December 2011 Archives

The Portfolio Management System is a real-time, tax-lot accounting application that is fully integrated with the Brokerage Accounting System.

The Portfolio System provides advisors and their customers' monthly performance reports, including realized and unrealized gains and losses, net security positions, and estimated income spreadsheets.

Advisors can easily get an up-to-date picture of an account's portfolio composition and recent activity within the account.

Tax Lots and how they impact a portfolio.

A tax lot is created each time a security is purchased. For example, if an investor purchased 200 shares of Pfizer, Inc., on February 15, 2007, for $36.14 per share, and 300 shares of Pfizer, Inc., on March 1, 2007, for $35.00 per share, then this investor has two tax lots of Pfizer, Inc. The two lots represent the two different purchases of Pfizer, Inc., on two different dates at two different prices.

To manage a portfolio effectively, a tax manager needs to know not only what securities are held in the portfolio but also what the underlying tax lots are for those securities.

Continuing the example above, a tax manager must not only know that the investor owns 500 shares of Pfizer, but also that the investor purchased the shares on two different dates for two different prices. Furthermore, there could be two similar sets of portfolios and tax lots and yet the optimal portfolio management solution may be different because the investors’ tax circumstances and objectives differ. For example, one investor may have a significant capital loss carryforward and the other may have a net gain for the year. Therefore, the application of a single “standard” strategy cannot effectively meet all investors’ needs.

Customized Portfolio Management Approach

Systems. The foundation of a customized product structure is a flexible portfolio management system that provides the portfolio manager with analysis tools. The system must provide separate consideration of short- and long-term gains and losses, and objective functions designed to help an investor maximize losses and minimize gains while monitoring active risk.

Maximizing realized losses and minimizing realized gains are common objectives for individuals with taxable investments because a net realized loss can be used to offset some income (currently $3,000 for most individuals), and minimizing realized gains reduces the investor’s overall tax bill. Although this functionality may seem basic, not all portfolio management tools can perform at this level of customization. In such cases, the actual after-tax value may be significantly reduced. For example, if the portfolio management tool allows the tax manager only to generate a net loss, then the tax manager may be generating unwanted gains. The parameter of a net loss means that the system can generate both gains and losses as long as the net loss equals the desired amount. In essence, this reduces the manager’s after-tax returns by the amount of gains generated due to the inadequate tool. After-tax returns begin with the portfolio’s pretax return and then add in or subtract out the impact of taxes on the portfolio. For example, if a portfolio generates net realized gains, then the portfolio’s after-tax return will be less than the pre-tax return because the investor will have to pay taxes on the realized gains.

Cost Basis is the original value of an asset that is used to calculate capital gain or loss for tax purposes. For most positions, your cost basis will be the purchase price plus any commissions, and it will be adjusted for wash sales, corporate actions and/or return of capital that occur during the time you hold it.

The original value of an asset for tax purposes (usually the purchase price), adjusted for stock splits, dividends and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset's cost basis and the current market value. Also known as "tax basis".

Cost Basis Example - Stock Split

You buy 100 shares of XYZ stock for $5 per share. Your online commission was $7 for the transaction, so your cost basis is $507. While you hold the shares, Company XYZ issues a 2-for-1 stock split, meaning you now hold 200 shares of XYZ. Your cost basis in the position is still $507 total, but your per-share cost basis has changed, and this will be important if you decide to sell all or part of your holdings. Divide $507 by 200 shares to arrive at your new per-share cost basis of $2.54. If you sell 50 shares at $3.50, your capital gains from the sale will be calculated using the adjusted cost basis of $2.54, not your original purchase price of $5.

Tax Lots

In your Scottrade account, the cost basis for each of your positions is tracked with a unique number called the tax lot number.

You can have multiple tax lots for the same security. For example, consider the XYZ example above. If your original purchase of 100 shares of XYZ was made on Monday, and you also bought 100 more shares of XYZ on Tuesday, each of these transactions will be assigned a different tax lot number even though they both involve shares of the same stock.

Partial fills are averaged into a single tax lot. For example, you place a market order for 500 shares of XYZ when each share is selling for around $10. Your order is filled in pieces: 100 shares at $9.99, 200 shares at $10.01 and 200 shares at $10.02. At the end of the trading day when all orders are processed, these three fills will be rolled up into a single tax lot with an average price of $10.01. This average price will be used to calculate your cost basis.

Tracking Your Cost Basis

Beginning in tax year 2011, the cost basis of a particular tax lot is required to be reported to you and the IRS via the revised Form 1099-B, which in the past has merely required reporting the gross proceeds less commission of a sale. At this time, brokerages will also be required to communicate cost basis information with one another, so if you make equity purchases in 2011 and later with another brokerage and transfer them to Scottrade, your cost basis information will be retained in the transfer. Similar regulatory requirements will be implemented for mutual funds and ETFs in 2012 and for options, fixed income and other securities in 2013. For more information about this regulation or cost basis in general, visit the Cost Basis Education section of the Knowledge Center.

Finding Your Cost Basis & Tax Lot Number

After a transaction has been processed, you can find its tax lot number by clicking the My Account tab in your account and choosing Order Status from the left menu. Your tax lot number and details of any partial fills, cancels or rebills will be available in the Completed Orders section.

Your cost basis for tax purposes is available in the Ledger section of Gain/Loss & Tax Center. Remember, for any positions entered before Jan. 1, 2011, especially those transferred from another firm, it is your responsibility to ensure you are providing accurate cost basis information to the IRS.

Scottrade does not provide tax advice. The material provided is for informational purposes only. Please consult your tax, or legal, advisor for questions concerning your personal tax or financial situation.

Tax Lot Accounting'

A tax lot is a record-keeping method that tracks the dates of purchase and sale, cost basis, and transaction size for each security in an account portfolio.

Read more: http://www.investopedia.com/terms/t/taxlotaccounting.asp#ixzz1hMhojHm8