Cost Basis Regulations

What is cost basis?

The cost basis of an investment is usually the amount you paid for it, including any commissions, fees, reinvestments and original issue discount (OID). It also may include adjustments for sales, principal returns, mergers, splits and spin-offs.

How is cost basis used?

An investment’s cost basis is used to calculate a capital gain or loss when you sell or redeem it. This gain or loss information is used by your tax professional to determine whether you owe any capital gains taxes.

Capital Gain or Loss

  • If you held the sold security for more than one year, the capital gain or loss is long-term. Long-term capital gains are subject to lower tax rates than ordinary income.
  • If you held the security for one year or less, the capital gain or loss is short-term. Short-term capital gains are subject to ordinary income tax rates.
  • Capital losses, whether short-term or long-term, may first offset any capital gains realized for the tax year. If capital losses exceed capital gains for the tax year, the losses generally offset up to $3,000 of ordinary income ($1,500 if married filing separately). Generally, any additional losses may carry forward to the next tax year.

What is a "covered" vs. "non-covered" security?

Cost basis regulations require Edward Jones and other brokerage firms to report cost basis to the IRS when securities "covered" by the regulations are sold. Securities acquired before certain effective dates, and some specific securities, are referred to as "non-covered" securities. Form 1099-B reports cost basis (and other information) for sales of covered securities to clients and the IRS. For non-covered securities, cost basis is provided to clients on Form 1099-B, but is not reported to the IRS.

Covered securities are those purchased on or after certain effective dates:

Effective Date
Covered Securities
Jan. 1, 2011
Stock shares not in a dividend reinvestment plan
Jan. 1, 2012

Mutual fund shares

Stock shares in a dividend reinvestment plan

Jan. 1, 2014  

Fixed-income securities designated by the IRS as "less complex"

Generally includes bonds, notes and certificates of deposit (CDs) with a determinable yield.

Jan. 1, 2016

Fixed-income securities designated by the IRS as "more complex"

Generally includes convertible debt instruments, stripped bonds or coupons (STRIPs) and inflation-indexed debt instruments (TIPs).

 Securities are non-covered if they are:

  • Purchased before the applicable effective dates above; or
  • A security type specified by the regulations as being non-covered regardless of when purchased: Collateralized mortgage obligations (CMOs), real estate mortgage investment conduits (REMICs), mortgage-backed securities and short-term debt instruments with maturities of not more than one year.

Transfer of cost basis between firms

When covered securities are transferred between brokerage firms, regulations generally require the transferring firm to provide cost basis to the receiving firm. If cost basis is provided when you transfer covered shares to Edward Jones, it will be tracked by our system.

Cost basis for equities and fixed-income securities

For equities and fixed-income securities, Edward Jones uses the first-in, first-out cost method, unless:

  • You direct us, at the time of the sale, to sell specific shares; or
  • Shares are missing cost basis at the time of the sale and you do not direct us to sell specific shares. In this case, the shares without cost basis are sold first.

How do I specify which shares are sold?

You can choose which shares of stock you would like to sell as long as you specify them before the trade’s settlement date. Regulations generally prohibit changing the selection after the trade settles. Many considerations may affect which shares you should sell, so you should work with your tax professional and financial advisor prior to executing any sale of securities.

Cost basis for open-end mutual funds

For domestic open-end mutual funds, Edward Jones uses the average cost method to calculate cost basis. Regulations generally require brokerage firms to calculate separate averages for covered and non-covered shares.

When covered shares are sold, the covered average cost per share will be used to determine cost basis and resulting capital gain or loss, and when non-covered shares are sold, the non-covered average will be used.

More questions?

For tax questions, consult your tax professional. For investment-related questions, please contact your local financial advisor.

Important Information:

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. This content should not be depended upon for other than broadly informational purposes. Specific questions should be referred to a qualified tax professional.

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