Order Code RL34216
Tax Gap: Proposals in the 110th Congress to
Require Brokers to Report Basis on Publicly
Traded Securities
Updated November 9, 2007
James M. Bickley
Specialist in Public Finance
Government and Finance Division

---

Tax Gap: Proposals in the 110th Congress to Require
Brokers to Report Basis on Publicly Traded Securities
Summary
Recent and projected large deficits and the need for revenue to offset spending
or tax reduction proposals have generated congressional and executive branch
interest in different proposals to reduce the tax gap. Proposals in the 110th Congress
to require brokers to report adjusted basis on publicly traded securities sold by
individuals are examined in this report. Basis is the amount a taxpayer uses to
determine the cost of acquiring an asset, which is used to determine the asset’s
capital gain or loss. In order to calculate the appropriate “adjusted basis” for tax
calculations the original cost may have to be altered.
A proposal to report basis was included in the President’s FY2008 Budget and
is initially discussed in this report. Then the Senate Finance Committee’s draft
proposal to report basis on publicly traded securities, which was released on May 25,
2007, is examined. On June 29, 2007, the committee held a hearing on this proposal.
Written comments of representatives of private financial associations are examined
and legislative implications presented. Lastly, relevant legislation in the 110th
Congress is described.
The President’s FY2008 Budget proposes that information reporting to the IRS
be expanded to include requiring basis reporting on security sales. The Treasury
estimates that this reporting proposal would yield revenue of $1.035 billion for the
period of January 1, 2009, through September 30, 2112, and $6.709 billion for the
period of January 1, 2009, through September 30, 2017.
The Senate Finance Committee drafted a proposal similar to the proposal in the
President’s Budget that brokers be required to report basis to the IRS and customers
for publicly traded securities. Witnesses at a committee hearing on reporting basis
included representatives from five financial associations. The written comments of
these witnesses provide useful insights, and numerous implications for drafting
legislation to report basis can be derived from their testimony.

As of October 26, 2007, two bills had been introduced in the 110th Congress that
focus on requiring broker reporting of a customer’s adjusted basis in securities
transactions. These bills, H.R. 878 and S. 601, have almost the exact same wording
and the same title, the Simplification Through Additional Reporting Tax Act of 2007.
On October 30, 2007, the Temporary Tax Relief Act of 2007 (H.R. 3996) was
introduced. This bill includes Section 622 titled “Broker Reporting of Customer’s
Basis in Securities Transactions,” which the Joint Committee on Taxation estimates
would raise $3.365 billion from 2008-2017, but this proposed tax change would not
be effective until 2010.

This report will be updated as issues develop, new legislation is introduced, or
as otherwise warranted.

---

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
President’s FY2008 Budget Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Senate Finance Committee’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Views of Selective Witnesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Investment Company Institute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Securities Industry and Financial Markets Association . . . . . . . . . . . . . 6
The Clearing House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
American Bankers Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
National Association of Real Estate Investment Trusts . . . . . . . . . . . . . 8
Legislative Implications of Witnesses’ Testimony . . . . . . . . . . . . . . . . . . . . 9
Proposed Legislation in the 110th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

---

Tax Gap: Should Brokers Be Required to
Report Basis on Publicly Traded Securities
Introduction
Recent and projected large deficits and the need for revenue to offset spending
or tax reduction proposals has generated congressional and executive branch interest
in different proposals to reduce the tax gap. Proposals in the 110th Congress to
require brokers to report adjusted basis on publicly traded securities sold by
individuals are examined in this report. Basis is “the amount a taxpayer uses to
determine the cost of acquiring an asset, which is used to determine the asset’s
capital gain or loss.”1 The original cost may have to be altered in order to calculate
the appropriate “adjusted basis” for tax calculations. For example, the original cost
of a purchase of stock would be adjusted upwards to account for brokerage fees.
The Internal Revenue Service (IRS) defines the tax gap “as the aggregate
amount of true tax liability imposed by law for a given tax year that is not paid
voluntarily and timely.”2 The IRS defines the true tax liability for any given taxpayer
as “the amount of tax that would be determined for the tax year in question if all
relevant aspects of the tax law were correctly applied to all of the relevant facts of
that taxpayer’s situation.”3 For the 2001 tax year, IRS estimated that the gross tax
gap was approximately $345 billion.4 After enforcement efforts and late payments,
this gross tax gap was reduced by an estimated $55 billion to equal a net tax gap of
$290 billion.5
Current law requires brokers to report annually the name and address and gross
proceeds of each sale to the IRS. Brokers are also required to report this information
to each customer.6 The term broker includes “a dealer, a barter exchange, and any
other person who (for a consideration) regularly acts as a middleman with respect to
property or services.”7 An individual taxpayer’s gain or loss is the difference
between the amount realized on the sale of property and the adjusted basis. Because
1 The Encyclopedia of Taxation and Tax Policy, edited by Joseph J. Cordes, Robert D. Ebel,
and Jane G. Gravelle (Washington, DC: The Urban Institute Press, 1999), pp. 22-23.
2 Internal Revenue Service, Reducing the Federal Tax Gap, A Report on Improving
Voluntary Compliance, Washington, Aug. 2, 2007, p. 6.
3 Ibid.
4 Ibid., p. 8.
5 Ibid.
6 U.S. Code, Title 26, Section 6045 (a) and (b).
7 U.S. Code, Title 26, Section 6045 (c).

---

CRS-2
brokers are currently not required to report adjusted basis, there is no third-party
reporting of adjusted basis; consequently, the ability of the IRS to verify the amount
of capital gains and losses reported by individuals is limited. Brokers would incur
significant costs in reporting adjusted basis, but taxpayers would be relieved of the
often substantial costs of calculating adjusted basis to determine capital gains and
losses from the sale of securities. According to the IRS, third-party reporting
increases voluntary tax compliance.8
For tax year 2001, the Government Accountability Office (GAO) found that an
estimated 8.4 million out of an estimated 21.9 million taxpayers (or 38%) with
securities transactions misreported their securities gains and losses.9 GAO calculated
that the most frequent reason for this misreporting of securities gains and losses was
the inaccurate reporting of basis of securities sold.10
The issue of reporting basis is complicated by the following current computation
rules:
If a taxpayer has acquired stock in a corporation on different dates or at different
prices and sells or transfers some of the shares of that stock, and the lot from
which the stock is sold or transferred is not adequately identified, the shares
deemed sold are the earliest acquired shares (the “first-in-first-out rule”). If a
taxpayer makes an adequate identification of shares of stock that it sells, the
shares of stock treated as sold are the shares that have been identified. A
taxpayer who owns shares in a regulated investment company (“RIC”) generally
is permitted to elect, in lieu of the specific identification or first-in-first-out
methods, to determine the basis of RIC shares sold under one of two average-
cost-basis methods described in Treasury regulations.11
A proposal to report basis was included in the President’s FY2008 Budget and
is initially discussed in this report. The Senate Finance Committee’s draft proposal
to report basis on publicly traded securities, which was released on May 25, 2007, is
also examined. On June 29, 2007, the committee held a hearing on this proposal.
Written comments of representatives of private financial associations are examined
and legislative implications presented. Lastly, relevant legislation in the 110th
Congress is described.
8 For an overview of tax gap and tax enforcement issues, see CRS Report RL33882, Tax
Gap and Tax Enforcement, by James M. Bickley.
9 U.S. Government Accountability Office, Capital Gains Tax Gap: Requiring Brokers to
Report Securities Cost Basis Would Improve Compliance if Related Challenges Are
Addressed, GAO-06-603 (Washington: June 2006), p. 10.
10 Ibid., p. 14.
11 Senate Committee on Finance, Proposal to Impose Basis Reporting Requirements for
Publicly-Traded Securities, June 29, 2007, p. 1.

---

CRS-3
President’s FY2008 Budget Proposal
The President’s FY2008 Budget proposes that information reporting to the IRS
be expanded to include requiring basis reporting on security sales.12 The U.S.
Treasury describes this proposal as follows:
Certain brokers (including brokerage houses, mutual funds, asset managers and
fiduciaries) would be required to report information regarding adjusted basis in
connection with the sale of certain publicly traded securities. The IRS and
Treasury Department would be granted regulatory authority to promulgate
specific rules, including exceptions, to implement this mandate. Brokers also
would be required to report acquisition or disposition dates for securities to
determine short-term or long-term gain or loss for taxpayers. To facilitate
accurate basis reporting if a customer transfers securities from an account with
one broker to an account with another, the transferor broker would be required
to provide the relevant information to the transferee. Under regulations, a broker
would be exempt from reporting items of information that the broker is unable
to obtain with reasonable efforts. Regulations may establish a regime under
which customers provide information to their brokers about customer
transactions that produce adjustments to basis and about the customers’ initial
basis in securities when the broker has no other way of knowing this information.
Information about basis adjustments that are applicable to all holders of
securities of a particular class would be available to brokers either directly from
the relevant issuer or indirectly from the issuer through a central repository of
information.13
This reporting proposal would apply to securities acquired after December 31,
2008.14 The Treasury estimates that this reporting proposal would yield revenue of
$1.035 billion for the period of January 1, 2009, through September 30, 2112, and
$6.709 billion for the period of January 1, 2009, through September 30, 2017.15
The Joint Tax Committee indicates that this proposal would reduce compliance
costs of some taxpayers, raise compliance costs of some brokers, and impose
significant costs on the Internal Revenue Service. “Under current law taxpayers must
determine the effects of certain actions undertaken by issuers of securities — spin-
offs, recapitalization, mergers, and return of capital distributions, for example — on
the taxpayers’ basis in those securities.”16 The proposal would relieve taxpayers from
12 U.S. Executive Office of the President, Office of Management and Budget, Analytical
Perspectives, Budget of the United States Government Fiscal Year 2008 (Washington: GPO,
2007), p. 262.
13 U.S. Treasury, General Explanations of the Administration’s Fiscal Year 2008 Revenue
Proposals, Feb. 2007, p. 64. This document is available at [http://www.treas.gov/offices/
tax-policy/library/bluebk07.pdf].
14 Ibid.
15 Ibid.
16 Joint Committee on Taxation, Description of Revenue Provisions Contained in the
President’s Fiscal Year 2008 Budget Proposal, committee print, 110th Cong., 1st sess., JCS-
(continued...)

---

CRS-4
making these calculations concerning basis because brokers would be required to
provide this information to customers when securities are sold.17
Some brokers, particularly brokers with large portfolios, currently provide
information about adjusted basis to customers. Other brokers provide partial
information or no information concerning basis to their customers, and these brokers
would incur expenses in meeting the proposal’s reporting requirements.18 The IRS
would incur significant costs from altering or creating new forms, processing data
including matching data, and storing data.19
Because the proposal would only apply to publicly traded securities, some
taxpayers may shift part of their assets from publicly traded securities to other
securities and assets. Some taxpayers may prefer to acquire assets not subject to the
requirement that brokers must report basis information to the IRS.20
Senate Finance Committee’s Proposal
The Senate Finance Committee drafted a proposal similar to the proposal in the
President’s Budget that brokers be required to report basis to the IRS and customers
for publicly traded securities. One of the advantages of analyzing this draft proposal
is the availability of extensive testimony and background documents provided by
witnesses at the committee’s hearing on the proposal.
Description
The Senate Finance Committee description of its draft proposal includes the
following excerpts:
The proposal provides that in every case in which a broker is required under
section 6045(a) to file with the IRS a return reporting a customer’s gross
proceeds with respect to any applicable security, that broker is required to
include in the return the customer’s adjusted basis in each applicable security and
information necessary to determine the customer’s holding period in that
security. The broker also is required to include this information in the statement
required to be furnished to a customer under present-law section 6045(b).
Present-law penalties for failure to comply with the requirements of section
6045 also apply to failures to comply with the new basis and holding period
reporting requirements.
16 (...continued)
2-07 (Washington: GPO, Mar. 2007), p. 90.
17 Ibid.
18 Ibid.
19 Ibid., p. 91.
20 Ibid.

---

CRS-5
The proposal applies to applicable securities acquired by purchase or by
other means such as gift or inheritance.21
Under the proposal, every broker that transfers an applicable security to
another broker must furnish to that other broker a written statement with
information necessary to enable that other broker to comply with the new basis
and holding period reporting requirements.
The proposal imposes new reporting requirements when actions undertaken
by issuers of applicable securities affect the basis of those securities.22
The proposal applies to securities acquired after the date that is 18 months
after the date of enactment.23
Although this proposal is similar to the proposal in the President’s budget, it contains
more detail.
Views of Selective Witnesses
Witnesses at the Senate Finance Committee’s hearing on June 28, 2007,
included representatives from five financial associations. The written comments of
these witnesses provide useful insights. The subsequent discussions of the written
testimony from each witness summarize major positions, but the reader may want to
refer to the actual written testimony for details.
Investment Company Institute.24 The Investment Company Institute (ICI)
emphasized three points concerning reporting of basis:
First, a mandatory basis-reporting regime will be costly, and the cost
ultimately will be borne by fund investors. Second, sufficient time must be
provided to ensure that necessary programming and systems challenges are
addressed effectively. Finally, the flexibility the current law provides to mutual
funds and their shareholders to compute cost basis under any available method
(first-in, first-out (“FIFO”), specific identification, and average cost, in the case
of fund shareholders) must be maintained. We recognize that allowing this
flexibility will limit the use of cost basis information for Internal Revenue
Service (“IRS”) matching purposes.25
21 Senate Committee on Finance, Proposal to Impose Basis Reporting Requirements for
Publicly-Traded Securities, June 29, 2007, p. 3.
22 Ibid., p. 4.
23 Ibid., p. 5.
24 As of July 1, 2007, the Investment Company Institute members included 8,766 open-ended
investment companies (mutual funds), 670 closed-end investment companies, 440 exchange-
traded funds, and four sponsors of unit investment trusts. Mutual fund members of the ICI
have total assets of approximately $11.242 trillion (representing 98% of all assets of U.S.
mutual funds; these funds serve approximately 93.9 million shareholders in more than 53.8
million households. Source: ICI’s website at [http://www.ici.org/about_ici.html].
25 Senate Finance Committee, Investment Company Institute Comments at hearing on
(continued...)

---

CRS-6
The ICI indicated that many mutual funds currently provide average cost basis
information to a substantial portion of their shareholders, but some funds
(particularly smaller funds) do not provide any cost basis information.26 No mutual
fund provides cost basis information to all of its shareholders because the fund
managers do not have or cannot have access to the necessary information or are not
confident that the information is accurate.27 The ICI maintains that mutual funds
would “need sufficient lead time to program their systems to provide cost basis
information to all of their shareholders in all circumstances.”28 The date applicable
to basis reporting should be the later of “December 31 of the calendar year that ends
more than 18 months after the date of enactment or December 31 of the first calendar
year that ends at least twelve months after the issuance of final regulations by the
Secretary.”29 The ICI maintained that filing requirements should be prospective
based on the date of purchase if the fund has not reported cost basis data. If a fund
wishes to try and reconstruct basis using “good faith efforts” then the mutual fund
would have reasonable cause for any errors.30 The internal transfer of shares in
mutual funds results in complex recording issues.31 The ICI recommends that the
written statement requirement for data on the transfer of stock may also be met using
electronic transmittal.32
Securities Industry and Financial Markets Association. The Securities
Industry and Financial Markets Association (SIFMA) represents the interests of more
than 650 securities firms, banks, and asset managers.33 SIFMA made five major
recommendations.
(1) SIFMA strongly opposes the proposal to extend gross proceeds reporting (and
thus adjusted basis reporting) to corporate customers and recommends this
proposal be dropped. The Secretary of the Treasury already has the authority to
extend gross proceeds reporting to corporations and can exercise this authority
without legislative action if corporations are a significant source of
noncompliance.
(2) The Secretary of the Treasury should be granted broad regulatory authority
to implement the new reporting requirements and to provide safe harbors,
25 (...continued)
Proposed Legislation Requiring Basis Reporting Requirement for Publicly Traded
Securities, 110th Cong., 1st sess., June 28, 2007, p. 2.
26 Ibid.
27 Ibid., pp. 2-3.
28 Ibid., p. 5.
29 Ibid., p. 6.
30 Ibid., p. 9.
31 Ibid., pp. 9-11.
32 Ibid., p. 17.
33 Securities Industry and Financial Markets Association, Comments to Senate Finance
Committee on Proposed Legislation Requiring Basis Reporting Requirement for Publicly
Traded Securities, July 17, 2007, p. 1.

---

CRS-7
uniform adjusted basis calculation rules, simplifying assumptions, and limited
exceptions if justified.
(3) The new reporting regulations should be effective for securities acquired 18
months after Treasury regulations are finalized (rather than 18 months after date
of enactment). Brokers cannot develop or modify their basis reporting systems
if they do not know the rules they must follow.
(4) The definition of “applicable security” should be clarified.
(5) S. 636, the Reduce Wasteful Tax Forms Act of 2007 ... should be
incorporated into the proposal.34 The new reporting requirements will greatly
increase year-end processing for brokers and custodians, thus increasing the
number of corrected 1099 and cost basis statements that will have to be issued
to taxpayers and the IRS. S. 636 would delay the filing deadline for 1099
statements by two weeks, from January 31 to February 15.35
The Clearing House. The Clearing House Association L.L.C. (The Clearing
House), an association of major commercial banks, presented its concerns about the
Senate Finance Committee’s Basis Reporting Proposal.36
The Clearing House states that “the Proposal requires financial institutions to
report gross proceeds with respect to securities sold by corporate customers.”37 The
Clearing House states that corporate customers of brokers and financial institutions
have generally been exempt from gross proceeds reporting requirements. The reason
is that timing and accounting differences would result in mismatches in gross figures
being reported to corporate customers and the IRS.38 Hence, the Clearing House
states that “the cost to implement gross proceeds and basis reporting on payments to
corporations will ... be prohibitive with no foreseeable benefit to the Internal Revenue
Service or the corporate customers.”39 The Clearing House maintains that financial
institutions and brokers would be unable to report adjusted basis and holding period
information for certain securities such as foreign securities and securities purchased
as part of a dividend reinvestment program.40 The Clearing House argues that the
proposal’s requirement that persons transferring securities to a broker provide that
broker with a written statement which includes data to calculate adjusted basis “is
34 S. 636, Reduce Wasteful Tax Forms Act of 2007, was introduced by Senator Schumer and
referred to the Senate Committee on Finance on Feb. 15, 2007.
35 Securities Industry and Financial Markets Association, Comments to Senate Finance
Committee on Proposed Legislation Requiring Basis Reporting Requirement for Publicly
Traded Securities, June 28, 2007, pp. 1-3.
36 The Clearing House Association L.L.C., Comments to Senate Finance Committee on
Proposed Legislation Requiring Basis Reporting Requirements for Publicly Traded
Securities, June 29, 2007, p. 1.
37 Ibid.
38 Ibid.
39 Ibid., p. 2.
40 Ibid.

---

CRS-8
inefficient, burdensome, unmanageable and susceptible to error.”41 The Clearing
House believes that the volume of transfers of securities would preclude a paper
transfer system and necessitate an electronic system.42
The Clearing House represents large banks that do not collect and send basis or
holding period data to their customers; hence, these large banks would have to
develop necessary information systems, which would be time consuming. In
addition, large banks are currently integrating multiple information reporting systems.
Consequently, the Clearing House advocates an effective date for compliance with
the proposal of either three years after the date of the passage of the law or two years
after the finalization of relevant Treasury regulations.43
American Bankers Association. A representative of the American
Bankers Association (ABA) provided written comments that stated that the Finance
Committee’s proposal raised significant issues among its members. The ABA
indicated that while banks serving in fiduciary and related capacities were required
to meet Section 6045 filing requirements, they may not be directly involved in either
the purchase or sale of securities; hence, they do not have direct access to the
necessary information concerning basis or have access only through third-party
reporting.44 The ABA maintains that the proposal should require that banks receive
information from the party that files Form 1099-B, and banks should be able to rely
on the accuracy of information from third parties, particularly clients, without
penalty.45 The ABA argues that the proposal should be effective prospectively and
allow sufficient time to implement after regulations have been established.46 The
ABA maintains that taxpayers should be allowed to continue to select the method of
accounting for gains and losses on securities sold.47 Finally, the ABA states that the
IRS should be provided with broad authority to provide exceptions or safe harbors
where determining adjusted basis is difficult or impossible.48
National Association of Real Estate Investment Trusts. The National
Association of Real Estate Investment Trusts (NAREIT) represents U.S. real estate
investment trusts (REITs) and publicly traded real estate companies worldwide.49
41 Ibid.
42 Ibid.
43 Ibid., p. 3.
44 American Bankers Association, Comments to Senate Finance Committee on Proposed
Legislation Requiring Basis Reporting Requirement for Publicly Traded Securities, June 29,
2007, p. 2.
45 Ibid.
46 Ibid., p. 3.
47 Ibid., pp. 3-4.
48 Ibid.
49 National Association of Real Estate Investment Trusts, Comments to Senate Finance
Committee on Proposed Legislation Requiring Basis Reporting Requirement for Publicly
(continued...)

---

CRS-9
The NAREIT made only one specific comment: “that brokers and mutual funds be
provided with an additional two weeks — until February 15th — to report dividend
income to taxpayers on IRS Form 1099-DIV.”50
Legislative Implications of Witnesses’ Testimony
Numerous implications for drafting legislation to report basis can be derived
from the testimony of witnesses from finance associations at the Senate Finance
Committee hearing. Some issues were raised by more than one witness.
First, several witnesses stated that sufficient time should be allowed for brokers
to implement the requirements necessary to report adjusted basis. This time period
may be approximately two years after Treasury regulations have been written.
Witnesses emphasized that some financial intermediaries would have to develop new
systems to report basis and other intermediaries would have to reprogram existing
systems. From Treasury’s perspective, additional time to implement the reporting
of basis would result in lost tax revenue.
Second, two witnesses maintained that the flexibility in the methods of reporting
basis should be maintained. Currently, a taxpayer may use the “first-in-first-out rule”
or the specific identification rule. A taxpayer who owns shares in a mutual fund may
use either of these rules or one of two average-cost-basis methods. Many mutual
funds report basis to their customers using an average cost method. From the IRS
perspective, requiring the use of one standard rule such as “first-in-first-out” would
expedite the use of cost basis data for IRS matching purposes.
Third, two witnesses believed that filing requirements should be prospective,
based on the date of purchase, or brokers should not be held accountable for errors
in data on current and prior reports of adjusted basis. Many brokers do not have
records concerning basis and must rely on customers or third parties for information.
Fourth, two witnesses expressed opposition to extending gross proceeds
reporting (and thus adjusted basis reporting) to corporate customers because the
Secretary of the Treasury already has the authority to extend gross proceeds reporting
to corporations, without legislative action if corporations are a significant source of
noncompliance.
Fifth, one witness stated that the volume of transfers of securities would
preclude a paper transfer system providing brokers with data to calculate adjusted
basis; hence, an electronic system would be necessary. Another witness maintained
that electronic transmission of transfer data should be allowed as an option.
Sixth, two witnesses argued that the Treasury should have broad authority to
implement legislation requiring the reporting of basis. These witnesses maintained
that the legislative language in the Senate Finance Committee’s draft proposal did not
49 (...continued)
Traded Securities, p. 1.
50 Ibid.

---

CRS-10
address many issues such as the reporting of gifted and inherited securities and the
reporting of options’ transactions. Congress could specify many of these issues in
legislative language, which would result in congressional preference being
implemented and a reduced need for Treasury discretion in writing rules.
Seventh, two witnesses maintained that the deadline for filing 1099 statements
should be delayed by two weeks, which is addressed by proposed S. 636, the Reduce
Wasteful Tax Forms Act of 2007. These witnesses argue that the Senate Finance
Committee’s proposal would cause such an enormous increase in the year-end
processing costs for brokers and custodians that the two week delay would be
necessary.

Proposed Legislation in the 110th Congress
As of October 23, 2007, two bills had been introduced in the 110th Congress that
focus on requiring broker reporting of a customer’s adjusted basis in securities
transactions. These bills, H.R. 878 and S. 601, have almost the exact same wording
and the same title. A third bill, H.R. 3970, includes a section requiring the broker
reporting of customers’ adjusted basis in securities transactions.
On February 7, 2007, Representative Rahm Emanuel introduced H.R. 878,
Simplification Through Additional Reporting Tax Act of 2007, which would require
broker reporting of customers’ adjusted basis in securities transactions. The
Secretary of the Treasury would issue regulations in cases in which brokers did not
have sufficient information to report basis. These regulations could require other
information relating to basis to be reported and some cases in which brokers would
be exempt from any reporting.
On February 14, 2007, Senator Evan Bayh introduced S. 601, Simplification
Through Additional Reporting Tax Act of 2007, which would require broker
reporting of customers’ adjusted basis in securities transactions to the IRS. The
contents of S. 601 are almost the same as H.R. 878.
On October 30, 2007, Representative Charles B. Rangel, Chairman of the
House Committee on Ways and Means, introduced H.R. 3996, Temporary Tax Relief
Act of 2007.51 This bill includes Section 622 titled “Broker Reporting of Customer’s
Basis in Securities Transactions,” which the Joint Committee on Taxation estimates
would raise $3.365 billion from 2008-2017.52 The summary of the House Committee
on Ways and Means of this provision is as follows:
51 On Oct. 25, 2007, Representative Rangel introduced H.R. 3970, Tax Reduction and
Reform Act of 2007. This bill included Section 1221, which had the same title and was
almost identical to Section 622 in H.R. 3996. H.R. 3970 was superseded by H.R. 3996.
52 Joint Committee on Taxation, Estimated Revenue Effects of the Chairman’s Amendment
in the Nature of a Substitute to H.R. 3966, The “Temporary Tax Relief Act of 2007,” Oct.
31, 2007, (JCX-105-07), p. 6.

---

CRS-11
The bill creates mandatory cost basis reporting by brokers for transactions
involving publicly traded securities. Covered securities are generally stock, debt,
commodities, derivatives and other items as specified by the Treasury Secretary,
which are acquired in the account or transferred to the account managed by the
broker. The provision applies to stock acquired after January 1, 2009 and after
January 1, 2011 for all other instruments.53
In addition to the current requirement that brokers report the gross proceeds from the
sale of a covered security, brokers would be required to report the customer’s
adjusted basis and whether any gain or loss is long-term or short-term.54 Every
broker that transfers to another broker a covered security must furnish to the
transferee broker a written statement that allows the transferee broker to satisfy the
proposal’s basis and holding period requirements.55 The bill changes to February 15,
from the present-law January 31, the deadline for furnishing certain information
statements to customers including statements showing gross proceeds.56

53 House Committee on Ways and Means, Summary of H.R. 3996, Temporary Tax Relief Act
of 2007, Nov. 1, 2007, pp. 8-9. Available at [http://waysandmeans.house.gov/].
54 Joint Committee on Taxation, Description of the Chairman’s Amendment in the Nature
of a Substitute of H.R. 3996, The Temporary Tax Relief Act of 2007, Nov. 1, 2007, (JCX-
106-07), p. 123. Available at [www.house.gov/jct].
55 Ibid., p. 125.
56 Ibid.

---