Fidelity Investments has rolled out new tools to help financial advisors manage the new cost-basis requirements that take effect at the start of the new year.
Under the Emergency Economic Stabilization Act of 2008, custodians and broker-dealers must report the adjusted cost basis of stocks bought on or after January 1, 2011 to the IRS on Form 1099-B. Many firms already report this information; going forward, they will all have to.
The new requirements will be phased in during the next three years, beginning with stocks in 2011. In 2012, custodians and brokerages must provide cost-basis information for mutual funds and equities acquired through dividend reinvestment programs. In 2013, cost-basis reporting will apply to bonds and stock options.
In response to the new rules, Fidelity has put out a new report, Six Noteworthy Changes Issued in the Final Cost Basis Regulations, that gives an overview and analysis of six key components of the mandates. The report is available through both Fidelity's RIA custody business and its National Financial brokerage clearing business.
The new report highlights six notable features in the new cost-basis regulations. These include:
* Clarification for when certain types of securities are considered covered. The final regulations clarify the timing of coverage for unit investment trusts (UITs), real estate investment trusts (REITs), and exchange-traded funds (ETFs). Generally, these three types of securities are considered shares of stock in a corporation and thus considered covered securities beginning in 2011.
* No requirement for brokers to offer standing instructions for client accounts. The preamble to the final regulations clarifies that although allowable, it is not required for brokers to accept standing instructions for alternative cost-basis disposal methods (ADMs) for client accounts.
* Simplified requirements for average cost elections. Beginning Jan. 1, 2011, an average cost election is no longer binding, i.e., taxpayers will no longer be required to obtain written approval from the IRS to change a client account from average cost to another depletion method.
* New process for broker's reporting of cost basis for inherited securities. The final regulations now require brokers to apply fair market value (FMV) as of the date of death to inherited securities when determining the cost basis for assets transferred from a decedent account. This change makes the transfer process for securities much simpler than the process originally outlined in the proposed regulations.
* Complex rules for reporting gifted securities. Although the industry requested simplified rules from the IRS, the final regulations continue to require brokers to capture and maintain both the carryover basis (i.e., the donor's cost basis) and the FMV as of the date of the gift. At the time of the sale, the broker will then evaluate which form of basis to use based on specific IRS rules for gifted securities.
* Penalty relief for transfers with missing cost basis. The final regulations provide penalty relief for transferors through 2011. Essentially, between Jan. 1, 2011 and Dec. 31, 2011, brokers who are not prepared to send cost basis with asset transfers will not incur IRS penalties. In these situations, receiving brokers of transferred assets without cost basis may classify them as non-covered.
Fidelity has also developed two operational guides for handling cost-basis requirements--one for RIAs and the other for broker-dealers.?
"Education is the big thing here because these new rules are fairly complex," says Fidelity spokesman John Eidson. He notes that a Fidelity survey found 80% of 400 advisors queried said their clients will come to them as the main source of education on the new cost-basis requirements and how it could impact their gains and losses.