An incredibly frustrating day with Fidelity yesterday - it highlighted lots of potential (for me, real) problems with the way the cost basis tracking is being transitioned from voluntary (funds/brokers voluntarily providing cost basis, usually average cost, as a courtesy) to mandatory.
To be fair to Fidelity (which ain't easy after yesterday), they had what may have been the best online system for tracking mutual fund lots, costs, trades, prior to this year. And that may have made it even harder for them to comply with IRS requirements going forward.
Their system still says that once you switch from average cost to specific share, you cannot switch back. But the IRS now requires financial institutions to allow you to switch back and forth via written notification (which may be electronic). Their system used to allow you to trade specific shares regardless of how you had set it up (I recall getting messages like: we don't recognize the shares you're telling us to trade, but hey, it's your neck on the line, go ahead, we'll send you back an acknowledgement). But now, even if you're set up for specific shares (and are selling pre-2012 shares that they don't report), if their records don't match yours, it won't accept the order with the lots you indicate.
That's not a hypothetical problem. I tried to sell shares in a fund that had been set up years ago for specific shares. I had sold shares in 2007 by specifying which shares, and had received a confirmation with those shares and lots confirmed. Didn't matter - apparently their system had sold the shares FIFO (the confirmation lied). Fidelity readily acknowledged the error, but initially refused to correct it. (A second person in their tax center finally agreed it could be fixed.)
My takeaway is to be meticulous, to ensure that every financial institution one deals with has the correct records for each share of each fund one owns; that every financial institution has the standing order (default cost accounting, e.g. FIFO, Highest first, average cost, etc.) that one wants. Don't rely on the fact that they're required to take your specific lot instructions when you make a trade (or even after that, up to the time of settlement).
Comments
Looks like it's going to be a mess to keep up with for a few years, while there may be covered and uncovered shares mixed in single funds or stock holdings. It'll be complicated enough that the fund companies/brokerages are bound to make errors at least here and there on the statements that go to the IRS, which the investor will have to explain, or get the company to issue a corrected statement.
Yikes.
Thank you for the taking the time to post this information; to help us attempt to sort everything.
Scott and AndyJ, thank you too, for the additional comments.
Regards,
Catch