New cost basis software gives investors tax options

The recent regulations are complex and can have significant financial ramifications.

By Stock Traders Daily Dec 4, 2012 2:24PM

Calculating numbers for income tax return with pen and calculator copyright Stockbrokerxtra Images, PhotolibraryBy Barry S. Cohen, Stock Traders Daily

 

Tis the season to be jolly, but soon after the New Year it'll be time to start thinking about a less cheerful topic: taxes. And for those investors who sold stocks during 2012, contending with the new cost basis reporting regulations and forms could be enough to drive them to the medicine cabinet for heartburn relief.

 

Cost basis reporting and the related requirements were enacted by the Economic Stabilization Act of 2008 and are being phased in through IRS regulations. The legislation that requires brokers to report their clients' cost basis went into effect Jan. 1, 2011; that requirement was only for securities sold after that date. But what about the millions of shares investors purchased before Jan. 1, 2011, and sold in 2012?

 

Determining the cost basis of those shares could be a big headache -- and have monumental tax ramifications. Take, for instance, the investor who began purchasing shares of General Electric (GE) in 1977, made subsequent purchases in the intervening years, reinvested all dividends, and sold $50,000 worth of the stock in November 2012. Depending on the cost basis method used -- FIFO, LIFO, HIFO, LOFO and LGUT -- the options range from a long-term gain of more than $46,000 to a long-term loss of $81,000.

 

A less dramatic example involves the investor who started buying Walt Disney (DIS) in 1985 and also sold $50,000 in shares in November 2012. He has the option to choose between a long-term gain of $48,000 using LIFO or a long-term loss of more than $2,000 using HIFO.  A Philip Morris (PM) investor who also sold $50,000 in shares during November can report a long-term gain of about $49,000 or a long-term loss of about $9,300. 

 

Keep in mind that the default method of treating most stock sales is FIFO, which generally results in the highest reported capital gains.

 

Fortunately, new tax software is available that can determine cost basis of securities in a matter of minutes, taking into account reinvested dividends, stock splits, acquisitions and other corporate actions. Of course, not all cost basis software is created equal. In fact, a recent article in the CPA Journal encouraged investors and tax professionals to be discriminating when making their selection, making certain the tool they choose offers:

 

·         The flexibility to coverall all possible transactions for a security

·         The ability to reconcile a Form 1099-B with Form 8949 and even export it directly into a Schedule D, and

·         The capability to cover securities historically.

Tags: DISGEPM
1Comment
Dec 11, 2012 4:47PM
avatar
Checked this out. Individuals can use the software as well. I did numerous stock transactions this year plus sold all my shares in one particular mutual fund. This will certainly come in handy when tax time rolls around. With the new laws, I want to get this right and stay in compliance. Thanks for the information.
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