Questions to Ask about your Cost Basis Reporting System

Before you buy or build a cost basis reporting system or choose to rely on a third party vendor for compliance – download the Cost Basis Reporting Readiness Checklist. This checklist is a 'must have' to help evaluate whether your organization is on track to comply with the cost basis regulation and if it can be done on time. The questions address various issues, including:

• Is the cost basis system overwhelmed by the radical increase in data volume triggered by the IRS’ wash sale rule?
  Most systems do not support tax sub-lots triggered by wash sale adjustments. Yet the wash sale rule can easily result in a 300 percent increase in data volume. For a firm with two million accounts, the volume can easily grow to more than 400 million tax lots when wash sales are taken into account. This volume creates a problem that is hard to resolve with traditional database architecture.
• Can the system transfer cost basis properly when processing the high volume of recurring corporate events, both simple and complex?
  With thousands of corporate actions affecting the basis of stocks each year, managing them is a difficult, full-time job. Firms need a system that can automatically process a full range of corporate action adjustments.
• Does the system correctly apply the differing tax methods for determining the basis of securities sold?
  Systems need to be capable of supporting the different tax accounting methods chosen by customers. Additionally, systems must be able to employ methods that apply to different security types, such as the special rules pertaining to mutual fund shares.

If you are evaluating vendors, answers to these questions in RFIs or RFPs can avoid pains in the development process and can assist with decision making. If you are building a system, consideration of these points in your project plan is essential to compliance.

Click here to request a cost basis reporting readiness checklist.