Covered vs. Noncovered Securities: 1099-B Reporting and Cost Basis

A covered security is one your broker must track and report the cost basis for to the IRS when you sell it. A noncovered security is one where the broker reports only the sale proceeds, leaving you to calculate and document the purchase price yourself. The difference between covered and noncovered securities comes down mostly to when you acquired the investment, and it decides how much record-keeping falls on you at tax time and how closely the IRS can check your numbers.

What Puts a Security in Each Category

Under 26 U.S.C. § 6045(g), any broker reporting gross proceeds from the sale of a covered security must also report your adjusted basis and whether the gain or loss is short-term or long-term.¹ The rules phased in by asset type, and the cutoff date for each type is what draws the line between covered and noncovered:

Anything acquired before its applicable cutoff is noncovered. Stock bought in 2009, mutual fund shares from 2010, bonds from 2012, crypto from 2020 — none of it carries a broker-reported basis, even if the position still sits in a modern account statement.

Purchase date is not the only path to a noncovered designation. Under 26 U.S.C. § 6045A, when you move a covered security between brokers, the old broker has 15 days to send a transfer statement carrying the basis data to the new broker.⁵ If that statement never arrives or shows up incomplete, the receiving broker will typically flag the security as noncovered. You could have bought the stock well after the 2011 cutoff and still find yourself responsible for the basis at the new firm because the paperwork fell through.

How Each Type Shows Up on Form 1099-B

When you sell an investment in a taxable brokerage account, your broker files Form 1099-B with the IRS and sends you a copy. What appears on that form is the most visible difference between the two categories.

For a covered security, the form shows the gross proceeds, your adjusted cost basis, and whether the gain or loss is short-term or long-term. The IRS has everything it needs to match those figures against what you put on your return. Mismatches generate automated notices.

For a noncovered security, the broker reports only the gross proceeds. The cost basis section is either blank or the broker checks Box 5 to signal that the security is noncovered. When Box 5 is checked, the broker carries no liability for the accuracy of any basis information, even if it voluntarily fills those fields in as a courtesy. Any basis number you see there is informational and can be wrong. If a broker does not check Box 5, it becomes responsible for basis accuracy on that sale, so most brokers are careful to flag noncovered transactions correctly.⁶

How You Report Each Type on Your Tax Return

Sales of both covered and noncovered securities go on Form 8949 and flow through to Schedule D, but they land in different boxes.

Covered securities use Box A for short-term holdings and Box D for long-term. Because the broker already sent the basis to the IRS, these are the simplest entries. If the broker’s basis matches your records and you have no adjustments, you can often skip Form 8949 and report the totals straight on Schedule D.⁷

Noncovered securities use Box B for short-term and Box E for long-term. The broker didn’t send basis to the IRS, so you enter it yourself in column (e).⁷ If no 1099-B was issued at all, you’d use Box C or Box F. Starting with 2026 transactions, digital assets get their own set of checkboxes (G through L) mirroring whether basis was reported to the IRS.

If the basis reported for a covered security is wrong, don’t simply overwrite the number. You enter the broker’s figure, then use column (g) for the adjustment and column (f) for the reason code. The IRS matches your return against the 1099-B line by line, and unexplained differences trigger notices.

Cost Basis Methods

How you calculate basis depends on the method that applies to your holdings. The statute sets defaults, and you have some room to choose.

For covered securities other than mutual funds, the default is first-in, first-out. Your broker assumes you’re selling your oldest shares unless you say otherwise.¹ FIFO tends to produce the largest taxable gain on an appreciating investment because the oldest lots usually have the lowest basis.

For mutual funds and other securities eligible for the average basis method under Section 1012, the broker applies its own default unless you elect a different one. Many brokerages defaulted to average cost for mutual funds historically, though some have shifted toward FIFO for newer accounts.

Specific identification gives you the most control. You designate exactly which shares to sell, and the broker uses that lot’s basis. It requires a manual decision at or before the trade and cannot be set as an account-wide default. For covered securities, the broker records your selection and reports it on the 1099-B.

For noncovered securities, your method still matters for your return, but none of it is being reported to the IRS by the broker. You apply FIFO, specific identification, or average cost consistently, and you keep records that back up the number you use.

Where Wash Sale Tracking Stops

Section 1091 disallows a loss 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, adding the disallowed loss to the basis of the replacement shares. Brokers track wash sales for covered securities, but only within a single account and only for identical securities in that account.¹

They don’t track wash sales for noncovered securities. They also don’t track wash sales across accounts, even for covered positions. Sell a stock at a loss in one brokerage and buy it back within 30 days in another account or in an IRA, and that’s a wash sale you’re expected to report — neither broker will flag it. The IRS has all your 1099-Bs and can see patterns across firms that neither broker can see alone.

Inherited and Gifted Securities

Inherited and gifted investments add another layer to the covered versus noncovered question.

Inherited positions generally get a basis reset to the fair market value on the decedent’s date of death under 26 U.S.C. § 1014.⁸ The executor supplies the date-of-death value, and the receiving broker updates its records for covered securities. Verify the number against the estate records anyway. Errors in the reported valuation are common, and the broker is only working from what the estate provided.

Gifted securities follow different rules. If the donor’s basis was below the fair market value on the gift date, you generally take the donor’s original basis and holding period. Your actual basis when you sell can depend on whether you sell at a gain or a loss relative to the gift-date value, so both numbers matter. When covered securities are transferred as a gift, the transferring broker must include the donor’s basis and the gift-date fair market value on the transfer statement.

Gifts of noncovered securities carry no transfer statement requirement. If the donor bought the shares before the applicable cutoff, the receiving broker has no obligation to track any basis information at all, and you’ll need to reconstruct the purchase price from the donor’s records.

Keeping Records for Noncovered Positions

The real cost of the noncovered label is the record-keeping burden it puts on you. Reconstructing basis means tracking down the original purchase date, price per share, and any commissions or fees, plus every corporate action along the way.

A two-for-one stock split doubles your share count and halves your per-share basis. A reverse split does the reverse. Mergers, spinoffs, and return-of-capital distributions all require adjustments. Miss one and you can produce a figure that looks obviously wrong to the IRS — reporting an $80 per-share cost on a stock that hasn’t traded above $45 in a decade suggests a split you overlooked.

Original trade confirmations and archived brokerage statements from the purchase year are the best sources. Some brokers keep historical data and will provide it on request, though records from the 1990s or earlier are often gone. Transfer agents for individual stocks sometimes hold purchase records. For an inherited or gifted position, you may need documents from the previous owner.

The IRS requires you to keep records related to property until the statute of limitations expires for the year you dispose of it. That’s generally three years from filing, six years if you omit more than 25% of your gross income, and seven years if you claim a loss from worthless securities.⁹ For noncovered securities you still hold, keep the purchase records indefinitely. You’ll need them whenever you sell.

If you cannot substantiate basis at all, the IRS can treat it as zero, which turns your full sale proceeds into taxable gain. Courts have sometimes accepted reasonable estimates when partial evidence exists, but that is a much weaker position than documented records. Gathering what you have now, while brokers and transfer agents can still help, is easier than reconstructing after a sale.

Digital Assets Join the System in 2026

Digital assets are the newest addition. Starting January 1, 2026, brokers must report cost basis on digital asset transactions using the new Form 1099-DA.⁴ Cryptocurrency purchased on or after that date through a broker subject to the rules will be tracked the way stock purchased after 2011 has been.⁷

Digital assets acquired before January 1, 2026 will be noncovered. Given how many people traded crypto between 2015 and 2025 with limited record-keeping, that pre-2026 pool is likely to produce the same documentation problems that pre-2011 stock has. Exchange transaction histories, blockchain explorers, and wallet records are the reconstruction tools. Cryptocurrency gains have been taxable all along regardless of whether any broker reported them; the 2026 change adds reporting infrastructure, not a new tax.

1
Office of the Law Revision Counsel. 26 USC 6045 – Returns of Brokers
2
Internal Revenue Service. Notice 2010-67 – Reporting of Adjusted Basis and Determination of Holding Period for Covered Securities
3
Federal Register. Basis Reporting by Securities Brokers and Basis Determination for Debt Instruments and Options
4
Internal Revenue Service. Digital Assets
5
Office of the Law Revision Counsel. 26 USC 6045A – Information Required in Connection With Transfers of Covered Securities to Brokers
6
Internal Revenue Service. Instructions for Form 1099-B
7
Internal Revenue Service. 2025 Instructions for Form 8949
8
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
9
Internal Revenue Service. How Long Should I Keep Records