In 2008, Congress passed legislation requiring 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 required 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.
Transactions occurring after the effective date of this legislation are considered "covered" 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 "non-covered" 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:
- Income Menu
- Capital Gain/Loss (Sch D)
- Select New and enter the description of the security.
- In the Form 1099-B Type drop down menu:
- for a covered security, select "Box 3 Cost Basis Reported to the IRS"
- for a non-covered security, select "Box 3 Cost Basis NOT Reported to the IRS"
- Enter the remaining information as requested. Note that selecting one of the "Various" options under Date Sold will prevent the return from being electronically filed.
NOTE: This is a guide on entering covered and non-covered transactions into the TaxSlayer Pro program. This is not intended as tax advice. Refer to the Additional Information below for more detail.