Table of Contents
- What Is a Noncovered Security?
- Key Takeaways
- What Is a Covered Security?
- Understanding Noncovered Securities
- Important Note
- Types of Noncovered Securities
- What Is Cost Basis for an Investment?
- Do I Have to Report Cost Basis for Noncovered Securities on My Taxes?
- What If I Don't Know the Cost Basis for a Stock I Sold?
- The Bottom Line
What Is a Noncovered Security?
Let me explain what a noncovered security is. It's a designation from the U.S. Securities and Exchange Commission (SEC) that means your brokerage isn't required to report the cost basis of that security to the IRS. Instead, they only report the adjusted cost basis to you, the taxpayer. These are usually small and limited in scope.
Remember, even if the cost basis isn't reported to the IRS, any income from selling a noncovered security could still be taxable. You have to report it on your tax return.
Key Takeaways
The SEC designates noncovered securities, so brokerages don't have to report the cost basis to the IRS. For instance, if you bought an investment in 2011 and transferred it to a dividend reinvestment plan (DRIP) using the average cost method, it's considered noncovered. This also applies to stocks sold by foreign intermediaries or foreign persons who aren't in the country for at least 183 days in the calendar year. Sales of both covered and noncovered securities get reported using Form 8949.
What Is a Covered Security?
Back in 2008, Congress passed legislation requiring brokers to report the adjusted cost basis for securities and mutual funds to both you and the IRS, starting from tax year 2011. Since then, Form 1099-B has been used to report the cost basis, showing if the capital gain or loss is short-term or long-term. Any transaction from 2011 onward is a covered security, reported on that form.
Definition of a Covered Security
- Any stock in a corporation, including American Depositary Receipts (ADRs), acquired on or after Jan. 1, 2011
- Mutual funds acquired on or after Jan. 1, 2012
- Stocks or ADRs acquired through a dividend reinvestment plan (DRIP) on or after Jan. 1, 2012
- Less complex bonds, derivatives, and options purchased on or after Jan. 1, 2014
- More complex bonds, derivatives, and options purchased on or after Jan. 1, 2016
Understanding Noncovered Securities
Noncovered securities are investments you bought before those effective dates I mentioned. Brokers don't have to report the detailed cost basis to the IRS after you sell them, but they might still report the gross proceeds or redemption value. The broker will report the cost basis to you, and it's your job to report it to the IRS via Schedule D on Form 1040 for any shares sold, covered or not. Even without a cost basis report, you must report your adjusted cost basis to the IRS.
Important Note
The IRS sees securities as noncovered if they're acquired through a corporate action and their cost basis comes from other noncovered securities.
Types of Noncovered Securities
Corporate actions like stock splits, stock dividends, and redemptions often give you additional shares. If those come from noncovered shares, the new ones are noncovered too. For example, if you bought 100 shares in 2010 and they split three-for-one in 2013, you get 200 more shares. Those 200 are noncovered because they stem from pre-2011 shares, even though acquired after 2011.
A dividend reinvestment plan (DRIP) lets you reinvest dividends for more shares in the same company. If you purchased a security in 2011 and transferred it that year to a DRIP using the average cost method, it's noncovered. But if the transfer was after 2011, it stays covered.
Investment sales are split into covered and noncovered on Form 8949. For noncovered ones not on Form 1099-B, use Code C for short-term (box C checked) and Code F for long-term (box F checked).
What Is Cost Basis for an Investment?
Cost basis is the original purchase price of an asset. For investments, you use it to calculate gain or loss when sold. It can adjust due to corporate actions like stock splits or dividends.
Do I Have to Report Cost Basis for Noncovered Securities on My Taxes?
Yes, you do. Even though the brokerage doesn't report it to the IRS, you're responsible for reporting it on your tax return. Calculate the profit or loss from the sale and put it on Schedule D of Form 1040. Not reporting accurately could lead to IRS penalties.
What If I Don't Know the Cost Basis for a Stock I Sold?
If you don't know the cost basis, check with the brokerage where you bought the stock—they should have records. Even if you didn't keep yours, they can provide it. Look on their website or contact them directly.
The Bottom Line
A noncovered security is an SEC designation meaning the broker doesn't report the cost basis to the IRS, usually for smaller securities. Ones created from noncovered securities, like through stock splits or DRIPs, stay noncovered. The brokerage reports the cost basis to you, and if you sell, report the basis and any gains or losses on Schedule D of Form 1040. Form 8949 is for reporting sales of both covered and noncovered securities.
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