Covered securities are investments for which a broker is required to report the asset's cost basis to the Internal Revenue Service (IRS) and to you as the owner. They include several types of stocks, notes, bonds, commodities, and mutual fund shares.
The concept of covered securities was first introduced by the National Securities Market Improvement Act of 1996. It refers to classes of securities that are exempt from state regulations under federal law.
- A broker must annually report a covered security’s cost basis to the IRS and to the owner.
- This rule has been in place since 1996, but brokers weren’t required to also report gains or losses until subsequent legislation took effect in 2011.
- Barter exchanges must also report this information.
- Transactions are reported on Form 1099-B.
The Legislative History
Additional legislation was passed in 2011 that required brokers to report the adjusted basis of these securities on Form 1099-B for tax purposes. Brokers became obligated to indicate whether gains or losses realized on the sale of covered securities were short-term or long-term.
Investment firms had no such reporting duties prior to that time, which often left taxpayers grappling to find the information necessary for filing accurate tax returns. Firms were only required to report gross proceeds before the 2011 legislation took effect.
Investments That Are Covered Securities
Covered securities include:
- Any stock in a corporation that was acquired on or after January 1, 2011
- Any mutual fund shares that were acquired on or after January 1, 2012
- Stock in a corporation that was purchased through a dividend reinvestment plan acquired on or after January 1, 2012
- Notes, bonds, and commodities, as well as derivatives or contracts based on commodities, that were acquired on or after January 1, 2013
Securities that were acquired prior to these dates are considered noncovered.
When Brokers Must Report
The rules for reporting apply to both brokers and barter exchanges. They must do so under any of three circumstances:
- They've sold a covered security for cash for any investor.
- The investor exchanged property or services through the barter exchange.
- The investor received compensation, including stock, cash, or other property, from a corporation that acquired its stock in an acquisition of control or had a substantial change in capital structure that was reported on Form 8806, "Information Return for Acquisition of Control or Substantial Change in Capital Structure."
A broker is defined by the IRS as anyone who "effects sales to be made by others" in the ordinary course of their business.
Brokers and barter exchanges aren't required to report for exempt entities. These include charitable organizations, most U.S. government entities, or assets held within IRAs, health savings accounts, Archer medical savings accounts, or corporations.
Covered Securities and Form 1099-B
Investment brokers are first tasked with citing whether an investment is a covered security on Form 1099-B. This is a tax document that reports the sale of stocks, bonds, mutual funds, and other investment securities.
A check in box 6 of Form 1099-B indicates that the broker is reporting the cost basis to the IRS, which means that it's a covered security. The cost basis of such an asset is its original value plus adjustments for events like capital distributions and stock splits.
Each transaction must be reported on its own Form 1099-B.
Covered Securities and Form 8949
Investment sales are also separated into covered and noncovered securities using Form 8949. This is a tax form that details the sales of stocks, bonds, and other capital investments. Form 8949 reports three subgroupings covering six codes.
Transactions of securities reported on Form 1099-B show the basis that was reported to the IRS in the first subgroup. All covered securities are reported here. Code A is used for short-term holdings. Code D is used for long-term holdings.
This subgroup covers transactions of securities reported on Form 1099-B. It shows that basis was not reported to the IRS. Non-covered securities are usually reported here using code B for short-term holdings. Code E is used for long-term holdings.
The third subgroup is for transactions that aren't reported on Form 1099-B. These are also noncovered securities. Code C is used for short-term holdings. Code F is used for long-term holdings
Frequently Asked Questions
Are all securities covered by this legislation?
Different types of securities have varying “acquired by” dates for being subject to the 2011 rules. For example, only stocks in corporations acquired on or after January 1, 2012 are considered to be covered securities if they were purchased through a dividend reimbursement plan.
How do I know whether my investment is a covered security?
You should receive Form 1099-B from your broker shortly after the beginning of the new year. Your investment is a covered security if box 6 of the form is checked. This means that the IRS has reported your cost basis to the IRS.