Without fail, every April the mad rush to tie up all of the loose ends on a tax return comes. All of the details are complete to submit the tax returns, except the ever-elusive cost basis on investment sold in the previous year.
What happens next? A vicious cycle begins: the CPA requests information from the investor, the investor looks to the investment advisor, the investment advisor then looks to the investment company (brokerage, mutual fund, etc.). This process can be time consuming and in many cases requires additional research from the investment advisor and the investor.
For now, it is ultimately the investor's responsibility to keep track of each of their investments' cost basis. All transaction confirmations and year-end account statements should be maintained for the life of the investment to determine cost basis. In order to accurately track cost basis an investor will need to choose an accounting method, understand tax implications of wash sales and short sale rules and other complex rules related to their investments. How should investments acquired as gifts or through inheritance be handled? Does the average investor have the necessary knowledge to accurately track basis? In my experience the answer is no.
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There are computer programs available for to assist investors in tracking their cost basis, such as, GainsKeeper, published by Wolters Kluwer. I would contend that there is a very small percentage of investors who take the time or energy to accurately track cost basis even with the help of specialized software.
CPAs certainly have the tax knowledge to track cost basis, however in many cases they do not have access to their client's investment accounts. Some advisors have access to the investment accounts and may not have the appropriate tax knowledge. Investment companies have the scope to truly make a change in the tracking of cost basis by providing investors with thorough account history.
Investors, who maintain transaction confirmations and year-end account statements, will still need the assistance of knowledgeable financial service professionals to sift through the information and accurately track cost basis. They may personally hold stock certificates that have split numerous times or have been part of a merger or acquisition. A mutual fund may have switched share classes from the time they were purchased to the time they were sold. The average investor will have a very difficult time culling this information.
In many cases, investment brokerage accounts may have gone through several account transfers and the original transaction occurred in a brokerage account that has long since been closed. If the investor does not maintain proper documentation then the old brokerage firms would need to be contacted.
Can the cost basis follow the investment? Currently there are approximately fifty firms that will transfer cost basis information with a transfer of the investment or will accept cost basis information on incoming investments. Even if you have an account at one of these companies, it does not necessarily mean that the cost basis tracking will automatically happen. Some firms will charge additional fees to keep track of this information or require the investor to complete additional paperwork.
