The tax code can be complex and often confusing — we understand. Below are some common questions about cost basis reporting. If you have your own questions about filing, dependents, or other issues related to your federal income taxes, you may want to talk to your tax advisor or look for answers on irs.gov.
General Questions on Cost Basis Reporting
Financial institutions are now required to report the adjusted cost basis of covered securities and debt securities to the IRS on Form 1099-B.
Cost basis refers to the price, including fees, at which you purchased a security, adjusted for corporate changes. Stock splits would be one example.
The IRS defines a covered security as a security purchased or acquired for cash on or after specific effective dates. A security is also considered covered if it is transferred to a subsequent account from another account in which it was a covered security. The effective dates are as follows:
Equity securities: purchased or acquired on or after January 1, 2011
Mutual funds and dividend reinvestment plan shares (DRIPs): purchased or acquired on or after January 1, 2012
Simple debt securities, options, rights and warrants: purchased or acquired on or after January 1, 2014
Certain "complex" debt securities: purchased or acquired on or after January 1, 2016
Simple debt securities include:
Original issue discount (OID) bonds
Zero coupon bonds
Complex debt securities include:
Instruments that do not have a fixed yield and fixed maturity date
Instruments that provide for more than one rate of stated interest, such as those with stepped interest rates
Zero coupon bonds that convert to interest paying bonds
Stripped bonds or coupons
Instruments that require payment of principal or interest in a non-U.S. currency
Certain tax credit bonds
Instruments with a payment-in-kind feature, where the instrument may be redeemed for additional debt of the issuer
Instruments of a non-U.S. issuer
Instruments issued as part of an “investment unit,” including investments with more than one component, such as a forward contract combined with a bond
Contingent payment debt instruments
Variable rate debt instruments
Inflation-indexed debt instruments
When a stock is sold at a loss, the IRS allows the loss to offset capital gains you might have, and losses in excess of your capital gains may be used to offset ordinary income up to $3,000. The exception to this is a “wash sale” (PDF).
A wash sale occurs when the same or substantially identical stock is purchased 30 days before or after the sale of such stock at a loss. In the case of a wash sale, the federal tax code does not allow current recognition of that loss. This prevents you from selling the stock, taking the deduction or using the loss to offset other capital gains, and then buying it back within the wash sale time frame to capture any future gains. The wash sale rule can also be triggered by multiple purchases on the same day if one of those tax lots is sold within 30 days for a loss.
If the incorrect lot of a security is sold, you have until settlement date to notify your Financial Advisor to correct the trade. After settlement date, the trade will stand as is.
IRS regulations state specific share designation must be made by settlement date of the closing transaction. After that time, the trade must stand as is.
Tax Lot Relief Methods
A tax lot relief method determines which lot of stock or securities — and its associated cost basis — is used in computing the gain or loss on a sale and whether that gain or loss is long- or short-term.
There are eight available tax lot relief methods from which clients can choose as their standing tax lot relief method. These methods are as follows: FIFO (First In First Out), LIFO (Last In First Out), HIFO (Highest In First Out), LOFO (Lowest Cost First Out), HCST (Highest Cost Short Term), HCLT (Highest Cost Long Term), LCLT (Lowest Cost Long Term), and LCST (Lowest Cost Short Term).
The designation of a specific tax lot relief method on an account determines the order in which specific positions are sold. For example, if an account has a FIFO (First In First Out) designation, the positions purchased first will be sold first. If an account has a LIFO (Last In First Out) designation, the positions acquired most recently would be the first to be sold.
If you don’t designate a specific tax lot relief method, the account will be set up using the Wells Fargo Advisors default of FIFO (First In First Out), which is consistent with federal regulations.
All accounts opened prior to January 1, 2011, were opened using the firm’s FIFO (First In First Out) default method unless the client specifically requested a different method. If you wish to designate a different tax lot relief method for any of your accounts, please contact your Financial Advisor.
Debt Security Elections
For debt securities purchased on or after January 1, 2014, it is assumed the client has made the following elections:
Current amortization of taxable bond premium
Deferred inclusion of market discount as income to the date of sale or redemption
Computation of market discount accruals under the straight line method
Yes. According to IRS regulations, making a change will require written notification by you to your Financial Advisor. Once your Financial Advisor receives this notification, the election methods can be changed. It is recommended you speak with your personal tax advisor, as Wells Fargo Advisors cannot provide tax advice to clients. Please note, changing this election with Wells Fargo Advisors does not constitute changing the election with the IRS.
If no different election methods are chosen and presented to your Financial Advisor in writing, the calculations of cost basis for covered debt securities will be made in accordance with the IRS default election methods.
No. Election and default methods for debt securities purchased prior to December 31, 2013, will not change unless you elect to change them using the process outlined above.
You can find more information in IRS Publication 550 entitled Investment Income and Expenses (Including Capital Gains and Losses). This publication discusses requirements and available elections for amortization of premiums and accretion of discounts on debt securities. You can also contact your Financial Advisor for more information. It is very important to review your elections with your tax advisor, or consult this IRS publication, to help ensure your elections are consistent with the regulatory requirements.
If you have additional questions about cost basis reporting or how gains and losses on your investments are calculated, contact your Financial Advisor or tax professional.
Make a list of questions you have about cost basis reporting.
Discuss tax lot relief methods and your tax lot relief strategy with your advisors.
As Wells Fargo Advisors is not a legal or tax advisor, we encourage you to speak to your chosen tax advisor regarding your specific situation.