The Emergency Economic Stabilization Act of 2008, otherwise known as the “government bailout,” includes changes in tax reporting requirements of cost basis. The amendments were phased in and we will enter phase three in 2014, which includes tax reporting regulations for fixed income securities and options.
- Phase one covered equities, which was effective for any equity purchased January 1, 2011 and beyond.
- Phase two was for mutual funds and dividend reinvestment programs effective January 1, 2012 and beyond.
- The first part of phase three begins on January 1, 2014 and the second part commences on January 1, 2016 for fixed income assets. Effective January 1, 2014 is the less complex. The more complex is effective January 1, 2016.
Any equity purchased January 1, 2011 and forward the IRS is calling “covered,” meaning brokers/custodians are required to report the cost basis and any gain or loss information to the IRS, and you will find this information on the 1099-B that the broker/custodian issues to you. The same applies to phase two with mutual funds and, as we enter 2014, this applies to fixed income securities, as well.
The less complex fixed income assets that will be covered in 2014 are:
- Taxable and tax-exempt bonds with fixed rates and fixed maturity and payment schedules. Examples of this are fixed rate corporate or municipal bonds as well as Treasury notes and bonds.
- The more complex, which will be covered in 2016, include, but are not limited to, variable rate bonds, foreign issued bonds and convertible or stepped rate bonds.
- There are also a few fixed income assets that will be excluded from the mandatory reporting, which include, but are not limited to, fixed income assets with payments that are subject to acceleration and short-term fixed income assets (meaning those with maturity dates less than one year from the issue date).
Calculating the cost basis for fixed income is more complicated than for equities and mutual funds because fixed income is affected by income accruals and other choices made by the owner at the time of purchase.
At Fort Pitt, we understand that these new rules are complicated, but we feel it’s important for our clients and all consumers to be up-to-date on all regulations when it comes to your personal finances.
Make sure to keep excellent personal records, which will include trade confirmations at the time of purchase and any information on gifted fixed income assets. This will help to ensure that you and your broker/custodian have the same information and accurate cost basis figures are reported to the IRS. Work with your tax professional and financial advisor to fully understand how this regulation might impact your personal financial situation. Finally, for more information we suggest you visit the FINRA website and remember, your financial consultant is always available to answer any questions you might have.