Non-Covered Security: What It Means and How It’s Reported

What is a noncovered security?

A noncovered security is a designation that determines whether a broker must report the security’s adjusted cost basis to the IRS. For noncovered securities, brokers generally do not report cost basis to the IRS; they may report proceeds of a sale, but it’s the investor’s responsibility to report the cost basis and any resulting gain or loss on their tax return.

Covered vs. noncovered: key dates and rules

Congress expanded broker reporting in stages. Securities acquired on or after these effective dates are treated as covered (i.e., brokers report cost basis to the IRS on Form 1099‑B):

• Stocks and American Depositary Receipts (ADRs): on or after Jan. 1, 2011
• Mutual funds and stocks/ADRs acquired through dividend reinvestment plans (DRIPs): on or after Jan. 1, 2012
• Less complex bonds, derivatives, and options: on or after Jan. 1, 2014
• More complex bonds, derivatives, and options: on or after Jan. 1, 2016

Investments purchased before these dates — or securities created from those investments — are typically noncovered.

How noncovered securities arise

Common situations that produce noncovered securities:

• Purchases made before the applicable covered date (e.g., stock bought in 2010).
• Corporate actions that create new shares from pre-covered holdings, such as stock splits, stock dividends, and redemptions. Example: If you bought 100 shares in 2010 and the company later does a 3-for-1 split, the 200 additional shares remain noncovered because they originated from pre‑2011 shares.
• Transfers into a DRIP that uses the average-cost method: if the transfer occurred in the same year as purchase and that method applies, those shares may be noncovered.

Reporting cost basis and gains/losses

Even when a broker does not report cost basis to the IRS for noncovered securities, you must still report any capital gain or loss when you sell:

• Brokers report sales and proceeds to investors and may report gross proceeds to the IRS.
• All investment sales (covered or noncovered) get reported on Form 8949. For noncovered transactions not reported on Form 1099‑B:
• Use Code C (box C checked) for short‑term noncovered sales.
• Use Code F (box F checked) for long‑term noncovered sales.
• Totals from Form 8949 flow to Schedule D of Form 1040 to calculate taxable capital gains or deductible losses.

What is cost basis?

Cost basis is the original purchase price of an investment, adjusted for corporate actions (splits, dividends, return of capital) and other events that affect basis. It’s used to calculate gain or loss on sale: Gain/Loss = Proceeds − Adjusted Cost Basis.

If you don’t know the cost basis

• Contact the brokerage where you bought the security — they should have transaction records and can often provide the cost basis.
• If records are unavailable, reconstruct the basis using purchase price, reinvested dividends, adjustments for splits/dividends, and other relevant documentation. Accurate reporting is required to avoid penalties.

Practical takeaways

• Covered securities: brokers report adjusted cost basis to the IRS (Form 1099‑B).
• Noncovered securities: brokers typically do not report cost basis to the IRS; you must report basis and gains/losses on your tax return.
• Sales of both types are reported on Form 8949 and summarized on Schedule D (Form 1040).
• Keep purchase records and documentation of corporate actions to support your cost‑basis calculations.

Conclusion

A noncovered security is primarily an administrative classification that shifts the burden of reporting the adjusted cost basis to the investor. Regardless of designation, investors must accurately report proceeds, cost basis, and resulting gains or losses to the IRS when they sell securities.