What is cost basis and what are tax lots?
- Cost basis. Cost basis is used to determine capital gain or loss for tax purposes. It is the original cost of the asset, adjusted for certain activity, including any reinvested dividends, reinvested capital gain distributions (for mutual funds), sales charges, transaction fees, accrued discounts and premiums (for bonds), returns of capital and corporate actions, where applicable. Other adjustments can apply.
- Tax lots. A tax lot is a record of the date, quantity and cost of a purchase or opening transaction (short sale). Holding period is traced by tax lot, and cost basis is generally tracked by tax lot. Each purchase represents a unique tax lot, so you could have multiple tax lots within your total position in a security. If a single trade fills in multiple pieces and different prices, however, the prices will be averaged and the trade assigned a single tax lot. Special rules apply to mutual fund shares and most ETF shares in accounts using the average cost method of accounting.
- Nonqualified accounts. Cost basis rules apply to investments held in nonqualified accounts; they are not relevant for investments held in tax-deferred (“qualified”) accounts, including IRAs, 529 plan accounts, HSAs, or qualified retirement plans.
Why is cost basis important?
- Cost basis is important for tax purposes because it is part of the calculation used to determine the amount of capital gain or loss when the asset is sold.
- Each time you sell an investment, if you are not selling the entire position we will identify which investments (tax lots) have been sold based on a tax lot method.
- For more information, see the “Tax lot method” section below.
- Understanding how cost basis plays into investment decisions can help you manage your tax liability over time. Reach out to your Ameriprise financial advisor and tax adviser if you have questions about your specific situation.
- Note: Cost basis rules apply to investments held in nonqualified accounts, so this is not relevant for IRAs or qualified retirement plans.
What investments are covered by the cost basis tax rules and when?
“Covered” is a term used to identify investments that are subject to required tracking and reporting of cost basis and holding period information under tax law and IRS regulations. If covered investments are transferred to another custodian, this information must be provided to that firm. See below for information about “What will be reported on my tax documents when I sell or dispose of investments in nonqualified accounts?”
Securities are considered covered based on the investment type and the date purchased. This means that investments you purchase on or after the phase in date for that type of investment are covered by the requirements. However, any tax lots purchased prior to the phase-in date for that investment type will remain noncovered. Additionally, certain investment types are not covered regardless of acquisition date (see Which investments are not subject to cost basis report regulations?)
Example 1: Shares of a mutual fund purchased before Jan. 1, 2012 are noncovered. Shares of the same mutual fund purchased on or after Jan. 1, 2012 are covered.
Example 2: A common stock purchased before Jan. 1, 2011 is noncovered. Shares of the same common stock purchased on or after Jan. 1, 2011 are covered.
Example 3: Units in a master limited partnership generally are noncovered, regardless of when they were acquired.
This table provides a description of the investment types and the dates they are considered covered under guidance of the law and IRS regulations.
|Law/Regulation phase in date||Covered investments|
|Purchased on or after Jan. 1, 2011||
|Purchased on or after Jan. 1, 2012||
|Purchased on or after Jan. 1, 2014||
|Purchased on or after Jan. 1, 2015||
|Purchased on or after Jan. 1, 2016||
For definitions of the various types of investments listed above see the next questions.
2If a shareholder elected to NOT participate in a dividend reinvestment program (DRP), these securities were covered as of Jan. 1, 2011. If they are part of a DRP, they became covered in 2012.
What is the cost basis reporting for options and "less complex" covered bonds under IRS reporting regulations beginning on Jan. 1, 2014?
The cost basis regulations divide debt instruments into two categories, generally based on the complexity of the tax rules applicable to different types of bonds and debt instruments, for cost basis reporting purposes: “less complex” bonds and “more complex” bonds. “Less complex” bonds are generally debt instruments with a fixed yield and maturity. These regulations do not affect which investments FINRA or other regulators may deem to be a complex security or product.
Most option closing transactions have cost basis and holding period reported to you and the IRS on Form 1099-B. Option premium will be reported as an adjustment to basis or gross proceeds, depending on the option (put or call) and the taxpayer’s position in the option (writer/short or holder/long).
The tables below provide details about the less complex debt instruments and options that are covered beginning with purchases in 2014.
|Bond with a single fixed payment schedule for which a yield and maturity can be determined||
|Bond with an alternate payment schedules for which a yield and maturity can be determined||
|Bond for which the fixed yield of the debt instrument can be determined||
|Financial attribute options||
What are the "more complex" bonds that are subject to the cost basis reporting regulations starting with Jan. 1, 2016 purchases?
The IRS defines debt instruments as “more complex” if they are not “less complex” (as defined above) or excluded from cost basis reporting. Generally, a debt instrument is “more complex” if the applicable tax rules are more complicated. These regulations do not affect which investments FINRA or other regulators may deem to be a complex security or product.
The tables below provide details about the more complex debt instruments that are covered beginning with purchases in 2016 and their tax reporting implications.
|Variable rate (and stepped rate) debt instrument (VRDI)||Bonds and debt instruments with an interest rate that changes (or could change) over time.||Examples: Floating rate municipal bonds, corporate bonds and agency bonds. Ameriprise Step-Up Rate Certificates|
|Convertible bonds||Bonds that can be converted into stock or into cash or other property of equal value.||Examples: Mandatory exchangeable securities|
|Stripped bonds and stripped coupons||Bonds where one person holds the right to receive principal payments and another person holds the right to receive interest payments.||Example: US Treasury STRIPS|
|Contingent payment debt instruments (CPDI)||Debt with one or more contingent payments.||Examples: Bonds and CDs with payments determined by reference to the value of an asset or index. Ameriprise® Stock Market Certificates|
|Inflation indexed bonds||Debt that adjusts principal for inflation or deflation.||Example: TIPS (Treasury Inflation Protected Securities)|
|Payment in-kind bonds (PIK)||Bonds that pay “interest” with additional bonds instead of cash|
|Tax credit bonds||A debt instrument that, at one or more times in the future, entitles the holder or issuer to a tax credit||Build America Bonds|
|Foreign issued bonds or bonds paying in a foreign currency||A payment of interest or principal in a currency other than the U.S. dollar||Example: Bonds making interest payments in Euros|
|Physical certificates||Bond evidenced by a physical certificate unless such certificate is held by a securities depository or by a clearing organization||Example: Bearer Bonds|
|Certain Preferred securities||Preferred securities taxable as debt in the prospectus||Example: Preferred securities that trade with the accrued interest|
|A debt instrument that is issued as part of an investment unit||Debt issued together with other property or embedded derivatives, such as options, stock rights, or warrants||Example: Reverse convertible securities|
|Debt without a prospectus, offering memorandum, or other description of the debt’s terms & conditions||A debt instrument for which the terms of the instrument are not reasonably available to the broker within 90 days of the date the debt instrument was acquired by the customer||Example: Private debt|
Which investments are not subject to cost basis reporting regulations?
“Noncovered” investments are exempt from cost basis tracking and reporting requirements. These may be investments purchased prior to the regulation phase-in date for the specific type of investment (see above) or investments currently excluded from cost basis reporting regulations (see below).
While we may provide you with cost basis and holding period information for noncovered securities, if we have it available, it is for informational purposes only and we will not report it to the IRS.
Investments currently excluded from cost basis regulations:
- Debt instruments secured by a pool of debt instruments that are subject to prepayment of principal, including:
- Certain Asset-Backed Securities (ABS)
- Mortgage-Backed Securities (MBS)
- Real Estate Mortgage Investment Conduits (REMIC)
- Employee stock options (once exercised the stock itself is covered)
- Grantor Trusts, including some ETFs taxed as grantor trusts
- Master Limited Partnerships, and most other partnerships, unless taxed as corporations
- Money market mutual funds including floating rate NAV funds
- Options on commodities (oil, precious metals, grains, etc.)
- Options on foreign currency
- Pre-paid forward contracts including many Structured Products
- Short-term debt instruments - fixed maturity date not more than one year after the issuance date
What should I know about cost basis and gain/loss information on noncovered securities?
- For sales and transfers of noncovered investments, cost basis and holding period information is not required to be reported to the IRS (for sales) or to other custodians (for transfers). See Which investments are not subject to cost basis reporting regulations?
- Individual taxpayers continue to be responsible for tracking the cost basis of their noncovered investments and for calculating and reporting the holding period and any realized gain or loss on the sale of those investments. Taxpayers are generally required to report this information on Schedule D (Form 1040), Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets.
- For data related to noncovered investments, including all data for investments acquired in 2010 and prior years, it is important to verify this information using your own records when calculating gains or losses for tax reporting purposes. For noncovered shares, we may adjust for returns of capital, wash sales, corporate actions, basis transfers, and gifted and inherited shares, but we may not have made these adjustments prior to cost basis reporting start dates for various investment types. Please consult with your tax adviser in those situations. We also cannot verify cost basis information obtained through corporate acquisition of other brokers (such as H&R Block Financial Advisors Inc. and J. & W. Seligman & Co. Inc.).
What types of account ownerships are subject to cost basis reporting?
Cost basis reporting affects all nonqualified accounts subject to reporting on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. This includes all nonqualified accounts owned by:
- Individuals in joint accounts (including but not limited to Joint Tenants with Rights of Survivorship, Tenants in Common)
- Uniform Gift and Transfer to Minors (UGMA and UTMA)
- Trusts and estates
- S Corporations
What types of account ownerships are not subject to cost basis reporting?
- Corporations, government entities, exempt organizations, financial institutions, etc. are not subject to cost basis reporting.
- Retirement and education savings accounts (including inherited accounts) listed below are not subject to cost basis reporting. Distributions from these accounts will continue to be reported as they have in the past.
- Roth IRAs
- 403(b) / TSCAs
- Coverdell Education Savings Account (CESA)
- 529 Plans
- ABLE accounts (Achieving a Better Life Experience Act of 2013)
What are bond elections?
If you purchased a bond at premium or discount on or after Jan. 1, 2014, you can make elections related to these bonds which may affect the earnings on your bonds and the character of your bond income. Elections also affect your cost basis and tax reporting. These elections are:
When to recognize accrued market discount
- Broker default – at sale or redemption
- Election – Included in income annually as accrued (current inclusion)
Which accrual calculation method is used for market discount
- Broker default - Constant yield3 (multiplies the adjusted basis by the yield at issuance less the coupon)
- Election - Straight line (ratable, applies a constant dollar amount for each day the security is held)
Whether or not to amortize bond premium (does not apply to tax exempt debt)
- Broker default - amortize (reduces taxable interest income and adjusts basis)
- Election - do not amortize (does not offset interest income or adjust basis)
Each bond election has an associated due date by which it must be made. Once you choose an election (as opposed to the default) it is generally irrevocable4.
After the election due date, you will be locked-in to either the default or your election. Your Ameriprise financial advisor can help answer questions regarding election due dates.
An IRS required broker default will be used whenever you do not make an alternate election.
3The IRS required broker default market discount accrual method was changed to constant yield for bonds purchased as of Jan. 1, 2015. Constant yield was also the broker default accrual method we used for bonds purchased prior to Jan. 1, 2014. Only bonds purchased in 2014 used straight line accrual default method, per IRS rules.
4Some elections may be revoked, with written approval from the IRS Commissioner.
Where can I find more information about cost basis?
- If you have any questions about cost basis and the impact on your investments, please contact your Ameriprise financial advisor and tax preparer. If you’re not currently working with an advisor, find an advisor who is right for you.
- For more information on cost basis reporting, see the irs.gov website:
- Form 8949 (including instructions)
- Publication 550: Investment Income and Expenses
- Publication 551: Basis of Assets
- Cost Basis Reporting and FAQs
- Instructions for Form 1099-B