In most cases, the cost basis of an investment is the original price upon acquisition. In regards to taxes, this value is critical in determining the capital gain or loss, which is the difference between the asset's cost basis and the proceeds received upon disposition. Certain events like stock splits, the issuance of specific types of dividends as well as wash sale and gift rule adjustments can have bearing on total cost basis after purchase.
Emergency Economic Stabilization Act
The Emergency Economic Stabilization Act of 2008 requires that brokerage firms and mutual fund companies report their customers' cost basis and holding period on covered securities to the IRS on their Consolidated Form 1099s when securities are sold. Prior to 2011, firms such as TD Ameritrade reported only sale proceeds. The goal of the act is to help ensure the accurate reporting of gains and losses, and to simplify your year-end tax preparation.
Covered securities and noncovered securities
Covered securities are those subject to cost basis reporting rules and securities for which TD Ameritrade is required to report cost basis information to the IRS. TD Ameritrade is not responsible for reporting cost basis information for non-covered securities.*
Broker reporting changes since 2011
The Emergency Economic Stabilization Act was implemented in phases. The following became covered securities:
Cost basis reporting exclusions
To date, certain securities are still considered noncovered by default. These include:
It is important to understand that these reporting requirements affect the broker, and are not necessarily the same for the taxpayer. The taxpayer is responsible for reporting any security bought and sold on his or her tax return.