In 2008, the U.S. Department of the Treasury issued extensive new regulations that required financial services firms to begin tracking and reporting the cost basis of securities acquired in 2011 or later and subsequently sold or transferred. This responsibility was previously held by investors.
Due to their complexity, the IRS has been phasing in the new requirements:
Phase III of the IRS’s new cost basis requirements (delayed from 2013) will begin in 2014 and will be implemented over a multi-year period. Under the requirements, RBC Wealth Management will begin reporting cost basis information for options and less-complex debt securities acquired on or after January 1, 2014, in addition to the cost basis of securities covered by Phases I and II.
Historically, RBC Wealth Management has adjusted the cost basis for fixed income securities and reported this adjusted cost to clients on monthly statements. As currently scheduled, beginning in January 2014, RBC Wealth Management will change the way it calculates adjusted cost basis for bonds acquired at a premium or market discount on or after January 1, 2014. RBC Wealth Management will begin using the IRS default method stated by the new regulations. If you wish to use a method that differs from the IRS default method, please contact your financial advisor.
Cost Basis Defined
Cost basis is generally the amount you have paid for an investment, including any commissions and fees. For tax purposes, it may be adjusted over time due to certain events such as corporate actions or wash sales.
RBC Wealth Management's Tax Reporting 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 required to report to the IRS the cost basis upon the sale or disposal of certain types of securities acquired on or after January 1, 2011 (known as covered securities).
The IRS requires RBC Wealth Management and other financial services firms to issue revised Forms 1099-B retroactively for a period of up to three years if notified by an issuer or other third party, or if RBC Wealth Management becomes aware of any change that affects information previously reported to clients and the IRS, regarding reportable or covered securities. This includes any changes to cost basis information. RBC Wealth Management appreciates and regrets the difficulty and inconvenience this poses for clients but is required to issue corrected tax documents under IRS regulations.
Overview of the New Regulations
Please note: The new regulations do not apply to securities acquired prior to the effective dates noted in the table below (known as covered securities). 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 because the security is considered "non-covered".
|Security Type||Security acquired and disposed of on or after:4||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, less-complex fixed-income securities (fixed rate, fixed maturities), and other required investments||January 1, 20143||2014 tax year (delivered in 2015)|
|Complex debt instruments||January 1, 2016||2016 tax year (delivered in 2017)|
1 Stocks and other registered securities representing ownership interest in a corporation.
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 On May 2, 2012, the IRS announced that it would postpone the effective date for cost basis reporting for fixed income, option and other remaining securities. Instead of taking effect on January 1, 2013, the rules will take effect on January 1, 2014.
4 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 reports proceeds on the sale or disposal of securities and cost basis information to the IRS on Form 1099-B. RBC Wealth Management will continue to show the proceeds on the sale or disposal and cost basis of non-covered securities on Form 1099-B but will not report the cost basis of those securities to the IRS. For example, if a security is sold after January 1, 2011, but was acquired prior to January 1, 2011, it was excluded from the new regulations and therefore RBC Wealth Management was not required to report the cost basis to the IRS.
When You Sell a Security
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:
Important Note: The cost basis for non-covered securities is not reported to the IRS by RBC Wealth Management.
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.
Tax treatment of wash sales has not changed due to the new regulations, and RBC Wealth Management automatically adjusts the cost basis of a security for wash sale situations when an identical CUSIP is involved in both the purchase and sale; this is reflected in reporting done on Forms 1099-B.
For an additional illustration of a wash sale scenario, please see the following example:
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 that incurred a loss, the $500 loss is disallowed and is added to the basis of the "replacement" shares (those shares purchased on October 17, 2011). The cost basis reported to the IRS by RBC Wealth Management for the sale on October 15, 2011, would have been reduced by the disallowed loss of $500, resulting in a net cost of $1,500. The proceeds would be reported without adjustment as $1,500. The $500 will appear on Form 1099-B as a “Wash Sale Loss Disallowed”, reportable in Box 5 of that form. The cost basis on the purchase of 100 shares of 123456789 (ABC Corp. common stock) on October 17, 2011, would have been adjusted to $2,100 ($1,600 original purchase cost and $500 disallowed loss).
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 that incurred a loss, the $500 loss is disallowed and is added to the basis of the "replacement" shares (those shares purchased on October 17, 2011).
The cost basis reported to the IRS by RBC Wealth Management for the sale on October 15, 2011, would have been reduced by the disallowed loss of $500, resulting in a net cost of $1,500. The proceeds would be reported without adjustment as $1,500. The $500 will appear on Form 1099-B as a “Wash Sale Loss Disallowed”, reportable in Box 5 of that form.
The cost basis on the purchase of 100 shares of 123456789 (ABC Corp. common stock) on October 17, 2011, would have been adjusted to $2,100 ($1,600 original purchase cost and $500 disallowed loss).
Important points for clients to remember about wash sales:
Impacts on Option Processing
Since January 1, 2011, when options are assigned or exercised, option premiums are automatically adjusted against the cost basis of the underlying common stock for clients. The adjusted cost basis is reported to the IRS when appropriate, along with the proceeds, when the underlying common stock is disposed at the time of the assignment or exercise of the option.
“S” corporations are no longer treated as exempt recipients. Beginning in tax year 2012, RBC Wealth Management was 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 on Forms 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 mutual fund share basis if all of the following conditions exist. The client:
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 an illustration of mutual fund 90-day rule, please see the following example:
Client bought ABC Growth Fund on September 1, 2012, for $5,000 (including a $100 front load), and then exchanged that fund for ABC Balanced Fund on November 1, 2012, for $6,000. In this case, the load was removed from the basis of the first ABC Growth Fund and added to the basis in the newly received ABC Balanced Fund because:
Since the three conditions were met, RBC Wealth Management would have reported 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 have been $6,100 ($6,000 basis and the original $100 load).
For More Information
The IRS offers helpful information about the new cost basis reporting mandate on its website. Please visit http://www.irs.gov/ for more information.
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.