New Tax Rules Could Affect Investors

Do you have a brokerage account? If so, you’ve probably received a mailing or call about a new tax law that takes effect this year. Let’s hope you didn’t ignore it.

Starting in 2011, after you sell a stock, your broker has to provide the Internal Revenue Service (IRS) with the investment’s cost basis. This is the price you paid to acquire an investment. It’s the starting point for determining, after you sell a stock, whether you had a profit or a loss.

In the past, the IRS had no way of knowing whether taxpayers were accurately calculating and reporting capital gains and losses correctly. Some studies showed the errors were resulting in a large amount of underpaid taxes.

Brokers must begin tracking acquisitions and subsequent sales of stocks, real estate investment trusts and foreign stocks starting in January 2011, but mutual fund companies and dividend-reinvestment plans don’t have to do so until January 2012. For individual bonds and options, the law doesn’t go into effect until January 2013. Other assets, such as exchange-traded funds, fall under more than one rule, depending on the type of asset.

The new rules apply only to the sales of investments purchased after these dates. So, for example, if next year you sell a stock you bought back in 2008, your broker doesn’t have to provide the IRS with the cost basis.

What does this mean for you?

Right now you should indicate how you want shares to be sold when you sell them.

FIFO (first-in, first-out), LIFO (last-in, first-out) or HIFO (highest-basis-in, first-out) are common options.

You may also let your broker choose for you, or decide on a case-by-case basis. But if you don’t tell your broker what to do, the law will choose for you – and it will usually choose FIFO.

The tax information in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations and is not exhaustive. Investors should consult their tax counsel for advice and information concerning their circumstances.

Exchange-Traded Funds: Are They Right for You?

Many economists and investment theorists have attempted to translate their academic ideas into reality by opening investment funds. But is it a good idea to invest in them?

Some, such as Dimensional Fund Advisors, have been successful. Others, such as Long-Term Capital Management, which imploded in 1998, have been massive failures.

Today, the $800 billion Exchange-Traded Fund (ETF) market is full of funds operated by renowned academics.

An ETF is an investment fund that tracks a market index. Unlike an index mutual fund, however, it’s traded on an exchange like a stock. Many ETFs are basic, tracking a standard market index such as the S&P 500 Index or MSCI EAFE Index.

But other ETFs are complex investment vehicles that track subsets of market indices, such as dividend-paying stocks. Others track housing investments or oil prices. Some get very complex, combining bullish and bearish stock bets or pools of U.S. Treasury securities.

While market research by renowned academics has certainly helped shape how investments are managed, and the actual investments these academics create have sometimes performed well, they haven’t always. They’re also extremely complex.

Before investing in an ETF, we suggest you consult a financial adviser who can help determine if it’s the right investment for you given your financial circumstances and goals.