Securities reporting rule could make for some insecure advisers

Securities reporting rule could make for some insecure advisers
Ramped-up role in spelling out tax implications of stock sales might well be 'differentiator' in landing prospects; boon to some, bane to others
AUG 11, 2011
New IRS rules will put pressure on financial advisers and accountants to manage the tax consequences of a client's decision to sell stocks. The rule — which goes into effect in 2011 for corporate stock, in 2012 for mutual funds and some dividend reinvestment programs, and in 2013 for all other securities — is part of the Emergency Economic Stabilization Act of 2008. It changes the way custodians must report securities sales to the IRS and investors. Rather than report only the sale price of a security, as in the past, custodians now must report both the purchase and sales price, minus commissions and fees. The IRS estimates this will help it collect an additional $6.6 billion in taxes over ten years. Investors have always been required to report the so-called cost basis, or net purchase price for the securities they sell, but they were responsible for gathering purchase information themselves. This frequently left their advisers or accountants in the dark. Now that it will be more readily available, advisers will have the information they need to minimize capital gains, perhaps by specifying a particular lot of shares to sell, said long-time tax attorney Stan Smiley, senior vice president of the advanced planning group at Cetera Financial Group, "The role of the adviser will become more important in working with the client to minimize taxes," Mr. Smiley said. "It is an opportunity to enhance the relationship." The usual way of handling stock sales has been the so-called “first in, first out” method, which assumed that a partial sale of shares came from the earliest purchase. In a rising stock market, that almost always will result in the highest possible tax. Investors don't frequently take advantage of the option to choose a particular lot to sell, or to sell the last lot they purchased, both of which are allowed, Mr. Smiley said. The tax consequences can be huge. Shares bought years ago for a fraction of the current price could net a big capital gains tax, he noted, while shares bought one year ago at a bit below the selling price could result in a minimal tax bill. The rule covers only securities bought after the rollout of the new regulations, so it will take time before advisers can take full advantage of the new information. Still, Mr. Smiley noted that many investors don't have a firm understanding of their options for calculating cost basis. Advisers who understand and use the new information may find it's "a differentiator when meeting with prospective clients," he said.

Latest News

Wealth management industry is facing a looming retirement crisis, report warns
Wealth management industry is facing a looming retirement crisis, report warns

Despite technology adding capacity, an advisor shortage is predicted.

Just 30% of people are very confident in managing their finances right now
Just 30% of people are very confident in managing their finances right now

And there's a large gap between the fears they have and the action they take.

Stocks waver on tariff concerns, gold hits new record high
Stocks waver on tariff concerns, gold hits new record high

Cautious investors are also awaiting US inflation stats.

Will Asian economies give in to Trump demands?
Will Asian economies give in to Trump demands?

Threat of tariffs may leave some countries with no choice.

Musk wants to buy OpenAI, here's how Altman responded
Musk wants to buy OpenAI, here's how Altman responded

AI firm's leader has made a cheeky counter-offer in response to $97B bid.

SPONSORED Taylor Matthews on what's behind Farther's rapid growth

From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.

SPONSORED Why wealth advisors should care about the future of federal tax policy

Blue Vault features expert strategies to harness for maximum client advantage.