Covered Tax Lots: Broker Tracking, 1099-B, and Basis Fixes

A covered tax lot is a block of securities your broker is required to track and report to the IRS, including what you paid for it and whether any gain or loss on sale is short-term or long-term. That obligation exists because of a 2008 change to federal tax law, and it only applies to securities you acquired on or after a specific date that depends on the type of security. For anything else, called a noncovered lot, the record-keeping is on you.

What Makes a Lot Covered

Section 403 of the Energy Improvement and Extension Act of 2008 added broker cost basis reporting to the Internal Revenue Code.1Congress.gov. Energy Improvement and Extension Act of 2008 Under 26 U.S.C. ยง6045(g), a security counts as covered when two conditions are both met: it falls into a category of “specified security” defined by the statute, and you acquired it on or after the applicable date Congress set for that category.2Office of the Law Revision Counsel. 26 USC 6045 – Returns of Brokers

Once a lot is covered, your broker’s data becomes the authoritative record. The IRS receives the cost basis figures directly and uses them to cross-check what you report on your return. Mismatches are a common audit trigger, so the numbers on your 1099-B and the numbers on your Form 8949 need to agree, or your return needs to explain why they don’t.

Which Securities Are Covered and When

Congress phased the rules in over several years, starting with simpler instruments. The acquisition date is what controls coverage, and there is no way to retroactively make an older purchase covered no matter how good your own records are.

Because the purchase date controls everything, you can hold covered and noncovered lots of the same stock in the same account. Shares of a company bought in 2009 remain noncovered forever. Shares of that same company bought in 2012 are covered. The split creates real complications when you sell, especially if you don’t tell the broker which lots to liquidate.

What Your Broker Tracks for a Covered Lot

For every covered security, the broker records the acquisition date, the total cost basis (purchase price plus fees), and any events that later change that basis. Corporate actions like splits, mergers, spinoffs, and return-of-capital distributions trigger automatic basis recalculations. The broker also has to determine whether a sale produces a short-term or long-term gain based on your holding period, since short-term gains are taxed at ordinary income rates and long-term gains get lower capital gains rates.

Default Cost Basis Methods

If you sell covered shares without telling the broker which specific lots to sell, a default method applies. For stocks and most other securities, the default is first-in, first-out, meaning your oldest shares are treated as sold first. For mutual fund shares eligible for average basis, the broker uses its own default, typically average cost, unless you elect otherwise.2Office of the Law Revision Counsel. 26 USC 6045 – Returns of Brokers

The default matters more than most investors realize. FIFO in a rising market sells your lowest-basis shares first, producing the largest taxable gain. If you’d rather sell higher-basis lots to reduce the current tax hit, use specific identification. Most brokerages let you set a standing preference such as highest cost first, but the election has to be in place before the trade settles.

The Wash Sale Limit You Still Own

When you sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the wash sale rule disallows the loss and adds it to the basis of the replacement shares.5Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities Your broker will make that adjustment for you, but only for wash sales that happen within the same account and involve identical securities.2Office of the Law Revision Counsel. 26 USC 6045 – Returns of Brokers If you sell at a loss in one account and rebuy within 30 days in a different account, the rule still applies to you as a taxpayer. Neither broker has to catch it. You do.

Transferring Covered Securities Between Brokers

Moving covered lots from one brokerage to another is one of the most common ways basis data gets lost. A security keeps its covered status at the new broker only if the receiving broker actually gets a proper transfer statement from the old one.2Office of the Law Revision Counsel. 26 USC 6045 – Returns of Brokers Federal regulations require that statement, with acquisition date, adjusted basis, and any relevant adjustments for each lot, to be sent to the receiving broker.6eCFR. 26 CFR 1.6045A-1 – Statements of Information Required in Connection With Transfers of Securities

When a transfer statement is incomplete or never arrives, the new broker can reclassify those lots as noncovered. From that point on, no basis gets reported to the IRS for them, and you’re the one on the hook for supplying accurate numbers on your return. After any account transfer, it’s worth pulling up the cost basis at the new brokerage and confirming each lot is still marked covered with its original acquisition date and basis intact.

How Covered Status Shows Up on Your Tax Return

After a sale, the broker reports the transaction on Form 1099-B, showing both proceeds and, for covered lots, the adjusted cost basis. The form indicates whether the basis was reported to the IRS, which tells you how the lot was classified.7Internal Revenue Service. Instructions for Form 1099-B (2026) For noncovered securities, only proceeds are reported. The basis field is blank or marked as not reported. You’re still required to report the correct basis, but the IRS has nothing to check against, so the burden sits entirely on your own records.

That classification carries through to Form 8949, which feeds Schedule D. The form uses checkbox categories to sort your transactions:

  • Covered securities, basis reported to the IRS: Short-term goes in Box A; long-term in Box D. If the 1099-B is correct and needs no adjustment, you can skip Form 8949 entirely for these and report summary totals directly on Schedule D.8Internal Revenue Service. Instructions for Form 8949 (2025)
  • Noncovered securities, basis not reported: Short-term goes in Box B; long-term in Box E. You enter the cost basis yourself.8Internal Revenue Service. Instructions for Form 8949 (2025)
  • No 1099-B received: Short-term in Box C; long-term in Box F. This covers private sales and transactions with no broker involved.

Getting the box right matters. Put a noncovered transaction in Box A and the IRS may expect matching broker data that doesn’t exist, flagging the mismatch. Fail to report basis on a noncovered sale and the IRS can treat the entire proceeds as taxable gain, producing a much larger bill than you actually owe.

Fixing a Wrong Cost Basis on Your 1099-B

Brokers get cost basis wrong more often than you’d expect, particularly after corporate reorganizations, complex mergers, or account transfers. You don’t need a corrected 1099-B to file. You report what the broker sent and then adjust it on Form 8949 using a code in column (f).

  • Code B: The basis on the 1099-B is wrong. Enter the broker’s figure in column (e), then put the correction in column (g) as a positive number if the correct basis is lower, or a negative number in parentheses if the correct basis is higher.9Internal Revenue Service. Form 8949 Codes
  • Code T: The 1099-B misclassifies the holding period, treating a gain or loss as short-term when it’s long-term or vice versa. Enter zero in column (g) and report the transaction in the correct Part of Form 8949.9Internal Revenue Service. Form 8949 Codes

Keep your documentation. Purchase confirmations, account statements, and records of corporate actions are what you’ll need if the IRS questions the adjustment. Reviewing your 1099-B when it arrives, rather than the night before the return is due, is how these errors get caught in time to fix cleanly.