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Cost basis is generally the amount an investor paid for an investment, adjusted for certain later changes. It is used to help work out how much gain or loss occurs when the investment is sold.
A merger, stock split, or spin-off can change that basis. When this happens, the amount a broker reports on Form 1099-B may also need to change. Brokers therefore need records showing what changed and how the new basis was calculated.
This article explains the records brokers should keep to support basis adjustments, corrections, and 1099-B cost basis recordkeeping after corporate actions.
Brokers should update the cost-basis record whenever an organizational action changes, reallocates, reduces, or carries forward the basis of a security. Common examples include:
Issuer information provides the tax basis treatment for a corporate action, while the broker’s operational records document how that treatment was applied to affected customer positions. Brokers should therefore retain both the issuer documentation and the processing records needed to trace the basis adjustment from the corporate action through its application to customer positions.
The broker’s file should include the following:
Retain the applicable Form 8937, Report of Organizational Actions Affecting Basis of Securities, or equivalent issuer information used to support the basis adjustment.
Keep the details needed to identify and reproduce the adjustment, including:
Brokers generally rely on this issuer information unless it is incomplete or known to be incorrect.
Beyond the issuer form, brokers need operational data to link the action to specific customer positions:
When a security moves between firms, the receiving broker must preserve the transfer statement. It gives the receiving broker the basis details needed when the cost-basis history comes from outside the firm. Such a transfer statement must generally be furnished within 15 days after the settlement date.
Brokers must retain:
A broker’s cost-basis documentation trail from acquisition to disposition can help show how each amount reported on Form 1099-B was calculated. The following basis calculation trail shows how the basis moves from acquisition through reporting:
Original or transferred basis ↓ Pre-action basis ↓ Corporate-action adjustment/allocation ↓ Basis after the adjustment ↓ Adjusted basis by lot ↓ Basis at disposition ↓ Basis reported on Form 1099-B
For each affected lot, the broker should be able to show:
The final adjusted basis in the broker’s lot records should agree with the amount entered in Form 1099-B, Box 1e. The records should also show how the basis changed after the corporate action. When the amounts do not match, the broker needs to find the cause and fix the records or the form before filing.
A broker’s internal controls should create an exception record whenever issuer or transfer-statement information cannot be used.
When a required transfer statement does not arrive on time, the broker should follow up with the transferor firm and keep a record of what happened. That record should show:
Note: If the broker asks for a complete transfer statement and does not receive it, IRS rules may allow the security to be treated as noncovered.
When issuer filings or transfer statements are incomplete or known to be inaccurate, brokers should preserve:
Late issuer or transfer information should produce a correction trail showing exactly what changed. If an issuer statement is received after Form 1099-B has been filed and it changes the reported information, the broker generally must file a corrected Form 1099-B within 30 days of receiving the statement. The correction is generally not required when the issuer statement is received more than three years after the original Form 1099-B was filed.
Similar rules apply when a later transfer statement shows that a security previously treated as noncovered is covered. The broker must file a corrected Form 1099-B within 30 days, unless the statement is received more than three years after the original Form 1099-B was filed.
If the broker already transferred that covered security to another broker, a corrected transfer statement must generally be furnished within 15 days, unless the new information is received more than 18 months after the original transfer statement was furnished.
The correction file should retain:
The IRS generally says that copies of information returns should be kept, or the data should remain reconstructible, for at least 3 years from the return due date, and for 4 years if federal withholding, including backup withholding, was imposed.
For practical corporate action tax records, the supporting documentation should remain connected to the return data it supports. That includes:
Note: The 10-year Form 8937 rule requires issuers using the public-reporting exception to keep the form on their website for 10 years. It is not a blanket 10-year retention requirement for every broker’s Form 1099-B basis records.
Good 1099-B cost basis recordkeeping should make it easy to see where the basis reported on Form 1099-B came from. Someone reviewing the file should be able to follow the basis back through each adjustment to the original purchase or transfer record.
A simple record trail might look like this:
The file should also make clear that:
Generally, no. For Form 1099-B purposes, the broker takes into account organizational actions occurring during the period it held custody of the security, beginning when it received the transferred security.
Yes. A security can remain noncovered if its basis is derived from a noncovered security involved in the corporate action. The treatment of covered status is determined by the rules governing basis reporting.
Generally, brokers are not required to consider transactions, elections, or other events occurring outside the account when determining reportable adjusted basis, subject to the applicable IRS rules.
The broker should be able to trace the amount reported on Form 1099-B for the disposed lot through each corporate action adjustment and back to the issuer information, the original acquisition record, or the incoming transfer statement.
Keep the Basis Trail Together Tax1099 helps brokers keep Form 1099-B filing data organized so reported basis can be reviewed, corrected, and supported when needed. File Form 1099-B with Tax1099
Tax1099 helps brokers keep Form 1099-B filing data organized so reported basis can be reviewed, corrected, and supported when needed.