FAQs on Cost-Basis Reporting for Brokers

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1 FAQs on Cost-Basis Reporting for Brokers The IRS published a list of Frequently Asked Questions on the new expanded tax reporting requirement for brokers which include reporting their customer s tax basis and holding period information. The guidance explains the types of securities covered, how to report tax basis if less than all securities are sold, when returns are due, who qualifies as a broker, and more detailed items like reporting for wash sales. Cost Basis Reporting Overview and FAQs Section 403 of the Energy Improvement and Extension Act of 2008 amended the Internal Revenue Code to mandate that every broker required to file a return with the IRS reporting gross proceeds from the sale of a covered security additionally report a customer's adjusted basis in the security and whether any gain or loss on the sale is classified as short-term or long-term. Additionally, the amendments direct brokers to follow customers' instructions and elections when determining adjusted basis. The amendments also provide that, when a broker transfers securities to another new broker before their sale, the transferring broker must furnish to the receiving broker a statement containing sufficient information about the transferred securities for the receiving broker to determine the customer's adjusted basis and whether any gain or loss is short-term or long-term when the transferred security is eventually sold. Finally, the amendments require issuers of securities to file a return with the IRS and furnish a statement to holders of the securities after taking a corporate action that affects the basis of the security to explain the corporate action and its quantitative effect upon the basis of the security. Securities Subject to Reporting The types of securities covered by the legislation (referred to in the legislation as "specified securities") include stock in a corporation, notes, bonds, debentures and other evidence of indebtedness, commodities, commodity contracts or derivatives, and any other financial instrument for which the Secretary determines reporting adjusted basis is appropriate. A security is a "covered security" and therefore subject to the basis reporting requirements if it is acquired after its corresponding applicable date. For stock in a corporation, the applicable date is January 1, 2011 unless the stock is in a mutual fund or is acquired in connection with a dividend reinvestment plan (DRP), in which case the applicable date is January 1, For any other specified security, the applicable date is January 1, 2013, or a later date determined by the Secretary of the Treasury. Brokers therefore are not required to report basis for any securities acquired before Reporting Basis If a customer sells less than his or her entire position of a security in an account, a broker must report a customer's adjusted basis in the security (other than mutual fund or DRP stock) using the first-in, first-out (FIFO) method, unless the customer provides the broker an adequate and timely identification of the shares or units the customer wants to sell. A broker 1

2 must report the adjusted basis of mutual fund or DRP stock (for which a customer may average the basis of the stock) in accordance with the broker's default method unless the customer notifies the broker that the customer elects a different permitted method. Averaging Basis The amendments change how taxpayers determine the average basis of mutual fund stock and permit taxpayers to average stock held in a DRP. Starting in 2012, taxpayers who elect to average the basis of mutual fund shares will compute separate averages for fund shares held in different accounts. Taxpayers also will be permitted to average the basis of mutual fund shares in one account but not average them in another account. Further, unless the fund or broker holding the fund shares elects otherwise, taxpayers will compute a separate average for fund shares in an account that are covered securities and a separate average for fund shares in an account that are not covered securities. Taxpayers also may average the basis of stock held in a DRP and acquired on or after January 1, Averaging only applies to DRP stock held in plans for which the written plan documents require that at least 10 percent of every dividend paid is reinvested in identical stock. Other Broker Reporting Provisions Wash Sales -- The amendments require brokers to adjust basis to reflect wash sales but only if the acquired securities are identical (instead of substantially identical) to the sold securities. Further, the amendments only require brokers to report wash sales when the purchase and sale transactions occur in the same account. S Corporations -- Brokers have not previously been required to report the gross proceeds from the sale of securities owned by S corporations or C corporations. The amendments now require that brokers report sales of covered securities that S corporations acquire on or after January 1, Short Sales -- Previously, brokers reported the gross proceeds of short sales for the year in which a short sale is entered into. The amendments now require that brokers report short sales for the year in which the short sale is closed. Time for Furnishing Statements -- The amendments extend the due date for brokers to report securities sales to customers on Form 1099-B from January 31 to February 15 of the year following the calendar year in which a security is sold. This later due date also applies to Form 1099-S, and, when reporting payments to attorneys or substitute payments by brokers in lieu of dividends or interest, Form 1099-MISC. The later due date also applies to other statements that must be furnished by January 31 if furnished with one of these three statements in a consolidated reporting statement. Transfer Statements The Act provides that when a broker transfers covered securities to another broker, the transferring broker must furnish to the receiving broker a written statement with all necessary information required for the receiving broker to comply with the Act's basis 2

3 reporting requirements. Statements required by this rule are generally due no later than 15 days following the transfer of the covered securities. Issuer Reporting The Act provides that an issuer of a specified security must file a new information return with the IRS to describe any organizational action it takes that affects the basis of the security (such as a stock split or merger) within 45 days after the date of the organizational action (unless the action takes place in December, in which case the return must be filed by January 15 of the following year). The return must describe the organizational action and its quantitative effect on the basis of the security. Additionally, the issuer must furnish a copy of the return to each holder of the security by January 15 of the year following the action. These requirements first apply to organizational actions on or after January 1, 2011, that affect the basis of stock in a corporation other than a mutual fund. Frequently Asked Questions 1. How has the Act changed the reporting requirements of brokers? Before the Act took effect, brokers were required to file a return with the IRS under Code section 6045 showing gross proceeds from the sale of a customer's securities. The Act amended the reporting requirements to additionally require the reporting of the customer's adjusted basis in the securities and whether any gain or loss on the sale is short-term or long-term. 2. When are returns due? The Act gives brokers until February 15 of the year following the sale of a security to furnish Form 1099-B to their customers. Brokers must file Form 1099-B with the IRS by February 28 of the year following the sale. However, brokers who electronically file Form 1099-B with the IRS may file the forms by March 31 of the year following the sale. 3. Who qualifies as a broker? The Act did not change the definition of a broker that must report the sale of securities. The regulations continue to define a "broker" as any U.S. or foreign person that, in the ordinary course of a trade or business, stands ready to effect sales to be made by others. However, if a sale of securities takes place outside the United States, only a U.S. payor or U.S. middleman under Regulations section (c)(5) qualifies as a broker. 4. What are "specified securities"? The term "specified securities" connotes the various types of securities which, if acquired after their respective effective dates, are subject to the basis reporting requirements of the Act. Specified securities include stock in a corporation, notes, bonds, debentures and other evidence of indebtedness, commodities, commodity contracts or derivatives, and any other financial instrument for which the Secretary determines reporting adjusted basis is appropriate. 3

4 5. What are "covered securities"? The term "covered security" refers to specified securities which are acquired after their applicable effective date. Covered securities are therefore those securities subject to the basis reporting requirements. A specified security is covered if it was acquired for cash and either (1) was acquired through a transaction in the account in which the security was held; or (2) was transferred to that account from an account in which the security was a covered security, but only if the broker receiving the security receives a transfer statement from the transferring broker. Securities that are not covered securities are called noncovered securities. Because the regulations stipulate that a specified security is only covered if it is received for cash, certain stock acquired through other transactions is not covered. Stock granted by an employer is not covered because it is not acquired for cash. Conversely, stock acquired by the exercise of rights distributed by an issuer is a covered security because it is acquired for cash. The regulations further treat a security acquired by stock dividend, stock split, reorganization, redemption, stock conversion, recapitalization, corporate division, or other similar action as if it were acquired for cash and, therefore, as a covered security if the basis of the new security is determined from the basis of a covered security. 6. What will brokers have to report? The regulations instruct brokers to report basis as the total amount of cash paid by a customer or credited against a customer's account when securities are acquired, adjusted for commissions and fees from the purchase of the security and other events in the account such as a stock split. 7. When do these reporting requirements go into effect? For stock in a corporation, the applicable date is January 1, 2011 except for shares of a mutual fund and stock held in a dividend reinvestment plan (DRP), in which case the applicable date is January 1, For any other specified security, the applicable date is January 1, 2013 or a later date determined by the Secretary of the Treasury. A covered security acquired in 2011 is not covered if it is transferred into a DRP in 2011, but remains covered if transferred into a DRP after How do brokers report basis when customers pay for securities in a foreign currency? The regulations require that brokers who receive payment in a foreign currency for covered securities traded on an established securities market convert the amount of the payment to a U.S. dollar amount when reporting basis by using a spot rate or reasonable spot rate convention as of the settlement date of the purchase. 9. How is basis to be calculated on wash sales? Although taxpayers must comply with the wash sale rules of Code section 1091 for sales of securities that are substantially similar to securities acquired within 30 days of a sale, 4

5 brokers are only required to report wash sales when the securities have the same CUSIP number. Further, brokers are only required to report wash sales when the purchase and sale transactions occur in the same account. Taxpayers must still comply with the wash sale rules whether the transactions occur in the same or different accounts. 10. Are brokers required to report wash sales for high frequency traders? Yes. But, the regulations do not require a broker to report wash sales for customers who have informed the broker in writing that the customer has made a valid and timely mark-tomarket accounting method election under Code section 475(f)(1). The exemption applies only to accounts identified by the customer as containing only securities subject to the mark-to-market election. 11. Are securities acquired by businesses covered? It depends. Securities acquired by S corporations or partnerships are covered securities if bought after the applicable date. However, securities acquired by S corporations in 2011 are not covered. Securities acquired by C corporations are never covered. 12. Is a broker required to determine whether a corporate customer is an S corporation or a C corporation? If so, how? Brokers are required to report sales of covered securities that S corporations acquire on or after January 1, 2012 but are not required to report any sales by C corporations. Therefore, to determine whether a corporate customer is exempt from reporting under these rules, a broker must determine whether its customer is an S corporation or a C corporation, but only for sales of covered securities acquired on or after January 1, If a broker has no actual knowledge of whether a corporate customer is a C corporation, the broker must request a Form W-9 exemption certificate or report the sale of a covered security acquired on or after January 1, 2012 as the sale of a covered security under a presumption that the corporation is an S corporation. Because brokers generally cannot determine from a customer's name alone whether the customer is an S corporation or C corporation, a broker is not permitted to make a determination about corporate status for this exception solely based on the name of the corporation for sales of these covered securities. 13. In the case of a short sale, at what point is reporting required? For short sales opened on or after January 1, 2011, brokers must report the sale for the year in which the short sale is closed. Previously, brokers reported the sale for the year in which the short sale was opened. 14. When is backup withholding permitted for proceeds from short sales? Brokers may perform backup withholding from the gross proceeds of the sale when the short sale is opened or, if the broker expects that it will be able to determine the gain on the short sale when the short sale is closed, from any gain when the short sale is closed. 5

6 15. What happens to basis information if a customer transfers a security to another broker? When a broker, custodian of securities, issuer of securities, or trustee or custodian or an individual retirement plan transfers custody of a specified security to a broker, custodian, or issuer, the transferor must furnish to the receiving broker a written statement with all necessary information required for the receiving broker to comply with the basis reporting requirements of the Act. Transfer statements are due no later than 15 days following the transfer. The Act requires transfer statements for transfers of stock on or after January 1, 2011, except for shares in a mutual fund. Transfer statements are required for transfers of mutual fund stock on or after January 1, In order to promote industry readiness to comply with the new basis reporting rules, the IRS has provided transitional relief from the transfer reporting requirements. In Notice , the IRS announced that it will not assess penalties for failing to provide transfer statements for transfers of stock in 2011 that are not incidental to the stock's sale or purchase. Further, a broker receiving transferred stock in 2011 may treat the stock as a noncovered security whether or not the transferor furnishes a transfer statement if the transfer was not incidental to the stock's sale or purchase. 16. Is a transferred security a covered security in the new account? A transferred security is a covered security under the regulations if it was a covered security prior to transfer and if the receiving broker, custodian, or issuer receives the transfer statement required by the Act. 17. What if a broker, custodian, or issuer receives no transfer statement? If a transfer statement is not received, the regulations permit the receiving broker, custodian, or issuer to treat the securities as noncovered provided that the receiving broker notifies the transferor that it does not receive a transfer statement and requests the statement and no statement is provided in response before the receiving broker reports the sale or a subsequent transfer of the security. 18. What must a broker do if it receives a transfer statement after it has already reported the sale of the security? If a broker receives a transfer statement within three years of reporting the sale of a security, the broker must file a corrected Form 1099-B unless the broker reported the required information on the original return consistently with the transfer statement. 19. Are transfer statements required for transfers of noncovered securities? Yes. The regulations require that a transfer statement be provided for the transfer of all securities, whether covered or noncovered. However, the transfer statement of a noncovered security need not report basis and other information about the security's acquisition. 6

7 20. What must be included in a transfer statement? Will there be a form for transfer statements? Because transfer statements are not submitted to the IRS, there will be no official form or format required. However, at a minimum, a transfer statement must identify the securities being transferred, and include the total adjusted basis of the securities, the original date of acquisition, the transfer date, and the settlement date for the transfer. Additionally, a transfer statement must identify the person furnishing the statement, the person receiving the statement, the owner or owners transferring the securities, and if different, the owner or owners of the securities after any transfer other than a sale, such as a transfer of gifted or inherited securities. 21. Are transfer statements required in the case of securities transferred in connection with a loan? The regulations do not require transfer statements for transfers in which the transferor lends or borrows a security and acts as the principal directing the loan (such as when a transferor arranges the transfer of securities to open or close a short sale). This exception applies whether the transferor lends its own securities or lends its customer's securities when the customer has granted the custodian general permission to lend the securities. The exception does not apply when the transferor's customer acts as the principal directing the loan by arranging the lending or borrowing agreement. 22. Is transfer reporting ever required for short sales? Yes. A transfer statement is required if a customer who has entered into a short sale at a broker borrows securities from another broker and delivers the borrowed securities to the first broker to satisfy the obligation to the first broker. A transfer statement is required because the customer, not the second broker, acted as principal for the transfer. The second broker must furnish the transfer statement and indicate on it that the transferred security is borrowed. This indication informs the first broker that the customer's short sale is still open. Because the short sale is still open, the regulations do not permit the first broker to file a return reporting the sale as if the short sale were closed. Instead, the first broker must furnish a separate statement to the second broker containing the information necessary to report the sale to the IRS when the customer later closes the short sale in the account at the second broker. 23. What are the new reporting obligations imposed on issuers of securities? An issuer of a specified security must file a new information return with the IRS that describes any organizational action it takes that affects the basis of the security (such as a stock split or merger) within 45 days after the date of the organizational action (unless the action takes place in December, in which case the return must be filed by January 15 of the following year). The return must identify the issuer and security affected by the action, provide information and a detailed description of the action, and explain the quantitative effect on the basis of the security. Additionally, the issuer must furnish a copy of the return to each holder of the security by January 15 of the year following the action. These requirements apply to corporations (except for mutual funds) for organizational actions on or 7

8 after January 1, 2011, that affect the basis of the corporation's stock. Mutual funds must report all organizational actions taken on or after January 1, 2012, that affect the basis of the fund's stock. 24. Are foreign issuers subject to the organizational action reporting requirements? Yes. The requirements apply to both domestic and foreign issuers of securities if the security is owned by U.S. taxpayers, either directly or as a depositary receipt. The exception from reporting organizational actions to foreign holders is described in more detail in the regulations. 25. If securities affected by an organizational action are held by someone other than the holder, to whom must the issuer report the action? When securities are held as nominee by someone other than the holder of record, such as a broker or custodian, the issuer is required to furnish the issuer statements to the nominee listed on its books, unless the nominee is the issuer itself or the issuer's agent. 26. Is there an alternative to mailing the issuer statements to each holder or nominee? Yes. The regulations waive the requirement to file the issuer return with the IRS and furnish issuer statements to holders and nominees if the issuer (1) posts the return in a readily accessible format to a section of its primary public website dedicated to the sole purpose of reporting organizational actions; (2) posts the return by the same due date for reporting the action to the IRS; and (3) keeps the return accessible to the public for ten years on its website or the primary public website of any successor organization. 27. Is an issuer required to amend a return or information statement regarding an organizational action if the issuer discovers additional facts or mistakes in the previous return? Yes. The regulations require that issuers correct issuer returns and issuer statements whenever the issuer discovers additional facts or mistakes which result in a different quantitative effect on basis than what the issuer previously reported. The corrected issuer returns must be filed with the IRS within 45 days after determining the facts that result in a different quantitative effect on basis from what the issuer previously reported. The corrected issuer statements must be furnished by the later of the date the corrected return must be filed or the original due date for furnishing the statements on January 15 of the year following the action. 28. How can issuers report the effect of an organizational action on basis when the effect may not be known until much later? To relieve an issuer's uncertainty about the effects of an organizational action within the 15- to 45-day period to file an issuer return with the IRS, the regulations permit issuers to make reasonable assumptions about facts that cannot be determined prior to the due date. If 8

9 contrary facts or effects are determined after the due date, the issuer must correct the issuer return and any issuer statements as described in the previous paragraph. 29. Must an S corporation report organizational actions to shareholders even though it furnishes them a Schedule K-1 each year? No. Although S corporations are not exempt from the reporting requirements concerning organizational actions, the regulations consider an S corporation to satisfy its reporting obligations if the organizational action's effects are reflected on a Schedule K-1 for each applicable shareholder, the K-1s are timely filed with the IRS, and copies of the K-1s are timely furnished to all applicable shareholders. 30. Is a mutual fund or real estate investment trust (REIT) required to file an issuer return for undistributed capital gains reported under Code section 852(b)(3)(D) or 857(b)(3)(D) on Forms 2438 and 2439? No. Although undistributed capital gains are reportable under the Act, because these forms report the information required on the issuer return, the regulations provide that an issuer that files and furnishes Forms 2438 and 2439 is deemed to meet the issuer reporting requirements under the Act for undistributed capital gains that affect the basis of its stock. 31. What must a broker do if it receives an issuer statement after it has already reported a sale of the security? If a broker receives an issuer statement within three years of reporting the sale of a security, the broker must file a corrected Form 1099-B unless the broker reported the required information on the original return consistently with the issuer statement. 32. How must a broker report basis for a sale of securities in which the gain or loss on some securities is short-term, while on others long-term? What if some securities sold are covered, while others are noncovered? When the sale of covered securities includes gain or loss that is short-term and long-term, brokers must report the securities held for a short-term period and the securities held for a long-term period on separate returns. Further, because noncovered securities must be reported separately from covered securities to avoid treatment as covered securities, brokers may report the covered shares and noncovered shares on separate returns. Therefore, a single sale in an account could require as many as three separate returns if the sale included covered securities held less than one year, covered securities held longer than one year, and noncovered securities. 33. What if the customer is a tax-exempt organization when it acquires a security but loses its tax-exempt status before it sells the security? If a customer is excepted from Form 1099-B reporting at the time it acquires securities but not at the time it sells the securities, the broker must report the sale of the securities on Form 1099-B. The broker is not required to report basis, however, because securities 9

10 acquired by a customer excepted from 1099-B reporting at the time of the acquisition are noncovered securities. 34. How does a broker determine if a security is "stock"? For purposes of establishing the applicable date to commence basis reporting, the regulations define "stock" as any security an issuer classifies as stock. If the issuer has not classified a security, a broker does not need to treat the security as stock unless the broker knows that the security is reasonably classified as stock under general Federal tax principles. A broker also does not need to accept another broker's classification of transferred securities as "stock." 35. Are shares of stock in a foreign corporation classified as "stock" for reporting purposes under the Act? Yes. Shares of stock in a foreign corporation including depositary receipts representing shares of stock in a foreign corporation (ADRs) are treated as stock for basis reporting purposes. 36. Can a broker treat all securities as covered to simplify reporting? Yes. The regulations do not require a broker to report a noncovered security as noncovered. Brokers may report adjusted basis and whether any gain or loss on a sale is long-term or short-term for all securities without indicating that any of the securities are noncovered. The broker will be subject to penalties for any incorrect information, however. The penalty safe harbor for reporting adjusted basis and whether any gain or loss on a sale is long-term or short-term only applies to noncovered securities if the broker indicates on the return that the sale is the sale of a noncovered security. 37. How must a broker determine basis when a sale includes securities acquired on different days or at different prices? What if the acquisition date is unknown for some shares? If a customer acquires securities on different days or at different prices and sells less than the entire position in an account, a broker must report the sale consistently with the customer's identification of the security to be sold if the customer provides the broker an adequate and timely identification. If the customer does not provide an adequate and timely identification when selling securities other than mutual fund or DRP stock, the broker must first report the sale of any shares or units in the account for which the broker does not know the acquisition or purchase date followed by the earliest shares or units purchased or acquired, whether covered securities or noncovered securities. For mutual fund or DRP stock (for which a customer may average the basis of the stock), a broker must report adjusted basis in accordance with its default method unless the customer notifies the broker that the customer elects a different permitted method. 38. Must brokers use the average basis method to determine basis? 10

11 The regulations permit taxpayers to average the basis of identical shares of mutual fund or DRP stock. Brokers must use the average basis method when determining basis for this stock if a customer elects the method and notifies the broker of the election. Brokers may also choose the average basis method as its default method when determining basis for mutual fund and DRP stock unless a customer elects another permitted method. 39. What qualifies as "identical" shares of stock? Shares of stock are identical when they have the same Committee on Uniform Security Identification Procedures (CUSIP) number or other security identifier that the IRS may designate in later published guidance. For purposes of averaging the basis of identical stock, stock acquired in connection with a DRP is not identical to stock with the same CUSIP number that is not in a DRP. 40. Does a DRP need to be administered by an issuer for the average basis method to be permissible? No. The regulations define a DRP as a written arrangement, plan or program administered by an issuer or non-issuer of stock. Accordingly, a taxpayer may elect the average basis method for a DRP administered by someone other than a security's issuer. 41. Do all dividends have to be reinvested for securities to qualify as a DRP? No. The regulations only mandate that a DRP's plan documents require that at least 10% of every dividend paid be reinvested in identical stock. 42. If the DRP's plan documents do not require that at least 10% of every dividend paid be reinvested in identical stock, may the taxpayer use the average basis method for stock held in the plan? No. If the plan documents do not provide for the reinvestment of at least 10 % of every dividend in identical stock, the plan is not a DRP for purposes of the average basis method. 43. Will a plan still qualify as a DRP if the issuer of the securities has never paid dividends or if it suspends dividends? Yes. The regulations provide that a stock may be held in a DRP even if the issuer has never paid dividends or the issuer has suspended dividends. 44. Will transfers of identical stock into a DRP be considered part of a DRP? Yes. Stock acquired in connection with a DRP includes the stock initially purchased in the DRP, identical stock subsequently transferred into the DRP, additional periodic purchases of identical stock through the DRP, and all identical stock acquired through reinvestment of dividends or other distributions paid by the DRP. 45. If a DRP is terminated or the taxpayer withdraws his or her stock from the DRP, is the average basis method election still available? 11

12 No. After termination of a DRP, or withdrawal of a taxpayer's stock from a DRP, a taxpayer may no longer elect the average basis method. However, the basis of each share of stock immediately after the change is the same as the basis immediately before the change. 46. If the average basis method is elected for mutual fund or DRP stock, which stock is sold first if some of the stock has a long-term holding period and some has a short-term holding period? When there is a mix of stock having long-term and short-term holding periods in an account for which the average basis method has been elected, the stock sold is determined on a FIFO basis. 47. Can a taxpayer who has been using the double category method of determining average basis for mutual fund stock continue to do so? No. The regulations provide a transition rule for taxpayers using the double category method for mutual fund shares. On April 1, 2011, the basis of stock for which the average basis method has been elected is computed by averaging the basis of all identical stock in an account regardless of the holding period. 48. How and when is the average basis method elected? Starting in 2012, a customer elects the average basis method by notifying his or her broker of the election in writing. A taxpayer may make a written average basis election electronically. The regulations provide that a customer may elect the average basis method at any time. The election takes effect for sales that occur after the election. 49. When is a taxpayer permitted to revoke an average basis election or change from the average basis method? A taxpayer may revoke an average basis election by the earlier of one year from the date of making the election or the first sale or other disposition of the stock following the election. After a revocation, the taxpayer's stock basis is the basis before averaging. However, a taxpayer may change from the average basis method to another permissible method prospectively. The regulations do not limit the number of times or the frequency at which a taxpayer can change his or her basis determination method. Following a change, the taxpayer's stock basis remains the same as the basis immediately before the change. 50. If a taxpayer owns shares of the same mutual fund in different accounts, can he or she make an average basis election for only some of the accounts? Yes, but only after December 31, Prior to 2012, the regulations require that an average basis election apply to all shares of a particular mutual fund in all accounts in which a taxpayer holds the fund. Starting in 2012, a taxpayer may elect to average basis for a particular mutual fund in one account but not in another account. 51. Can taxpayers average the basis of different lots of identical stock purchased on the same day? 12

13 Yes. Taxpayers must calculate the average of the basis of multiple lots of identical stock purchased at separate times on the same day if the stock is purchased in a single trade order and the broker executing the trade provides a single confirmation reporting the aggregate total cost or average cost per share. However, a taxpayer is permitted to calculate basis by actual cost per share if he or she informs the broker in writing of this intent. 52. How is an averaged basis determined for mutual fund or DRP stock when some of the shares are covered securities and some are noncovered? Beginning in 2012, the regulations treat mutual fund and DRP stock that is a noncovered security as being held in a separate account from stock that is a covered security. Because stock is averaged on an account-by-account basis starting in 2012, the basis of shares that are covered securities will be the average basis of only the covered securities and the basis of the shares that are noncovered securities will be the average basis of only the noncovered securities. However, if a broker has accurate basis information for shares that are noncovered securities and makes a "single-account election" for some or all of the shares, the shares subject to the single-account election are treated as covered securities and their basis is averaged with the shares that are covered securities. 53. Is the single-account election revocable? No. A broker cannot specifically revoke a single-account election. However, if a taxpayer revokes an average basis method election for a particular stock, the taxpayer's revocation will void a single-account election for that stock. In this case, stock that became a covered security as a result of the single-account election will cease to be a covered security after the election is voided. Conversely, if a taxpayer changes (rather than revokes) his or her basis determination method and ceases to use the average basis method in an account in which a single-account election was made, shares that were treated as held in a single account before the change continue to be covered securities and considered to be held in a single account. 54. If a taxpayer does not elect the average basis method for mutual fund and DRP stock, may a broker that uses the average basis method as its default method make a single-account election for that stock? No. A broker only may make a single-account election following a taxpayer's average basis method election. 55. Brokers may make the single-account election only for noncovered mutual fund or DRP stock for which they have accurate basis information. Must a broker know whether a taxpayer previously averaged mutual fund or DRP stock held by the broker? Yes. Accurate basis information includes whether the basis of stock held by the broker previously was averaged by the taxpayer. A taxpayer makes the average basis method election for noncovered mutual fund or DRP stock on the taxpayer's return and, for stock sold before 2012, must average the basis of all identical stock held in any account. 13

14 Therefore, a broker should exercise caution in making a single-account election for mutual fund or DRP stock if a taxpayer may have averaged the basis with the basis of stock held by other brokers. 56. How does a broker make a single-account election? A broker makes a single-account election simply by clearly noting it in its books and records, which must reflect the date of the election; the taxpayer's name, account number, and taxpayer identification number; the stock subject to the election; and the taxpayer's basis in the stock. Additionally, a broker must notify a taxpayer of a single-account election through reasonable means (mailings, circulars, or suffice). The notice must clearly identify the securities subject to the election and state that all securities will be treated as covered, regardless of date of acquisition. 57. Does previously noncovered stock in a mutual fund or DRP for which a singleaccount election has been made remain covered upon transfer to a different broker? Yes, provided that the receiving broker received a transfer statement. 58. When must taxpayers elect specific identification as their lot selection method? Taxpayers must identify stock sold by the earlier of the settlement date or the time for settlement under SEC regulations. 59. Can a taxpayer use a standing order to specify a lot selection method? Yes. A broker may permit a taxpayer to identify lots to be sold by a standing order. 60. Is there any specific way that a taxpayer must communicate a lot selection? No. In order to enable the greatest flexibility to taxpayers, there is no specific method designated by the regulations for communicating a lot selection. 61. Are brokers still required to provide a customer with written confirmation of the sale of specifically identified stock? If so, is a broker permitted to communicate the required confirmation of sales of specific stock to a taxpayer electronically? Yes. The written confirmation requirement still applies. The regulations require brokers to provide written confirmation of the sale of stock which a customer specifically identified. Electronic confirmation satisfies the "written confirmation" requirement. The regulations also provide that account statements and other periodic account documents satisfy the written confirmation requirements if provided within a reasonable amount of time following a sale or transfer. 62. Does the FIFO lot selection method apply on an account by account basis? 14

15 For mutual fund and DRP stock, FIFO applies on an account by account basis beginning in For stock for which the average basis is not available, FIFO applies on an account by account basis beginning in How is specific identification achieved in an estate or trust? A trustee of a trust or executor of an estate satisfies the specific identification requirements if he specifies the stock in writing in the books and records of the estate or trust. If the stock is distributed, the trustee or executor must identify the stock in writing to each distributee. 64. What are consolidated reporting statements and when are they permissible? The Act extended from January 31 to February 15 the due date to furnish to payees Form 1099-B, Form 1099-S, and, when reporting payments to attorneys or substitute payments by brokers in lieu of dividends or interest, Form 1099-MISC. The Act also applied this extended due date to other statements that must be furnished by January 31 if they are furnished with one of these three forms in a "consolidated reporting statement." The regulations define consolidated reporting statements as groupings of reporting statements provided to the same customer or customers on the same date, whether or not the statements concern the same account or transaction. The regulations require that the statements included in the grouping arise out of the same relationship as the statement furnished under section Therefore, a broker may furnish Form 1099-DIV and Form 1099-R to a customer by February 15 if the broker mails the statements to the customer with Form 1099-B because the broker furnishes all three statements based on the same broker-customer relationship. Because a customer with a taxable brokerage account may not sell securities in the account every year, the regulations provide a special rule that permits brokers to treat any customer with a taxable account as receiving a consolidated reporting statement regardless of whether the consolidated reporting statement actually includes a Form 1099-B. 65. Can gifted or inherited securities be covered? Yes. If gifted or inherited securities were covered in the account of the donor or decedent, they remain covered upon receipt by the donee or heir. Covered securities transferred by gift or inheritance must be accompanied by a transfer statement that indicates that the gifted or inherited securities are covered securities. In the case of inherited securities, the transfer statement must also report the date of death and the stepped-up basis as of the date of death or as reported to the broker by the authorized representative of the estate. In the case of gifted securities, the transfer statement must include the donor's adjusted basis, the donor's original acquisition date, the date of the gift, and the fair market value of the gift on that date. The transferor is only required to compute the fair market value of the securities on the date of the gift if the value is readily ascertainable at the time of the transfer. 66. How is a transfer of ownership to be treated by a broker, issuer, or transfer agent if the circumstances of the transfer are unclear? 15

16 Under the regulations, if a request to transfer ownership of covered securities between different persons is silent as to the reason for the transfer, the transfer should be treated as a gift. 67. Is a broker subject to penalties under Code sections 6721 or 6722 if the broker relies on inaccurate information provided in a transfer statement or issuer statement reporting a customer's adjusted basis? No. A broker is not subject to penalties for relying on inaccurate information provided in a transfer or issuer statement. However, if the broker later receives a corrected transfer statement or issuer statement, the broker must file a corrected Form 1099-B or furnish a corrected transfer statement unless the broker reported the required information on the original return or transfer statement consistently with the later-received information. Corrected reporting is only required when a broker receives corrected information within 3 years after filing Form 1099-B or 18 months after furnishing a transfer statement. 68. Is a broker permitted to adjust the reported basis of covered securities to include information not reported on a transfer statement or issuer statement? Yes. A broker is permitted to adjust the reported basis of covered securities to include information not reported on a transfer or issuer statement. For purposes of determining whether any penalties that result from any adjustment should be waived, a broker will be deemed to have relied in good faith on information not reported on a transfer or issuer statement if the broker neither knows nor has reason to know that the information is incorrect. Page Last Reviewed or Updated: March 07,

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