Key Takeaways
- Brokers do not report cost basis to IRS.
- Taxpayer must calculate and report basis.
- Applies to securities acquired before 2011–2013.
- Risk higher taxes if basis not reported correctly.
What is Non-Covered Security?
A non-covered security is a financial asset, such as stocks or mutual funds, for which brokers are not required to report the cost basis to the IRS upon sale. This means you, as the taxpayer, must calculate and report your adjusted cost basis to accurately determine your capital gains or losses.
This contrasts with covered securities, where brokers report both the sale proceeds and cost basis to the IRS, simplifying your tax reporting obligations.
Key Characteristics
Non-covered securities have distinct features that affect your tax reporting responsibilities:
- Cost Basis Reporting: Brokers do not report the cost basis to the IRS, leaving you responsible for accurate calculations.
- Acquisition Dates: Typically include securities acquired before January 1, 2011 for stocks and before January 1, 2012 for mutual funds.
- Tax Forms: Sales appear on Form 1099-B with proceeds reported, but cost basis often omitted.
- Risk of Higher Taxes: Failure to report basis may lead the IRS to assume zero basis, resulting in a higher gain and increased tax liability.
- Adjustments Required: You must account for stock splits, dividends, and other corporate actions when calculating basis.
How It Works
When you sell a non-covered security, your broker reports the gross proceeds to the IRS but does not provide cost basis information. You must use your records to determine the adjusted cost basis and report this on Form 8949 and Schedule D of your tax return.
Maintaining accurate documentation of purchase price, dates, and corporate actions is essential to avoid errors that could trigger audits or penalties. Utilizing reliable sources or tools can improve your data analytics for tracking basis adjustments over time.
Examples and Use Cases
Understanding real-world applications helps clarify the concept of non-covered securities:
- Airlines: Shares purchased before 2011 in companies like Delta require you to report cost basis yourself when sold.
- Mutual Funds: Units acquired via dividend reinvestment plans before 2012 are non-covered, necessitating careful record-keeping on your part.
- Index Funds and ETFs: Some older ETFs fall under non-covered status; consider reviewing options in best ETFs for updated investments with automated reporting.
- Low-Cost Investments: For broad diversification, you might explore best low-cost index funds, which often feature covered securities simplifying your tax reporting.
Important Considerations
Because brokers do not report cost basis for non-covered securities, you must be diligent in tracking your purchase prices and adjustments. Inaccurate reporting can lead to overstated gains and higher taxes, impacting your ability to pay taxation fairly.
Whenever possible, consider transitioning to covered securities or updating your portfolio with companies featured in investments that provide automated basis reporting, reducing your administrative burden and tax risk.
Final Words
Non-covered securities require you to track and report your cost basis accurately to avoid overstated capital gains and higher taxes. Review your transaction records carefully and consider consulting a tax professional to ensure proper reporting on your tax return.
Frequently Asked Questions
A non-covered security is a financial asset like stocks or mutual funds for which brokers do not report the cost basis to the IRS when sold. This means taxpayers are responsible for calculating and reporting the adjusted cost basis themselves.
Covered securities require brokers to report both the sale proceeds and adjusted cost basis to the IRS and the taxpayer. In contrast, non-covered securities only have the sale proceeds reported, leaving the cost basis reporting to the taxpayer.
Securities acquired before certain dates—such as stocks bought before January 1, 2011, or mutual funds acquired before January 1, 2012—are classified as non-covered. This classification comes from IRS rules established after the Emergency Economic Stabilization Act of 2008.
If you fail to report the cost basis for a non-covered security, the IRS may assume your cost basis is zero, meaning you could be taxed on 100% of the sale proceeds as a capital gain, which can lead to higher taxes.
You need to calculate and report the adjusted cost basis on Form 8949 and Schedule D of Form 1040. Brokers typically report the gross sale proceeds on Form 1099-B, but you must provide the cost basis information yourself.
When calculating the adjusted cost basis, consider events like stock splits, dividends, corporate actions, capital expenditures, and any appreciation or depreciation that affects the original purchase price.
Cost basis information for non-covered securities generally does not transfer automatically between brokers. Taxpayers must keep accurate records and report the adjusted cost basis when they sell, regardless of broker changes.
