Cost Basis
Cost basis is the price that you paid to purchase a security plus any additional costs such as a broker’s commission. When you sell a security, your tax liability is determined by the cost and sales price of that security. If you sell an equity security for more than the cost that you paid for, the difference will be taxed as a capital gain. The reporting method of your cost basis will default to FIFO, which stands for “First In, First Out”. Learn more about cost basis reporting, legislation, and requirements below.
New Cost Basis Legislation
The Emergency Economic Stabilization Act of 2008 requires broker dealers to track and report cost basis to the IRS in three phases over three tax years. Starting January 1, 2011, Firstrade is responsible for tracking and reporting both your cost basis and sales proceeds for securities covered by the new legislation. The changes to how cost basis is tracked give you a more comprehensive and accurate evaluation of your cost basis, and will help you simplify your annual tax filings. Because these changes could impact the cost basis which is used to calculate your gains and losses, it's very important for you to understand these reporting changes as well as how they will apply to you.
Reporting changes will be in place in three phases over three tax years:
- 2011: Equity securities
- 2012: Mutual funds and dividend reinvestment plan shares
- 2014: Debt securities, options and all other financial instruments.
- The first phase of the cost basis legislation went into effect on January 1, 2011. The securities affected by this first phase of the legislation are equities purchased or acquired on or after January 1, 2011 and include US issued and non-US issued stock. NOTE: Tax Lots that are marked Uncovered will not be reported to the IRS or on your 1099-B.
- The second phase of the cost basis legislation goes into effect on January 1, 2012. The securities affected by phase two of the legislation are mutual funds, ETFs, unit investment trusts, real estate investment trusts, dividend reinvestment plans, limited partnerships and all other regulated investment companies.
- The third phase of the cost basis legislation goes into effect on January 1, 2014. The securities affected by phase three of the legislation are options, fixed income (bonds) and all other securities.
Covered and Non-covered securities
- Covered securities refer to the securities for which Firstrade is responsible for tracking and reporting cost basis information to IRS. This includes:
- Securities acquired on or after Jan. 1, 2011
- Mutual funds and dividend reinvestment plan shares acquired on or after Jan. 1, 2012
- Debt securities, options and other securities acquired on or after Jan. 1, 2014
- Non-Covered securities are those securities acquired before these date by legislation:
- Equities: Jan. 1, 2011
- Mutual funds, DRIPs, ETFs: Jan. 1, 2012
- Options, and all other securities: Jan. 1, 2014
*Please note: Only information about covered securities will be reported to the IRS, while information of non-covered securities is allowed but not required to be reported to the IRS by Firstrade.
