We have almost completed our first year under the IRS’s new cost basis regulations and reporting requirements. Stocks were the first group of securities included in the new reporting requirements. Mutual funds will be covered starting next year, and coverage for other securities like bonds and options begins in 2013. Hopefully your firm has been ahead of the game with understanding these new reporting requirements. If not, or if you need a refresher course, there are already many best practices and ideas to help your firm.
First, make sure the accounting method for your clients’ accounts are coded correctly. Now that new systems for capturing trade records are in place with most custodians, you have several accounting methods to choose from, and in most cases this can be identified on the client’s new account application. Given the importance of this selection, part of your reconciliation process for confirming clients’ correct names, addresses, beneficiary information, etc., should include checking the cost basis accounting method.
One of the more confusing aspects of the new cost basis regulations is the concept of covered and uncovered securities. Even though stocks are part of the new reporting requirements for 2011, the rules only apply to stocks that were purchased and sold after January 2011. For example, 100 shares purchased in February 2011 and then sold in November 2011 would be covered. However, if the purchase date was in October 2010, then they would be considered uncovered. This is fairly straightforward, but it will likely become more confusing with the introduction of mutual funds in 2012—especially if you reinvest the dividends of your mutual funds. Perhaps you purchased a mutual fund in 2011, reinvested the quarterly dividends and then sold the entire position in August 2012. At the point of sale, the original purchase would be considered uncovered. However, the quarterly dividends reinvested during 2012 and subsequently sold would be considered covered.