7519 / What are the basis reporting rules that became effective in 2011? To which types of securities do the new rules apply?

Under current law, brokers are required to file annual information returns with the IRS showing the gross proceeds realized by customers from various sales transactions.¹ Under EIEA 2008, new requirements were enacted with respect to the reporting of a customer’s basis in securities,² and rules were put in place for determining the basis of certain securities subject to the new reporting requirements.³ The reporting requirements and basis rules generally took effect on January 1, 2011.⁴ Final regulations were released in October 2010.⁵

Under Section 6045(g), every broker that is required to file a return from the sale of a “covered security” must now include in the return (1) the customer’s adjusted basis, and (2) whether any gain or loss with respect to the security is long-term or short-term.⁶

A “covered security” is any “specified security” acquired on or after the “applicable date” if the security was (1) acquired through a transaction in the account of which the security was held, or (2) transferred to that account from an account in which the security was a covered security (but only if the transferee broker received a statement under Section 6045A).⁷

A “specified security” is: (1) any share of stock in a corporation (including stock of a mutual fund); (2) any note, bond, debenture, or other evidence of indebtedness; (3) any commodity, or a contract or a derivative with respect to the commodity (if the Treasury Secretary determines that adjusted basis reporting is appropriate); or (4) any other financial instrument with respect to which the Treasury Secretary determines that adjusted basis reporting is appropriate.⁸

The “applicable dates” are as follows: stock in a corporation – January 1, 2011; stock in a mutual fund, or stock acquired in connection with a dividend reinvestment plan – January 1, 2012; any other specified security – January 1, 2013.⁹ The Service announced, however, that the basis reporting requirement for debt instruments and options was not effective until January 1, 2014.¹⁰

Form 1099-B. Effective after December 31, 2008, EIEA extended the deadline for furnishing information statements to customers from January 31 to February 15.¹¹

EIEA 2008 also provided new rules for determining the basis of certain securities subject to the new reporting requirements.¹² The adjusted basis of any security (other than stock in a mutual fund, or stock acquired in connection with a dividend reinvestment plan) is determined under the first-in-first-out method unless the customer notifies the broker by making an adequate identification of the stock sold at the time of sale.¹³ For any sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by the Treasury regulations for determining adjusted basis (i.e., the first-in-first-out, specific identification, and average basis conventions) must be applied on an account-by-account basis.¹⁴ An exception for uncorrected, de minimis errors now applies.¹⁵