In 2008, Congress passed legislation, which requires brokers to report the adjusted cost basis for taxable accounts to the IRS and taxpayers via Form 1099-B starting with tax year 2011 for some securities. This legislation also requires that a 1099-B indicate if the gain or loss is short-term or long-term and that the cost or basis in the underlying security is provided.
If a transaction occurs after this effective date of this legislation, then the transaction is considered a ‘covered’ security and the basis in the stock is reported on a 1099-B. If the original purchase of the equity occurred before the effective date of this reporting requirement, then the transaction is considered a ‘non-covered’ security and the basis is NOT reported on the 1099-B. The only distinction between ‘covered’ and ‘non-covered’ transactions is whether the brokerage firm is required to provide the taxpayer the basis and gain or loss information.
The effective dates for ‘covered’ transactions are as follows:
Shares of equities, stock and ADR’s acquired on or after January 1, 2011.
Mutual funds and stock or ADR’s acquired in connection with a dividend reinvestment plan are generally not covered unless acquired after January 1, 2012.
Certain other types of securities (debt instruments and options) are covered if acquired after January 1, 2014.
Transactions involving securities purchased and held prior to these effective dates can still be reported as they have been in the past, meaning that brokers may not provide detailed cost basis reporting to the IRS on the sales of non-covered securities. Some brokerage firms report both covered and non-covered securities on the same Form 1099-B, but if both types of transactions are being reported on the 1099-B, that information should be noted on the form. Accordingly, the basis for all non-covered securities must be determined before the actual Gain or Loss can be reported on Schedule D and the taxpayer must determine the basis in the securities through their records.
To enter the sale of a covered or non-covered security from the Main Menu of the Tax Return (Form 1040) select:
Capital Gain/Loss (SCH D)
Select ‘New’ and enter the description of the security. If the transaction is a covered security, the ‘Form 1099-B Type’ will be ‘Box 3 Shows Basis,’ but if the transaction is non-covered the ‘Form 1099-B Type’ will be ‘Box 3 Does Not Shows Basis;’ and then enter the sales information for the transaction.
NOTE: This is a guide on entering covered and non-covered transactions into the Keystone Tax Solutions program. This is not intended as tax advice.