Fair Market Value reporting is straightforward once expectations are clear, but there are a few common mistakes that tend to come up year after year. The good news is that most of these issues are easily avoided with a bit of awareness and preparation.
Using the Original Purchase Price Indefinitely
One of the most frequent mistakes is continuing to report the original purchase price as FMV year after year.
While the purchase price may be a reasonable starting point, it rarely reflects the current market value over time. Changes in market conditions, asset performance, or loan status can all affect value.
How to avoid it:
Revisit FMV annually and confirm whether the value has changed based on current information.
Forgetting Appreciation or Depreciation
FMV should reflect both positive and negative changes in value.
Common examples include:
- Real estate appreciating due to market shifts
- Notes decreasing in value due to missed payments
- Private investments changing based on performance
Ignoring these changes can result in FMV that does not accurately reflect the asset’s current condition.
How to avoid it:
Consider how the asset would realistically be valued if sold at year end, not how it was valued when acquired.
Submitting Incomplete or Unsupported Documentation
FMV submissions sometimes lack key details, making it difficult to understand how the value was determined.
Incomplete documentation may:
- Delay processing
- Require follow up requests
- Lead to reporting inconsistencies
How to avoid it:
Ensure documentation clearly identifies the asset, valuation date, value, and source.
Assuming the Custodian Determines FMV
Some account holders assume the custodian calculates FMV automatically. This can result in missed deadlines or incomplete submissions.
How to avoid it:
Remember that FMV is provided by the account holder or a qualified third party, not the custodian.
Treating FMV as a One Time Task
FMV is sometimes treated as something that only matters in the year of purchase or sale.
How to avoid it:
Think of FMV as an annual reporting obligation that evolves with the investment.
A Simple Check Before You Submit
Before submitting FMV, ask:
- Does this reflect the current market reality?
- Is the documentation clear and complete?
- Is the value tied to the correct year end date?
If the answer is yes, you are likely on the right track.