Transfer Statements – When clients transfer ("ACAT") accounts between brokerage firms, the transferring broker must give the receiving broker tax cost basis data on all covered securities transferred not later than 15 days following the transfer date. At minimum, the transfer statement must include:

Identity of the security
Total adjusted basis of securities
Original date of acquisition
Transfer date
Settlement date for the transfer

Share Reporting Methods – Investors often acquire shares of the same security through multiple purchases, such as through DRPs or mutual fund dollar cost averaging. When they then sell a partial holding, the IRS allows taxpayers an option of cost basis accounting methods:

Average cost – Each sale uses the average cost basis of all remaining shares.
First in, first out (FIFO) – The first shares acquired are sold first.
Last in, first out (LIFO) – The last shares acquired are sold first.
Highest in, first out (HIFO) – The shares with the highest cost basis are sold first.
Specific share identification – The customer specifically identifies tax lots to be sold.

It is each investor's responsibility to choose one of these methods with the help of their financial advisors or CPAs. For partial sales of securities other than mutual funds or DRP shares, the new law requires brokerage firms to follow the following order, for IRS 1099-B reporting:

If the customer identifies a specific cost basis method or specific tax lots to be sold on an "adequate and timely basis," the broker must report the tax cost basis according to instructions.
In other cases, the firm must first report as sold any shares for which it does not have cost basis data.
Next, it must report as sold the first shares purchased – i.e., using a FIFO basis.

For mutual fund or DRP programs, the brokerage firm must reported cost basis in accordance with its default method, unless the customer chooses a different method. The default method often is average cost basis.

Instant Insights /

How to explain the new cost basis reporting rules to your clients

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