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Cost Basis Glossary

Automated Customer Account Transfer Service (ACATS): An automated system that facilitates the transfer of securities from one trading account to another at a different financial institution.

Cost basis: The value of an asset for tax purposes (usually the purchase price, plus commissions and fees) adjusted for stock splits, dividends, and return of capital distributions. This value is used to determine the capital gain or loss, which is equal to the difference between the asset’s adjusted cost basis and its sale price. Also known as “tax basis.”

Covered/non-covered indicator: A notation on brokerage statements that indicates whether the investment is covered under IRS cost-basis legislation.

Covered security: Any security purchased or acquired on or after these IRS-designated effective dates:

  • Equity securities acquired on or after January 1, 2011
  • Mutual fund and dividend reinvestment plan (DRIP) shares acquired on or after January 1, 2012
  • Simple debt securities, such as fixed-rate bonds, original issue discount (OID) bonds and zero coupon bonds, options, rights, and warrants acquired on or after January 1, 2014
  • More complex debt instruments acquired on or after January 1, 2016

For sales transactions of covered securities, the investment firm is responsible for reporting both the cost basis and gross proceeds to the IRS. Assets purchased and held prior to the effective dates are non-covered securities.

Disallowed wash sale amount: The amount of a loss that cannot be realized for tax purposes due to a wash sale rule violation. The disallowed wash sale amount value is included as an adjustment to the cost basis on the trade that triggered the violation.

Default tax-lot relief method: A firm-chosen tax-lot relief method designated for any account that does not specify a particular method at account opening. Consistent with current federal income tax regulations, Wells Fargo Advisors uses the First In, First Out (FIFO) default tax-lot relief method.

Dividend reinvestment plan (DRIP): A plan a corporation offers that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment date.

Emergency Economic Stabilization Act of 2008: The act that includes the provisions for the IRS-mandated cost-basis reporting regulations for financial institutions.

Frozen tax lots: Securities purchased or gained through reinvestment programs by a financial institution where the cost basis can be verified. (Covered securities are automatically considered frozen securities.)

Gift date: The date on which a tax lot was transferred into an account as a gift.

Gift fair market value: Fair market value (FMV) of a tax lot transferred into an account as a gift. The FMV of a stock or bond is the mean between the highest and lowest selling prices quoted on the valuation date. The valuation date could be the transfer date or the as-of date, if used.

Non-covered security: Any security purchased or acquired prior to the covered security effective dates. Assets purchased and held prior to the effective dates have only gross proceeds on sales transactions reported to the IRS by the firm, leaving the investor responsible for providing the cost basis to the IRS when the assets are sold.

Open date: Date on which a tax lot was purchased or transferred into an account.

Original open date: Original open date of the tax lot.

Reconciliation: The matching of a taxpayer’s gains and losses on Schedule D of his or her 1040 with the financial institution’s 1099-B.

Short sale: A sale of securities that the investor does not own. The transaction is considered closed when the client purchases the shares to close out the position. Short sales are reported in the year in which the position is closed.

Step-up: A term used when transferring securities that refers to the process of adjusting the cost basis of a tax lot to the current market value on the date of transfer or the as-of date, if used.

S-Corporation: A type of corporation that meets the IRS requirements to be taxed under Subchapter S of the Internal Revenue Code. This provides a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. This means that any profits the corporation earns are taxed at the level of the shareholders rather than at the corporate level.

Tax lot: The record of a taxable purchase date and cost for a specific security transaction. This provides the shareholder with the option of specifying exactly which shares to sell at a later date to possibly reap a tax advantage. (see versus purchase).

Tax-lot relief method: A method for determining which lot of stock or securities—and its associated cost basis—is used in computing the gain or loss on a sale and whether that gain or loss is long or short term.

Term: Indication of the holding period for capital gains/losses. Long-term holdings are more than one year. Short- term holdings are less than one year.

Unit cost: Cost per unit for each tax lot (total cost amount divided by quantity).

Versus purchase (VSP): A trade in which an investor designates specific tax lots to be sold. The investor should provide these instructions to the financial advisor at the time he or she places the sale order.

Wash sale rule: An IRS rule that prevents investors from claiming a loss on a sale if he or she does any of the following within 30 days before or after the sale creating the loss:

  • Buys substantially identical stock or securities
  • Acquires substantially identical stock or securities in a fully taxable trade
  • Acquires a contract or option to buy substantially identical stock or securities

Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.