Form 8949 Box E: Basis Not Reported to the IRS

A long-term securities sale where your broker sent you a 1099-B but did not report the cost basis to the IRS goes on Form 8949 Box E, in Part II of the form. Because the IRS has no basis figure from the broker to compare against, the number you enter controls whether you owe tax on a gain or get to claim a loss, and you carry the burden of proving it.

When a Transaction Belongs in Box E

Three conditions have to line up. You received a Form 1099-B or a substitute statement for the sale. That form shows cost basis was not reported to the IRS. And you held the asset for more than one year.¹ Look at Box 12 on the 1099-B: if it is unchecked or affirmatively marked to show basis was not reported, and the holding period is long-term, the transaction goes in Box E.

Two adjacent boxes cover situations that feel similar and are not. Box D is for long-term sales where the broker did report basis to the IRS. Box F is for long-term sales where you never received a 1099-B at all.² The Box E versus Box F line trips people up: if the broker reported the proceeds but not the basis, it is Box E; if no 1099-B exists, it is Box F. Filing the wrong box will not change your tax, but it can generate an IRS notice asking you to reconcile the mismatch.

Which Securities Are Noncovered

A security is “noncovered” when you acquired it before brokers were required to track and report its cost basis. Those effective dates were staggered by asset type:

Individual stocks: shares acquired before January 1, 2011
Mutual fund shares and dividend reinvestment plan shares: acquired before January 1, 2012
Options and simpler fixed-income securities: acquired before January 1, 2014
Complex debt instruments: acquired before January 1, 2016

A mutual fund share bought in February 2011 is noncovered even though an individual stock bought the same day is covered. The 1099-B will tell you directly: brokers label noncovered lots as their way of flagging that basis was not sent to the IRS. Certain foreign securities and shares received through employee stock purchase plans can also fall into the noncovered category regardless of purchase date, when the broker lacked information to compute basis.

Reconstructing Your Cost Basis

Because the broker did not report basis, the reconstruction is on you. Start with the original purchase confirmation, old brokerage statements, or transfer records from the account you moved the shares out of. Many brokers keep digital records reaching back further than the mandatory reporting dates, so it is worth checking online account history or calling even for pre-2011 lots.

If you cannot find records, the IRS expects a reasonable effort using whatever evidence exists. Historical price data can approximate a purchase price when you know the approximate date, but you need documentation to back any figure you put on the return. Reporting basis of zero is not prohibited, but it treats the entire sale proceeds as profit and generally produces the largest possible tax bill. Avoid that outcome if there is any way to substantiate what you actually paid.

Which Shares Did You Sell

If you bought the same security in more than one lot and did not tell the broker at sale time which lot to sell, the IRS default is first-in, first-out. The oldest shares are treated as the ones sold.³ For noncovered lots that is often the shares with the lowest basis and the longest holding period, which can produce a large taxable gain.

Adjustments That Change Basis

Your basis is rarely just the original purchase amount. Several events change it during the holding period:

Stock splits. A 2-for-1 split doubles your share count and halves your per-share basis. Total basis stays the same.
Reinvested dividends. Each reinvested dividend adds to your total basis because you already paid income tax on the dividend in the year received. Omitting reinvested dividends is one of the most common and costly errors on noncovered returns because it overstates the gain.³
Return of capital distributions. These reduce basis because they represent a return of your own money rather than income.
Commissions. The purchase commission increases basis. The sale commission reduces net proceeds.

Inherited or Gifted Shares

Many Box E entries come from shares that were inherited or gifted rather than bought. The rules for basis and holding period differ sharply between the two.

Inherited Shares

If you inherited the shares, your basis is generally the fair market value on the date the original owner died, regardless of what they paid.⁴ This stepped-up basis can dramatically reduce a taxable gain on shares held for decades. Inherited property is also automatically treated as long-term, so it always belongs in Part II even if you sell within weeks of inheriting it.⁵

Gifted Shares

For a gift, your basis for computing a gain is generally the donor’s adjusted basis, called carryover basis, and your holding period includes the donor’s holding period.⁵ One wrinkle: if the fair market value on the gift date was lower than the donor’s basis, you use that lower fair market value as basis when computing a loss. The rule stops donors from transferring built-in losses to other taxpayers.

Filling Out Part II

Check Box E at the top of Part II. Then complete each row across eight columns:²

Column (a), description of the property. Something like “100 sh. XYZ Co.” lets the IRS identify the asset.
Column (b), date acquired. Must be more than one year before the sale for Box E. Use the trade date, not settlement.
Column (c), date sold.
Column (d), proceeds. Enter the figure exactly as shown on the 1099-B. If the 1099-B did not net out selling expenses like commissions, adjust through columns (f) and (g).⁶
Column (e), adjusted cost basis, including splits, reinvested dividends, and purchase commissions.
Column (f), adjustment code if one applies. Common codes: B to correct a wrong basis, W for a disallowed wash-sale loss, E when selling expenses are not already netted in proceeds.
Column (g), the dollar amount of the adjustment in column (f). Leave both blank if none applies.
Column (h), gain or loss. Column (d) minus column (e), then adjusted by column (g). Losses go in parentheses.²

If Box E transactions overflow a single page, use additional copies of Form 8949 with Box E checked on each.

Moving the Totals to Schedule D

Total columns (d), (e), (g), and (h) at the bottom of Part II. Those totals go to line 9 of Schedule D, the designated line for long-term sales where basis was not reported to the IRS.¹ Schedule D then merges Box E with any Box D and Box F results to produce net long-term capital gain or loss, and eventually combines the short-term and long-term figures into a single number that flows to Form 1040.⁷

How the Result Is Taxed

Because Box E is long-term, any net gain qualifies for long-term capital gains rates of 0%, 15%, or 20% depending on taxable income, rather than the higher ordinary income rates. High-income filers may also owe the 3.8% Net Investment Income Tax on capital gains once modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), thresholds that are not indexed for inflation.⁸

If Box E produces a net loss and it exceeds your other capital gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately), with any remainder carrying forward to future years indefinitely.⁹ A loss is unlikely on very old low-basis shares, but stepped-up inherited shares near or above the current sale price can genuinely produce one.

Records and Penalties

Keep every document that supports the basis figure you reported: purchase confirmations, old statements, split notices, dividend reinvestment records, and any worksheets used in your calculation. The IRS expects you to retain property records until the statute of limitations closes for the year the sale was reported, generally three years after filing.¹⁰ Because the IRS has no broker-reported basis to check against yours, Box E entries carry a somewhat higher audit risk on basis than covered lots do. If you cannot produce documentation when asked, you can lose the deduction or face an upward adjustment to your gain.

Reporting an inflated basis, whether careless or intentional, can trigger the accuracy-related penalty of 20% of the resulting underpayment, applied when the IRS finds negligence or a substantial understatement.¹¹ An understatement is substantial if it exceeds the greater of $5,000 or 10% of the tax that should have been shown. Interest on the underpaid tax accrues from the original due date. The strongest protection is showing a reasonable, good-faith effort to establish the correct basis; that usually defeats the penalty even when the IRS disagrees with the number itself.

1
Internal Revenue Service. Form 8949 – Sales and Other Dispositions of Capital Assets
2
Internal Revenue Service. Instructions for Form 8949
3
Internal Revenue Service. Stocks (Options, Splits, Traders) 3
4
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
5
Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
6
Internal Revenue Service. Instructions for Form 8949
7
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
8
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
9
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
10
Internal Revenue Service. How Long Should I Keep Records?
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Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments