I was once walking with a friend who had recently sold her house. “We almost doubled our money!” she said (obviously this was several years ago, before the real estate values declined!).
She would not have known her true gain without a very key data point: Cost Basis, or, to put it another way, How Much It Cost You In The First Place And How Much It Cost You While Owning It.
When I did my first Asset Transfer (with one of my own personal accounts) several years ago, I hadn’t thought of the consequences of losing cost basis information (it didn’t transfer).
When you sell something, and don’t know how much you paid for it in the first place, how do you know if you actually had a gain or not? This can be tricky if you don’t keep your own records (most people don’t, although it’s in their best interest to).
Some brokers (e.g. Fidelity, Charles Schwab, TD Ameritrade) have done better jobs than others at making cost basis transparent for clients and ensuring they have this information easily available when they log into their accounts.
But with the recent Economic Stabilization Act come requirements for firms holding client assets to report cost basis and holding periods to the client and the IRS.
Without going into the weeds with the various cost basis calculations (specific lot? FIFO? LIFO?), this is great for clients because it’s key data needed to fully understand the entire result of a sale: Without it a client doesn’t know if they really did have a gain or loss and to what extent.
One of my favorite parts of The Act: The requirement that brokers (where the client’s assets are in custody) must provide cost basis when conducting a Transfer of Assets (a Transfer of Assets takes place between brokers; for example, let’s say you want to switch your IRA from Fidelity to Schwab).
This is going to save everyone a whole lot of headache because it won’t be guesswork anymore when it comes time to sell an asset.
This will also apply to any gifted or inherited securities; this is super important because when a client sells these securities it can be a guessing game as to what the adjusted cost basis was when the gift/inheritance was received if they weren’t given this information from the donor (person who gifted to them).
I strongly advocate for 1) Transparency and 2) Client Empowerment: That’s why I am so excited about this requirement!
It improves both because now a client can see cost basis in their account when they log in, more fully informing them on the results of a purchase or sell as well as their overall gains/losses.
No paper chases, no Kafkaesque phone calls, no nightmares at tax time.
At least that’s my hope…and that’s what I suspect this part of The Act will deliver on for the client experience.
(Disclosure: I am a Fee-Only Financial Planner. Here’s my website.)