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Cost Basis Updates

Important Information about the New Cost Basis Regulations Effective Tax Year 2011

Under provisions of the Emergency Economic Stabilization Act of 2008, the U.S. Treasury has issued new regulations that will require RBC Wealth Management to begin reporting to the IRS the cost basis of securities you acquire in 2011 or later and subsequently sell or transfer.

What Is Cost Basis?
Cost basis is the amount you have paid for an investment, including any commissions and fees. For tax purposes, it is adjusted over time due to certain events such as corporate actions or wash sales.

RBC Wealth Management's New Responsibility
The responsibility for tracking and reporting gains and losses to the IRS has historically fallen to investors. Under the new regulations, financial institutions are now also required to report to the IRS realized gains and losses that result from the sale or disposal of certain types of securities acquired on or after January 1, 2011.

Overview of the New Regulations

  • The new requirement covers securities that have been acquired for cash, including those acquired through the exercise of rights by the issuer, or have been acquired as a result of a stock dividend, stock split, reorganization, redemption, stock conversion, recapitalization, corporate division, or other similar action.
  • Your cost basis for the covered securities will be reflected on your monthly statement and reported on your year-end Form 1099-B for the year in which you dispose of the securities.
  • The new reporting requirement will be phased in over a three-year period.

Please note: The new regulations do not apply to securities acquired prior to the effective dates noted in the table below. For example, the sale or transfer of shares that were acquired under a dividend reinvestment plan on December 31, 2011, would not be subject to the new cost basis reporting requirements.

Cost Basis Reporting Timetable

Security Type Security acquired and disposed of on or after3 Reported on IRS Form 1099-B beginning in
Equities1 January 1, 2011 2011 tax year (delivered in 2012)
Regulated investment company (RIC)2 shares and investments that are part of a dividend reinvestment plan (DRP) January 1, 2012 2012 tax year (delivered in 2013)
Options, fixed income securities, and other required investments January 1, 2013 2013 tax year (delivered in 2014)

1 Stocks and other registered securities representing ownership interest in a corporation, including unit investment trusts and non-widely-held fixed investment trusts.

2 Regulated investment company (RIC) shares include most domestic mutual funds and exchange-traded funds. Funds that are not classified as Regulated Investment Companies are covered by the 2011 regulations.

3 The acquired date determines whether or not the cost basis information for a tax lot in a security is covered or non-covered—that is, subject to the new requirements and therefore reportable to the IRS. RBC Wealth Management is required to report cost basis information for covered securities on Form 1099-B starting with the 2011 Form 1099-B, which you will receive in 2012. RBC Wealth Management will continue to report the proceeds on the sale or disposal of non-covered securities on Form 1099-B but will not report the cost basis of those securities. For example, if a security is sold after January 1, 2011, but was acquired prior to January 1, 2011, it is excluded from the new regulations and therefore RBC Wealth Management is not required to report the cost basis to the IRS.

When You Sell a Security

  • RBC Wealth Management will use the "first in, first out" lot selection method for reporting the cost basis of the security unless you provide different instructions.
  • Take care to understand the tax consequences of your transactions prior to giving an order. The lot selection method to calculate gains or losses cannot be changed after your trade settles. 
  • A Schedule of Realized Gains and Losses will be produced on a monthly statement when, during that month, you make a specific tax lot selection when disposing of a security. Previously, this schedule was only produced when a prior-period adjustment was made or when the December month-end statement was sent to you.

When You File Your Taxes
You are responsible for reporting any applicable cost basis information to the IRS on your annual tax returns (including cost basis for securities not covered by the new requirements). Please consult your tax advisor for more information on your particular tax situation.

Here's what RBC Wealth Management will report on Form 1099-B starting in tax year 2011 (delivered in 2012):

  • Sale proceeds (currently being reported)
  • Cost basis of covered securities (new requirement) (see above table for timing)
  • Whether the gain or loss is short or long term (new requirement)
  • Whether the shares disposed of are covered or non-covered (new requirement)

Additional Information
Generally, cost basis is the amount you paid for an investment, including any commissions and fees. However it may adjust over time due to certain events such as corporate actions or wash sales.

Corporate Actions include events such as mergers, spin-offs, splits, stock dividends, non-taxable distributions, rights distributions, and other adjustments required for proper tax reporting, and may adjust the cost basis of an investment as they occur.

Wash Sales result when you purchase a "substantially similar" security within a 61-day period that extends from 30 days before you take your loss until 30 days after. For example, if you sold a stock at a loss on April 30 and bought a "substantially identical" stock between March 31 and May 30, this would result in a wash sale situation. The IRS disallows losses associated with wash sales and the basis of the purchased security is increased by the amount of the disallowed loss.

Tax treatment of wash sales has not changed due to the new regulations. However, RBC Wealth Management will now automatically adjust the cost basis of a "covered" security for wash sale situations when an identical CUSIP is involved in both the purchase and sale.

For further clarification of wash sales, please see the example below.

  • On January 2, 2011, Client A bought 100 shares of CUSIP 123456789 (ABC Corp. common stock) for $2,000.
  • On October 15, 2011, Client A sold 100 shares of CUSIP 123456789 (ABC Corp. common stock) for $1,500, resulting in a realized loss of $500 (net cost = $2,000; proceeds = $1,500). 
  • On October 17, 2011, Client A bought 100 shares of CUSIP 123456789 (ABC Corp. common stock) for $1,600.

Because the original shares were sold for a loss on October 15, 2011, and identical shares (identical CUSIP) were bought within 30 days prior to or 30 days after the sale, the realized loss cannot be taken by Client A. The $500 loss is disallowed and added to the basis of the "replacement" shares (those shares purchased on October 17, 2011).

The cost basis information reportable to the IRS by RBC Wealth Management for Client A's sale on October 15, 2011, will display a net cost of $1,500 and proceeds of $1,500, for a realized loss of $0.

The cost basis on the purchase of 100 shares of 123456789 (ABC Corp. common stock) on October 17, 2011, will be adjusted to $2,100 ($1,600 (original purchase cost) + $500 (disallowed loss) = $2,100).

Important points for clients to remember about wash sales:

  • Regulations associated with wash sales have not changed.
  • What has changed is RBC Wealth Management will now automatically adjust cost basis and report wash sales on Form 1099-B for covered securities in 2011 and beyond when a wash sale occurs in an identical CUSIP.
  • If a client buys and sells ABC Corp. common stock for a loss, but then buys back $100,000 face value of a convertible ABC Corp. bond within 30 days before or after the sale, RBC Wealth Management will not adjust the cost basis or report to the IRS on Form 1099-B that a wash sale has occurred because the purchase was not for an identical CUSIP. But a wash sale has still occurred, and the client must not take the loss on the sale of the ABC Corp. common stock on their individual return because of the "substantially similar" doctrine of the existing regulations.

Impacts on Option Processing
Beginning January 1, 2011, when options are assigned or exercised, option premiums will be automatically "netted" against the cost basis of the underlying common stock for clients. This adjusted cost basis will be reported to the IRS when appropriate, along with the proceeds, when a client disposes of the underlying common stock at the time of the assignment or exercise of the option.

S Corporations
After December 31, 2011, “S” corporations will not be treated as exempt recipients. Beginning in tax year 2012, RBC Wealth Management is required to begin reporting gross proceeds and cost basis information for the sale and disposal of covered securities for S corporations to the IRS. To comply with these regulations, the client must identify their account as an S or C corporation via an updated IRS Form W-9.

Mutual Fund 90-Day Rule
The original cost basis of a mutual fund share is generally its purchase price plus an allocable portion of load charges (sales or similar charges). Regulations limit the amount of load charges added to a mutual fund share’s basis if all of the following conditions exist. The client:

  1. Receives a reinvestment right because of the purchase of the shares or the payment of the fees or load charges;
  2. Disposes of the shares within 90 days of purchase; and
  3. Subsequently acquires shares in the same mutual fund or another fund for which the mutual fund company waives the load charge because of the reinvestment right.

The amount of any load charge is excluded from the basis of the original shares and transferred to the basis of subsequently acquired shares (as long as the three conditions are met).

For example:

If you bought ABC Growth Fund on September 1, 2011, for $5,000 (including a $100 front load), and then exchanged that fund for ABC Balanced Fund on November 1, 2011, for $6,000, the load is removed from the basis of the first ABC Growth Fund and added to the basis in the newly received ABC Balanced Fund because:

  1. The original purchase included reinvestment rights;
  2. The exchange occurred within 90 days of the original fund opening (September 1, 2011, opening and November 1, 2011, exchange); and
  3. The fund company waived the load on the new purchase of ABC Balanced Fund.

Since the three above Mutual Fund 90-Day Rule conditions have been met, RBC Wealth Management would report a basis of $4,900 ($5,000 basis less the $100 load) along with $6,000 proceeds to the IRS on Form 1099-B. Additionally, the basis on ABC Balanced Fund would be $6,100 ($6,000 basis plus the original $100 load).

For More Information
The IRS offers helpful information about the new cost basis reporting mandate on its website. You may wish to use it when consulting with your tax advisor. You’ll find this information at http://www.irs.gov/taxpros/article/0,,id=237099,00.html (external link - opens new window).

RBC Wealth Management is not a tax advisor. This material is provided for informational purposes only and does not constitute tax advice. All decisions regarding the tax implications of your investments should be made in consultation with your independent tax advisor.