What Is a Covered Security? Tax Rules and 1099-B Reporting

A covered security is a term that means two very different things in federal law. In tax law, it’s an investment your broker is required to track and report the cost basis of to you and the IRS when you sell. In securities regulation, it’s an investment that federal law shields from state-level registration requirements. Which definition matters depends on why you’re asking: the tax version affects almost every individual investor at filing time, while the securities-law version mostly matters to companies raising capital.

The Tax Definition Most Investors Encounter

Under 26 U.S.C. § 6045, a covered security is a “specified security” acquired on or after a specific date set by law for that asset type.¹ Congress added this rule through the Energy Improvement and Extension Act of 2008, and it requires brokers to track your cost basis and report it to the IRS along with your sale proceeds.²

Anything you acquired before the applicable start date is a “noncovered security.” Your broker still holds it, still shows it on your statements, and still reports the sale — but it does not have to report the cost basis, the acquisition date, or whether the gain is short-term or long-term.

When Each Asset Type Became Covered

The rule phased in over several years, with different start dates for different assets:

Corporate stock: acquired on or after January 1, 2011.¹
Mutual fund shares and stock eligible for average basis, such as shares in a dividend reinvestment plan: acquired on or after January 1, 2012.¹
Bonds, options, and other specified securities: acquired on or after January 1, 2013, or a later date set by the IRS depending on the instrument. Certain variable-rate debt instruments, convertible bonds, and options on foreign-currency-denominated debt became covered after 2015.³
Digital assets: acquired on or after January 1, 2023.¹

What This Looks Like on Your 1099-B

Every January or February, your broker sends Form 1099-B for the previous year’s sales. For covered securities, the broker must report the acquisition date, the cost basis, the character of the gain or loss (short-term or long-term), any wash sale loss disallowed, and any accrued market discount.³ The IRS receives the same information. If your Schedule D reports different numbers, expect a matching notice.

For noncovered securities, the broker reports only the gross proceeds. The cost basis, acquisition date, and gain/loss character boxes can be blank. You are responsible for calculating your own basis and holding period. Some brokers will still show a basis as a courtesy, but they aren’t required to, and the IRS won’t have it on file to compare against your return.

The practical consequence: if you bought shares in 2005 and sell them today, keeping your own purchase records is the only reliable way to avoid overpaying. Without a documented basis, the IRS can treat the entire sale amount as gain.⁴

How Corporate Actions Can Change the Status

A security can become covered even if the original purchase happened before the applicable date. When you receive shares through a stock split, reorganization, or spinoff, and the basis of the new shares is derived from the basis of a covered security, the new shares are also covered.³ People often assume restructured shares are noncovered because the original purchase was decades ago; that isn’t how the rule works.

The Securities-Law Definition

The other meaning of covered security comes from the National Securities Markets Improvement Act of 1996, codified at 15 U.S.C. § 77r. Before NSMIA, a company selling shares across state lines had to register with each state’s securities regulator under laws known as Blue Sky laws. NSMIA declared that certain categories of securities are “covered” by federal regulation, and states cannot require registration or qualification for them.

The statute is direct: no state law requiring registration of securities “shall directly or indirectly apply to a security that is a covered security.”⁵ An issuer of a covered security can sell nationwide without going through fifty separate approval processes.

What Qualifies

The main categories of covered security under NSMIA are:

Stock listed, or authorized for listing, on a national securities exchange such as the NYSE or Nasdaq. If a company’s common stock is listed, any security from the same issuer that is equal in seniority or senior to that stock — its bonds and preferred shares, for example — is also covered.⁵
Securities issued by a registered investment company, meaning mutual funds, exchange-traded funds, and unit investment trusts registered under the Investment Company Act of 1940. The SEC’s existing oversight of these entities is comprehensive, so Congress saw no reason to layer state registration on top.⁶
Securities sold through private placements under Rule 506 of Regulation D. This is the exemption most private equity, venture capital, and hedge fund offerings rely on.⁷
Regulation A Tier 2 offerings, which let companies raise up to $75 million without state qualification. Tier 1 offerings remain subject to state review.
Securities sold under Regulation Crowdfunding, created by the JOBS Act.⁵
Certain government securities exempt under Section 3(a) of the Securities Act, such as federal government bonds. Municipal bonds have a carve-out: a municipal bond is not a covered security in the state where the issuer is located.⁵

What States Can Still Do

Federal preemption under NSMIA applies only to registration and qualification. States keep full antifraud enforcement authority over covered securities. A state attorney general or securities regulator can still pursue an issuer for fraud in the sale of a covered security. Congress meant to eliminate redundant paperwork, not to shield issuers from state fraud prosecution.

States can also require notice filings and collect fees. For Rule 506 offerings and investment company securities, many states require issuers to submit a copy of the federal filing along with a fee. Listed securities on national exchanges are exempt even from notice filing requirements.

What Is Not a Covered Security

Several common offering types are not covered and remain fully subject to state Blue Sky laws:

Intrastate offerings, where a company raises money only from residents of the state where it is incorporated and does business.
Offerings under Rule 504 of Regulation D, which allow raises up to $10 million.
Securities sold by nonprofit or charitable organizations relying on the Section 3(a)(4) exemption.

Anything that doesn’t fit a statutory category stays under the traditional dual-regulation system, where both federal and state authorities have a say. And in the tax context, remember that “noncovered” simply means acquired before the applicable date for that asset type; the security still exists, still gets sold, and still gets reported — just without your broker’s basis figure carrying the weight of an IRS-matched number.

1
Office of the Law Revision Counsel. 26 USC 6045 – Returns of Brokers
2
Congress.gov. Energy Improvement and Extension Act of 2008
3
Internal Revenue Service. Instructions for Form 1099-B (2026)
4
Internal Revenue Service. Stocks (Options, Splits, Traders)
5
Office of the Law Revision Counsel. 15 USC 77r – Exemption from State Regulation of Securities Offerings
6
Securities and Exchange Commission. Investment Company Registration and Regulation Package
7
U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)