The Internal Revenue Service and the Treasury Department have decided to delay for a year the proposed effective date for cost basis reporting by brokers for debt instruments and options.

Notice 2012-34 responds to comments on the proposed regulations relating to basis reporting by brokers for debt instruments and options published in the Federal Register on November 25, 2011. The notice, issued Wednesday, provides that the Treasury Department and the IRS intend to delay the proposed effective dates for reporting for debt instruments and options under Sections 6045(g), 6045(h), 6045A, and 6045B of the Tax Code from Jan. 1, 2013, to Jan. 1, 2014.

Section 403 of the Energy Improvement and Extension Act of 2008 amended the broker reporting rules in Section 6045 for certain securities, including debt instruments and options. For a debt instrument acquired on or after Jan. 1, 2013, a broker is generally required when reporting the sale of the debt instrument to report the customer’s adjusted basis for the debt instrument and whether any gain or loss upon the sale of the debt instrument is long-term or short-term. 

The Act also added two new sections to the Tax Code:  1) Section 6045A, which requires a broker transferring securities subject to basis reporting to report basis and other information to the receiving broker; and (2) Section 6045B, which requires an issuer of a security subject to basis reporting to file a return to describe the issuer’s actions that affect the basis of the security.

Under the proposed regulations, a broker is required to report the required information for certain debt instruments and options granted or acquired on or after Jan. 1, 2013. The proposed regulations also require a broker to provide the information for a transfer of certain debt instruments or options that occurs on or after Jan. 1, 2013, and the information for an organizational action occurring on or after Jan. 1, 2013, that affects a debt instrument or an option.

Last November, the Treasury Department and the IRS published in the Federal Register a notice of proposed rulemaking relating to the reporting requirements for debt instruments and options. A public hearing on the proposed regulations was held on March 16, 2012. The Treasury and the IRS received numerous requests to delay the proposed effective dates for both debt instruments and options in the proposed regulations.  Brokers and other interested parties maintain that the proposed effective date of Jan. 1, 2013, does not provide them sufficient time to build and test the systems required to implement the reporting rules for debt instruments and options.

Among the banks that asked for the delay were Bank of New York Mellon, Northern Trust and State Street, and organizations such as the American Bankers Association, the Securities Industry and Financial Markets Association and Janney Montgomery Scott, according to Bloomberg.com.

After considering the comments and testimony, the Treasury Department and the IRS intend to provide that the rules in the proposed regulations when finalized will not apply until Jan. 1, 2014. The final regulations under Section 6045(g) will not apply to a debt instrument acquired before Jan. 1, 2014, and the final regulations under Section 6045 will not apply to an option granted or acquired before Jan. 1, 2014.

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