Non-Covered Security

Demystifying Non-Covered Securities: What You Need to Know

In the intricate world of securities trading, understanding the nuances of covered and non-covered securities is essential for investors navigating tax reporting requirements. Let's delve into the intricacies of non-covered securities, deciphering their significance and implications.

Unveiling the Concept of Non-Covered Securities

A Primer on SEC Designations

Non-covered securities, as designated by the Securities and Exchange Commission (SEC), pertain to securities of limited scope, where the cost basis may not be reported to the Internal Revenue Service (IRS). Unlike covered securities, the adjusted cost basis of non-covered securities is solely disclosed to the taxpayer, rather than the IRS.

Deciphering Covered Securities

The Evolution of Reporting Requirements

Following legislative mandates in 2008, brokers were mandated to report adjusted cost basis for securities to both investors and the IRS, effective from tax year 2011 onwards. Securities falling under this mandate are termed as covered securities and are reported through Form 1099-B, indicating capital gains or losses.

Understanding the Distinction

Pre- and Post-Effective Date Transactions

Non-covered securities encompass investments acquired prior to the effective dates specified by SEC regulations. While brokers are not required to report detailed cost basis to the IRS for non-covered securities, gross proceeds from sales may still be disclosed. Taxpayers are responsible for reporting adjusted cost basis to the IRS, even in the absence of broker reports.

Exploring Intricacies and Exceptions

Corporate Actions and DRIPs

Corporate actions, such as stock splits and dividends, may result in additional shares for investors, classified as non-covered if derived from non-covered securities. Similarly, investments transferred to dividend reinvestment plans (DRIPs) utilizing the average cost method for cost basis calculation retain their non-covered status.

Navigating Tax Reporting

Form 8949 and Reporting Codes

Transactions involving non-covered securities are documented on Form 8949, with specific reporting codes denoting short-term and long-term holdings. Understanding these codes is crucial for accurate tax reporting and compliance.