IF you use AccountSync and you use FIFO and you conscientiously avoid wash sales, you have taken a giant step in the right direction of keeping track of dividend reinvestments.
You'll still need to make sure that end of the year adjustments are made correctly however. Changes such as re-classification of dividends or a change in the reporting for a reorganization won't come across through AccountSync. You'll need to enter those manually from information on your 1099 form or, in the case of reorganizations that affected shares you hadn't sold, from information on unrealized gain/loss reports from your broker.
The problem is not that you can't correctly track dividend reinvestments. The problem is that there are many things that can affect whether it is done correctly. If it's not, there are many many lots that are affected so getting things straightened out becomes a very big project.
On Sun, Apr 14, 2013 at 8:18 PM, John Rice
<rice.j1969@att.net> wrote:
Doesn't AccountSync do all of this as long as you stay with FIFO method and avoid any washes?
John
To: club_cafe@bivio.com
Sent: Sat, April 13, 2013 10:50:30 AM
Subject: Re: [club_cafe] Automatic Dividend Reinvesting
The issue has to do with accurate record keeping. Each purchase when you reinvest a dividend is a separate lot of stock and needs to have it's cost basis tracked correctly. Having an accurate cost basis over the years will depend on things like this:
- Accurate entry of the original purchase (There are lots of numbers that can become typos when fractional shares are being purchased.
- Complete entry of all reinvestments - We frequently see records where entries have been missed completely
- Proper adjustments for historical reorganizations such as splits, spinoffs, mergers etc. These can get very complicated. When there are lots of lots, there are lots of things to adjust and lots of opportunities for mistakes.
- Proper adjustments for re-classification of dividends. Sometimes dividends are re-classified after the end of the year, this requires proper adjustment of cost basis for all prior purchases.
- Supporting Documentation- Clubs often ask how long they should keep records from their brokers. If you need to substantiate or check historical entries, you may need lots of old statements to justify the information you are using to calculate cost basis.
- Proper lot selection identification for prior year sales. If you've entered any sales using a different lot selection than you used at your broker, all your current sale entries will be wrong.
- Wash sales- It's easy to forget that you've just made or are about to make another purchase when you decide to sell some of your holding. Proper wash sale adjustments over multiple lots can become extremely, extremely difficult.
- Changing brokers or treasurers- If you change brokers or club treasurers, historical cost information can easily be lost.
- Cost basis method- The rules have just changed because of the new cost basis reporting rules. Average cost was not allowed for dividend reinvesting in stocks prior to 2012. It is now allowed if the dividend reinvesting is done as part of a company run DRIP program. It is not supposed to be allowed for brokerage dividend reinvesting though there seems to be some confusion about this.
In any case, if you do not stay with FIFO lot selection on sales, you will have to track cost basis for pre-2012 reinvestments differently than post 2012 reinvestments and make extra adjustments in your club accounting to handle sales.
- Extra taxes- If you can't properly substantiate the cost basis for your lots, you will have to assign them a basis of 0 and pay gains on the total proceeds you received in a sale.
- Of course, any of these things done incorrectly may mean that all your historical club accounting was inaccurate. This can mean things like needing club and members to amend old tax returns, and incorrect determination of payout amounts for withdrawals paid.
These are all real life issues we've run into with clubs. This all adds a lot of work and responsibility to the club treasurer. It's not that you can't track all these things accurately, it just depends on how much work and attention you want to give to it.
Hope that helps.
On Sat, Apr 13, 2013 at 1:13 PM, Carole Jansen
<cljansen@verizon.net> wrote:
Laurie, can you explain what the extra recordkeeping would be, or direct me to some literature that explains it? I know about the new cost basis reporting rules and the wash sale rules, but I still don't understand what the issue is now.
Thanks,
Carole Jansen
Treasurer ("for life"), Wise Investment Club