Since the 2008 legislation for cost basis reporting, many investment managers are considering no longer sending tax reports from PortfolioCenter to their clients. Since managers are NOT required to track cost basis under the new regulations, how do you decide whether to send realized gain/loss reports from PortfolioCenter?1First, make sure you understand what has changed. The Emergency Economic Stabilization Act of 2008 requires custodians and broker-dealers to report to the IRS and taxpayers (on Form 1099-B) the adjusted cost basis of covered, sold securities, including whether the gain/loss is short or long term. These reporting requirements phased in as follows:
- Equities acquired on or after January 1, 2011
- Mutual funds, ETFs and dividend reinvestment plans (DRIPs) acquired on or after January 1, 2012
- Other securities, including fixed income and options, acquired on or after January 1, 2014 (delayed from 2013)
Securities purchased on or after these dates are covered securities. Securities purchased before these dates are uncovered securities, and custodians are not required to report their cost basis to the IRS.
Many brokers are including uncovered securities on their 1099s to investors, but not reporting them to the IRS.2Next, run a Cost Basis Reconciliation report to assess the accuracy of your cost basis information in PortfolioCenter and at your custodian(s).
To get the most complete picture, you may want to adjust the report settings to show all security types and include “not fully known” and “not certified” cost basis. Remembering that it is very difficult to process wash sales in PortfolioCenter.
Assuming your assessment reveals that you are not headed for a cost basis train wreck, sending the realized gain/loss reports to your clients may help them — especially if some of the information can only be found in PortfolioCenter.
However, if your broker’s data is accurate and complete, you may elect to stop sending tax reports from PortfolioCenter to avoid confusion in the case of discrepancies.IfIf you do send tax reports from PortfolioCenter, I would recommend adding a disclaimer saying the broker’s data is the official record. For example:
DISCLAIMER: This realized gain/loss information is an estimate only and does not account for disallowed losses resulting from wash sales. This report is based on information concerning your original purchases and reinvestments. It is provided in response to your request and with best efforts, but is not a substitute for tax information which normally comes from an accountant or the Custodian that holds your investments.
Or a shorter version:
There may be discrepancies between this report and 1099s provided by your brokerage firms. The 1099s are the official record and should be used for tax purposes.
Schwab Performance Technologies Cost Basis Legislation Overview
TD Ameritrade Cost Basis information
Fidelity Institutional Wealth Services Cost Basis Overview
T.Rowe Price Cost Basis Accounting & Calculation