Tracking cost basis in PortfolioCenter software is an increasingly time-consuming proposition. As brokers provide more accurate cost basis numbers through their downloads, we are seeing with increasing clarity how difficult it is to maintain a duplicate system in PortfolioCenter.
Since advisors are NOT required to track cost basis under the new regulations, how much time and effort should you spend on tracking cost basis in the PortfolioCenter software?
The Emergency Economic Stabilization Act of 2008 requires custodians and broker-dealers to report to the IRS and taxpayers (Form 1099-B) the adjusted cost basis of covered, sold securities, including whether the gain or loss is short or long term. The reporting requirements for custodians phased in over three years:
- Equities acquired on or after January 1, 2011
- Mutual funds, ETFs and dividend reinvestment plans (DRIPs) acquired on or after January 1, 2012
- Other securities, including fixed income and options, acquired on or after January 1, 2013
Securities purchased on or after these dates are covered securities. Securities purchased before these dates are uncovered securities, and custodians are not required to report their cost basis to the IRS. Most brokers are including uncovered securities on their 1099s to investors, but not reporting them to the IRS.
If tax efficient planning and trading are integral to the service you offer:
you should make every effort to ensure both the PortfolioCenter software and your custodian(s) have accurate cost basis. In this case, you would strive to reconcile cost basis in PortfolioCenter with your custodian at least to the $1.00 — if not to the penny — to be able to use the tools in PortfolioCenter to its fullest.
If tax efficient trading is nice but not your first priority:
You could use cost basis in PortfolioCenter as a check on your custodian the way you balance your checkbook. In this case, you could live with reconciling cost basis in PortfolioCenter with your custodian to within a reasonable dollar amount. Most of the time your positions will reconcile to a reasonable degree of accuracy and you need only investigate those positions which differ wildly. If you provide your clients with tax reports from PortfolioCenter, the reports should carry a disclaimer to use the broker’s numbers for tax reporting purposes.
If tax efficient trading does not factor into your practice:
you could rely on your custodian’s cost basis system and not track cost basis in PortfolioCenter. In these case, you want to ensure your custodian has complete and accurate cost basis for your clients and that PortfolioCenter uses the same matching method as your broker. After that, you would only need to reconcile cost basis between your broker and PortfolioCenter to check the cost basis of new accounts. Again, if you provide your clients with tax reports from PortfolioCenter, the reports should carry a disclaimer to use the broker’s numbers for tax reporting purposes.
Resources:
Schwab Cost Basis Overview
TD Ameritrade Cost Basis information
Fidelity Institutional Wealth Services Cost Basis Overview
T.Rowe Price Cost Basis Accounting & Calculation
Careful records can result in capital gains