News on Cost Basis

Cost basis is a hot topic around here lately due to a recent announcement that starting in 2011, all custodians (such as Schwab, Fidelity, and T.D. Ameritrade) will be required by the IRS to report a stock’s cost basis on their statements. In 2012 they will be required to report the cost basis for mutual funds, and in 2013, for bonds. This is good news for you because it makes tax reporting easier; it is not so good news for the custodian.

The reason is that cost basis is not quite as straight forward as many people think. A lot of times an investor believes that what they paid for the stock is the basis and that’s the end of the issue. But in reality, it can get complicated. What if you bought the stock multiple times over the years and subsequently sold a portion of the stock? Did you sell the initial lot that you purchased, or a later lot that you purchased, which was most likely purchased at a different price? The custodian must determine which accounting method they will use in such cases: HIFO (Highest In, First Out), LIFO, (Lowest In, First Out), or Average Cost. With mutual funds, once you use one method for a particular fund, you must continue using that method.

If you buy your stock or funds at your current custodian, they will have a designated way of tracking this and automatically do that for you unless you instruct them otherwise. If you transfer assets to that custodian, however, you will need to provide that cost basis to have it appear on your statement. You will have to ensure that you have adjusted the cost basis accordingly for spin-offs, splits and mergers and reinvested dividends (reinvested dividends increase your basis). There are software and web sites that can determine the adjusted basis for you. If you have all of the necessary information: original amount of shares purchased, price and date, as well as the information regarding subsequent sales, your Parsec advisor can help you determine the cost basis.

Harli L. Palme, CFP®
Financial Advisor

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