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AmericasMay 6 2007

Cost basis reporting will be costly for all

The US government wants to impose cost basis reporting on the investment industry to make it easier to determine how much capital gains tax investors owe on their securities. Michael Imeson reports.
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What is it?

The proposed Simplification Through Additional Reporting Tax Act would “require brokerage houses and mutual fund companies to track and report to taxpayers and the IRS [Internal Revenue Service] investment information related to capital gains taxes, making it easier for taxpayers to file their tax returns and helping the IRS crack down on would-be cheaters”. The IRS, the Treasury, the Government Accountability Office (GAO) and the Joint Tax Committee support it.

Who dreamed it up?

In February, senators Evan Bayh and Tom Coburn, and congressmen Rahm Emanuel and Walter Jones proposed the Act. US President George W Bush included the idea in this year’s budget.

What are its main provisions?

That brokers and securities issuers provide adjusted cost basis information to the IRS. The US government wants to extract more tax from personal investors by imposing “adjusted cost basis reporting” on the investment industry. This would show the IRS the true cost to investors of securities purchases, so that when they sold those securities it would be easier to calculate the capital gain and any capital gains tax due. Forcing brokers and securities issuers to report to taxpayers and the IRS the “adjusted cost basis” (the purchase price, plus any necessary adjustments) when they sell a stock, bond or mutual fund would help taxpayers to file accurate tax returns and the IRS to check accuracy.

What’s in the small print?

Download the GAO’s report to the Senate’s finance committee, Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost Basis Would Improve Compliance if Related Challenges are Addressed, from the GAO website.

What does the industry say?

The Securities Industry and Financial Markets Association (Sifma) has laid out points it says must be included in any cost basis law: 1. It should initially apply only to securities such as common stock and mutual funds to limit the burden placed on firms – cost basis is most easily calculated on these types of investments; 2. It should ensure that securities issuers provide enough information to brokers to allow them to calculate cost basis; 3. It should not apply to past securities purchases, only to ones made after the law has come into effect; 4. It should be drafted to give the IRS and the Treasury enough flexibility to address any unforeseen problems.

How much will it cost?

For investors, up to $17bn a year. For investment firms, it would be costly to implement. For brokers and issuers, no estimates have been made, but “it certainly wouldn’t be free,” says Sifma. “Our members would have to implement new policies and procedures, new back-office systems and be able to track investments from the point of purchase to eventual sale.”

What do the legislators say?

Senator Coburn says: “This bill will give the IRS the tools to both increase accuracy in capital gains reporting, and crack down on would-be cheaters.”

The law of unintended consequences

If securities issuers were not fully engaged in the reporting process, investors and brokers could be provided with incorrect information, which would make the cost basis figures passed on to the IRS inaccurate – and we all know how tax authorities react when they sniff what they think is a tax dodge. Investors and brokers could be investigated for innocently committed errors.

Could we live without it?

Yes. But, but because the Republicans and Democrats are united on it and it is in the President’s budget, it will happen.

Rating: 2

Rating scale:

5 = Essential;4 = Useful; 3 = Neutral;2 = Unnecessary;1 = Waste of time.

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Read more about:  Financial Regulation , Regulations , Americas , US