Cost basis reporting continues its march to full implementation. To refresh your memory, the IRS started tracking corporate stock purchases as of Jan. 1, 2011. They then added ETFs, mutual funds and S-corporations purchased as of Jan. 1, 2012. This year, options and some bonds are now part of the cost basis reporting rules.
All options acquired as of Jan. 1, 2014, are now part of the cost basis reporting rules. The types of bonds that are included are a little more complex. Simple debt instruments were the first type of bonds to be added to the cost basis reporting rules, including bonds based on a single fixed payment schedule where the yield and maturity is determined. This also includes debt instruments that involve a demand loan where the yield can be determined or that involve a call or put option that allows the bond to be called before expiration.
Given the complexity of cost basis reporting for bonds, there are multiple factors for advisors to consider when selecting an appropriate accounting method. Bonds are very different from and more complicated than equities and mutual funds, so calculating cost basis for federal income tax purposes is also complex. Therefore, you and your client’s tax professional are the best individuals to make these decisions.
You must make these accounting method decisions specifically for bonds prior to Dec. 31 in order for these instructions to apply in 2014. Also, keep in mind that your custodian has a default accounting method in place if you do not make a specific selection. It is important to make sure that their systems reflect any changes to the accounting method you select prior to year-end.