Saturday, May 17, 2008
New Tools for New Cost-Basis Reports
IT WON’T BE LONG BEFORE CONGRESS MANDATES THAT YOUR BROKER tell the Internal Revenue Service the exact cost basis of securities you’ve sold. The move, designed to help pay for new federal programs—such as those aimed at the housing crisis—will not only increase scrutiny on investors, but likely sharpen a budding competition between two software companies that make tax-aware portfolio-management software.
The House Ways & Means Committee recently passed the Housing Assistance Tax Act, which includes a cost-basis reporting measure that could bring in $8 billion in tax revenues annually. “You do things to help housing, and you have to pay for part of it with cost-basis reporting,” says Stevie Conlon, tax director at investment-software specialist GainsKeeper. Ways & Means’ passing a bill with that provision puts it on “an express train to passage.”
If passed, the law would require tighter cost-basis reporting for positions that are closed in 2009. The compliance dates would be Jan. 1, 2010, for stock, Jan. 1, 2011, for mutual funds, and Jan. 1, 2012, for debt and other instruments. Investors are supposed to report the cost basis for their sales now, but the new measures would tighten scrutiny and impose penalties for mistakes.
Given all the headlines about subprime mortgages, Conlon thinks there’s a high likelihood the measure will become law.
Cost-basis reporting was also a funding mechanism in the farm bill that has a May 16 deadline for passage. Only one bill can legislate it, so the existence of two makes new, stricter rules that much more likely.
Conlon says, “There is likely to be pressure from different groups in the financial industry to make some changes, especially from mutual funds.” For instance, she expects that effective dates could change, as well as what kinds of holdings—for example, stocks, commodities, derivatives—the new reporting requirement will cover.
WHATEVER ITS EVENTUAL SHAPE, the measure will further stir a new rivalry. For years, the only game in town was Conlon’s employer, GainsKeeper, published by Wolters Kluwer. It comes in several versions. Earlier this year, upstart Maxit was rolled out by publisher Scivantage. Intriguingly, a cofounder of GainsKeeper, Cameron Routh, was hired away by Scivantage last year, leading to a fierce marketing war and behind-the-scenes legal kerfuffles.
GainsKeeper was first offered as a Web destination. Customers signed up for an account, then imported their brokerage transactions. Now the firm offers an enterprise application to brokers that integrates with their Websites, allowing clients to use GainsKeeper while logged into their accounts.
GainsKeeper is integrated into online brokers like TDAmeritrade, Scottrade, E*Trade Platinum and ShareBuilder, where customers get it for free. OptionsXpress clients can set up a GainsKeeper account for $24.95 per year, while at Zecco, it costs $24.99 every six months. This summer, Firstrade is expected to offer it, too.
Other firms offer a link to the retail version of GainsKeeper. These include Schwab, Fidelity, thinkorswim, Siebert, Interactive Brokers, AB Watley, ChoiceTrade and E*Trade (for customers who don’t qualify for the Platinum level of service). Using the retail version requires a customer to export transactions to a file that’s then imported into GainsKeeper.
Maxit doesn’t have a consumer version, although its enterprise application is integrated into several newer brokerages. It’s now offered free to customers of TradeKing and Just2Trade. Options- House is in the process of making Maxit available; it expects to roll it out over the summer. Other brokers are expected.
Why does any of this matter to brokerage clients? With the potential for hefty penalties, filing a correct tax return is more important than ever. And GainsKeeper’s and Maxit’s tools help traders reduce taxes, and calculate statistics such as return on investment. It’s also important for frequent traders to correctly identify and report wash sales. Their ability to track ticker-symbol changes and stock splits, is helpful, too.
A company that chose Maxit says it was impressed with how its system reads database files, making portfolio updates in close to real time; GainsKeeper’s methodology involves converting several files, sometimes leading to a reporting delay.
The nitty-gritty of how the two programs deal with the transaction files is most important to the brokers. One executive said that the overall cost (purchase plus operating expenses), ease of integration, and functionality were important to his firm, which opted for Maxit. But GainsKeeper still has more brokers. And their rivalry should aid traders as well as brokers.
Published in Barron’s, May 11, 2008.