Cost Basis Glossary
Automated Customer Account Transfer Service (ACATS): An automated system developed by the National Securities Clearing Corporation (NSCC) that facilitates the transfer of securities from one trading account to another at a different financial institution.
Cost Basis: The value of an asset for tax purposes (usually the purchase price, plus commissions and fees) adjusted for stock splits, dividends, and return of capital distributions. This value is used to determine the capital gain or loss, which is equal to the difference between the asset's adjusted cost basis and the asset’s sale price. Also known as “tax basis.”
Covered/Non-Covered Indicator: A notation on client statements that indicates whether the tax lot is covered under IRS cost basis legislation.
Covered Security: A covered security is any security purchased or acquired on or after the effective date as designated by the IRS.
- Equity securities acquired on or after January 1, 2011
- Mutual fund and dividend reinvestment plan (DRIP) shares acquired on or after January 1, 2012
- Simple debt securities, such as fixed-rate bonds, original issue discount (OID) bonds and zero coupon bonds, options, rights, and warrants acquired on or after January 1, 2014
- More complex debt instruments acquired on or after January 1, 2016
Disallowed Wash Sale Amount: The amount of a loss that cannot be realized for tax purposes due to a wash-sale violation. The disallowed wash-sale amount value is included as an adjustment to the basis on the trade that triggered the wash sale violation.
Default Tax Lot Relief Method: A firm-chosen default tax lot relief method is designated for any account that does not specify a particular method at account opening. Consistent with current Federal income tax regulations, Wells Fargo Advisors has elected to use the default tax lot relief method of First In, First Out (FIFO).
Dividend Reinvestment Plan (DRIP): A plan offered by a corporation that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment date.
Emergency Economic Stabilization Act of 2008: In 2008, Congress passed the Emergency Economic Stabilization Act. Embedded within the laws in the Stabilization Act were provisions for the new IRS-mandated cost basis reporting regulations for financial institutions.
Frozen Tax Lots: Securities purchased or gained through reinvestment programs by a financial institution where the cost basis can be verified are considered frozen. (Covered securities are automatically considered frozen securities.)
Gift Date: The date on which the tax lot was transferred into the account as a gift.
Gift Fair Market Value: Fair market value of a tax lot transferred into an account as a gift. The fair market value (FMV) of a stock or bond is the mean between the highest and lowest selling prices quoted on the valuation date. The valuation date could be the transfer date or the as-of date, if used.
Non-Covered Security: Any security purchased or acquired prior to the covered security effective dates is considered non-covered. Assets purchased and held prior to these effective dates will have only gross proceeds on sales transactions reported to the IRS by the firm.
Open Date: Date on which the tax lot was purchased or transferred into an account.
Original Open Date: Original open date of the tax lot.
Reconciliation: Reconciliation is the matching of a taxpayer’s gains and losses on Schedule D of his or her 1040 with the financial institution’s 1099-B.
Short Sale: A short sale occurs when a client sells securities which he or she does not own. The transaction is considered closed when the client purchases the shares to close out the position. Short sales are reported in the year in which the position is closed.
Step-Up: A term used when transferring securities that refers to the process of adjusting the cost basis of a tax lot to the current market value on the date of transfer or the as-of date, if used.
S-Corporation: A type of corporation that meets the IRS requirements to be taxed under Subchapter S of the Internal Revenue Code. This provides a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. This means that any profits earned by the corporation are not taxed at the corporate level but, rather, are taxed at the level of the shareholders.
Tax Lot: A tax lot is the record of a taxable purchase date and cost for a specific security transaction. This provides the shareholder with the option of specifying exactly which shares to sell at a later date in order to possibly reap a tax advantage.
Tax Lot Relief Method: 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.
Term: Indicates the holding period for capital gains/losses. Long-term holdings are more than one year. Short- term holdings are less than one year.
Unit Cost: Cost per unit for each tax lot (total cost amount divided by quantity).
Versus Purchase (VSP): Clients may select specific tax lots to be closed by sale order on a transactional basis to effect a “versus purchase” trade on specific transactions, if desired. These instructions should be provided by the client to the Financial Advisor at the time of order acceptance.
Wash Sale: A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale:
- Buy substantially identical stock or securities
- Acquire substantially identical stock or securities in a fully taxable trade
- Acquire a contract or option to buy substantially identical stock or securities
Wells Fargo Advisors does not provide legal or tax advice. Although this information is not intended to replace discussions with your tax advisor, it may help you understand the tax implications to your investment plan effectively going forward.
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