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With regard to cost basis, what is the difference between “covered” and “noncovered” securities?

The main difference relates to who is responsible for reporting cost basis information to the IRS when you sell investments.

Covered cost basis means that your brokerage firm is responsible for reporting cost basis and sale information to the IRS. As part of this responsibility, your firm is required to send this information with your account when your transfer your account to a new broker.

Noncovered cost basis means that your brokerage firm is NOT responsible for reporting cost basis information to the IRS and will only report the sales information. For noncovered securities, you are responsible for reporting cost basis information to the IRS when you file your taxes. If you do not report your cost basis to the IRS, the IRS considers your securities to have been sold at a 100% capital gain, which can result in a higher tax liability.

Securities are typically “noncovered” if you acquired them before firms were required to report cost basis to the IRS (prior to January 1, 2011 for individual stocks and January 1, 2012 for mutual funds). Securities that you purchased after these dates are most likely “covered.” Your employer stock may also be considered a noncovered security.

Nothing in this blog should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become Wealthfront Inc. clients pursuant to a written agreement, which investors are urged to read carefully, that is available at www.wealthfront.com. All securities involve risk and may result in some loss. For more information please visit www.wealthfront.com or see our Full Disclosure. While the data Wealthfront uses from third parties is believed to be reliable, Wealthfront does not guarantee the accuracy of the information.

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