Congress is asking for input on a proposal to require brokers and mutual funds to report the cost bases of their customers’ securities transactions, and financial planners and advisers should give it.
The brokerage and mutual fund industries are likely to argue against the legislation, because it would add another layer of complexity to their reporting to clients and would undoubtedly add to their cost structures.
But both industries would be better advised to help Congress develop legislation that would provide clients with the information they or their accountants and advisers needed to fill out their income taxes accurately.
Financial planners, accountants and investment advisers should support the legislation and provide guidance to the committee.
On the surface, this proposal is a no-brainer. It would simplify the preparation of income tax forms for those investors wanting to report their income tax obligations accurately, and for accountants and financial planners involved in preparing those reports.
At present, yearend statements of activity from many brokerage firms don’t report the cost bases for transactions, and investors often must keep track of the purchase prices themselves or rely on the financial planner or investment adviser to do so.
The Department of the Treasury suspects that many investors report inaccurately, either inadvertently or deliberately, the cost bases of the securities they sell during the year, thus reducing the reported capital gains.
There are complications, however. Some brokerage firms claim that they aren’t set up to provide cost basis information easily to clients in their yearend tax statements.
The securities firms also often have no way of finding out the cost bases of securities given by one person to another. When accounts are moved from one broker to another, the cost basis information often isn’t transferred with them.
In addition, there are several ways to calculate the cost basis.
Therefore, Congress must draft the legislation carefully, and the Treasury Department must draw up the regulations with equal care.
Likewise, financial planners and advisers, and accountants, should provide guidance to the Senate Finance Committee on the need for this legislation, and any ideas they may have on ways it may be implemented.
In particular, the committee and the Treasury Department need guidance on how long the transition period should be: Is 18 months long enough? Should there be a two-year transition period?
But they also need guidance on exceptions.
Should the law require the reporting, at least initially, only of the cost basis of straightforward transactions, routine stock and bond sales, and leave the more complicated transactions to a later date? Or would this lead some brokers and their clients to introduce complications to avoid the reporting requirements?
Time is short. The Senate Finance Committee wants comments from interested parties by June 30.
Financial planners, and especially the Denver-based Financial Planning Association, should step up to the plate and support cost basis reporting.
To remain silent is to assent to the existence of a tax evasion loophole.
