Covered & Non-Covered Basis? Options Trading Tax Info? Your 1099-B Questions Answered

Learn about the 1099-B, how taxation on options trading works, and how TD Ameritrade clients can use GainsKeeper to help determine cost basis.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Broken pencil: 1099-B Options, covered basis, and tax reporting
4 min read
Photo by Getty Images

Key Takeaways

  • Non-covered cost basis and taxes related to options contracts are two common areas of confusion on the 1099-B 
  • For TD Ameritrade clients, the Gain/Loss page powered by GainsKeeper® can help you track non-covered cost basis
  • The accounting for options contracts that are liquidated or that expire worthless is more straightforward than that involving exercise or assignment

Ah ... tax time. The time for broken pencils and spinning heads. But there’s no need for either of those things. If you have questions, you just need to know where to turn. 

Case in point: the dreaded 1099-B. Here are two common areas of confusion:

  • You’ve received your 1099-B and are all set to start filing your taxes. But then you review your form. You notice non-covered cost basis, and some of it is missing. Now what?
  • You started trading options this year, and you’ve got all this new info on your 1099-B. What are these numbers, and how do you verify they’re correct?

Whether it’s covered calls or covered basis, here are a few basics on how trades are reported. 

But note: TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances. 

What Is Covered vs. Non-Covered Cost Basis?

Non-covered basis is the cost basis for securities purchased prior to the date at which reporting by brokers was made mandatory. 

Without getting too far into the weeds, a tax law passed a few years back now requires brokers to report cost basis information on Form 1099-B and to the IRS after the sale of certain securities—stocks, bonds, options, exchange-traded funds, mutual funds—pretty much anything you buy and sell through your broker. It was rolled out in phases between 2011 and 2016:

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

So if, in a given year, you sell securities you had purchased prior to the dates listed above, your 1099-B may not include cost basis information, or it may be incomplete. This doesn’t mean the non-covered cost basis isn’t reportable; rather, it’s not required to be reported by a broker to the IRS. You’re still responsible for including this information on Schedule D of your tax return.

How to Calculate Cost Basis

Gone are the days when you tracked your cost basis on a general ledger notebook with a pencil (and a very large eraser). TD Ameritrade offers a more efficient and easier way to determine cost basis with the Gain/Loss page powered by GainsKeeper.

Covered securities are automatically tracked in GainsKeeper, and the cost basis is automatically adjusted for wash sales, corporate actions, dividend reinvestments, return of capital, gifted securities, inheritances, and any other adjustments.

Didn’t Receive a 1099? This Might Be Why

Brokers like TD Ameritrade are required to report certain info to the IRS, but it can differ from what individual investors are required to report. The 1099 Information Guide shows you what items and information brokerage firms need to report. For more, read “Your Guided Tour Through the Consolidated 1099 Tax Form.” TD Ameritrade clients can access the full list of reportable “covered” activity

Non-covered securities are also tracked, but depending on the year of purchase (refer to the rollout dates above), the original purchase information may not be available in GainsKeeper.

All of your current cost basis information in GainsKeeper—covered and non-covered—flows to Form 1099-B for taxable accounts. The non-covered cost basis will display in the non-covered section of the form but won’t be reported to the IRS. Having the cost basis for covered and non-covered securities in one place may help you streamline the tax-filing process.

Helping You “DIY” Your Non-Covered Basis

Even if you’ve already reported your taxes for securities you sold last year, you may own other non-covered securities for which you’ll need to report the cost basis in the future. To help avoid any issues down the road or missing information, you can check your covered and non-covered cost basis on the Gain/Loss page in GainsKeeper.

It might be a good idea to dig up the original purchase details of those “seasoned” components of your portfolio and enter them into GainsKeeper. Then select the Edit your GainsKeeper cost basis button and update the information for each non-covered security. If there’s missing basis you are unsure of, or the basis doesn’t seem accurate, you’ll want to contact your broker for assistance.

Now, about those options contracts ...

Taxes on Options Trading & Info on Your 1099-B

Even the savviest option traders may need a little help at tax time, particularly with cost basis reporting. Confused by all that options information? You may still require a tax professional, but to better understand how options are reported, let’s dive into some of the 1099 reporting requirements.

SCENARIO #1: BUY LONG, THEN SELL

Let’s say you bought an XYZ July 2020 95-strike put options contract for $5.30 on September 24, 2019. By the beginning of February 2020, it was continuing to decline and you needed to jump ship, selling it for $1.16. This transaction is simple and straightforward. Your cost is $5.30, plus transaction costs, and your proceeds are $1.16, minus transaction costs, which your 1099-B will reflect. (And remember: The multiplier for standard equity options is 100, so it’s really a cost of $530 per contract with proceeds of $116 per contract, not including transaction costs.)

Seems too easy, perhaps? Let’s see what happens if you switch it around and sell it to open the position.

SCENARIO #2: SELL TO OPEN, THEN BUY TO CLOSE

What if instead you had sold the XYZ put options contract to open at $5.30, then closed it out with a $1.16 purchase? The IRS decided to make this transaction just a wee bit tricky, but don’t worry. We’ll explain.

Your 1099-B is going to show a proceeds amount of $4.14 ($414 with the multiplier, and it will be modified by transaction costs) and a basis of $0. Confused? You’re not the only one. The IRS mandates that a trader with a cash-settled, written contract report only the gain or loss as proceeds. Your tax document will not reflect the $5.30 or $1.16 amounts, just your profit of $414 minus transaction costs.

See, that wasn’t too bad. If this had been a loss, your proceeds amount would be negative. Just for clarification, GainsKeeper is still going to show the original sale and purchase amounts so you can understand how your 1099 calculates a profit or loss. 

A NOTE ON SELLING (WRITING) OPTIONS

“Writing an option” is trader talk for selling an option contract as an opening trade. If the position is closed out prior to expiration, the reporting is straightforward: It’s the cash difference between the sale price and the purchase price, (with transaction costs figured in). But remember: You can be assigned at any time. If the contract is exercised or assigned, it will settle in the underlying security, not cash. Here’s a refresher of the basics of exercise and assignment.

Expired options are simple to report at tax time. When the contract expires, the premium and transaction costs paid (for option buyers) will be a loss. Option writers will realize a gain equal to the amount of the cash received (the premium minus transaction costs) for selling the contract.

Did you read those Choose Your Own Adventure books in elementary school? Tax reporting for options exercise and assignment is similar—there are only four paths you can take when an exercise or assignment takes place. Follow the adventure below.

If you _____you have _______ the underlying at the strike price.When _____your _____equals the strike price _____ the contract’s premium (+/- transaction costs).
purchase a call,the right to buyexercised,cost basis of shares purchasedPLUS 
purchase a put,the right to sellexercised,proceeds from the sale of sharesMINUS 
sell a call,the obligation to sellassigned,proceeds from the sale of sharesPLUS 
sell a put,the obligation to buyassigned,cost basis of shares purchasedMINUS

Essentially, the contract in and of itself will not be a reportable line item on your 1099 if the contract was exercised/assigned. It’s built into either your cost or proceeds, depending on which path you took.

Did an options exercise or assignment lead to you taking a long position in XYZ? If so, just remember that even though the contract is “done,” it isn’t taxable until you sell the shares of XYZ. Whenever you decide to sell XYZ, your cost basis is the acquisition cost, which is the strike price and the premium adjustment, plus transaction costs. And keep in mind that could be the next day or 10 years later. 

SPECIAL CASE: MARK-TO-MARKET ON BROAD-BASED INDICES AND FUTURES

Options on broad-based indices such as the S&P 500 Index (SPX) are treated a bit differently. Broad-based index options (as well as futures contracts and options on futures) fall under Section 1256 of the IRS tax code and are required to be treated with mark-to-market status. This means that even if you didn’t liquidate a position by the last trading day of the year, the IRS treats it as if you did and uses the closing price of that final trading day to figure your unrealized gain or loss. The closing price is “marked” and used as the cost basis going forward. For more on this and other “special” tax rules for traders, refer to this primer.

Trading and investing can take up enough of your brain power without the added strain of tax reporting, but we’re here to help give your head a break from the spinning. And for crying out loud—don’t take it out on those poor pencils.

Print

Key Takeaways

  • Non-covered cost basis and taxes related to options contracts are two common areas of confusion on the 1099-B 
  • For TD Ameritrade clients, the Gain/Loss page powered by GainsKeeper® can help you track non-covered cost basis
  • The accounting for options contracts that are liquidated or that expire worthless is more straightforward than that involving exercise or assignment

Related Videos

Call Us
800-454-9272

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

Exercising an option position incurs a $19.99 exercise fee.

TD Ameritrade and Wolters Kluwer Financial Services, Inc. are separate, unaffiliated companies and are not responsible for each other’s policies and services. GainsKeeper is a registered trademark of Wolters Kluwer Financial Services, Inc.

adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top