Taxation is one area that is not only confusing for many, but legitimately frustrating as well.
There is no area where this is not more true than it is in the investment world, where investors are left figuring out what tax implications of particular transactions and trades will be, particularly at the end of the year when they can transact in such a way that will limit total gains by offsetting those gains with losses.
What a lot of investors find especially frustrating is the issue of adjusted cost base.
Figuring out your adjusted cost base for an investment is pretty simple on the surface.
Simply take what you paid on a per share basis, add in your commission fees and there you have it, your adjusted cost base.
As with everything in life, things are seldom this simple.
Often, multiple "blocks" can be broken up at different times of the year.
An investor who already owned 500 shares of ABC might pick up another 500 shares mid-year and another 500 in the fall.
By the end of the year, 750 of the total 1,500 might have been sold.
The investor will have to decide how to report the cost base of these positions.
Will they use the first price paid, or the last? Will they use an average and, if so, will this be enough to appease the IRS? Other complications arise when investors purchase stocks that are part of a DRIP (or dividend reinvestment program) or mutual funds, which will have a fluctuating adjusted cost base.
And to complicate matters even more, regular investment programs that allow investors to invest on a regular basis also make the process of determining the adjusted cost base even more difficult.
To help with the matter, the IRS will be requiring brokerage firms to calculate the adjusted cost base for the investor as well as the government.
While this will definitely have negative implications for some investors, the benefits for long term-investors is clear: no more lengthy spreadsheets.
Although the pitfalls are always what come out in the media, consider a mutual fund investor who invests over the course of his entire working career, $100 every two weeks for twenty years.
Finding such data is virtually impossible for the average, every day investor.
That process will now be automatically completed by the brokerage.
So while there are certainly some pitfalls, particularly for the wealthiest of investors who are able to take advantage of tax benefits afforded to substantial capital gains and dividend payments, the rest of the tax-filing population will be able to find relief in the delegation of the tax of figuring out adjusted cost base to the brokerage firms.
There is no area where this is not more true than it is in the investment world, where investors are left figuring out what tax implications of particular transactions and trades will be, particularly at the end of the year when they can transact in such a way that will limit total gains by offsetting those gains with losses.
What a lot of investors find especially frustrating is the issue of adjusted cost base.
Figuring out your adjusted cost base for an investment is pretty simple on the surface.
Simply take what you paid on a per share basis, add in your commission fees and there you have it, your adjusted cost base.
As with everything in life, things are seldom this simple.
Often, multiple "blocks" can be broken up at different times of the year.
An investor who already owned 500 shares of ABC might pick up another 500 shares mid-year and another 500 in the fall.
By the end of the year, 750 of the total 1,500 might have been sold.
The investor will have to decide how to report the cost base of these positions.
Will they use the first price paid, or the last? Will they use an average and, if so, will this be enough to appease the IRS? Other complications arise when investors purchase stocks that are part of a DRIP (or dividend reinvestment program) or mutual funds, which will have a fluctuating adjusted cost base.
And to complicate matters even more, regular investment programs that allow investors to invest on a regular basis also make the process of determining the adjusted cost base even more difficult.
To help with the matter, the IRS will be requiring brokerage firms to calculate the adjusted cost base for the investor as well as the government.
While this will definitely have negative implications for some investors, the benefits for long term-investors is clear: no more lengthy spreadsheets.
Although the pitfalls are always what come out in the media, consider a mutual fund investor who invests over the course of his entire working career, $100 every two weeks for twenty years.
Finding such data is virtually impossible for the average, every day investor.
That process will now be automatically completed by the brokerage.
So while there are certainly some pitfalls, particularly for the wealthiest of investors who are able to take advantage of tax benefits afforded to substantial capital gains and dividend payments, the rest of the tax-filing population will be able to find relief in the delegation of the tax of figuring out adjusted cost base to the brokerage firms.
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