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Cost Basis Reporting FAQs

Cost Basis FAQs for Form 1040 filers
Cost Basis FAQs for Debt Instruments

Cost Basis FAQs for Form 1040 filers

1. If I sold, exchanged, or otherwise disposed of a capital asset, what do I need to file with my tax return this year?

Generally, when you sell, exchange or otherwise dispose of a capital asset (most property you own and use for personal purposes, pleasure, or investment is a capital asset, including your house, furniture, car, stocks, and bonds), you report it on Form 1040, Schedule D. However, there are changes to the reporting requirements for returns filed beginning with the 2011 tax year. 

Many transactions that previously would have been reported on Schedule D or D-1 must be reported on Form 8949 if they occurred in 2011 or later. In general, complete Form 8949 before you complete Schedule D. Beginning with 2011 transactions, Schedule D-1 is no longer in use; Form 8949 replaces it.

You may need multiple Forms 8949 if you have multiple transactions to report. The IRS has created a page for information about Form 8949 and Schedule D at www.irs.gov/form8949.

2. What can I expect to receive from my broker that is different from previous years?

You will still receive a Form 1099-B; however, we added new boxes beginning with tax year 2011. The key changes to the form are:

  • Starting in tax year 2011, brokers must report the adjusted basis and whether any gain or loss on a sale is classified as short-term or long-term from the sale of "covered securities" on Form 1099-B.
  • "Covered securities" are generally shares of corporate stock acquired after 2010.
  • Shares of stock in mutual funds and stock acquired in connection with a dividend reinvestment plan are generally not covered unless acquired after 2011.
  • Certain other types of securities (e.g., debt instruments and options) are covered if acquired after 2013. See debt instrument FAQs below.

3. What form replaces the Schedule D-1 for tax year 2011 and later?

Beginning in tax year 2011, Form 8949 replaces Schedule D-1. Details for individual transactions pertaining to short-term and long-term dispositions are reported on Form 8949, and then entered on the Schedule D. We have information about Form 8949 and Schedule D at www.irs.gov/form8949.

Cost Basis FAQs for Debt Instruments

Introduction

If you sell a debt instrument, your broker generally is required to report the proceeds you receive from the sale to you and the IRS. If the debt instrument is a covered security, your broker also is required to report the adjusted basis of the debt instrument (and whether any gain or loss is short-term, long-term, or ordinary) to you and the IRS. However, in certain circumstances, you may need to use an adjusted basis different from the one reported to you to report the correct amount of gain or loss on your tax return. For more information, see Publication 550, Investment Income and Expenses, Publication 1212, Guide to Original Issue Discount (OID) Instruments, the instructions for Form 8949, Sales and other Dispositions of Capital Assets, and the relevant Schedule D, Capital Gains and Losses.

The following frequently asked questions and answers relate to the reporting of the adjusted basis of a debt instrument that is a covered security.

Frequently Asked Questions

1. What debt instruments are considered covered securities beginning in 2014?

In general, a debt instrument acquired on or after January 1, 2014, is a covered security if the debt instrument provides for a fixed yield and a fixed maturity date. However, there are certain types of debt instruments with a fixed yield and a fixed maturity date, as described in Q&A 2, that are not covered securities unless they are acquired on or after January 1, 2016. There also are certain types of debt instruments with a fixed yield and a fixed maturity date, as described in Q&A 3, that aren’t covered securities. See Treas. Reg. §1.6045-1(n)(2) for the specific requirements to determine if a debt instrument is a covered security beginning in 2014.

2. What debt instruments are considered covered securities beginning in 2016?

Except for a debt instrument described in Q&A 3, the following debt instruments acquired on or after January 1, 2016, are covered securities (see Treas.Reg. §1.6045-1(n)(3) for the specific requirements to determine if a debt instrument is a covered security beginning in 2016):

  • A debt instrument that provides for more than one rate of stated interest (for example, a debt instrument with stepped interest rates)
  • A convertible debt instrument (that is, one that permits the holder to convert it into stock of the issuer)
  • A stripped bond or coupon
  • A debt instrument that requires payment of either interest or principal in a currency other than the U.S. dollar
  • A debt instrument that entitles the holder to a tax credit (or credits)
  • A debt instrument that provides for a payment-in-kind feature
  • A debt instrument issued by a non-U.S. issuer
  • A debt instrument for which the terms of the instrument aren’t reasonably available to the broker within 90 days of the date the debt instrument was acquired by the customer
  • A debt instrument issued as part of an investment unit (for example, a debt instrument issued with an option, security, or other property)
  • A debt instrument evidenced by a physical certificate unless such certificate is held (whether directly or through a nominee, agent, or subsidiary) by a securities depository or by a clearing organization described in Treas. Reg. § 1.1471-1(b)(18)
  • A contingent-payment debt instrument
  • A variable-rate debt instrument
  • An inflation-indexed debt instrument (for example, a Treasury Inflation-Protected Security)
  • Any other debt instrument not described above

3. What types of debt instruments aren’t covered securities?

The regulations currently exclude the following securities from the definition of a covered security: (a) a debt instrument described in I.R.C. §1272(a)(6) (in general, certain debt instruments in which the principal is subject to acceleration, such as mortgage-backed securities); and (b) a short-term debt instrument (that is, a debt instrument with a fixed maturity date not more than one year from the date of its issue). A broker is therefore not required to report adjusted basis for these types of securities. In addition, a broker is not required to report adjusted basis for a debt instrument not subject to gross proceeds reporting under Treas. Reg. §1.6045-1 (for example, a U.S. Savings Bond).

4. What debt-specific items may affect the adjusted basis of a debt instrument?

In general, the basis of a debt instrument is adjusted by the following debt-specific items:

  • Original issue discount (OID) included in income on a taxable debt instrument increases your basis in the debt instrument. Any acquisition premium on the debt instrument reduces the amount of OID you include in income.
  • The amount of OID that accrues on a tax-exempt debt instrument while held by you increases your basis in the debt instrument. Any acquisition premium on the debt instrument generally reduces the amount of OID that accrues on the debt instrument.
  • Market discount you include in current income increases your basis in the debt instrument.
  • Bond premium reduces your basis in a debt instrument as it is amortized.

5. What is OID?

OID is a form of interest that generally is not paid in cash currently. OID accrues over the term of a debt instrument based on a constant yield. For a taxable debt instrument, for the period you hold a debt instrument, you include OID in your income as it accrues, whether or not you receive any payments on the debt instrument. A debt instrument generally has OID when the instrument is issued for a price less than its stated redemption price at maturity. In general, the stated redemption price at maturity is the stated principal amount of the debt instrument plus any stated interest that is not paid at least annually over the term of the instrument. The tax regulations call interest that is paid at a fixed or variable interest rate at least annually over the term of a debt instrument “qualified stated interest.” A zero-coupon bond is one example of a debt instrument with OID. For more information about OID, see I.R.C. §§ 1272 and 1273 and the underlying regulations; see also Pub. 550 and Pub. 1212. A broker generally must report the OID includible in income by you for a calendar year on Form 1099-OID.

6. What is acquisition premium?

For a debt instrument with OID, acquisition premium is the excess of (a) your adjusted basis in the debt instrument immediately after you acquire it, over (b) the debt instrument’s adjusted issue price at the time of acquisition. The adjusted issue price of a debt instrument is the issue price of the instrument plus the OID previously accrued, minus any payment previously made on the instrument other than a payment of qualified stated interest. As noted in Q&A 4, acquisition premium on a taxable debt instrument reduces the amount of OID otherwise includible in your income each year. For more information about acquisition premium, see Pub. 550 and Pub. 1212.

For a taxable debt instrument that is a covered security, a broker generally must report any acquisition premium for the year on Form 1099-OID. Instead of reporting a gross amount for both OID and acquisition premium, a broker may report a net amount of OID that reflects the offset of the OID includible in income for the year by the amount of acquisition premium allocable to the OID. In this case, the broker won’t report the acquisition premium as a separate item on Form 1099-OID.

7. What is market discount?

In general, market discount is the excess of (a) a debt instrument’s stated redemption price at maturity over (b) your basis in the debt instrument immediately after you acquire it. If a debt instrument also has OID, market discount is the excess of (a) the debt instrument’s adjusted issue price as of the day you acquire it, over (b) your basis in the debt instrument immediately after you acquire it. Although it arises as a result of a purchase at a discount, market discount is a form of interest that is includible in taxable income. Although qualified stated interest received and OID accrued on a tax-exempt debt instrument are tax-exempt and not includible in income, market discount on a tax-exempt debt instrument isn’t tax-exempt interest and therefore is includible in taxable income.

8. When is market discount includible in income?

Unless you have made an election to include market discount in income as it accrues, you must treat any gain when you dispose of a debt instrument with market discount as interest income, up to the amount of the accrued market discount. In addition, you must treat any partial principal payment on a debt instrument with market discount as interest income, up to the amount of the accrued market discount. In general, market discount accrues over the term of a debt instrument on a ratable basis or, if you elect, on a constant yield basis. For more information about market discount, see Pub. 550 and Pub. 1212.

9. What is bond premium?

In general, bond premium is the amount by which your basis in a debt instrument right after you acquire it is more than the total of all amounts payable on the debt instrument after you acquire it (other than payments of qualified stated interest). For more information about bond premium, see Pub. 550 and Pub.1212. For a covered security, a broker generally must report any amortized bond premium for the year on Form 1099-INT. Instead of reporting a gross amount for both stated interest and amortized bond premium, a broker may report a net amount of stated interest that reflects the offset of the stated interest payments by the amount of amortized bond premium allocable to the payments. In this case, the broker won’t report the amortized bond premium as a separate item on Form 1099-INT.

10. What is amortization of bond premium, and how does it affect your basis in a debt instrument?

For a taxable debt instrument, you may elect to amortize bond premium over the term of the debt instrument (a section 171 election). The amortization of bond premium generally means that each year, over the term of the debt instrument, a portion of the premium is applied to reduce the amount of the stated interest includible in your income. If you elect to amortize bond premium, you must reduce your basis in the debt instrument by the amortization for the year. If you don’t make the election to amortize bond premium, you must not reduce your basis in the debt instrument, and you generally will realize a capital loss upon the disposition or maturity of the debt instrument.

For a tax-exempt debt instrument, you cannot elect to amortize bond premium. Instead, under I.R.C. §171, you must amortize the bond premium over the term of the debt instrument. The amortization of bond premium on a tax-exempt debt instrument generally means that each year, over the term of the debt instrument, a portion of the premium is applied to reduce the amount of tax-exempt interest reportable in that year (for example, on Form 1040, line 8b). You also must reduce your basis in the debt instrument by the amortization for the year.

In general, bond premium is amortized over the term of a debt instrument based on a constant yield. For more information about the amortization of bond premium, see Pub. 550 and Pub. 1212.

11. What assumptions must a broker use to report acquisition premium, market discount, and bond premium?

For acquisition premium on a taxable debt instrument, unless you have timely notified your broker that you have elected to determine the amount of acquisition premium taken into account each year based on a constant yield (the §1.1272-3 election) or you have revoked your §1.1272-3 election, your broker must report acquisition premium to you each year based on the ratable method described in I.R.C. §1272(a)(7). See Treas. Reg. §1.1272-3 for more information on how to make or revoke a §1.1272-3 election.

For market discount, unless you have timely notified your broker that you have elected to accrue market discount based on a constant yield (the section 1276(b) election), your broker generally must report accrued market discount to you based on a ratable method described in I.R.C. §1276(b)(1). Once made, a section 1276(b) election can’t be revoked. In addition, unless you have timely notified your broker that you have elected to include market discount in income as it accrues (the section 1278(b) election), your broker must report accrued market discount upon a disposition of a debt instrument with market discount or upon a partial principal payment on a debt instrument with market discount. See Rev. Proc. 92-67,1992-2 C.B. 429, for more information on how to make a section 1276(b) or section 1278(b) election and section 32 in the Appendix of Rev. Proc. 2011-14, 2011- 4 I.R.B. 330, for more information on how to revoke a section 1278(b) election.

For bond premium, unless you have timely notified your broker that you have not elected to amortize bond premium on a taxable debt instrument (the section 171 election), your broker must report to you the amount of amortized bond premium for the year. For a tax-exempt debt instrument, your broker must report to you the amount of amortized bond premium for the year. See Treas. Reg. §1.171-5 for more information on how to make or revoke a section 171 election for a taxable debt instrument. See also section 5 in the Appendix of Rev. Proc. 2011-14 on how to revoke a section 171 election for a taxable debt instrument.

12. If I give my broker timely written instructions to change one or more of the elections, will they notify the IRS so the change also will apply for purposes of my tax return? Does my notification to the broker mean I have made or revoked the election with the IRS?

Your broker isn’t required to notify the IRS when you instruct the broker to change the assumption concerning an election regarding how information is to be reported to you. Making or changing an election with your broker doesn’t mean you have made a valid election or revoked an election with the IRS. You must still complete all of the procedures required to make or revoke an election, which are not the same for each election. See the answer to Q&A 11 for the relevant guidance on how to make or revoke a particular election.

13. What’s the deadline for me to provide my broker with my debt instrument elections?

You must inform your broker in writing (including a writing in electronic format, such as an email) by no later than December 31 of the year for which you want your broker to begin to apply or cease to apply the election.

14. If my broker is reporting my basis for a debt instrument, do I need to make additional adjustments to my cost basis on my Form 8949 for my debt instruments?

You are required to properly apply the Internal Revenue Code and Income Tax Regulations in completing your tax return. In some situations, the basis information reported to you by your broker may need to be adjusted. For example, because information on the basis of a covered security is provided on an account by account basis, you may receive information from your broker that reflects only the information known by that broker and that doesn’t reflect information from other brokers. An example of this situation occurs if you sell a debt instrument at a loss in your account at Broker A and repurchase a debt instrument with the same CUSIP number within 30 days in your account at Broker B. In this example, the wash sale rules in I.R.C. §1091 apply to the transactions. However, because the transactions occurred in different accounts, Broker A doesn’t have the information to properly report the wash sale to you. It’s nevertheless your responsibility to make the appropriate adjustments to the information reported for a sale on your Form 8949 and to your basis records for the debt instrument held by Broker B.


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Page Last Reviewed or Updated: 06-Feb-2015