New tax rules over the years have been aimed at alleviating the burden on taxpayers to maintain a record of cost and acquisition date for their securities investments. Brokers and mutual fund companies now track cost and holding periods for recently purchased shares. However, the new regulations are not applicable to some shares in your accounts. Shares tracked by brokerage operations are called covered shares. Other shares are termed uncovered. You must continue keeping details on uncovered shares that are not tracked for you.
Brokers are only required to keep a record of your stock shares purchased after January 1, 2011. Cost and holding period for mutual fund shares are only tracked for purchases after January 1, 2012. Brokerage firms start maintaining details about bonds and options acquired in accounts after January 1, 2014. Consequently, a broker or mutual fund company may have a record of cost for some recently purchased shares but not older shares in your account.
The law allows exceptions for brokers. They aren’t required to consider straddle transactions. Straddles are a complex trading strategy. If you acquire shares using a straddle, tax rules require adjusting your record of cost. Another exception is that brokers don’t adjust share cost for wash sales that occur in multiple accounts. You must adjust cost when you sell and buy the same shares within 30 days for a wash sale. In addition, you must have your own records that reflect cost adjustments for any gift tax paid on shares you’re given.
Gifts and Inheritance
Shares you inherit or receive as gifts are uncovered by the brokerage holding the shares for you. Normally, your cost becomes the same as the gift giver’s cost. However, if the fair market value of the shares at the time of the gift is less than the giver’s cost and you calculate a loss when selling the shares, you must switch to using the fair market value as your cost. Your cost for inherited shares is considered the fair market value on the decedent’s date of death.
Transfers and Reinvesting
Shares transferred to a different broker than the one used to purchase them are uncovered. The new broker doesn’t know your cost. Subsequent purchases cause mingling of uncovered shares with newly acquired covered shares. The same difficulty arises when new buying occurs in any account with long-held uncovered shares. This happens when reinvesting dividends in a mutual fund account. Recent acquisitions are covered and older shares are uncovered. Having your own record of all shares is necessary to ensure accuracy.