Cost basis FAQs

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What is cost basis?

Cost basis is the price at which you purchased or acquired a security, including all commissions and fees. This information is important to you because it is required information when completing your tax returns. Cost basis reporting regulations issued by the IRS in 2010 require all brokers to report to their clients and to the IRS the cost of "covered securities" that are sold during the tax year.
These regulations took effect over a three-year phase-in period that began in 2011. During this period, different types of securities have become "covered" and subject to new 1099-B cost basis reporting to the IRS and to clients. The phase-in of the various types of securities began as follows:
  • Equities — January 1, 2011
  • Mutual funds or DRIPs — January 1, 2012
  • Options and simple bonds acquired on or after January 1, 2014
  • Complex bonds and options issued as part of a fixed income instrument acquired on or after January 1, 2016

What is a covered security?

A "covered" security refers to a security you purchased on or after IRS cost basis reporting regulations took effect (and depending on which type of security was purchased):
  • Equities — January 1, 2011
  • Mutual funds or DRIPs — January 1, 2012
  • Options and simple bonds acquired on or after January 1, 2014
  • Complex bonds and options issued as part of a fixed income instrument acquired on or after January 1, 2016
A security that has been transferred to your account from another brokerage account in which the security was already "covered" is considered a covered security. As required by cost basis reporting regulations, when you sell covered securities we will report to the IRS and to you not only the gross proceeds from the sale, but also the cost basis, the date of acquisition, whether any gain or loss with respect to such securities is long-term or short-term, and whether a portion of the gain is ordinary income.

How are gains and losses determined?

To determine whether you have a gain or loss on a sale or exchange, you must first know your adjusted cost basis. That's because you will be taxed on the difference between the cost basis of the securities and the amount you received when you sold them.

Can a security's cost basis change?

The cost basis of a security can change due to a stock split, corporate distribution that is treated as a return of capital, certain wash sales or a spin-off. If any of these changes occur while your account is with Merrill Edge, we will automatically adjust the cost basis for affected securities.

What is adjusted cost basis?

Adjusted cost basis is used to calculate a gain or loss as a result of selling a security. It is based on the price paid for a security, but includes a variety of possible adjustments (for example, when a stock splits). The adjusted cost basis is used for determining the gain or loss that results from a sale.

How is cost basis calculated?

The IRS has identified several approved methods for calculating cost basis. The calculation method you choose will affect the amount of the taxable gain or loss reported for the year. You are required to specify the method you have elected to use on your tax return. Once you select a method, that method must be used for all shares held in the security. IRS approval is required to change a method you have selected. The approved methods are as follows:
  • FIFO (first in, first out): The shares you bought first will be treated as being sold first. Unless you inform us that you elect to use another method, we will apply the FIFO method by default.
  • Specific identification method: Prior to settlement, you specify the share to be sold, typically to reduce any taxable gain or increase any loss for tax purposes.
  • Average cost method: Averages the purchase price of all shares bought. This method can apply only to mutual fund shares.

What is a tax lot?

A tax lot is the number of shares in the same security acquired at the same time. In general, each tax lot will have a different purchase price. As a result of IRS cost basis reporting regulations that took effect at the beginning of 2011, the cost basis for some of your tax lots may be reported to the IRS while the cost basis for other tax lots will not, depending on the date of purchase. If you choose the specific identification method of cost basis calculation, you can select which lots to sell to have more control over your reported gains and losses. Lot specification is regulated by the IRS and must be executed prior to settlement.

What is a wash sale?

Generally, you can't claim a loss for tax purposes on a trade if you bought what the IRS calls "substantially identical" shares within 30 days before or after the trade that generated the loss. This is called a wash sale. Brokers such as Merrill Edge will report wash sales only if the securities are "identical" (and not merely "substantially identical") and are held in the same account.

How do I update my cost basis information?

Use this form to print, complete and mail the information to us. It includes information regarding conditions that can cause a change in your cost basis. If you require assistance, please contact us.

If I transfer a covered security to Merrill Edge, will the cost basis also be transferred?

Yes, if the delivering firm participates in the Cost Basis Reporting Service (CBRS). Cost basis data is usually transferred within 10 business days after the security transfer. After 30 days, if your cost basis information is not transferred, you can complete our cost basis form and send it to us.

Why is the cost basis different from the price I paid for a tax lot?

Cost basis may differ from original cost due to various reasons. Differences could be due to wash sales, return of capital payments, bond premium amortization, and certain other factors.

How do I calculate the cost basis of a stock that has split?

Generally, you take the original investment amount and divide it by the new amount of shares you now hold as a result of the stock split to arrive at the new per-share cost basis.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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