What it means
When you sell an investment, tax depends on the difference between the sale price and your cost basis. For many securities, US brokers must now report the basis to both the investor and the tax authority.
Securities where this is not required are called non-covered, and covered securities are those where it is. The line between the two depends on when the security was acquired.
The reporting requirements were phased in by type of investment, beginning with most stocks in 2011, and later covering mutual funds, exchange-traded funds and bonds. Anything bought before the relevant phase-in date is usually non-covered.
Some other categories can also be non-covered, such as certain complex securities or investments transferred from another broker without basis information. The broker's year-end tax statement shows which sales were covered and which were not.
The two groups are normally listed separately. For non-covered sales, the broker may show the proceeds but leave the basis blank or show it as information only.
The investor is then responsible for finding the correct figure from purchase confirmations, old statements or other records. Using the wrong basis can lead to overpaying or underpaying tax.
The practical lesson is to keep records for as long as you own an investment, and for several years after you sell it. Details such as reinvested dividends, stock splits and fees all adjust the basis.
A short spreadsheet updated at each purchase can save hours of searching later. Companies that offer employee share plans meet this issue often, since employees may hold shares acquired many years ago.
Finance teams that help staff with tax paperwork should remind them to keep their own records. Guidance should also stress that rules differ between countries.
In practice
Real-world examples.
Example
An employee sells shares he received through a company plan many years ago. The broker's statement shows the sale proceeds of $25,000 but no cost basis. He finds his old purchase confirmations showing a basis of $9,000 and reports a gain of $16,000. He keeps the confirmations together with his tax papers in case the tax authority asks for evidence.
Example
A retiree transfers shares from one broker to another, and the new broker does not receive the basis information. The sale is shown as non-covered. She asks her old broker for the records before filing her tax return. The old broker supplies a statement, and the basis is entered on the return.
Example
An investor has reinvested dividends in a fund for twenty years. Each reinvestment adds to his cost basis, but the broker does not track the older ones. He uses a spreadsheet kept over the years to calculate the gain correctly. Each year he adds the reinvested amounts to the sheet, so the total is always up to date.
Formula
Calculation
Capital gain = sale proceeds - cost basis
An investor sells shares for $18,000. From her own purchase records, she bought them for $11,000, including a $50 fee. Her cost basis is $11,000, so her capital gain = 18,000 - 11,000 = $7,000. The broker did not report the basis because the shares were non-covered, so she must supply the $11,000 figure herself.Case study
Seen in the real world.
Taylor Industrial is a fictional company whose employee share plan has run for decades. In this illustrative story, a long-serving employee, Maria, sold shares worth $40,000 and received a tax statement with the basis column left blank. She assumed the basis was zero and reported the full $40,000 as a gain.
Her accountant found her old plan statements, which showed she had paid $15,000 for the shares over the years. The correct gain was 40,000 - 15,000 = $25,000, so she had overstated her gain by $15,000 and paid too much tax. She filed an amended return and received a refund, and the company began reminding staff each year to keep their purchase records.
Taylor's human resources team now includes a short guide with every share plan statement. It explains what cost basis means, why the broker may leave it blank for older shares, and how to keep a simple record of purchases. The company also holds a yearly session before the tax filing deadline where staff can ask questions of an external adviser.
Watch out
Common mistakes.
- Assuming a blank basis means zero. Using zero overstates the gain and increases the tax you pay.
- Throwing away old confirmations. For non-covered securities, they are often the only proof of your purchase price.
- Forgetting adjustments such as reinvested dividends and splits. They change the cost basis and should be tracked.
Questions
People also ask.
What makes a security non-covered?
Usually it was acquired before the date on which basis reporting became mandatory for that type of investment.
Who is responsible for the basis of a non-covered security?
The investor, who must calculate it and report it accurately.
Where can I find out whether a sale was covered?
On the broker's annual tax statement, which separates covered and non-covered sales. The two groups are usually reported in separate sections.
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