Cost Basis: Noncovered & Covered Securities Tax Implications

Learn about cost basis reporting changes and tax implications for covered securities and noncovered securities, and how capital gain tax works for each.

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Getting ready for tax season? It's time to take a look at cost basis and make sure you're covered when it comes to correct reporting.

Back in 2001, the U.S. Government Accountability Office (GAO) estimated that 38% of taxpayers who reported a security sale incorrectly reported their taxable gain or loss. Why? Because they used an incorrect cost basis. These miscalculations created an $11 billion tax gap.

Congress included a provision in the Energy Improvement and Extension Act of 2008 requiring brokers to report the cost basis of certain securities to the IRS and taxpayers when a sale occurred. The reporting requirements were rolled out in phases:

  • January 1, 2011: Equities
  • January 1, 2012: Mutual funds and equities purchase under dividend reinvestment plans
  • January 1, 2014: Fixed-rate debt instruments and options
  • January 1, 2016: Variable-rate debt instruments and other complex securities

The heightened reporting requirements are now fully in effect.

Covered and Noncovered Securities

Since 2011, sales and dispositions of property are reported on Schedule D and detailed on Form 8949. Six classification buckets are required for sale and disposition transaction details. 

Holding TermBoxReporting Requirement

Short-Term

Box A

Basis reported to IRS
Basis reported on 1099-B

Short-Term

Box B

Basis NOT reported to IRS
Basis may reflect on 1099-B

Short-Term

Box C

Basis NOT reported to IRS
Basis NOT reported on 1099-B

Long-Term

Box D

Basis reported to IRS
Basis reported on 1099-B

Long-Term

Box E

Basis NOT reported to IRS
Basis may reflect on 1099-B

Long-Term

Box F

Basis NOT reported to IRS
Basis NOT reported on 1099-B

Understanding the difference between covered securities and noncovered securities is vital for cost basis reporting. A few highlights:


  • Covered securities are security purchases made after the effective dates listed above. Brokers must track the purchase date, purchase price, holding period for such securities, and any required adjustments to the cost basis. Covered transactions are classified as short-term (Box A) or long-term (Box D) on Form 8949.
  • What is a noncovered security? These are security purchases made prior to the effective dates listed (e.g., January 1, 2011, for equities). If a noncovered transaction is reported on 1099-B, the sale is classified as short-term (Box B) or long-term (Box E) on Form 8949. All other noncovered transactions are classified as short-term (Box C) or long-term (Box F) on Form 8949.

Next Steps

  • Review tax implications with your tax advisor before executing transactions involving security sales.
  • Review your lot selection method (e.g., first-in, first-out for equities or average-cost for mutual funds) to ensure the best fit for you.
  • Review the new elections for debt securities with your tax advisor. Notify your broker or custodian whether you plan to make or revoke such elections.

This article is an update of the original "Cost Basis: Covered Securities and Tax Implications Explained," published on January 13, 2014.

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