Cost Basis Reporting for Fixed Income On April 17, 2013, the IRS released final regulations on cost basis reporting for fixed income and options securities as part of Phase III of cost basis legislation. Given the complexity of these investments, the Internal Revenue Service (IRS) will stagger the reporting requirements to cover: Less complex fixed income securities acquired on or after January 1, 2014 More complex fixed income securities acquired on or after January 1, 2016 Less Complex Fixed Income: Subject To 1/1/14 Reporting More Complex Fixed Income: Subject To 1/1/16 Reporting Fixed Income Excluded From Reporting* Taxable and tax-exempt bonds that have a fixed rate, fixed maturity, and fixed payment schedule, even if callable by the issuer. These include: Treasury notes and bonds Fixed-rate corporate bonds Fixed-rate municipal bonds Variable-rate bonds Stepped-rate bonds Convertible bonds Stripped bonds Certain tax credit bonds Contingent payment bonds Inflation-indexed fixed income securities Foreign-issued bonds or bonds that pay in foreign currency Payment-in-kind bonds Fixed income securities issued as part of an investment unit Fixed income securities for which terms are not reasonably available to the broker within 90 days of acquisition by client Fixed income securities evidenced by a physical certificate not held by a custodian or clearing agent (physical debt) Some specific interests in or mortgages held by a real estate mortgage investment conduit (REMIC) Certain other fixed income securities with payments subject to acceleration Pools of fixed income securities whose yields may be affected by prepayments Short-term fixed income securities with fixed maturity dates not more than one year from the date of issue * Fixed Income excluded from reporting: optionsxpress will not report cost basis to the IRS. Taxpayers are still responsible for reporting this information to the IRS.
PAGE 2/9 IRS Regulations on Fixed Income Amortization Under the final regulations, brokers will assume that clients have elected to amortize bond premium. Amortization is defined as: The process of adjusting the purchase price of a bond downward to par. The difference between the price of the bond bought above par and its par value is called the premium. When an investor buys a security in the secondary market at a premium (if the security was issued above or near 100), the purchase price is adjusted downward to 100 over the remaining life of the security until it reaches par on the maturity date. 2014 Year-End Reporting for Fixed Income optionsxpress will be reporting proceeds, cost basis and market discount to the IRS on less complex fixed income securities which were acquired on or after January 1, 2014 and subsequently sold in 2014. optionsxpress will report all principal payments, including partial principal payments, on the Form 1099-B in the non-covered securities Short-term/Long-term transactions for which basis is missing and not reported to the IRS section. Annual Bond Premium, if any, will now be reported to the IRS on Form 1099-INT for covered bonds. Acquisition Premium for OID securities will now be reported to the IRS on Form 1099-OID for covered taxable bonds. The amount of bond premium amortization for a tax year can be reported only up to the stated interest payment on the bond. Excess amortization will be carried forward to the next tax year. Market Discount will be reported when a bond is sold or matures. Changes to 2014 Tax Form(s) 1099 The IRS has made many changes to the 2014 tax forms and instructions. Here is a summary of the changes that may affect fixed income securities: Form 1099-INT Lines relocated State tax withheld The amount of any state backup withholding has been moved from separate income summaries in favor of a single summary section devoted to state tax withheld (illustrated later in this document). The state name and ID are found in the existing detail section devoted to state withholding. New boxes Two boxes were added to report Market Discount and Bond Premium.
PAGE 3/9 Market Discount and Bond Premium For covered lots, any amount of market discount or bond premium must be reported in new boxes added to the form for 2014. Market discount is reflected in line 10 while line 11 is devoted to bond premium. Unfortunately, the IRS did not create distinct boxes for bond premiums on different types of securities. To better serve you, we are including 4 unnumbered lines that show distinctly the components of total bond premium arising from non-treasury obligations, Treasury obligations, taxexempt obligations and tax-exempt private activity obligations. Coordination with other forms Information from several detail sections of the statement are aggregated in Form 1099-INT. These include interest income, tax-exempt interest income, tax-exempt OID and taxable OID. Form 1099- OID has provisions for reporting market discount and acquisition premium, but not for bond premium. Therefore, if there is bond premium on a taxable OID bond, the detail will be presented within the interest detail and summarized on Form 1099-INT (covered lots) and a new summary of adjustments to income and OID (non-covered lots) described in a subsequent section. Extract from the composite statement The statement extracts shown below reflect the removal of state withholding lines, new lines required for fixed income cost basis and accommodation of the new tax-exempt OID reporting.
PAGE 4/9 Form 1099-OID Lines removed or relocated Foreign country and withholding The IRS has eliminated boxes on Form 1099-OID devoted to foreign tax withheld and identification of the related jurisdiction. Accordingly, the summary no longer has lines for aggregation of such amounts. State tax withheld The amount of any state backup withholding has been moved from separate income summaries (1099 forms or the OID summary) in favor of a single summary section devoted to state tax withheld. New Lines Form 1099-OID now has lines for reporting currently recognized market discount and acquisition premium. Because the individual forms contain only a single security, a summary at that level does not require that premiums be separately identified as Treasury and non-treasury obligations. Adjustments to Interest and OID This is a new section for the summary pages. Items displayed in previous years, such as accrued interest paid, are found here along with an array of new lines showing additional income or adjustments to income on non-covered fixed income holdings. Lines consolidated and refined Taxable accrued interest paid Previously, there were distinct lines dedicated to taxable accrued interest paid and taxable accrued interest paid on OID bonds. These items have been rolled into a single line.
PAGE 5/9 Accrued Treasury interest paid Taxable accrued Treasury interest paid By allocating accrued interest paid between Treasury and non-treasury instruments, this new line adds a level of refinement to the presentation that was previously missing from the supplemental summary portion. The recipient is now able to judge immediately whether interest income reported in line 1, line 3 of Form 1099-INT or both should be offset by premium on the tax return. Bond premiums Bond premiums for noncovered lots are included here. They are shown in four distinct categories to allow investors to properly offset interest income only with like types of premiums. These summarized amounts represent transactions that are found in the detail pages for interest and tax-exempt interest. Bond premiums summarized in this section are as follows. Bond premium - Non Treasury obligations (noncovered lots) Bond premium - US Treasury obligations (noncovered lots) Bond premium - Tax-exempt obligations (noncovered lots) Bond premium - Tax-exempt obligations AMT (noncovered lots) Acquisition premiums For taxable securities, the acquisition premium for noncovered lots is shown here. For tax-exempt lots, the amounts of acquisition premium reflect all lots, covered or noncovered, because no box has been created by the IRS on Form 1099-INT for this type of income adjustment on tax-exempt obligations. These summarized amounts represent transactions that are found in the detail pages for taxable OID and tax-exempt OID. Acquisition premium - Non Treasury obligation (noncovered lots) Acquisition premium -Treasury obligation (noncovered lots) Acquisition premium - Tax-exempt obligations (all lots) Acquisition premium - Tax-exempt private activity (all lots) Market discount Since market discount represents additional taxable income regardless of the type of instrument on which it is earned, no granularity is required here other than the status as noncovered. The individual transactions summarized originate on the details of interest income, tax-exempt interest income, OID income and tax-exempt OID income. Market discount (noncovered lots) Extract from the consolidated statement The extract below reflects the arrangement of lines detailed above on the composite statement.
PAGE 6/9 State Tax Withholding This new section summarizes any state backup withholding that was done on the various types of income. The details continue to appear in both the income details (transaction level) and the statements designated state tax detail section (totals by state and form). The detailed state reporting section of the statement contains the originating form, jurisdiction and state ID. Non Reported Income, Fees, Expenses and Expenditures The majority of items included in this summary section have appeared previously on the composite statement under essentially the same section heading, but grouped under a series of subheadings. Due to the space requirements of the fixed income detail, they have been consolidated into a single section in which each line s description ties it back to the detail pages where the individual transactions are displayed. The detail sections are Other Receipts, Expenses, Opening Transactions, Fees and Payments Received and Income and Adjustments.
PAGE 7/9 Illustration Below is a depiction of the Details of Interest Income for an account holding two bonds. The first section shows transactions for the three lots of XYZ Corp. All the lots were purchased at premiums. One is covered and the other 2 are noncovered. For the second bond (New Corp) only 1 lot is owned and it was purchased at a discount.
PAGE 8/9 Form 1099-B The IRS made many changes to Form 1099-B that apply to all security types including moving and renumbering boxes. Some of the changes that affect fixed income directly are: The Cost Basis box was renumbered; the Wash Sale Loss Disallowed box was replaced with the Adjustment box and Code. Any adjustments to cost basis for either Wash Sales or Market Discount are displayed in Box 1g Adjustments (Wash Sales were previously displayed in Box 5). The code in Box 1f Code, if any, indicates Wash Sale (W) or Market Discount (D) adjustments. Please note that the IRS did not provide instructions on how to report a transaction that has both a disallowed loss and a market discount.
PAGE 9/9 optionsxpress, Inc. makes no investment recommendations and does not provide financial, tax or legal advice. Content and tools are provided for educational and informational purposes only. Any stock, options, or futures symbols displayed are for illustrative purposes only and are not intended to portray a recommendation to buy or sell a particular security. Products and services intended for U.S. customers and may not be available or offered in other jurisdictions. Online trading has inherent risk. System response and access times that may vary due to market conditions, system performance, volume and other factors. Options, futures, and forex involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options and Risk Disclosure Statement for Futures and Options prior to trading, which is also available by calling 888.280.8020 or 312.629.5455. An investor should understand these and additional risks before trading. + Important Note: Off-exchange Foreign Exchange ( Forex ) transactions are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. Forex trading involves speculation and clients should carefully consider all relevant risk factors and their own personal financial situation before trading. Some of these risks include the lack of a uniform quoting convention for currency pairs, the nature and amount of transaction costs, the use of leverage to amplify returns or losses (which can result in the total loss of your margin funds on deposit and/or require the deposit of additional funds), and the lack of a centralized marketplace and clearinghouse. Funds and positions held at a Forex dealer are not subject to the same protections available to securities or futures in the event of the bankruptcy or insolvency of the Forex dealer. Please read the Forex Risk Disclosure Statement prior to trading, which is also available by calling 888-280-8020. optionsxpress is an Introducing Broker to Forex Capital Markets, LLC ( FXCM ), which will hold your account and the respective funds and will act as the counterparty to your Forex trades. FXCM is not affiliated with optionsxpress or its affiliates. FXCM is a registered Retail Foreign Exchange Dealer and Futures Commission Merchant with the Commodity Futures Trading Commission ( CFTC ) and is also a Member of the National Futures Association ( NFA ), reference ID 0308179. optionsxpress is registered as a Futures Commission Merchant and Forex Firm with the CFTC and is a Member of the NFA, reference ID 0322615. Charles Schwab & Co., Inc., optionsxpress, Inc., and Charles Schwab Bank are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products are offered by Charles Schwab & Co., Inc. (Member SIPC) ( Schwab ) and optionsxpress, Inc. (Member SIPC) ( optionsxpress ). Deposit and lending products and services are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender ( Schwab Bank ). To learn more about how optionsxpress uses and protects your personal and account information, please read our Privacy Notice. 2015 optionsxpress, Inc. All rights reserved. Member SIPC.