wash sale adjustments: impact on cost basis reporting · wash sale adjustments: impact on cost...

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Wash Sale Adjustments: Impact on Cost Basis Reporting

Gudaru Anand RaoDomain Consultant, Wipro Technologies

Author

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............................................................................................................................................................................. 3

Wash Sale Rule ........................................................................................................................................................ 3

Key assumptions ....................................................................................................................................................... 3

........................................................................................... 4

Scope

............................................................................................................................................................... 3Introduction

Transactional Analysis – with Lots, Sub-lots

......................................................... 7Transactional Analysis – Holding Period and Potential Loss

.............................................................................................. 9Wash Sale: Complexities and Ambiguities

................................................................................................................................................................. 10Conclusion

.................................................................................................................................................................. 11References

Conten

ts

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In this paper, we will focus on the cost basis adjustments due to wash sale rules with respect to ‘Emergency Economic Stabili-zation Act of 2008’ (also known as U.S. bailout package) in general, and the wash sale complexities with accounting systems or cost basis reporting engine, in particular. This bailout rescue package of the U.S. financial system, legislated a new requirement of ‘Cost Basis Reporting’. Effective from 1/1/2011, the reporting burden will shift to financial intermedi-aries such as brokers, transfer agents, custodians, investment banks, mutual funds and issuers to report accurate, adjusted cost basis to investors and the IRS (Internal Revenue Service). Cost basis of the securities is one of the key drivers to deter-mine the realized gains and losses for tax reporting, which can be exclusively impacted by events (like wash sales, corporate actions, transfers, gifts and inheritance) and exempt distribu-tions. All the above stated factors, which can swing the cost basis, need to be tracked and reported during the life of the securities. Therefore, based on complexities of different asset categories, the following timelines are enforced on financial intermediaries for implementation and reporting:

Wash sale adjustment is one of the key components of cost basis adjustments. The author has used transactional analysis to explain the complexities, reconciliation techniques and recom-mendation of wash sale adjustments. In this paper, the concept of sub-lot is introduced to track wash sale adjustments of high volume. This will facilitate reconciliation between the broker and taxpayer, identification of wash sales adjustments and will help to provide explanation to IRS (Internal Revenue Service) inquiries. Also, this paper deals with the complexities faced by accounting products and cost reporting engines and helps to build simulations and illustrations for complex securities.

Introduction


To report realized gain/loss information to the IRS for ‘Equities’ purchased on 01/01/2011 or later.

To report realized gain/loss information to the IRS for Mutual Funds and ‘Dividend Reinvestment Plans’ (DRIPs) from 01/01/2012.

To report realized gain/loss to the IRS for all other securities such as debt instruments, options and other covered securi-ties from 01/01/2013 (yet to be finalized).

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As per proposed IRS regulation dated 16th December 2009, the identification of substantially identical stocks or securities is complex because stocks or securities of one corporation cannot be considered substantially identical to the stocks or securities of another corporation (even within the same industry or sector). But certain corporate actions and convertible options of the securities, justify the identification of substantially identical stocks or securities for wash sale rules. All the facts and circumstances should be considered in determining whether the shares are substantially identical. Therefore, in order to simplify the computation of new cost basis, the proposed regulation (REG-101896-09) of IRS dated 16th December 2009, highlights the key assumptions related to brokers with respect to wash sales:As per IRS Wash Sale Rule (IRC Section 1091), an investor is

deferred for claiming a loss, if the “economic position” of the asset is retained. This “economic position” can be retained either when the investor buys a substantially identical security in case of a long position or sells a substantially identical security in case of a short position. In simple terms, the wash sale rule prohibits an investor from claiming a loss, if the inves-tor sells a security and buys a substantially identical security within 30 days before or after the sale.

The IRS publication 550 (Investment income and expenses) states that in a wash sale, losses cannot be claimed from the sale or trade of stocks or securities. It also states the following four conditions, which trigger wash sale when traded at loss and within 30 days before or after the sale, the taxpayers:

For instance, this rule will be applicable if an investor sells a security X at a loss of $20 and immediately purchases the same security or a substantially identical security within 30 days. In this case the loss cannot be claimed and the same should be added to the cost basis of the remaining pool of securities of X or substantially identical security (except in case of point 4 above).

However, the above stated key assumptions can create ambiguity and an escape route for tax evasion. Let’s discuss the implications of wash sale adjustments at identical CUSIP level and not at substantially identical securities level.

The second assumption of wash sale adjustments applicable on account by account basis had simplified the reporting (adjusted cost) for brokers, but not for taxpayers. For instance, the taxpayer can open multiple accounts and trade the identical stocks or securities with one or multiple brokers to avoid wash sale rules by acquisition in one account and disposition in another account. The onus lies with the taxpayers to report the wash sale adjustments at identical CUSIP level, but any inaccurate reporting in form 1040 (Schedule D) cannot be easily reconciled on account by account basis with single broker or multiple brokers.

Scope Key Assumptions

Wash Sale Rule


In case of economic disasters, stocks or securities of the same industry or sector have similar or cascading negative impact (even if the other stocks or securities of the same industry or sector have good performance report). The investors can sell the stocks or securities of corporation A and buy the stocks or securities of corporation B (of the same industry and indicative data with similar attributes of stocks or securities of corporation A and B).

In case of corporate action, events like reorganization or CUSIP changes would bypass the wash sale adjustments.

Wash sale is applicable on account by account basis, which means that all wash sale transactions/adjustments are applicable within account (even with same broker).

Wash sale adjustments should be done at identical CUSIP level, rather than at substantially identical securi-ties.

Buy substantially identical stocks or securities,

Acquire substantially identical stocks or securities in a fully taxable trade,

Acquire a contract or option to buy substantially identical stocks or securities, or

Acquire substantially identical stocks for taxpayer’s individual retirement account (IRA) or Roth IRA

In this paper, the ability of current accounting/reporting engines to track and reconcile the wash sales is highlighted, so that the cost basis reporting engines or accounting products can gener-ate the desired output; which would also help the IRS in tax assessment with respect to cost basis adjustments and deter-mination of long and short term gains. The wash sales on options, straddles, DRIPs, mutual funds and other fixed income securities are out of scope and the focus here is primarily on transactional analysis of equities.

In the following transactional analysis, the adjusted cost basis is explained with lots and sub-lots. In case of multiple lots, re-computation and reconciliation issues, the introduction of sub-lots are important to identify the wash sale adjustments on proportionate basis. Now, let’s focus on the transaction complexities with wash sale adjustments. The key challenges associated with wash sale rules are the identification of lots and determination of new cost basis. It is important to identify the wash sale adjustments in the proportionate basis of the remaining lots, as these adjustments and re-computation (cancellation/rebook of trades) can trigger further wash sales. This process can go in loop due to high volume of trading (resulting in realized loss). The proportion-ate adjustment of wash sale loss can defer in the same lot,

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Wash Sale: Transactional Analysis – with Lots, Sub-lots & Wash Sale Allocation Ratio

Lot #

Total

Total

TradeDate Trade Shares CUSIP

TEST

TEST

TEST

TEST

TEST

TEST

TEST

TEST

TEST

Price Cost

1/18/2011 Buy 95

50

75

20

-45

-35

-35

-240

-65

-60

240

35

34

33

32

36

34

33

38

39

3325

1700

2475

640

-1620

-1190

-2145

-2280

-1365

Buy

Buy

Buy

Sell

Sell

Sell

Sell

Sell

1

2

3

4

1/19/2011

1/19/2011

1/19/2011

1/21/2011

1/21/2011

1/21/2011

1/22/2011

1/22/2011

Table 1: Wash sale loss movement

The cost reporting engine or accounting products should create adequate provision to plug the loop holes, as IRS can reconsider the above two assumptions at a later stage or should provide additional service to the clients (at least with identical CUSIP in multiple accounts with same broker).

else the adjustment should be deferred in the subsequent lots. Therefore, it is important to identify the wash sale adjustments within lots on proportionate basis to facilitate reconciliation, accurate accounting and tax assessment. The table below explains the wash sale loss movement from the same lot to the next lot and also depicts the complexities involved with re-computation or reconstruction of trades due to incorrect price, rate, units, principal or income.

We will further continue the analysis of the wash sale with illustrations, which will highlight the reconciliation techniques and methods of tracking wash sale adjustments with lots and sub-lots.

In table 1 below, the shares of company ‘TEST’ are traded in multiple lots. In lot 1, the broker has purchased 95 shares of company ‘TEST’ on 1/18/2011 and subsequently purchases more shares at different point of time on 1/19/2011 (to take advantage of the falling price). Therefore, 50 shares in lot 2, 75 shares in lot 3 and 20 shares in lot 4 were purchased for same identical securities (shares of company ‘TEST’). In this illustra-tion, the total shares purchased are 240 and all these shares are sold within ‘30 days wash sale rule’ on 1/21/2011 and 1/22/2011.

In table 2 below, based on broker’s default basis, the lot dispo-sition is on FIFO basis (FIFO stands for first-in, first-out, meaning that the oldest shares are recorded as sold first). In this table, the lot disposition is illustrated without the wash sale rules and no adjustment is made to the cost basis.

Lot # Sub Lot #

Trans Type

1/18/2011Sell

Sell

Sell

Sell

Sell

Wash Sale Adj

Sell

Wash Sale Adj

20

Shs#

Lot Acq Date

45

35

15

15

50

20

60

Wash Sale AllocRatio

Sales

-

-

-

0.43

-

0.57

-

1620

1190

495

1650

2280

585

780

$8,600 $8,140 $460

Cost basis

Adj to cost

1575

1225

525

$1,700.00

1700

$495.00

1980

495

640

15

15

65

20

115

Newcost

540

1765

2095

Newcost

45

(35)

(45)

15

(115)

20

185

1

1

1

2

3

3

4

1/18/2011

1/18/2011

1/18/2011

1/19/2011

1/19/2011

1/19/2011

1/21/2011

Lot Disp Date

1/21/2011

1/21/2011

1/21/2011

1/21/2011

1A

1B

1A.1

2A

1A.2

Wash Sale Adj

15 1 $495.00 45 451/19/20111A.2

Wash Sale Adj

50

15

20

1

-

-

$495.00 115 115

90

140

1/19/2011

1/19/2011

1/19/2011

Totals

1/22/2011

1/22/2011

1A.2

1B.1


Lot # TradeType

Shares#

1/18/201145

35

15

50

60

15

20

Sale Price

Lot Acq Date

36

34

33

33

38

39

39

Cost Sales

35

35

35

34

33

33

32

$1,620.00

$1,190.00

$495.00

$1,650.00

$2,280.00

$585.00

$780.00

Cost or other basis

Gain(or loss)

$1,575.00

$1,225.00

$525.00

$1,700.00

$1,980.00

$495.00

$640.00

$45.00

($35.00)

($30.00)

($50.00)

$300.00

$90.00

$140.00

$8,600.00 $8,140.00 $460.00

1

1

1

2

3

3

4

1/18/2011

1/18/2011

1/19/2011

1/19/2011

1/19/2011

1/19/2011

1/21/2011

Lot Disp Date

1/21/2011

1/21/2011

1/21/2011

1/22/2011

1/22/2011

1/22/2011

Totals

Sell

Sell

Sell

Sell

Sell

Sell

Sell

Table 2: Lot disposition on FIFO basis

Table 3: Wash sale rule analysis with FIFO and Sub-Lot


Let’s analyze table 3 above with wash sale rules and its impact on the cost basis. In conjunction with lot disposition method (FIFO), the concept of ‘Sub-Lot’ is introduced. The first sale of 45 shares on 1/21/2011, contributes short term gain of $45 with lot 1 and wash sale rule does not apply. The second sale of 35 shares also applies to lot 1, but contributes to loss of $35. As wash sale rules are applicable, therefore the sub-lot of 1A.1 is identified to defer the loss or add the loss incurred to the cost basis of remaining lot in proportionate basis. The loss of $35 incurred due to the sale of 35 shares is added in proportionate ratio to cost basis of lot 1 with $15 (as 15 shares remain in lot 1 and cost moves from ‘Cost basis’ of $525 to ‘New Adjusted Cost basis’ of $540) and is identified with sub-lot 1A.1. Next the remaining loss of $20 ($35-$15) for 20 shares, which is identified with sub-lot 1A.2, should be added to the cost basis of remaining lot. Now, the third sale of 65 shares is applicable to the cost of 15 shares in lot 1 and 50 shares in lot 2. In case of lot 1, the remaining 15 shares contrib-ute to loss of 45 (‘Sale Proceeds’ minus ‘New Adjusted Cost basis’), which is identified with sub-lot 1B.1 and triggers wash sale rules for the remaining lots.

Now, lot 2 requires cost basis adjustments for sub-lot 1A.2 and 1B.1 for $20 and $45 respectively, which moves cost from ‘Cost basis’ of $1700 to ‘New Adjusted Cost basis’ of $1765. The remaining third sale of 50 shares with lot 2, contribute to a loss of $115. This loss further triggers wash sale rules and is identified with sub-lot 2A.1, which adds the loss to the cost of the remaining lot. It is also observed that in table 3 above, the ‘Wash Sale Alloca-tion Ratio’ is introduced to determine the proportionate ratio of the loss allocated to the remaining lot of the identical securi-ties. It means that if the wash sale loss is exhausted, the total of sub-lots is equal to 1. For instance, in table# 3 above, the wash sale allocation ratio for sub-lot 1A.1 and sub-lot 1A.2 is 0.43 and 0.57 respectively. The total of sub-lot 1A.1 and 1A.2 is equal to 1 (0.43+0.57), which indicates that wash sale loss ($35) triggered on sale of sub-lot 1A is fully allocated and no potential loss remains to be claimed. On the other hand, if the wash sale allocation ratio is less than 1, then it implies that wash sale loss is not fully allocated. Therefore, when the alloca-tion ratio for sub-lot 1B.1 is 1, it means that wash sale loss ($45) triggered with respect to sale of sub-lot 1B is completely allocated. Similarly, the allocation ratio for sub-lot 2A.1 is 1, indicating that wash sale loss ($115) triggered with respect to sale of sub-lot 2A is completely allocated.

The wash sales can also trigger potential loss and impact the holding period of the existing lot. The potential loss can be identified at the end of the fiscal year; if the same identical security is not purchased within 30 days of the wash sale rules or residual loss exists after the proportion-ate allocation of loss to the cost of the remaining lots. On the other hand, the holding period determines the long or short term gain/loss. However, wash sale loss adjustment impacts the holding period of the existing lot, which takes the acquisition date of the security disposed as the acquisi-tion date of the existing lot.

In the following table 4 and table 5, the determination of holding period and potential loss is explained.

In the below table, securities of company ‘TEST1’ are purchased in three lots of 90, 50 and 25 shares respec-tively and first lot is sold entirely.

Table 4: Transactional Analysis with holding period

Wash Sale: Transactional Analysis – Holding Period and Potential Loss

Lot #

Total

Total

TradeDate Trade Shares CUSIP

TEST1

TEST1

TEST1

TEST

Price Cost

1/19/2011 Buy 90

50

25

90

90

165

11

8

8

10

990

400

200

900

Buy

Buy

Sell

1

2

3

2/14/2011

2/14/2011

2/15/2011

Lot #

Sub Lot #

Trans Type

1/19/2011Sell

Buy

Wash Sale Adj

Buy

Wash Sale Adj

Shs#

Lot Acq Date

90

50

50

25

25

Wash Sale AllocRatio

Sales

-

-

0.56

-

0.28

$900

$400

Cost basis

Adj to cost

$990

$200

$50

$25

Newcost

$225

$450

Gain (or loss)

($90)

$50

$25

Def-erred Loss

($90)

($40)

($15)

1

2

3

2/14/2011

1/19/2011

2/14/2011

1/19/2011

2/15/2011

Lot Disp Date

1A

1A.1

1A.2

New Lot Disp Date

1/19/2011

1/19/2011


As illustrated in the above table, wash sale loss of ($90) is triggered and this loss is adjusted in proportion to the remain-ing lots. In table 5 above, the wash sale allocation ratio for sub-lot 1A.1 and sub-lot 1A.2 is 0.56 and 0.28 respectively. The total of sub-lot 1A.1 and 1A.2 is not equal to 1, which indicates that wash sale loss ($90) triggered with respect to sale of sub-lot 1A is not fully allocated. Therefore, the scope of poten-tial loss increases, if neither subsequent same identical securi-ties are purchased nor enter into a contract or option to acquire stocks within the 30 days rule. The deferred loss is adjusted to the cost basis to the extent of $75, i.e., proportion-ate loss of $50 is added to the cost basis of lot 2 (as the cost moves from $400 to $450) and proportionate loss of $25 is added to the cost basis of lot 3 (as the cost moves from $200 to $225). The remaining loss of $15 ($90 - $50 - $25) is considered as potential loss, if the same identical stocks are not purchased within 30 days. For the tax year end adjustments, the potential loss can be claimed as loss. But if the same identi-cal stocks are purchased within 30 days, then the prior year tax reporting should be revised with correct data and form 1099-B and 1040 (Schedule D) should be re-submitted.

Apart from potential loss, the holding period changes with the wash sale adjustments, as the lot acquisition date of the remaining lot (to which the wash sale adjustment is applied) will take the acquisition date of the sale transactions (which triggered wash sale loss). In the above illustration, the lot acqui-sition date changed from 2/14/2011 to 1/19/2011 for lot 2 and 3, which is significant to determine the holding period. After 1/19/2012, if lot 2 is sold at gain then such gains will be treated as long term capital gains. Else, such gains will be attributed to short term capital gain.

Table 5: Transactional Analysis with potential loss

Adjusted cost basis with lots that trigger wash sale loss and sub-lots that identify the wash sale adjustments.

Determination of holding period, as the holding period for the replacement stocks includes the holding period of the stocks sold at loss for the applicable wash sale rule.

In case of full sale (if all lots are sold), the cumulative gain/loss without wash sale rules should reconcile with wash sale rules and as per above mentioned illustration, a gain of $460 matches with table# 2 and table# 3.

In case of partial sale (if lots remain), the wash sale alloca-tion ratio is less than 1 and it implies that wash sale loss is not fully allocated. If the substantial security is not purchased within 30 day rule, then potential loss can be recognized and claimed.

Wash sale allocation ratio helps to identify the potential wash sale loss and to determine whether the wash sale loss is allocated in full or in part.

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At present, most of the accounting products cannot handle wash sale adjustments, therefore cost reporting engines are integrated to compute adjusted cost basis and meet the tax reporting requirements. If accounting products and cost reporting engines maintain different lot disposition method, then the tracking of wash sale adjustments is complex and cumbersome.

The suggestions to track wash sale adjustments are listed below:

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The wash sale rules will continue in loop with frequent trading of same identical security, as the cost basis adjustments moves from one lot to another in proportionate basis. This loop will break, if no wash sale loss is incurred or with cancellation and rebook of trades (as a result of re-computation), which will result in gains. This concept is depicted in figure 1 above, which necessitates the implementation of edit checks to perform the following:

Track wash sale with lots/sub-lots, which will facilitate easy reconciliation and identification of wash sale losses to the tax authorities and taxpayers.

Identification of potential loss for the year end tax calcu-lation (as the same cannot be claimed, if same identical security is purchased within 30 days of wash sale rules).

Figure 1: Loop Concept for Wash Sale Adjustment

Wash Sale: Complexities and Ambiguities

Replacement Securities – In case of dividend reinvest-ment plans, the replacement shares (reinvested as per the plan prospectus), are considered for cost basis adjustment in the event of wash sale. Also, in the case of corporation stocks as bonus awards and to buy ‘Warrants’ for common stocks of the same corporation; are all considered as replacement securities and should not be considered as part of wash sale rule.

Substantially Identical Securities – For instance, the wash sale rules will be applicable, if warrants are sold at loss and common stocks are purchased of the same corporation; provided that warrants and stocks are considered to be substantially identical. All the facts and circumstances should be considered in determining whether the shares

are substantially identical. For instance, the shares issued by one corporation/mutual fund are not considered to be substantially identical to shares issued by another corporation/ mutual fund in the same industry or sector.

Technical Wash Sale – In case of pre-scheduled trades or re-class transactions, the cost reporting engine or account-ing systems can trigger wash sale without any intent or action on the part of the taxpayer. In case of DRP (Dividend Reinvestment Plan), a regular scheduled re-investment can occur within 30 days of wash sale rule, which requires adjustments to cost basis. However, such DRP plans should mention about the technical wash sale adjustments, irrespective of re-investment limit and pre-authorized instructions.

Book Cost & Lot Difference – The book cost difference in two applications (for instance, if accounting application has GAAP book set and cost basis reporting application has tax book set), will cause incorrect wash sale adjustments and this would be difficult to reconcile. Similarly, the cost basis reporting application can support only particular lot disposition method and is not in synchronization with other lot disposition methods of accounting application.

Re-computation (cancellation and rebook) of trades, due to incorrect price or shares or any other indicative/reference data of the trade can increase or decrease wash sale adjustment to arrive at new adjusted cost basis, or convert a wash sale loss to gain or vice versa. Such cancellation and rebook of trades are simple with equities, but the complexities increase for other securities with respect to determination of accurate cost basis (as amortization, corporate action and asset classification require re-computation and reconstruction of trades in right order to arrive at correct cost basis).

The wash sale adjustments create complexities and ambiguities in dealing with following:

Lot XAdjusted

Cost

Lot YWashSale

Lot XWashSale

Lot XAdjusted

Cost

Gain

30 days

30 da

ysLo

ss

Loss

TriggersEdit Checks,

Recomputation &Reconstruction

HoldingPeriod

As per IRS Rule 550

Long TermRealized Gains

Short TermRealized Gains

Wash Sale - Demonstration of Loop Concept

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Loss and gain on the same day – Loss from a wash sale of one block of stocks or securities cannot be used to reduce any gains on identical blocks sold on the same day.

Mark to Market election - No wash sale rule is applicable to traders, who elect ‘mark to market’ method, because holdings are valued at year's end market rate and there is no need to account for gains or losses that might occur within the 30-day wash sale restrictions. All gains and losses from trading activities should be reported as ordinary gains and losses on Form 4797 (Part II), instead on Schedule D of Form 1040. This election should not be applicable to securities held for investment.

At present the wash sale rules are applicable to same identi-cal security at CUSIP level, but the definition of substantially identical securities and identification of replacement securi-ties need further explanation and justification to plug any loopholes. The substantially identical and replacement securities should be tightly defined with appropriate examples by IRS. The accounting and tax reporting applica-tion should be designed to accommodate wash sale adjust-ments for substantially identical securities and other securi-ties identifiers (like ISIN, SEDOL, etc), so that foreign transactions can be reported. Also, the identification of replacement securities still remains a challenge and should be followed in right spirit, which should be based on flexible criteria. However, the onus to prove the intent should lie both with the broker and taxpayer to notify all the substan-tially identical and replacement securities.

Another key assumption for brokers is to track wash sale adjustments on ‘account by account’ basis, which can lead to misleading results. It incentivizes the taxpayer to open multiple accounts with one or multiple brokers to trade identical securities, by which wash sale rules can be avoided and not reported by the broker. This triggers the question, how can IRS verify the wash sale adjustment reported in form 1099-B and 1040, if the taxpayer does not consider wash sale adjustments for identical securities in multiple accounts.

Finally, the complexities with respect to substantially identi-cal securities, replacement share in case of corporate actions and technical wash sale with respect to pre-authorized repetitive investments need to be clarified by IRS. The subjectivity and ambiguity with cost basis adjust-ment can impact the accounting/reporting engine’s deriva-tion and posting rules, as the objective of wash sale rules is to prevent inappropriate, intentional recognition of loss and cost basis adjustments.

Replacement Securities – In case of dividend reinvest-ment plans, the replacement shares (reinvested as per the plan prospectus), are considered for cost basis adjustment in the event of wash sale. Also, in the case of corporation stocks as bonus awards and to buy ‘Warrants’ for common stocks of the same corporation; are all considered as replacement securities and should not be considered as part of wash sale rule.

Substantially Identical Securities – For instance, the wash sale rules will be applicable, if warrants are sold at loss and common stocks are purchased of the same corporation; provided that warrants and stocks are considered to be substantially identical. All the facts and circumstances should be considered in determining whether the shares

are substantially identical. For instance, the shares issued by one corporation/mutual fund are not considered to be substantially identical to shares issued by another corporation/ mutual fund in the same industry or sector.

Technical Wash Sale – In case of pre-scheduled trades or re-class transactions, the cost reporting engine or account-ing systems can trigger wash sale without any intent or action on the part of the taxpayer. In case of DRP (Dividend Reinvestment Plan), a regular scheduled re-investment can occur within 30 days of wash sale rule, which requires adjustments to cost basis. However, such DRP plans should mention about the technical wash sale adjustments, irrespective of re-investment limit and pre-authorized instructions.

Book Cost & Lot Difference – The book cost difference in two applications (for instance, if accounting application has GAAP book set and cost basis reporting application has tax book set), will cause incorrect wash sale adjustments and this would be difficult to reconcile. Similarly, the cost basis reporting application can support only particular lot disposition method and is not in synchronization with other lot disposition methods of accounting application.

Re-computation (cancellation and rebook) of trades, due to incorrect price or shares or any other indicative/reference data of the trade can increase or decrease wash sale adjustment to arrive at new adjusted cost basis, or convert a wash sale loss to gain or vice versa. Such cancellation and rebook of trades are simple with equities, but the complexities increase for other securities with respect to determination of accurate cost basis (as amortization, corporate action and asset classification require re-computation and reconstruction of trades in right order to arrive at correct cost basis).

Recommendations to the key assumption:

Exceptions:

Periodic reconciliation between two regions or versions (with and without cost basis adjustments), as explained in table#2 (pg6) and table#3 (pg6) previously.

Daily feeds and reconciliation between the accounting products and cost basis reporting engines, with respect to different book set, lot disposition methods and manual adjustments.

The wash sale rule with respect to cost basis gets complex with high volume of trade, accounting adjustments and re-computation, which can cause reconciliation and reporting breaks. In order to ensure compliance and correct cost basis reporting, it is recommended to track wash sale adjustments with lots, sub-lots and wash sale allocation ratio. The maintenance of lots and sub lots for wash sale adjustments in cost reporting engine is very critical to identify the adjustment of cost basis on proportionate basis and/or on basis of potential loss. This will further facilitate the following:

Conclusion

About the Author

References

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Gudaru Anand Rao is a Domain Consultant with the ‘Securities & Capital Market’ practice of Wipro Technologies. He has worked on Asset Serving and Wealth Management projects (Investment & Fund Accounting and Administration), with sound knowledge of Securities and Capital Markets, Application Architecture and overall service delivery experience in the financial services industry of USA, UK and Austria. For any questions, the author can be contacted at [email protected].

DisclaimerThis paper is based on IRS publication of rule 550, 551, 564 and proposed IRS regulations. The contents and illustrations in this paper are author’s understanding and interpretation of the IRS rules and do not necessarily represent the views of Wipro Technologies. The content and illustrations used in this paper are indigenous and any resemblance with any material is purely coincidental.

About Wipro Technologies Wipro is the first PCMM Level 5 and SEI CMMi Level 5 certified IT Services Company globally. Wipro provides comprehensive IT solutions and services (including Systems Integration, IS Outsourcing, Package Implementation, Software Application Development and Maintenance) and Research & Development Services (hardware and software design, development and implementation) to corporations globally.

Wipro’s unique value proposition is further delivered through our pioneering offshore Outsourcing Model and stringent quality processes of SEI and Six Sigma.

Wipro in Securities & Capital MarketsWipro Banking and Financial Services business unit serves the Top 10 Banks, Top 4 global Insurers and Top 2 brokerages across the globe with more than 85 customers spread across 5 continents, with more than USD 1 billion in revenues. Wipro’s Securities and Capital Markets practice serves industry participants across the value chain on buy and sell side. We specialize in serving the top capital markets infrastructure providers including some of the Top 5 customers from industry segments like custodians, data providers, exchanges and market utilities.

IRS Publication 550, 2009 – Investment Income and ExpensesIRS Publication 551, 2008 – Basis of AssetsIRS Publication 564, 2008 – Mutual Fund DistributionsProposed IRS Regulation as of 16th Dec 2009

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wash sale adjustments: impact on cost basis reporting · wash sale adjustments: impact on cost...

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