Everyone agrees that determining the cost basis of securities is a big headache.
Because it isn't easy to keep track of the stock splits and other corporate actions that affect the cost basis of securities — let alone know when grandpa bought those pre-divestiture AT&T shares you inherited — it is no wonder that determining capital gains can be difficult.
But things are getting better for investors, if not for record keepers.
Since the start of the year, broker-dealers have been complying with the cost-basis-reporting requirements of the Emergency Economic Stabilization Act of 2008, which requires them to report the cost basis of equity purchases to the Internal Revenue Service and to taxpayers. Fund companies will begin reporting the cost basis of fund purchases in January.
Those changes will make it easier for our grandchildren to figure out the cost basis of whatever paltry number of shares we can afford to buy and leave to them. Until then, however, it is still tough to figure out the cost basis of securities that have been held for ages.
Amelie Escher noticed the “lost” cost-basis problem years ago and decided that she could do something about it.
“In simplest terms, lost cost basis refers to the situation where a brokerage firm has no purchase details around a particular security or particular tax lot, and investors see a zero by the security on their brokerage statement in terms of cost basis,” said Ms. Escher, who quit her job as a broker at Smith Barney amid the turmoil of 2008 and launched YourOldMoney.com in June 2010.
Her research indicates that there are upwards of 40 million instances of lost cost basis among the accounts at the major brokerages. Using her service, a financial adviser or investor can pay a flat fee of $20 per security (or mutual fund purchase) to resolve a lost-cost-basis issue.
The consequences of finding out the true cost basis of securities can vary wildly, depending on what is discovered.
“It can come down to whether your client writes a check to the government for $1,000 or writes off $3,000,” said Ms. Escher, throwing out a random scenario to illustrate what an investor might face in terms of paying the IRS.
Harry Sze, a managing principal at Dynasty Advisors LLC, said that the service, which his firm has been using since April, easily pays for itself.
“Cost basis is actually more of an issue than most people realize; when clients come in for their first appointment, they might have a shoebox full of stuff, and lots of times, there are individual certificates or those they have inherited,” he said.
“Accurately dealing with this can be problematic because the IRS is becoming more and more strict about finding gains,” said Mr. Sze, noting that the service has been of particular interest to many of the certified public accountants with which his firm works.
He said that there are two other aspects making the site and service a plus for advisers. The first is that though accurate cost basis information is very important, advisers' need for the information is irregular, which means that employing a full-time or even part-time employee to work on cost basis data is uneconomical. In addition, YourOld Money.com stands behind the data it provides and will explain its methodology to anyone who asks, including tax authorities.
QUERYING DATABASES
To use the easy-to-navigate interface, an adviser or investor simply provides the original name of the holding (using the name, ticker symbol or CUSIP), the likely purchase date, whether dividends have been reinvested (a yes-or-no choice), the number of shares purchased and the price (if known), and any fees paid.
YourOldMoney.com then queries the databases of GainsKeeper, a division of Wolters Kluwer Financial Services and a provider of historical securities data used by many large financial firms to track cost basis. This triggers a historical search through stock splits, mergers and dividend reinvestments to generate a list of potential scenarios.
The report that is generated can be printed, saved as a PDF or e-mailed and combined with an investor acknowledgment letter that is in compliance with the Securities and Exchange Commission (the latter is to document for the SEC that it is the investor providing the information).
“We don't save or retain any documentation or transaction information ourselves; we want to be a completely neutral place that strictly provides information,” Ms. Escher said.
Visit
YourOldMoney.com online for more information including a video illustrating a lost-cost-basis scenario and how the service works.
djanowski@investmentnews.com
