Cost Basis Updates

In 2008, the U.S. Department of the Treasury issued extensive new regulations that required financial services firms to begin tracking and reporting the cost basis of securities acquired in 2011 or later and subsequently sold or transferred. This responsibility was previously held by investors.

Due to their complexity, the IRS has been phasing in the new requirements:

Phase I went into effect in 2011 and required firms to begin reporting cost basis on equities acquired in 2011 or later.
Phase II went into effect in 2012 and required firms to begin reporting on mutual funds acquired in 2012 or later.
Phase III went into effect in 2014 and includes less complex fixed income securities.
Phase IV went into effect in 2016 and includes complex fixed income securities.

Important Notes for Tax Year 2016

Complex fixed income securities are reported on Form 1099-B for tax year 2016 if acquired on or after January 1, 2016.

Important Notes for Tax Year 2015 and 2016

In early 2015, new regulations became effective for bonds acquired on or after January 1, 2015. RBC WM will use the IRS default method “constant yield” to conform with required tax reporting. If you wish to use an approved method that differs from the IRS default method, please contact your financial advisor.

With complex fixed income securities covered under phase IV, the classification of certain fixed income securities is being refined to ensure compliance with the IRS classification of these securities. As a result, some clients may see a change in the adjusted cost basis for some securities listed on their monthly statements, as well as on the client account website next year. Because of a refined realignment of the security to the IRS classification, a change could occur in the method of amortization/accretion computations. Additional information about these changes were communicated in early 2016.

Historically, RBC Wealth Management has adjusted the cost basis for fixed income securities and reported this adjusted cost to clients on monthly statements. In early 2014, per the regulations in effect for tax year 2014, for less-complex bonds acquired between January 1, 2014 and December 31, 2014, RBC accreted the market discount using the IRS mandated straight line method.

For more information, please read the Cost Basis: Fixed Income Elections fact sheet

Important Information about the Cost Basis Regulations Effective for Tax Year 2011 and Beyond

Cost Basis Defined

Cost basis is generally the amount you have paid for an investment, including any commissions and fees. For tax purposes, it may be adjusted over time due to certain events such as corporate actions or wash sales.

RBC Wealth Management’s Tax Reporting Responsibility

The responsibility for tracking and reporting gains and losses to the IRS has historically fallen to investors. Under the new regulations, financial institutions are now required to report to the IRS the cost basis upon the sale or disposal of certain types of securities acquired on or after January 1, 2011 (known as covered securities).

Important Note

The IRS requires RBC Wealth Management and other financial services firms to issue revised Forms 1099-B retroactively for a period of up to three years if notified by an issuer or other third party, or if RBC Wealth Management becomes aware of any change that affects information previously reported to clients and the IRS, regarding reportable or covered securities. This includes any changes to cost basis information. RBC Wealth Management appreciates and regrets the difficulty and inconvenience this poses for clients but is required to issue corrected tax documents under IRS regulations.

Overview of the New Regulations

The new requirements cover securities that have been acquired for cash, including those acquired through the exercise of rights by the issuer, or have been acquired as a result of a stock dividend, stock split, reorganization, redemption, stock conversion, recapitalization, corporate division, or other similar action.
Your cost basis for the covered securities will be reflected on your monthly statement and will be reported on your year-end Form 1099-B for the year in which you dispose of the securities.
Phases I and II and III have already been implemented in our reporting systems.
Please note: The new regulations do not apply to securities acquired prior to the effective dates noted in the table below (known as covered securities). For example, the sale or transfer of shares that were acquired under a dividend reinvestment plan on December 31, 2011, would not be subject to the new cost basis reporting requirements because the security is considered “non-covered”.

Cost Basis Reporting Timetable

Security Type	Security acquired and disposed of on or after:⁴	Reported on IRS Form 1099-B beginning in:
Equities¹	January 1, 2011	2011 tax year (delivered in 2012)
Regulated investment company (RIC)² shares and investments that are part of a dividend reinvestment plan (DRP)	January 1, 2012	2012 tax year (delivered in 2013)
Options, less-complex fixed-income securities (fixed rate, fixed maturities), and other required investments	January 1, 2014³	2014 tax year (delivered in 2015)
Complex debt instruments	January 1, 2016	2016 tax year (delivered in 2017)

¹ Stocks and other registered securities representing ownership interest in a corporation.

² Regulated investment company (RIC) shares include most domestic mutual funds and exchange-traded funds. Funds that are not classified as Regulated Investment Companies are covered by the 2011 regulations.

³ On May 2, 2012, the IRS announced that it would postpone the effective date for cost basis reporting for fixed income, option and other remaining securities. Instead of taking effect on January 1, 2013, the rules will take effect on January 1, 2014. Under the requirements, RBC Capital Markets, LLC, began reporting cost basis information for options and less-complex debt securities acquired on or after January 1, 2014, in addition to the cost basis of securities covered by Phases I and II. Historically, RBC Capital Markets, LLC, has adjusted the cost basis for fixed income securities and reported this adjusted cost to clients on monthly statements. In early 2014, per the regulations in effect for tax year 2014, for less-complex bonds acquired between January 1, 2014 and December 31, 2014, RBC Capital Markets, LLC accreted the market discount using the IRS mandated straight line method.

⁴ The acquired date determines whether or not the cost basis information for a tax lot in a security is covered or non-covered—that is, subject to the new requirements and therefore reportable to the IRS. RBC Wealth Management reports proceeds on the sale or disposal of securities and cost basis information to the IRS on Form 1099-B. RBC Wealth Management will continue to show the proceeds on the sale or disposal and cost basis of non-covered securities on Form 1099-B but will not report the cost basis of those securities to the IRS. For example, if a security is sold after January 1, 2011, but was acquired prior to January 1, 2011, it was excluded from the new regulations and therefore RBC Wealth Management was not required to report the cost basis to the IRS.

When You Sell a Security

When required by applicable law to report cost basis information on the sale of investments, RBC Wealth Management uses the IRS mandated default method for reporting the cost basis of the security, unless you specify an IRS approved alternative method in the manner required by applicable regulation.
Take care to understand the tax consequences of your transactions prior to giving an order. The lot selection method to calculate gains or losses cannot be changed after your trade settles.
A Schedule of Realized Gains and Losses will be produced on a monthly statement when, during that month, you make a specific tax lot selection in disposing of a security.

When You File Your Taxes

You are responsible for reporting any applicable cost basis information to the IRS on your annual tax returns (including cost basis for securities not covered by the new requirements). Please consult your tax advisor for more information on your particular tax situation.

Here’s what RBC Wealth Management will report on Form 1099-B:

Sale proceeds (currently being reported)
Cost basis of covered securities (see above table for timing)
Whether the holding period of a security is short- or long-term in nature
Whether the shares disposed of are covered or non-covered

Important Note: The cost basis for non-covered securities is not reported to the IRS by RBC Wealth Management.

Additional Information

Corporate Actions include events such as mergers, spin-offs, splits, stock dividends, non-taxable distributions, rights distributions, and other adjustments required for proper tax reporting, and may adjust the cost basis of an investment as they occur.
Wash Sales result when you purchase a “substantially similar” security within a 61-day period that extends from 30 days before the date of the sale that incurred a loss until 30 days after. For example, if you sold a stock at a loss on April 30 and bought a “substantially identical” stock between March 31 and May 30, this would result in a wash sale. The IRS disallows losses associated with wash sales and the basis of the purchased security is increased by the amount of the disallowed loss.

Tax treatment of wash sales has not changed due to the new regulations, and RBC Wealth Management automatically adjusts the cost basis of a security for wash sale situations when an identical CUSIP is involved in both the purchase and sale; this is reflected in reporting done on Forms 1099-B.

For an additional illustration of a wash sale scenario, please see the following example:

On January 2, 2011, Client bought 100 shares of CUSIP 123456789 (ABC Corp. common stock) for $2,000.
On October 15, 2011, Client sold 100 shares of CUSIP 123456789 (ABC Corp. common stock) for $1,500, resulting in a realized loss of $500 (net cost = $2,000; proceeds = $1,500).
On October 17, 2011, Client bought 100 shares of CUSIP 123456789 (ABC Corp. common stock) for $1,600.

Because the original shares were sold for a loss on October 15, 2011, and identical shares (identical CUSIP) were bought within 30 days prior to or 30 days after the sale that incurred a loss, the $500 loss is disallowed and is added to the basis of the “replacement” shares (those shares purchased on October 17, 2011).

The cost basis reported to the IRS by RBC Wealth Management for the sale on October 15, 2011, would have been reduced by the disallowed loss of $500, resulting in a net cost of $1,500. The proceeds would be reported without adjustment as $1,500. The $500 will appear on Form 1099-B as a “Wash Sale Loss Disallowed”, reportable in Box 5 of that form.

The cost basis on the purchase of 100 shares of 123456789 (ABC Corp. common stock) on October 17, 2011, would have been adjusted to $2,100 ($1,600 original purchase cost and $500 disallowed loss).

Important points for clients to remember about wash sales:

Regulations associated with wash sales were not changed by the new cost basis regulations.
RBC Wealth Management automatically adjusts cost basis and reports wash sales on Forms 1099-B for covered securities when a wash sale occurs in an identical CUSIP.
If a client sells a security for a loss and then purchases a substantially similar security that does not have the same CUSIP within 30 days before or after the sale, RBC Wealth Management is not required to adjust the cost basis or report to the IRS on Form 1099-B that a wash sale has occurred under the cost basis regulations. However, a wash sale has still occurred under existing regulations, even though RBC Wealth Management is not required to report it. Clients should consult with a tax advisor on such matters.

Impacts on Option Processing

Since January 1, 2011, when options are assigned or exercised, option premiums are automatically adjusted against the cost basis of the underlying common stock for clients. The adjusted cost basis is reported to the IRS when appropriate, along with the proceeds, when the underlying common stock is disposed at the time of the assignment or exercise of the option.

S Corporations

“S” corporations are no longer treated as exempt recipients. Beginning in tax year 2012, RBC Wealth Management was required to begin reporting gross proceeds and cost basis information for the sale and disposal of covered securities for S corporations to the IRS. To comply with these regulations, the client must identify their account as an S or C corporation on Forms W-9.

Mutual Fund 90-Day Rule

The original cost basis of a mutual fund share is generally its purchase price plus an allocable portion of load charges (sales or similar charges). Regulations limit the amount of load charges added to mutual fund share basis if all of the following conditions exist. The client:

Receives a reinvestment right because of the purchase of the shares or the payment of the fees or load charges;
Disposes of the shares within 90 days of purchase; and
Subsequently acquires shares in the same mutual fund or another fund for which the mutual fund company waives the load charge because of the reinvestment right.

The amount of any load charge is excluded from the basis of the original shares and transferred to the basis of subsequently acquired shares as long as the three conditions are met.

For an illustration of mutual fund 90-day rule, please see the following example:

Client bought ABC Growth Fund on September 1, 2012, for $5,000 (including a $100 front load), and then exchanged that fund for ABC Balanced Fund on November 1, 2012, for $6,000. In this case, the load was removed from the basis of the first ABC Growth Fund and added to the basis in the newly received ABC Balanced Fund because:

The original purchase included reinvestment rights;
The exchange occurred within 90 days of the original fund opening (September 1, 2012, opening and November 1, 2012, exchange); and
The fund company waived the load on the new purchase of ABC Balanced Fund.

Since the three conditions were met, RBC Wealth Management would have reported a basis of $4,900 ($5,000 basis less the $100 load) along with $6,000 proceeds to the IRS on Form 1099-B. Additionally, the basis on ABC Balanced Fund would have been $6,100 ($6,000 basis and the original $100 load).

For More Information

The IRS offers helpful information about the new cost basis reporting mandate on its website. Please visit http://www.irs.gov for more information.