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Vast Majority of CPAs Manually Calculate Cost Basis

How do you accurately calculate cost basis when purchase information is unknown or when securities have complicated histories? That's a dilemma many CPAs face today when calculating capital gains and losses for their tax clients – and the question we posed to readers in a recent Financial Planning Digest poll. The results of the reader poll show that despite a variety of software options on the market, 91.61% of practitioners continue to manually calculate cost basis by researching history. Only 5.64% of practitioners said that they use cost basis software and the remaining 2.76% said that they don't run into issues where client cost basis information is missing or inaccurate. 

Calculate-cost-basis

The Emergency Economic Stabilization Act of 2008 throws another twist into the mix by requiring financial intermediaries to track/report the cost basis of investments. While EESA should have long term benefits, its requirements were only phased in at the beginning of 2011 – making reconstructing cost basis in order to calculate accurate capital gains/losses an immediate challenge. 

There are complexities that practitioners need to consider before any covered securities sales are finalized, including:

  • Proactive decisions should be made about the method of accounting to be used on the sale prior to settlement of the transaction
  • The custodian must be notified of this method of accounting prior to settlement of the transaction
  • If the custodian is not notified timely, the default accounting method will be used (average cost for mutual funds and FIFO for all other securities) which will likely not be most tax effective
  • For firms who track portfolios, it is important to ensure that the firm system matches the system of the custodian
  • For tax reporting purposes, what the custodian reports on the 1099-B will trump all other data

For now, it's clear that CPA/PFS credential holders and, well – nearly everyone else we asked – complete the task manually even when confronted with complicated circumstances such as the inability to obtain purchase information, insufficiency of client records and the complexities of securities which have been part of stock splits, mergers, dividend re-investments and so forth. However, the job just must get done – whether manually or by using computer software. Perhaps the EESA will change the playing field? Only time will tell.

So why are so many practitioners still calculating cost basis manually? Let us know in the comment section below.

The AICPA's Financial Planning Digest is a free weekly email newsletter designed specifically for CPA personal financial planners and provides updates on trends, news, legislation and events of interest to CPAs and others who provide advice or are interested in tax, estate, retirement, risk management and/or investment planning. Sign up today for your free copy.

Andrea Millar, CPA/PFS, Sr. Technical Manager - PFP, American Institute of CPAs. Andrea leads the AICPA Personal Financial Planning Division. Her responsibilities include working with the PFP Executive and PFS Credential committees to drive the advocacy, education and other initiatives on behalf of the 7,500 AICPA members who specialize in providing estate, retirement, tax, investment and insurance advice to their individual clients.

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