Introduction to cost basis reporting

Introduction to cost basis reporting

Cost basis, also called tax basis, is usually the purchase price of a security plus sales commissions, transaction fees, and other expenses, and it is adjusted for corporate actions such as stock splits, dividends, mergers, acquisitions, and spin-offs. Cost basis information is used to determine capital gains and losses on an investment for tax purposes.

The Emergency Economic Stabilization Act of 2008 (EESA) requires custodians and brokers to report the adjusted cost basis Tooltip of covered, sold securities to taxpayers and the Internal Revenue Service (IRS). To determine if a security is covered Tooltip or uncovered Tooltip by the EESA reporting requirements, see the chart below.

cost basis reporting

Key features of Schwab cost basis reporting:

  • Obtain and report cost basis information through multiple channels.
  • Pick from a variety of cost basis methods available as a default at Schwab.
  • Transfer cost basis information Tooltip (from participating custodians).
  • View comprehensive data, including adjusted cost, for many fixed income securities.
  • Select security-specific account settings Tooltip .
  • Edit cost basis information online via Schwab Advisor Center®, or through formatted and unformatted service requests.
  • Receive cost basis alerts.
  • Access cost basis reporting at the master or individual account level.
  • Export default cost basis settings at the master and individual account level in a comma-delimited file.
    • Select the Subscription/Status link on the Cost Basis tab and choose the master account. Click the Export link to download the default cost basis settings for your master account.

Key information related to Schwab cost basis reporting:

  • Enroll clients to view cost basis information on Schwab Alliance via the Positions and Realized Gain/Loss screens using the Cost Basis Enrollment and Preferences Form.
  • Form 1099 Composite is available in electronic format for your clients if they sign up for paperless documents.
  • Schwab reports cost basis on covered securities.
  • Advisors should reconcile cost basis data daily.
  • The RIA firm should choose the default cost basis accounting method for the firm or master account using the Cost Basis Enrollment and Preferences Form.

For information regarding Schwab cost basis features, settings, and more, refer to the following details:

Fixed income cost basis
Properly accounting for the cost basis of fixed income securities is considerably more complex than it is for equity securities. Cost basis can be affected by elections made by the account holder of the debt instrument Tooltip .

To bring consistency to the process, the IRS made changes to the final regulations to help align what broker-dealers report on IRS Form 1099-B with what clients report on their tax returns. The IRS also divided fixed income securities into two categories—"less complex" and "more complex"—and set different dates for their coverage by the new requirements.

See the "Fixed income instrument 1099 reporting comparison" chart in the "Comparison charts" section for coverage requirements.

Amortization settings

Under the final regulation, brokers' cost basis reporting will assume clients have elected to amortize bond premiums. See the amortization chart illustrating the broker default amortization elections Schwab has implemented.

Options cost basis

Brokers are required to report adjusted cost basis and proceeds for closing transactions on options, warrants, and stock rights acquired on or after January 1, 2014; however, options on stocks, indexes, single stock futures, stock rights, and warrants are not currently subject to gross proceeds or cost basis broker reporting on IRS Form 1099-B.

If options contracts are exercised or assigned, brokers will be required to adjust the cost basis or proceeds of the underlying positions. Schwab has been reporting the adjusted cost basis on option exercises and assignments since 2011.

See the "Options reporting 1099 comparison" chart in the "Comparison charts" section for coverage requirements.

Cost basis reporting

There are several adjustments brokers will not be permitted to make when reporting the adjusted cost basis of stock rights, options, and warrants:

  • Schwab will not take into account the impact of option purchases or sales in determining disallowed losses on sales of the underlying securities. You should explain to clients that this treatment differs from taxpayer requirements.
  • Brokers may not apply straddle rules on options in reporting adjusted cost basis to the IRS.
  • Brokers will no longer be able to report the income component of stock acquired through the exercise of incentive stock options granted after January 1, 2014.

Wash sales

Schwab will continue to perform wash sale adjustments on options with the same CUSIP Tooltip that have disallowed losses. Advisors should suggest that clients consult with their tax advisors regarding their particular situations.

Corporate actions

Corporate actions are any events bringing material change to a stock. Examples of material change include mergers, acquisitions, spin-offs, and stock splits. Corporate actions may affect the cost basis reporting of stock. Stock issuers are required to supply taxability data within 45 days of the corporate action's effective date.

Schwab obtains information on corporate actions, and it tracks and adjusts for any lots affected by them. You will see these adjustments in your cost basis file download within two to four weeks after the corporate action is completed.

For information regarding Schwab cost basis pertaining to fixed income, options and equities, and more, refer to the following tables:

Fixed income instrument 1099 reporting comparison

Starting in 2014, the IRS implemented new regulations to align what broker-dealers report to the IRS with what clients report on their Form 1099-B. See the table below for the fixed income reporting requirements and effective dates.

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 having 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 paid 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)
  • Certain 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

*The IRS has delayed requirements for reporting cost basis on security transfers (transfer statements) for one additional year. Any fixed incomes or options transferred in this time will be treated as uncovered. This will allow brokers the necessary time to change the transfer reporting systems.

Options reporting 1099 comparison

Starting in 2014, the IRS implemented requirements to align what broker-dealers report to the IRS with what taxpayers report on Form 1099-B. See the table below for the options reporting requirements and effective dates.

Options subject to 1/1/14 reporting*Options subject to 1/1/16 reporting*Options excluded from reporting
  • Options on a single security
  • Options on more than one specified security, including an index in which the components are considered covered securities
  • Options on financial attributes of specified securities, such as interest rates or dividend yields
  • Warrants or stock rights
  • Investment units in which options, stock rights, or warrants are issued together with a fixed income security
  • Incentive stock options
  • Foreign currency options
  • Commodity options

*The IRS has delayed requirements for reporting cost basis on security transfers (transfer statements) for one additional year. Any fixed incomes or options transferred in this time will be treated as uncovered. This will allow brokers the necessary time to change the transfer reporting systems.

How to customize Schwab reporting
How to set up clients with paperless documents
Introduction to paperless documents
Introduction to the Corporate Actions tool
Introduction to tax reporting

Please see the following tools and resources to assist you with cost basis:

Cost basis legislation

Client reporting tools

  • Tax-required and tax-helpful cost basis information is included in your clients' Form 1099 Composite.
  • Monthly cost basis data is a display option for statement reporting format—available at both the lot and position level.
  • You can enroll your clients to view cost basis information on Schwab Alliance via the Position and Realized Gain/Loss screens using the Cost Basis Enrollment and Preferences Form.
  • For key tax reporting dates and report examples, see Introduction to tax reporting.

Technology tools

Schwab provides a number of tools to help you manage cost basis data on your Schwab accounts—enabling you to serve your clients better.

  • Quick reference chart of Schwab's cost basis data files—Our data files support integration with your portfolio management system and provide tools for comparing your records with Schwab's.
  • Download specifications—Third-party providers can access technical specifications for Schwab data downloads to reuse the cost basis data provided in the files we make available.
  • Web Trading File specifications—Learn to import trade files from your firm and from other brokers to the trading platform where you can edit them, add new orders, and view and filter order edits.
  • Reconciling Lot Instructions—It is best to setup a daily reconciliation process to ensure instructions have been followed accurately.

Contact information

  • For questions about the cost basis services available on Schwab Advisor Center, online access to unrealized gain/loss and realized gain/loss information, and lot trading capabilities, contact Advisor Platform Support at 800-647-5465.
  • If you have questions about cost basis reporting, statement preferences, and tax reporting, contact your service team or Advisor Services Cost Basis Service at 877-762-6446.

Taxpayers are responsible for accurate reporting of cost basis on covered Tooltip and uncovered Tooltip securities to the IRS on their tax returns. Tables are for illustrative purposes only, may be historical in nature, and should not be used as a basis for any investment decision. Any investments reflected are for illustrative purposes only and are not intended to be, nor should they be construed as, a recommendation to buy, sell, or continue to hold any investment.

Schwab does not claim that one cost basis method is optimal for your individual tax situation. We recommend that all clients (foreign and U.S.) consult their investment and tax advisors prior to selecting a cost basis method.

This information provided here is for general informational purposes only, and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, Financial Planner, or Investment Manager.

See irs.gov for the most up-to-date tax form mailing dates and current legislation.

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled Characteristics and Risks of Standardized Options before considering any option transaction.

Equities include corporate stock (other than stock in a regulated investment company [RIC] or stock acquired in connection with a dividend reinvestment plan). Internal Revenue Code section 6045(g)(3)(C)(i) provides that the applicable date is January 1, 2011.

For stock in an RIC (RIC stock) or stock acquired in connection with a DRIP (DRIP stock), section 6045(g)(3)(C)(ii) provides that the applicable date is January 1, 2012.

For any other specified securities, section 6045(g)(3)(C)(iii) provides that the applicable date is January 1, 2013, or a later date to be determined in the future. The reporting rules related to options transactions apply only to options granted or acquired on or after January 1, 2013, as provided in section 6045(h)(3).

The IRS does not use the common term "fixed income," but instead uses the term "debt instruments" in its publications and online assistance. When searching for information regarding fixed income on the IRS website, use "debt instrument." Schwab will continue to use "fixed income," except when using "debt instrument" or when both terms provide more clarity.

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