Decoding Mandatory Cost Basis: Covered Securities, 1099-B Basis & Examples

Educational information only, not tax, legal, or investment advice. Full disclaimer.

What is "mandatory cost basis" reporting?

Your cost basis is generally what you paid for an investment, including commissions and fees, adjusted over time for things like splits, return of capital and wash sales. When you sell, your gain or loss is the sale proceeds minus your adjusted basis.

Starting with the 2011 tax year, federal law (the Energy Improvement and Extension Act of 2008) has required brokers not only to report your sale proceeds to the IRS, but also your cost basis and whether the gain or loss is short-term or long-term, for covered securities. That requirement is often called "mandatory cost basis reporting." The broker must also send basis information along when you transfer covered shares to another broker.

Covered vs. noncovered securities

A security is covered if it was acquired on or after the date the rules phased in for that type of security. Anything acquired before that date is noncovered: your broker may still show a basis, but it is not required to report it to the IRS, and keeping the records is up to you.

Type of security	Covered if acquired on or after
Stock in a corporation (including most ETFs organized as corporations)	January 1, 2011
Mutual fund (regulated investment company) shares and stock bought through a dividend reinvestment plan (DRIP)	January 1, 2012
Less complex debt instruments (most fixed-rate bonds) and options, plus securities futures	January 1, 2014
More complex debt instruments (for example, certain variable-rate or contingent-payment bonds)	January 1, 2016
Digital assets held in a custodial account with a broker	January 1, 2026 (basis reporting; gross proceeds reporting began for 2025 sales)

Source: Treas. Reg. § 1.6045-1(a)(15) and the Form 1099-B instructions. See noncovered securities for what to do when your broker doesn't report basis.

What your broker reports on Form 1099-B

Box 1a–1c: description, date acquired, date sold.
Box 1d: proceeds.
Box 1e: cost or other basis (required for covered securities).
Box 1g: wash sale loss disallowed (only for wash sales the broker is required to track; see wash sales).
Box 2: short-term or long-term.
Box 5: checked if the security is noncovered.
Box 12: checked if basis was reported to the IRS.

You then report each sale on Form 8949 and Schedule D, choosing the Form 8949 category that matches whether basis was reported to the IRS. If the broker's basis is wrong or incomplete, you report the correct basis and use an adjustment code, as the Form 8949 instructions explain.

Basis methods and special cases

FIFO (first in, first out)

The default for stocks: the oldest shares are treated as sold first.

Specific identification

Choose exactly which lots you sell, if you tell the broker by settlement.

Average cost

Allowed for mutual fund and DRIP shares; one blended price per share.

Gifted shares

Carryover basis and the "dual basis" rule when the value has dropped.

Inherited shares

Basis steps up (or down) to the value at the date of death.

Adjusted basis

Reinvested dividends, stock splits, spin-offs and mergers.

Noncovered securities

Older shares where reconstructing basis is your job.

Wash sales

The 30-day rule, deferred losses and the IRA trap.

Return of capital

Form 1099-DIV box 3 distributions that lower your basis.

Short-term or long-term?

If you held an investment more than one year, the gain or loss is long-term; one year or less is short-term. Long-term gains are usually taxed at lower rates. Some basis rules carry over a prior holding period, which is noted on each page.

Sources

Last reviewed: November 2026