Key takeaways
– A noncovered security is one for which your broker is not required to report adjusted cost basis to the IRS. Brokers still usually report gross proceeds to the IRS and will provide cost-basis information to you, the investor.
– Noncovered securities are typically investments purchased before the IRS reporting rules took effect or securities created from those older holdings (for example, shares received in a split or certain shares in dividend-reinvestment plans).
– Even when a security is noncovered, any gain or loss from its sale is taxable and must be reported on your tax return. You are responsible for determining and reporting the adjusted cost basis.
– Common tax forms involved: Form 1099‑B (broker statements), Form 8949 (sales of capital assets), and Schedule D (Form 1040) to report totals.
What is a noncovered security?
A noncovered security is a security that a broker is not required to report to the IRS with an adjusted cost basis when it is sold. The broker must still give you (the taxpayer) a statement of your cost basis, but it does not have to transmit the basis to the IRS. The IRS considers many securities purchased before the effective dates of the broker reporting law, and securities created from those holdings, to be noncovered.
Background: covered vs. noncovered
– Covered securities: Beginning with legislation passed by Congress in 2008 and effective in the years that followed, brokers were required to report adjusted cost basis for many securities to both the investor and the IRS (reported on Form 1099‑B). Those later purchases are generally “covered.”
– Noncovered securities: Generally include securities purchased before those effective dates and securities that were created from pre‑effective-date (noncovered) holdings through corporate actions (splits, certain dividends, DRIP shares, etc.). For those, brokers are not required to report basis to the IRS.
Why it matters
– Tax reporting responsibility stays with you. If your broker doesn’t report basis to the IRS, you must still calculate and report the adjusted cost basis and any capital gain or loss on your tax return (Form 8949 and Schedule D).
– Brokers may still report gross proceeds to the IRS for noncovered security sales, which makes proper reporting of basis important to avoid discrepancies and potential IRS notices.
Types and common examples of noncovered securities
– Securities purchased before the broker‑reporting effective date(s) (commonly referenced as 2011 for many equity transactions).
– Shares created by corporate actions from noncovered shares. Example: You bought 100 shares in 2010 and the company did a 3‑for‑1 split in 2013. The extra 200 shares are treated as noncovered because they were derived from pre‑reporting (pre‑2011) shares.
– Shares acquired via dividend reinvestment plans (DRIPs) or certain transfers that retain the underlying noncovered characteristics (depends on timing and transfer rules).
– Securities whose cost basis is derived from other noncovered securities.
Cost basis: what it is and how it can change
– Cost basis = the original purchase price of a security, adjusted for items such as commissions, stock splits, spin‑offs, return of capital, wash‑sale adjustments, and certain corporate actions.
– Common adjustments:
• Add commissions/fees to purchase basis.
• Stock splits or reverse splits change the per‑share basis (basis per share = original basis ÷ post‑split share count).
• Reinvested dividends increase basis by the amount reinvested.
• Return of capital reduces basis.
• Wash‑sale rules can add disallowed loss back into basis of the replacement shares.
Do you have to report cost basis for noncovered securities?
Yes. Even though your broker might not send the cost basis to the IRS, you must compute and report the adjusted cost basis on your tax return so that gains or losses are calculated correctly. Brokers typically send you a Form 1099‑B indicating proceeds and whether basis was reported to the IRS; follow the instructions on Forms 8949 and Schedule D to report noncovered transactions.
Which tax forms to use (practical)
– Form 1099‑B: Broker report of proceeds. It will indicate whether basis was reported to the IRS for each transaction.
– Form 8949: Used to report individual sales of capital assets. Noncovered transactions are reported in the boxes for “not reported to the IRS.” (When brokers do not report basis, Form 8949 requires you to check the box for noncovered transactions; see the Form 8949 instructions for whether the transaction belongs in the short‑term or long‑term part and which box to check.)
• Practically: noncovered SHORT‑TERM transactions go in the Part I section for noncovered transactions (the box/letter designated for noncovered short‑term; see Form 8949 instructions for Code C/box C usage). Noncovered LONG‑TERM transactions go in Part II (check the appropriate long‑term box, Code F/box F per the Form 8949 instructions).
– Schedule D (Form 1040): Totals from Form 8949 are carried to Schedule D to compute total capital gain or loss.
Practical steps when you sell a noncovered security (checklist)
1. Gather documentation
• Broker statements, trade confirmations, Form 1099‑B, account transfer paperwork, trade dates, purchase price, commissions.
• Records of corporate actions (split notices, spin‑offs, DRIP records).
2. Determine whether the security is covered or noncovered
• Look at your Form 1099‑B: if the basis column is blank or the form indicates “basis not reported to IRS,” treat it as noncovered for reporting purposes.
• If you have any doubt, confirm with your broker.
3. Calculate adjusted cost basis
• Start with purchase price(s) plus commissions and fees.
• Apply adjustments: reinvested dividends, splits, returns of capital, wash‑sale adjustments, etc.
• If you used a specific identification method for sales, make sure you have evidence of which lots you sold; otherwise FIFO (first‑in, first‑out) is commonly used by brokers.
4. Report the sale on Form 8949
• Use the part and box appropriate for noncovered short‑term or long‑term transactions (per Form 8949 instructions).
• Enter sale date, purchase date, proceeds, cost basis (your calculated adjusted basis), adjustments (if any), code (if required), and gain or loss.
5. Transfer totals to Schedule D
• Aggregate totals from Form 8949 and report on Schedule D to arrive at net capital gain or loss.
6. Keep documentation
• Retain records supporting your basis calculations for at least three years (and often longer if adjustments or omissions may be challenged).
If you don’t know the cost basis — practical remedies
– Contact the broker(s): they often retain historical trade records and can provide your original purchase details or account transfer documentation.
– Check with a transfer agent: for direct‑held stock or older issues, the transfer agent may have purchase records or reinvestment histories.
– Reconstruct from personal records: bank statements, trade confirmations, past tax returns, or prospectuses.
– Use acceptable defaults only when necessary: if you cannot determine a lot‑level basis, brokers may have used FIFO or average cost (average cost is allowed for mutual funds in some situations). If you use average cost for mutual funds, ensure you followed the method allowed and documented.
– If you cannot reasonably reconstruct basis, report your best estimate, fully document your method, and be prepared to support it if questioned by the IRS.
Common investor questions and important notes
– Are noncovered securities taxable? Yes — sale proceeds that exceed your adjusted cost basis are taxable as capital gains; losses may be deductible subject to normal rules.
– Can brokers help with basis calculations? Many brokers will provide cost‑basis information to you (even if not to the IRS). Request detailed lot history if you need to identify specific lots sold.
– What about DRIPs and transfers? DRIP shares or shares created by corporate actions are often noncovered if they derive from noncovered shares. Timing of transfers can affect covered status — confirm with your broker or tax advisor.
– Penalties and IRS matching: brokers may report proceeds to the IRS even if they don’t report basis, which can generate mismatch notices if you fail to report basis correctly. Proper recordkeeping and accurate reporting on Form 8949/Schedule D reduce audit risk.
Practical examples
– Stock split example: You buy 100 shares in 2010 (pre‑reporting). In 2013 the company declares a 3‑for‑1 split; you have 300 shares. Although the additional 200 shares were received after 2011, they’re treated as noncovered because they were created from pre‑2011 shares. When you sell any of those shares, you must compute the adjusted basis based on your original 2010 basis allocated across the post‑split shares and report on Form 8949.
– DRIP example: You bought shares in 2011 and elected a DRIP in the same year but the DRIP uses average‑cost accounting tied to pre‑reporting shares; those DRIP shares may be treated as noncovered if Treasury/IRS rules indicate the basis is derived from prior noncovered lots. (For specifics, check broker statements and the Form 1099‑B treatment.)
Recordkeeping recommendations
– Keep trade confirmations, purchase invoices, commission receipts, reinvestment records, corporate action notices, and year‑end brokerage statements.
– Keep tax‑related records for at least three years after the date you file, and longer (for example, seven years) if you have large adjustments or trust the records may be needed to support carrybacks or other items.
Bottom line
A noncovered security is one for which your broker is not required to report adjusted cost basis to the IRS. That does not eliminate your tax obligation: you must calculate and report the adjusted cost basis and resulting capital gains or losses on Form 8949 and Schedule D. Maintain careful records, obtain historical trade data from brokers or transfer agents when needed, and follow Form 8949/Schedule D instructions so your reported gains/losses match IRS information returns.
Selected references
– U.S. Congress. H.R.1424 — 110th Congress (2007–2008), Public Law 110–343.
– Internal Revenue Service. Instructions for Form 1099‑B, Proceeds From Broker and Barter Exchange Transactions.
– Internal Revenue Service. Instructions for Form 8949, Sales and Other Dispositions of Capital Assets.
– Internal Revenue Service. Instructions for Schedule D, Capital Gains and Losses.
– Internal Revenue Service. Publication 550, Investment Income and Expenses (Including Capital Gains and Losses).
– Walk through a step‑by‑step worked example showing how to compute adjusted basis for a split or DRIP and how to complete Form 8949, or
– Provide a checklist/email template you can send to your broker to request missing basis records. Which would you prefer?