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Frequently Asked Questions:
What does the law require?
The Emergency Economic Stabilization Act of 2008 requires that for securities purchased after the
effective date, every 1099-B (Proceeds From Broker and Barter Exchange Transactions) report of
applicable sale proceeds must also report:
the adjusted cost basis of the sale,
the calculated gain or loss, and
whether the holding period was long-term or short-term.
When does the law take effect?
| Security Type | Effective Date |
| Equities | January 1, 2011 |
| Securities eligible to use the Average Cost Method of tax basis reporting. This group includes dividend reinvestment program (DRP) holdings and regulated investment company (RIC -- mutual funds and real estate investment trusts) holdings. | January 1, 2012 |
| Options, fixed income instruments, and other securities as specified by the Secretary of the Treasury. | January 1, 2013 |
"Covered" securities are those purchased on or after the effective date for the security type.
"Uncovered" securities are those purchased prior to the effective date for the security type, or previously-covered, transferred-in securities for which the sending broker failed to report the basis.
Who is required to report?
Whoever is required to furnish a 1099-B form now has this new responsibility. For covered securities,
the entity now required to report the sale proceeds on a 1099-B is also required to furnish the adjusted
cost basis of the sale, to compute the gain or loss, and to classify the sale as short-term or long-term, on
the 1099-B. Usually this means brokers, although mutual fund companies and others are also required
to report sales on 1099 forms.
Exactly how is this to be reported?
The IRS has published a draft version of the proposed new 1099-B reporting form:
Draft new 1099-B Proceeds From Broker and Barter Exchange Transactions reporting form
Today, brokers can develop equivalent substitute forms and composite statements. However, as you can see, on a single form 1099-B you can report only one of three types of sales: uncovered securities, covered short-term, and covered long-term. Each such group requires a separate 1099-B.
A single sale from one account could include all three groups. Such a sale would generate three 1099-B reports.
Draft new 1099-B Proceeds From Broker and Barter Exchange Transactions reporting form
Today, brokers can develop equivalent substitute forms and composite statements. However, as you can see, on a single form 1099-B you can report only one of three types of sales: uncovered securities, covered short-term, and covered long-term. Each such group requires a separate 1099-B.
A single sale from one account could include all three groups. Such a sale would generate three 1099-B reports.
Are the IRS regulations final?
Yes. The IRS published the final regulations in the Federal Register on October 12, 2010.
What if a service provider keeps track of this for my firm?
As far as the IRS is concerned: if you are the filer, you are responsible for correct reporting even if you
contract the tracking of cost basis out to a service provider.
What if a covered security was transferred in, but without this
information?
If a security is covered by this requirement (that is, if it was purchased after the effective date for the
security’s type) and it is transferred to a different institution, the sending institution must report the
cost basis to the receiving institution on the transfer statement, within 15 days of the transfer. In such
cases, the sending institution is responsible for the accuracy of the report. If an uncovered security is
transferred in, the sending broker must state in the transfer letter that it is uncovered.
If you are the receiving broker and you sell the security prior to receiving this information, as long as you have requested missing information from the sending broker after the 15-day period has elapsed, you may treat the security as an uncovered security on the 1099-B -- but you must file an amended 1099-B when you receive the sending broker’s report.
If you are the receiving broker and you sell the security prior to receiving this information, as long as you have requested missing information from the sending broker after the 15-day period has elapsed, you may treat the security as an uncovered security on the 1099-B -- but you must file an amended 1099-B when you receive the sending broker’s report.
What are my responsibilities when securities are transferred?
If you receive an equity security into a customer account, you are required to assume that security is a
covered security, and you should expect to receive basis information from the delivering broker. If the
customer deposits a certificate, you have the same responsibility. In this case, though, the basis
information should come from the transfer agent for the security. If you do not receive the required
information within 15 days, you are required to request the information from the delivering broker or
transfer agent.
Once you receive the basis information, you are required to maintain that information, make adjustments for corporate actions, etc. and eventually use the information to report the client’s adjusted basis and gain or loss on a 1099-B when the customer sells the security.
If a client transfers a security out of your custody to another broker or transfer agent, you must deliver the adjusted basis information to the new broker in the same way.
Once you receive the basis information, you are required to maintain that information, make adjustments for corporate actions, etc. and eventually use the information to report the client’s adjusted basis and gain or loss on a 1099-B when the customer sells the security.
If a client transfers a security out of your custody to another broker or transfer agent, you must deliver the adjusted basis information to the new broker in the same way.
How are closing transactions to be paired with open tax lots?
The default method for pairing tax lots is FIFO – first-in, first-out. That is, the first tax lot(s) purchased –
the oldest open lots -- are assumed to be the ones sold, and thus are “paired” with the closing
transaction. However, if an investor sells less than his entire position in a security, the law allows the
investor to designate other lots, instead, up to the time of sale. They may elect other lots, with or
without technological assistance (for example, manual or automated lot-pairing intended to minimize or
maximize the gain for a particular sale), up to the time of sale. Brokers must confirm the lots selected
to a customer within a reasonable time after the sale, and the broker should have capability to correct
errors if the wrong lots were closed for any reason. So for each sale, brokers and service providers must
offer a way to designate the chosen lot(s) to close – and be able to change it. Practically speaking, they
also must provide and communicate “how-to” processes for their investors to inform the broker of their
elections.
Why is this hard?
For uncomplicated sales, it isn’t. But some events typically pose problems, and can require very
complex basis adjustments and allocations of cost among lots. These events include:
- Complex Corporate Actions
Portfolio accounting systems must process the cost allocations for complex corporate actions including spin-offs, mergers and exchanges with no losses allowed. -
Wash Sales
The system must accurately identify a wash sale, identify affected lots, and adjust both the loss of the previous closing transactions, and the cost and holding period of the opening transaction that triggered the wash sale process. - Option Exercises and Assignments
The system must accurately transfer the cost from options to the underlying security purchased or sold. - Mutual Fund Share Class Exchanges
The system must automatically transfer the cost from one share class to the other. - OID, Amortization and Accretion
The system must accurately identify and process the cost basis adjustments for securities purchased at a premium or discount. - Dividend Reinvestment Plans (DRP)
The system must correctly track the average cost for DRP holdings. - Gifted and inherited securities
These are subject to a complex set of requirements. Upon the death of an account owner, brokers must adjust basis according to the appropriate rules for the type of estate involved, and subsequently transfer the adjusted basis to the beneficiaries of the estate. When securities are transferred as a gift, brokers must transfer both the donor’s adjusted basis and the fair market value as of the date of the gift.
What are the penalties – for errors, for omissions?
The IRS can fine the reporter up to $50 for each wrong report. Since each sale can generate up to three
reports, the fine could be up to $150 per error. For a large institution, erroneous cost basis adjustments
resulting from a single, complex corporate action could result in hundreds, or even thousands, of
reporting errors.
Does this change affect what records I need to keep?
Yes. You now need to hold lot-level records for an indefinite period. Present regulations provide that
1099 forms can be corrected for the current year and three years prior. To determine whether a sold
lot is covered -- and if so, to classify it as long-term or short-term -- will require virtually indefinite
retention of lot records.
With regard to record retention, one practical implication of the new law is that you may need to upgrade your capacity for data storage and retrieval and enhance the security of your data center, or select a service provider who can offer the scale, security, and stability needed to help you comply with the new rules.
With regard to record retention, one practical implication of the new law is that you may need to upgrade your capacity for data storage and retrieval and enhance the security of your data center, or select a service provider who can offer the scale, security, and stability needed to help you comply with the new rules.
What do you need to look for in a service provider?
Not providing cost basis? Or providing cost basis data to your customers as a best-efforts, optional,
convenience service? No longer an option.
To support them in meeting this new requirement, many companies will look to service providers specializing in portfolio accounting. If you are among them, here are some things you should consider:
Broadridge’s Aspire Portfolio Accounting and Performance Reporting service was designed with the new requirements in mind. To learn more about Broadridge cost basis tracking solutions, please call 1-888- 237-1900.
To support them in meeting this new requirement, many companies will look to service providers specializing in portfolio accounting. If you are among them, here are some things you should consider:
- Government reporting experience
- Highly secure datacenters
- Scalable systems and high data capacity
- A track record for company stability and service
- Opportunities to add value (for example, Performance Reporting)
Broadridge’s Aspire Portfolio Accounting and Performance Reporting service was designed with the new requirements in mind. To learn more about Broadridge cost basis tracking solutions, please call 1-888- 237-1900.