Provisions of the Emergency Economic Stabilization Act of 2008 established cost basis reporting requirements for financial institutions including Hilliard Lyons. According to the relevant IRS regulations, beginning with the 2011 tax year we must report to the Internal Revenue Service on client tax forms (1099-B,) gross proceeds as we have in the past along with cost basis for covered securities disposed as well as any information related to the amount of gain or loss and whether the gain/loss is long-term or short-term.
The Act spawned many new regulations impacting related activities including identification of information reportable to the IRS, tax-lot-relief methods, transfer information protocol, accounting for attributes of debt instruments, etc. Additional details are set forth below describing related provisions and how they may affect you.
The regulations create a new reference to some of your investments distinguishing between covered and non-covered securities. Reporting obligations for financial institutions in this context are invoked for covered securities which are generally those purchased or acquired on or after effective dates defined in the regulations as illustrated below:
Equity securities acquired on or after January 1, 2011 Mutual fund and dividend reinvestment plan (DRIP) shares acquired on or after January 1, 2012 Debt securities, options and other investments identified by the IRS acquired on or after January 1, 2014 (The IRS extended this date from the previously announced date of January 1, 2013 and has excluded many debt instruments from immediate subjectivity pending systems development.)
"Non-covered" securities are generally those acquired before the effective dates. Transactions involving non-covered assets will continue to be reported as they have been in the past, meaning there will be no cost basis information transmitted to the IRS for sales of "non-covered" securities – only the gross proceeds will be transmitted to the IRS. Even though it isn’t shared with the IRS, you will continue to receive this information in your year-end tax package as long as the data is housed in our systems
According to the regulations, you will continue to carry the reporting and reconciliation obligation for maintenance of adequate supporting documentation with respect to the basis of your "non-covered" assets. Hilliard Lyons will continue to support you in this respect. Taxpayers should prepare for heightened reconciliation efforts between income tax returns and 1099's for "covered" securities after the enactment of these provisions.
The basis of your investment is used to measure gain or loss on the sale of an investment. Gain or loss is the difference between your adjusted tax basis and the amount your investment sells for. Prior to these regulations, financial institutions did not transmit information about your basis to the IRS.
Basis is normally the original cost of your asset. If you did not purchase your investment (you received the asset as a gift, inheritance, or in a tax-free distribution), then your basis is determined by something other than your original cost and your asset carries what is known as an "adjusted basis".
Occasionally, it may be necessary to increase or decrease the basis of investments. If the issuer declares a stock split, a return of capital, or undergoes merger activity, you may need to begin carrying an adjusted basis for the investment depending on the terms of the event.
You may decide to sell part, but not all, of your position. If you purchased shares at different times and prices, you may have different tax bases for those separate lots. There are different lot selection methods for identifying the basis of what you sold.
If is carried at original cost, it means that the original cost of the asset equals the basis. Thus, if you purchase shares of stock for $10,000, your initial cost basis in those shares is $10,000.
If an asset has a transferred basis it means that your initial cost basis will be as it was in the hands of the person who transferred the asset to you. Gifted shares are the most common example of property with transferred basis. The value of a gift is not included in the recipient's taxable income, nor may the donor deduct the value of gifts (unless made to a qualified charity). The recipient assumes the donor's basis in the property and uses that amount to measure any applicable gain or loss when the property is sold. (Recipients of gifts generally cannot use transferred basis for the purpose of determining a loss, but rather, would reduce the basis to an amount equal to that realized when sold. Affected taxpayers should consult a qualified tax advisor).
Fair market value (FMV) basis
Generally applicable to property acquired from a decedent which is considered part of the decedent’s gross estate. Assets acquired from a decedent carry an adjusted basis equal to fair market value on either the date-of-death or the Alternate Valuation Date as elected on the decedent's Estate Tax Return. The Alternate Valuation Date is six months after the date of death and is a mechanism that can be used to reduce the estate tax liability only if the values of the assets have declined.
Executors (or personal representatives or Successor Trustees) are vested with the authority to manage the assets, to make elections as referenced and to provide instruction and direction as to the applicable basis amounts for assets acquired from decedents.
You may have holdings in which you reinvest earnings. If your share quantity increases when you reinvest, then you have purchased a new tax lot which must be carried separately from the tax lot from which it arose. Reinvesting for new shares is equivalent to receiving an income distribution then purchasing new shares with the amount distributed to you.
Stock Splits, Stock Dividends, Stock Rights, etc.
A stock split involves a division into more units of the same stock. Generally, the aggregate value of the old and new shares should be the same. A stock dividend is a proportionate distribution of stock to all the shareholders. Similar to a stock split, it essentially subdivides the stock, but tends not to impact the amount known as basis. In both cases, the result is an allocation of the basis proportionally from before the event to the resulting shares after the event.
Open date content for stock received in a split or a stock dividend is the same as the holding period for the original shares. For holdings of multiple lots, basis must be allocated to the related lots proportionally.
Tax Lot Relief Methods
Tax lot relief methods define the sequence of retirement for differing tax lots of securities disposed. If you have acquired assets in varying quantities, amounts at different times, you will have a variety of tax lots. The tax lot relief method determines which lot(s) are retired in the event of disposition including the relevant cost basis amount and holding period used in computing the gain or loss and whether or it's long-term or short-term. Hilliard Lyons assumes you observe default tax lot relief as specified in the regulations. Use of alternate relief methods must be denoted by timely written notification.
As in the past, you may choose a specific tax lot to assign to closed events by providing the instruction to your Wealth Advisor not later than the settlement date. Once a specific tax lot has been sold, Federal tax regulations prohibit you or Hilliard Lyons from modifying that election after the settlement date of the trade.
Consistent with current Federal income tax regulations, Hilliard Lyons generally observes a default tax lot relief method of First In First Out (FIFO) and applies amortization routines against subject debt instruments in accordance with default federal provsions.
Please consult a tax advisor qualified in this subject matter if you should require additional information.
In the event of transfer between financial institutions, the delivering firm provides cost basis information to the receiving firm for covered securities. This information must generally be provided within 15 business days of the transfer event. If a delivering firm knows the lots that are non-covered, they are not required to transmit cost-basis data to the receiving firm, but will generally do so as a courtesy.
Financial institutions are generally required to adjust cost basis for covered securities based on information disclosed by issuers regarding corporate actions. IRS regulations establish reporting obligations for issuers to provide shareholders with relevant tax consequences for adjustment of cost basis information for such events. Hilliard Lyons monitors corporate actions and relevant issuer disclosures for delivery to the holder in this connection.
Property acquired in a corporate action event in the absence of adequate disclosure from the issuer will result in no allocation of basis to the successor positions within Hilliard Lyons’ systems. Any subsequent sale of this property will be reported as a sale without allocation of cost basis. Holders impacted by such events should seek guidance from a tax advisor qualified in the subject matter.
Foreign corporations not subject to U.S. tax law are not obligated to provide U.S. tax information including implications on their corporate actions. It is possible that there will be no guidance available for allocation of cost basis or other information for corporate events involving foreign companies or any other that has failed to make relevant disclosure.
For securities sold at a loss, regulation generally permits the holder to offset capital gains with the amount of loss encountered. Excess losses generally offset ordinary income up to $3,000 with any excess carried forward. The Wash Sale rules set out an exception to this condition. If the same or substantially identical stock is purchased within 30 days (before or after) the loss event, recognition of the loss is suspended. The wash sale rule can be triggered by multiple purchases on the same day if one of those tax lots is sold within 30 days for a loss and can be triggered in accounts with reinvestment activity.
For securities with the same CUSIP number, Hilliard Lyons is required to monitor and report wash sales for activity. We will append suspended losses and open dates to the replacement shares for property subject to these rules but only if the CUSIP numbers are the same and the activity is carried out in the same account. The obligation for monitoring wash sales across all accounts -- including those at other institutions including retirement or spousal accounts -- and compliance with these objectives is beyond our scope of responsibility and remains vested with the taxpayer.
Prior to implementation of these regulations, proceeds from short sales were reported to the IRS in the year the position was opened. Short sale transactions are now reported in the year that the position is closed.
Beginning with the 2012 tax year, accounts registered with Hilliard Lyons as S Corporations will receive consolidated year-end 1099-B forms setting forth reportable activity which will be transmitted to the IRS.
Tax Packages and Tax Form Changes
In response to these changes, IRS reformatted Schedule D of Form 1040 and introduced IRS Form 8949 commencing with the 2011 tax year. These forms include fields to report adjustments to cost basis information we have provided as well as customized reporting codes to explain reasons for adjustments including events such as corporate actions which lack issuer disclosure. Please consult a qualified tax advisor for guidance in populating these forms.
Based on these changes, Hilliard Lyons has developed enhancements to the supporting documentation provided to you including Realized Gain/Loss information in your year-end tax package formatted to more closely align with IRS Form 8949 and IRS Form 1040 Schedule D.
Additional Information on Cost Basis Reporting regulations can be viewed at the following links:
Please contact your Wealth Advisor if you have any questions.
J.J.B. Hilliard, W.L. Lyons, LLC. does not provide tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.