Essential Enhancement to Return of Capital Transaction Type

MikeChicagoIL Member ✭✭
edited May 2022 in Investing (Mac)
I have been experimenting with Quicken 2019 for Mac for a while in helping a relative manage her relatively simple financial life.  Feeling comfortable with the program, I recently decided to convert my 20+ years of more complex financial information from Quicken 2007 for Mac to the new Quicken.  First let me give credit to the new Quicken for continually improving the program.  That is terrific!  

One significant shortcoming in the new Quicken is the ability to adjust the cost basis of a security.  The method of doing that is via the Return of Capital (RC) transaction type.  A positive RC reduces cost basis and a negative RC increases cost basis.  Accurate cost basis is essential for Quicken to show an accurate Gain/Loss, either on an unrealized basis for securities currently held (which is important to know for decision making) or on a realized basis for accurate reporting of Gain/Loss for income tax purposes.

The RC transaction works perfectly well in adjusting cost basis when the investor owns a single tax lot (single purchase) of a security.  It also might work in some instances when there are multiple tax lots (purchases on multiple dates), but not always.  When there are multiple lots of a security, Quicken apportions RC among the various tax lots in proportion to the number of shares in each tax lot.  Over years of investing, I have found numerous situations where Quicken’s adjusted cost basis does not tie to the adjusted cost basis shown on my (online) statements or position listings from my major brokerage firms.  Usually these are situations involving mergers, spin-offs, or other corporate transactions affecting the cost basis of the securities.  I have found that there are times when the brokerage firm (presumably following proper methodologies) apportions cost basis between lots of a security based on the relative cost basis of each lot (rather than the number of shares that Quicken uses), or some other method that I am not easily able to determine.  The treatment of “cash in lieu” of fractional shares is another area (often tied to mergers and spinoffs) which can be treated in different ways with (albeit small but real) differences in the resulting cost basis for each lot from the way it is determined by Quicken’s allocation method.  Another problematical area is a complex corporate action coupled with an investor’s option to redeem certain shares for cash and the investor elects it for some, but not all, of his security lots.

Another area where Quicken’s methodology of allocating RC by shares does not work, and is easy to see, is where an individual has purchased the same bond on different dates.  Where bonds were purchased at a Market Discount or at Original Issue Discount, for example, that discount is required to be amortized (cost basis increases) at a different rate for each lot based on the size of the discount at purchase and when the bond was purchased (time to maturity).  For example, if you purchased the same number of bonds (say, $25,000 principal) on one date at par ($25,000) and on another date at a lower price (say, $22,000), the basis for the former lot should remain unchanged over time at $25,000, while the basis of the second purchase lot is supposed to increase over time for tax purposes.  But, you would not be able to adjust the cost basis of the later purchase lot in Quicken without also affecting the basis of the first lot, even though it should not be be adjusted.  (Of course, when you use RC to adjust basis in a non-cash transaction, another transaction needs to be added to offset the cash.)

There are other examples as well, but I think I’ve illustrated the problems that can exist trying to keep cost basis in sync with the actual cost basis in a brokerage firm’s records that are ultimately used for tax reporting when a security is sold.

First let me mention that this has also been a problem in Quicken 2007.  My workaround for that deficiency in Quicken 2007 was to create separate securities with the same symbol in those problematic cost basis situations.  A hypothetical example would if I had two lots of Apple.  If one of the problematic situations outlined above would arise where basis needed to be adjusted in a nonstandard manner, I would go back into the original purchase transaction of the second lot of Apple and change the name of the security to Apple2, with the same symbol AAPL so that the historical and future portfolio value would still be based on the actual prices of AAPL.  Then I could apply the necessary RC amount to Apple and the other necessary RC to Apple2 to assure each ties to the “official” adjusted cost basis determined by my brokerage firm. 

Unfortunately, this workaround cannot be used in new Quicken, because the program does not allow one to set up more than one security name with the same symbol.  

So, there are two enhancements to Quicken that would each allow the user to adjust cost basis properly by lot in all situations:

1.  Allow multiple security names to share the same symbol, as Quicken 2007 did, along with a warning/alert that it’s the same symbol as another security.

2.  Provide the Return of Capital action with the ability to Specify Lots (specify how the RC dollar amount is assigned to each lot) analogous to the Specify Lots capability in the Sell type of activity.  This would go beyond the capabilities of Quicken 2007.

Enhancement #2 would solve the issues discussed above regarding cost basis in the simplest manner for the user.  I believe if #2 is done, enhancement #1 would not be necessary to be able to manage cost basis by lot in all circumstances.  For other reasons, it is also less important to be able to set up multiple securities with the same symbol because of new Quicken’s capability of specifying Date Acquired in the Add Shares action—a terrific enhancement over Quicken 2007.  But I believe there may be instances where it could be still be useful to have enhancement #1.  So ideally, Quicken would implement both enhancements to give maximum flexibility to its customers.

I would be happy to discuss this further.  Quicken phone support recommended that I post this both under Report a Problem and Quicken Community, so I am doing both.  Thank you for taking the time to review this and keep up the great work.


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