COST BASIS

Cost basis is the original price you paid to acquire an asset. For equity investments, the cost basis begins as the original purchase price of the shares, which is later adjusted for stock splits, dividends, and distributions.


COST BASIS FOR SHAREHOLDERS

As of January 1, 2011, IRS regulations requires that brokers, transfer agents, and issuers report adjusted cost basis information to you and the IRS. This impacts you in several ways:

  • A Form 1099-B will be sent to you by brokers and transfer agents whenever a covered stock sale takes place.

  • When you transfer stock, you are required to identify if the transaction is a sale, gift, or inheritance.

  • FIFO is the default method for calculating your cost basis, although you may select specific lot identification by submitting a request in writing to the broker or transfer agent.

  • If you opt for specific lot identification, you must select the tax lot you wish to sell prior to the transfer taking place.

  • Short sales are reported at the time the short is opened, rather than closed.

  • You are required to consolidate all Form 1099-B’s you receive from brokers and transfer agents, and adjust the information as necessary on Schedule D.

QUICK TIPS & HIGHLIGHTS:

  • Only stock that is acquired on or after January 1, 2011 is covered by these new reporting regulations.

  • When you submit a transfer, indicate whether the transaction is a gift, sale, or inheritance.

  • If it is an inheritance, provide the fair market value of the securities as of the date of death.

  • If you do not indicate what type of transaction you are presenting to the transfer agent, gift tax rules will apply. 

What if I need to correct the cost basis that ClearTrust currently has on file for my shares?

Please notify ClearTrust in writing of any discrepancy in the cost basis record. We will collaborate with you, the issuer, and your broker (as appropriate) to resolve any record differences.

What happens if cost basis isn’t provided at the time of transfer?

If cost basis isn’t provided or is incomplete, the record will default to the Fair Market Value (FMV) of the day the transfer became effective.

What does cleartrust do with cost basis?

According to IRS regulations, transfer agents are required to record cost basis data and provide it to brokers when transferring shares. Brokers can also request cost basis data from ClearTrust. As a transfer agent, we do not file cost basis data with the IRS as this is ultimately the responsibility of the tax filer.


COST BASIS FOR ISSUERS

How does cost basis reporting affect the issuer?

1099-B Reporting. All issuers of common stock are required to report the adjusted cost basis of shares acquired on or after January 1, 2011. Reporting to each shareholder and to the IRS in the form of a 1099-B is required upon the sale or disposition of shares.

Corporate Action Reporting. Issuers are required to report both to the IRS and to shareholders (via permanent website posting) specific information about how corporate actions affect the cost basis calculation of shares. Corporate actions include, but are not limited to, dividends, stock splits, mergers, and acquisitions. The information must be made available to shareholders and the IRS by 45 days after the effective date of the corporate action, or by January 15 of the following year (whichever is earlier).

Fines and Penalties. Issuers that don’t report properly are subject to fines as high as 10% the amount that should have been reported with no maximum limit. In the case of mergers and acquisitions, both the acquiring and acquired companies are held “jointly and severally liable” for failure to properly report the adjusted cost basis. In addition, issuers remain liable for errors even if they use an agent to satisfy their reporting requirements.

Issuers, please note that if the cost basis is not provided, it will automatically default to the Fair Market Value.

To read the regulation, click here.