Balasubramanian T and Pradeep Rao S, TCS Financial Solutions

Over the past few years, Tax Lot accounting and Cost Basis Reporting have been discussed in great depth by the securities back office and tax accountant fraternity across the globe and, specially, in the USA, after a legislation was passed mandating that all parties involved in securities transactions accurately report the cost basis as part of the tax reporting environment. While most of the tax authorities in different countries had simpler rules for calculating capital gains tax on securities transactions, clients usually had difficulty in reporting the correct capital gains and losses due to challenges of adjusting the basis of the security.

Cost basis:

Cost basis is the total cost of acquisition of a security, including the original cost paid plus commissions and any other fees. From a taxation perspective, the calculation and storage of cost basis of individual transactions becomes important as it is one of the key inputs in calculating the tax liability for a reporting period.

Tax lot accounting:

The method of position-keeping based on the cost basis of the transactions is called tax
lot accounting. This is used to calculate the realized gain/loss for the trades. For calculation of realized gain/loss for pecific trades, different tax lot methods can be applied. The choice of tax lot method can have a significant effect on the computation of capital gains and losses. Some benefits of tax lot accounting are:

  • Track securities by tax lot – To minimize the tax outflow.
  • Avoid short-term gains. – Flexibility to decide on the lots that should be squared off based on the tax lot method that is chosen.
  • Flexibility to carry forward the losses to future years.
  • Flexibility to offset the losses made against the gains in order to minimize the tax liability.

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