Saturday, December 04, 2010
New IRS Rules for 2011
After years of talk, the Internal Revenue Service recently took some action. It released its final cost-basis regulations that will go into effect on New Year’s Day.
Under the current system, your broker reports the total proceeds from sales of securities to the IRS, but you are responsible for calculating the cost basis; any gains are subject to taxation. Now, in a bid to avoid creative accounting by investors, brokers will report the cost basis as well as the total proceeds to the IRS.
The first phase of the regulations covers stocks purchased after Jan. 1, 2011. For 2012, brokers will have to report similar information about mutual-fund sales and, in 2013, the program will be expanded to options and fixed-income. Current rules will apply to purchases prior to Jan. 1.
Several firms have been working to provide brokers with software to help them manage the complexities of cost-basis reporting. Scivantage (http://www.scivantage.com), publisher of Maxit, and Wolters-Kluwer, publisher of GainsKeeper (http://www.gainskeeper.com), both offer brokerage firms a suite of back-office solutions.
Joe Stensland, Scivantage’s senior vice president of product management and marketing, believes that the new regulations offer brokers the chance to offer an added client service. “They can’t avoid supporting cost-basis reporting any more; once you consider the tax impact of a transaction on an account, it gives you another bit of customer service you can provide,” he says.
Scivantage recently launched a portfolio rebalancing module aimed at financial advisors, who can use it to monitor client assets for so-called portfolio drift, or unintended shift in its asset allocations away from its targets. The module, installed in the Scivantage Professional system, will use some of the same data on securities purchases and sales that’s needed to generate the cost-basis figures.
Stensland says Scivantage will add this module to its self-directed platform in mid-2011, making it available to online brokers who have its tax accounting and portfolio management software, Maxit. He notes, “The focus of a lot of the online brokerage firms has been on trading, but as an increasing number of investors move their nest egg to self-directed accounts, this is one of the services they’ll have to have.”
We’ve been keeping an eye on the capital-gains reporting capabilities of online brokers for the past 15 years, and see these new regulations as a terrific opportunity. Uncle Sam, in trying to chase down revenue that may have previously escaped his grasp, is about to implement regulations that will unintentionally provide investors with better portfolio management tools. Go figure.
IN ANOTHER SIGN OF HOW hot precious metals are, E*Trade (http://www.etrade.com) added the NYSE Liffe U.S. 33.2-ounce minisize gold and 1,000-ounce minisize silver contracts to its futures-trading offerings. E*Trade’s customers can trade more than 200 products spanning agricultural commodities, currencies, energy, indexes, and metals. The firm already handles 100-ounce gold futures, 1,000-ounce minisize and 5,000-ounce silver futures as well as options on gold and silver futures.
E*Trade’s futures customers use a separate platform, TT_Trader, which allows access to every major futures exchange. The platform features customizable layouts, one-click order entry, and multiple-order types to manage risk (such as trailing stops). Transaction fees are $2.99 per contract (plus exchange fees, which typically add 2 to 10 cents to the commission), though for the first 90 days after opening a futures account, E*Trade charges 99 cents per contract.
The online broker has added futures education topics to its Investor Education Days; the first, featuring NYSE Euronext product experts, will be held Saturday, Dec. 11 in Philadelphia.
AND IT ISN’T JUST PRECIOUS METALS, as futures trading generally has been on the rise this year. To help you along, optionsXpress (http://www.optionsxpress.com) recently added Chart Patterns to its futures platform. This function helps find and interpret key technical events in the markets, to suggest where prices may be headed and how long they may take to get there. This feature has been used by stock and options traders at optionsXpress for several years. It lets you select several technical or fundamental indicators that can narrow down your universe of investing possibilities.
Published in Barron’s, December 6, 2010.