Tackling the Cost Basis Reporting Challenge

Terry Flanagan

While cost basis reporting (CBR) systems are still viewed primarily as a compliance requirement, firms are exploring ways to use them to streamline processes, integrate technologies and improve communications between end-users, financial intermediaries and solution providers.

“Firms are increasingly looking for ways to turn cost basis into a business differentiator,” said Greg Alves, senior vice-president, investment reporting, at Scivantage, a provider of brokerage, tax and portfolio reporting and wealth management applications.

“Automating complex tax calculations using sophisticated data processing to provide accurate reporting is becoming increasingly important as 1099 tax reporting volume continues to grow,” said Alves. “As complexity and sheer number of trades present a considerable CBR challenge, firms must streamline their cost basis operations to deliver a superior service experience to their clients.”

Through its Maxit platform, Scivantage incorporates tax rules and advanced tax lot management strategies to help investors avoid wash sale deferrals, harvest tax losses, and suggest short-term versus long-term sales.

“Maxit as a cost basis product serves custodian banks, prime brokers, retail brokerages, self-directed investors and mutual funds,” said Alves. “For Scivantage, CBR has opened up a new world of opportunity. Any firm that produces a 1099 has to have a cost basis solution.”

The Internal Revenue Service code provides that a taxpayer cannot take a loss on the sale of a stock or certain other types of securities and financial contracts if the taxpayer acquires substantially identical stock or securities within a 61-day period that begins 30 days before the date of such sale and ends 30 days after such sale—in other words, a wash sale.

Although the code regarding wash sales have been on the books since 1921, the 2008 CBR law allows brokers to ignore transactions occurring in other accounts (cross-account wash sales) and transactions that do not involve identical securities.

While broker-dealers are not required to report cost basis on uncovered securities to the IRS, taxpayers are responsible for accurate reporting of cost basis on covered and uncovered securities on their tax returns. Covered securities are those acquired on or after the applicable dates outlined by the CBR legislation. Securities acquired by clients before these dates are uncovered by the legislation.

According to a report by research firm Celent, financial services firms had challenges with the automation and transfer of data between books and records, cost basis reporting systems and tax reporting systems. In addition, accuracy of calculations for wash sales and corporate actions were also a high priority.

“As firms have been actively operating their CBR systems over the past two years, it has become obvious that they underestimated the amount of technology enhancements, tax knowledge and operational adjustments needed to successfully comply with IRS regulations,” said Alexander Camargo, wealth management analyst at Celent, in a statement.

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