May 7th, 2012 by Stephanie Erickson
We recently reported on the troubles that cost basis stock reporting created for this tax season. Due to these complexities and the requests of several large financial organizations, the IRS has decided to delay cost basis reporting rules for debt instruments and options for one year. Initially, this requirement was set to be effective January 1, 2013; now this date has been moved a year later to 2014.
The cost basis reporting requirements were created in 2008 with the Troubled Asset Relief Program. Overall, it’s designed to make sure that taxpayers don’t overstate figures or underreport profits. Eliminating, or at least lessening, these instances of misreporting will hopefully help to lower the tax gap. According to an estimate by the congressional Joint Committee on Taxation, cost basis reporting could potentially raise $6.7 billion over 10 years.
So what does cost basis mean exactly? It refers to the amount taxpayers pay for investments that they later sell. The number represents a starting point for measuring capital gains or losses. Obviously, if the cost basis figure is too high or too low, the related tax reporting will be inaccurate. Before this requirement existed, the IRS trusted investors’ reported figures, but they were too often incorrect.
Because cost basis reporting will require new forms and practices, the IRS is using three phases to implement the changes. This tax season was dedicated to stocks. Next year will be mutual funds and dividend-reinvestment plans, and 2013 was subsequently supposed to be debt and options instruments. Darren Neuschwander, who has a nationwide practice for active investors in Alabama said, “Considering the trouble we’re having with rules already in effect on the cost basis for stocks, it makes sense to delay the rules on debt and option reporting.” But why did the IRS not delay the second phase, given the issues this tax season? It seems that cost basis reporting for debt and option instruments may be the most complex due to adjustments for discounts or premiums on bonds. Hopefully next tax season, cost basis on mutual funds and dividend-reinvestment plans will bring less confusion and fewer tax filing extensions.
Convey provides tax information reporting services and software to businesses to make IRS compliance clear and uncomplicated. U.S. federal tax advice contained in this web site is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document. (iii) The taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.