Covered Securities for Income Tax Reporting

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Definition: For tax purposes, a covered security refers to an investment security for which a broker is required to report the cost basis to the Internal Revenue Service and to the owner. A covered security is:

  • any stock in a corporation acquired on or after January 1, 2011,
  • mutual fund shares acquired on or after January 1, 2012,
  • stock in a corporation purchased through a dividend reinvestment plan acquired on or after January 1, 2012, and
  • notes, bonds, commodities (and derivatives or contracts based on commodities) acquired on or after January 1, 2013.

Investment brokers indicate 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 security. A check in box 3 of Form 1099-B indicates that the broker is reporting the cost basis to the IRS, which means this is a covered security.

We segregate investment sales by covered and noncovered securities using Form 8949. Form 8949 is a tax form where we detail the sales of stocks, bonds, and other capital investments. Form 8949 comes in three subgroupings:

  • transactions of securities reported on Form 1099-B showing basis was reported to the IRS. All the covered securities gets reported here. Use code A for short-term and code D for long-term holdings;
  • transactions of securities reported on Form 1099-B showing basis was not reported to the IRS. Noncovered securities are usually reported here. Use code B for short-term and code E for long-term holdings;
  • transactions not reported on Form 1099-B. These are also noncovered securities. Use code C for short-term and code F for long-term holdings.