Tax Software for Cost Basis Reporting Makes Pitch to Service Providers

With a tie-in to Advent Geneva for Cost Basis Reporting, G2 FinTech has been pitching hedge funds, prime brokers, fund administrators and audit firms on the benefits of tax analysis software.
By Jake Safane(2147484770)
Tax analysis and compliance software provider G2 FinTech has partnered with Advent to offer support for Phase 3 Cost Basis Reporting (CBR) through G2’s flagship offering, TaxGopher.

CBR stems from the Emergency Economic Stabilization Act signed in the U.S. in 2008, and it was implemented as a way to capture missing tax revenue from incorrect capital gains reporting. The law requires brokers to report to investors and the Internal Revenue Service (IRS) the gain or loss resulting from the sale of a security and whether it was a long- or short-term gain or loss. T

The first phase of CBR came into effect in 2011 for equities, followed by mutual funds and dividend reinvestment plans in 2012, and now Phase 3, after an initial extension, applies to certain bonds and derivatives purchased since the beginning of 2014, and more complex types of these securities will need to be reported on in 2016.

In order to support service providers such as prime brokers, who supply hedge funds with the necessary 1099-B forms for CBR, G2 has integrated CBR functionality, including for Phase 3, into Advent Geneva, a portfolio management, accounting and reporting solution. The relationship is not exclusive, but the business partnership now allows Advent to resell G2’s product as an add-on to Geneva.

While TaxGopher can receive tax lot information from any investment book system that hedge funds or their service providers might use, Brian Roberti, president at G2, notes, “It would be a mistake if we didn’t maximize the fact that Advent’s Geneva product placement is dominant in the alternative investment community, where it’s used by many hedge funds and their primer broker and fund administration service providers.”

“While Advent had developed their own Geneva wash sale module to help their prime broker clients address CBR, they decided in advance of CBR Phase 3 that it’s really not one of their core competencies, so they sought a best-of-breed provider for this tax analysis functionality,”

Prime brokers are the only ones generating the 1099-Bs for the hedge funds, but since many funds use multiple primes, they only receive part of their book reporting from each of their prime brokers. On the other hand, an administrator likely has a view of the entire book, so Roberti sees potential in expanding the product to these providers, many of whom also use Geneva.

“We’re evangelizing that administrators have a different opportunity—to be a provider of full tax analysis (i.e. the identification and treatment of wash sales plus other tax events), given we offer a tool that can plug into the admin’s system and convert a fund’s entire book into their tax book,” says Roberti.

However, one industry veteran notes that it’s more likely for the tax staff of audit firms to provide tax analysis, rather than the administrator, who would only use this type of software for select clients that ask for it. In part, this stems from the collegial nature of the hedge fund industry, where administrators might not want to step on audit firms’ turf.

Even if administrators do not make a full push into tax analysis, Roberti sees potential for a variety of firms to use this type of sofware. In addition to hedge funds, prime brokers and fund administrators such as Stone Coast Fund Services as clients, G2 has also added a public accounting firm. TaxGopher is still relatively new, with the longest-running client in its seventh tax season, so “only in the last two to three years did we decide we were ready to talk to the tax experts in the large accounting firms, to understand their processes and what they might think about using our tool,” explains Roberti.

“Naturally, they all have something, much of it based on Excel, macros, pivot tables…often supplemented by having the more junior staff helping to manually grind through the analysis. At the Big 4 accounting firms, some have more sophisticated technology, but you’d be surprised…there’s room for improved tools even inside those tax practices.”
Going forward, Roberti thinks tax analysis could play more of a role in the front office.

“The tax season is getting longer — it is not just the end of year tax return,” he says. “The fact is, particularly for funds with tax sensitive trading strategies, they are more likely to also need quarterly estimates, and our clients who are most tax sensitive are running analysis on a daily basis, to see if they would be generating a taxable event as a pre-trade check.

“With this daily process, hedge fund tax personnel can now give a heads-up to the front office, most often the portfolio manager. This alert can also originate from those service providers who run the analysis tool. And I believe somewhere down the road that this alert functionality will ultimately be plugged into a trader’s desktop, where it’s not a red alert, but rather an orange alert cautioning the decisions they make.”