Charles Schwab has released a white paper for the RIA industry providing guidance on the transition to new cost basis regulations.

The report relates to the requirements of the Emergency Economic Stabilization Act of 2008 for custodians and broker-dealers to report the adjusted cost basis of sold equity securities to the Internal Revenue Service for the first time. Next year, the rules are extended to include mutual funds, exchange traded funds and dividend reinvestment plans.

The white paper, Cost Basis Reporting: Preparing for 2012, highlights to RIAs the importance of alerting clients to the extension of the requirements on 1 January 2012, and communicating with them about the changes to the new Form 1099-B that went into effect this year, Charles Schwab said.

The changes have the following implications for firms, as laid out by the white paper: firstly, they must ensure their own client reporting matches the data sent by brokers; secondly, for tax-sensitive trades the tax consequences need to be considered at the time of the trade.

Charles Schwab recommends the following steps for advisors:

1) Develop a communications strategy to guide clients through changes;

2) Train back office staff to prepare for workflow changes and increased client inquiries, especially as relates to the Form 1099-Bs containing cost basis information on equities sold in 2011;

3) Implement a summary sheet, providing a reminder to clients about why they are receiving cost basis information and what they need to report on their tax return;

4) Contact clients’ CPAs and tax advisors, to capitalize on the “relationship building opportunities” presented by the rules, to create a more holistic approach towards tax planning and investing.  

The white paper is one of a series on industry issues, and Schwab is also hosting a webcast series for advisors on preparing for regulatory changes.