Emergency Economic Stabilization Act of 2008 included modifications to Form 1099-B. These changes imposed additional reporting criteria for custodians and brokers beginning in 2011 with equities, 2012- mutual funds and dividend reinvestments, and this year- bonds and other securities. Form 1099-B now includes cost basis, acquisition date, amount and character of gain/loss, and whether short or long term. This information is required for securities purchased/sold after the phase-in date. Transactions prior to this date remain the investor’s responsibility. Ultimately, the process of cost basis reporting will be drastically simplified. In the interim; however, CPAs have to face the challenge of servicing clients whose portfolio might be comprised of securities which have been covered by this change, as well as some that have not.

Prior to finalizing transactions involving securities not covered by these changes- financial planners must work with the client and the custodian to establish a method of accounting that works best for the client’s situation. Custodians will often use average cost for mutual funds and FIFO for everything else. Accounting this way produces the highest gains. Highest cost methodology produces smaller gains and lessens the tax burden. Securities are locked into the selected method once the transaction is finalized.  

In our modern, information-based world, there are many automated tools/programs available to facilitate efficiency as the CPA performs his/her duties. In reference to establishing cost basis, there are websites like www.youroldmoney.com and software like Net Basis. However, when confronted with securities with complicated histories, i.e. stock splits, mergers, dividend re-investments, many CPAs have reverted to manual calculations. In fact, respondents to a recent poll in Financial Planning Digest found that 91.61% of practitioners continue to perform these calculations manually and only 5.64% use cost basis software. Comments following the article suggest that some were not aware of the resources and others are not comfortable with the certainty of the data provided. As a CPA, assuming the risk, many would rather rely on their own calculations.

I tend to agree with one respondent that suggested some sort of materiality clause. The complexity of some historical research is so entailed and time consuming that the cost involved in paying for these services far outweigh the return of the investment. Perhaps the IRS could amend the act to exempt securities with estimated returns below a certain threshold.