doesn’t mean you don’t have to file your investment gains/losses. Having your broker report this information is a big win when thinking of all the variances that can happen to your original basis. It takes out the guesswork, time spent rifling through years of monthly statements, bookkeeping, and so on. Time is money! But remember, broker reporting requirements are not always aligned with IRS taxpayer requirements. There are rules like wash sales, constructive sales, and several others that will impact your reporting, but will not impact your broker’s reporting. (Learn more about wash sales differences here.) That being said, you do want to track your basis, as it is still your responsibility to report to the IRS accurately.
What was the driving force behind broker basis reporting? Good question! Let’s take a look at the U.S. Government Accountability Office (GAO). This group is sometimes referred to as the “congressional watchdog.” It investigates how our government is spending your hard-earned tax dollars. The GAO provides Congress with insight to improve operations and make the government more effective and efficient. They found that taxpayers misreported basis information during the 2001 tax year, causing a “tax gap” of approximately $11 billion. The GAO also estimated that 38% of taxpayers misreported their taxable gains or losses to the IRS. These findings gave lawmakers the push into basis reporting. Now, it isn’t that the GAO is claiming that 38% of taxpayers committed fraud. Granted, that does play a role, but it also has to do with complexities in the tax code.
If you are interested in learning more about the “tax gap,” take a look at the IRS site for more information. To familiarize yourself with the “congressional watchdogs,” visit the U.S. GAO site. It never hurts to be informed!
How Can We Help?
Questions? Drop TD Ameritrade a line 24/7 through the secure Message Center. You can also chat virtually in real time or speak to a Tax Services Representative at 1-800-669-3900 Monday through Friday, 9 a.m. to 5:30 p.m. ET.