When a security is sold in a taxable account, the seller (or the tax preparer) must compute the gain or loss to figure the tax due.
Until recently, it has been the responsibility of the taxpayer to track the cost basis, a task that is complicated by splits, reinvestments and difficulty locating purchase records for long-held positions.
Beginning in January 2011, a new law took effect requiring custodians to maintain cost data. For purchases made after the effective date, broker-dealers and fund companies must track the adjusted cost basis, report the data to the Internal Revenue Service and convey the information to another broker if the account is transferred.
Investors should understand the requirements and make decisions to minimize their tax liability.
According to a 2005 IRS study, inaccurate or fraudulent reporting of cost basis information results in an $11 billion annual loss in revenue to the federal government.