Tax Reporting for Brokers…Don’t Forget the Debt Instruments

Posted on 11.11.14

Tax Reporting for Brokers…Don’t Forget the Debt Instruments

Author: Gary G. Wallace, CPA | Tax Partner
Financial Services Industry Team

Beginning in 2014, brokers will be required to report to account holders the cost basis in debt instruments acquired after December 31, 2013 and to determine whether the gain/loss is short term or long term. Treasury Reg. 1.6045-1(a) provides the rules for determining which debt instruments meet the reporting requirement.  Brokers will generally be required to include this reporting on Form 1099s similar to the rules that already apply to equity transactions.

The cost basis reporting are required unless the account holder is an “exempt recipient.”  Corporations are generally exempt account holders.  The reporting is required for account holders if they are individuals, partnerships or trusts.

Only certain debt instruments are covered by these reporting requirements.  Complex debt instruments such as those with variable or stepped interest rates, paid in kind interest and interest denominated in foreign currency or issued by a non-U.S. issuer are not subject to the reporting rules until 2016.

The new regulations will require brokers to be more communicative with their account holders because the reporting rules require the broker to support several elections, including:

1. Bond premium amortization
2. Market discount accruals
3. Treating all interest as OID and
4. Spot rate elections

According to the regulations, the account holder must notify the broker in writing of the election by the end of the year in which the instrument is acquired or if later by the end of the calendar year for which the election is effective.

Brokers are also required to provide transfer statements to other brokers for securities that are transferred.

What does all of this mean for brokers?
Generally, more systems development, additional education for their customers, and additional tax reporting.

What does this mean for account holders? 
Hopefully, more complete tax information at tax time.  However, as with the original implementation for cost basis reporting for equity securities, account holders may anticipate delays in receiving Form 1099s or potential amended 1099s from their brokers.

Many brokers have already initiated correspondence with their account holders regarding these requirements and elective matters.  Industry groups including projected an 18 month timeline to comply with these regulations.

Questions? Contact your Keiter representative or information@keitercpa.com | 804.747.0000

Source:
Bank of New York Mellon, State Street Bank and Trust Co., and the Northern Trust Co.'s letter to Treasury and the IRS, “Re: Request for Delay in Effective Date of Regulations Pertaining to Basis Reporting by Securities Brokers and Basis Determination for Debt Instruments and Options,” 2012 TNT 22-18 (Jan. 31, 2012).

Posted by: Gary G. Wallace, CPA

Gary provides tax services to public and private entities and their owners in a variety of industry segments, including manufacturing, retail, real estate, and financial services.  Gary has significant knowledge and experience in individual taxation, business taxation, including C and S corporations and partnerships.  He advises clients on all aspects of tax matters, including tax accounting methods, multi-state tax matters, mergers and acquisitions, income tax accounting and representation with tax authorities. He is the leader of the Firm's Tax Practice and a leader in the Firm’s Manufacturing, Retail and Distribution industry team.