Form 8949 Box E: Noncovered Securities and Basis Reporting

Box E on Form 8949 is where you report long-term sales of securities for which you received a Form 1099-B that did not report your cost basis to the IRS.¹ It sits in Part II of the form, the long-term section, and it exists because for older shares — mostly those acquired before the broker basis-reporting rules phased in — the government has the sale price on file but nothing to compare it against. You supply the basis yourself, and the number you enter is what determines whether the sale is a taxable gain or a deductible loss.

When a Transaction Belongs in Box E

Three conditions all have to be true. You received a 1099-B or substitute statement for the sale. The form shows that basis was not reported to the IRS. And you held the asset for more than one year.² Check Box 12 on the 1099-B. If it is unchecked or marked to show basis was not reported, and your holding period was over a year, the sale is a Box E transaction.

The nearby boxes cover situations that look similar. Box D is for long-term sales where the broker did report basis. Box F is for long-term sales where no 1099-B was issued at all.³ The line between E and F is the one people cross by accident: if a broker reported the proceeds but not the basis, that is Box E, not Box F. Boxes B and C are the short-term counterparts and don’t apply here, because Box E is long-term by definition.¹

Which Securities Are Noncovered

A security is “noncovered” when it was acquired before brokers were required to track and report its basis. The cutoff dates depend on the type of asset:

Individual stocks acquired before January 1, 2011
Mutual fund shares and dividend reinvestment plan shares acquired before January 1, 2012
Options and simpler fixed-income securities acquired before January 1, 2014
Complex debt instruments acquired before January 1, 2016

The staggered dates matter. A mutual fund share bought in February 2011 is noncovered, while an individual stock bought the same day is covered. If you aren’t sure, the 1099-B will flag noncovered lots directly. Some shares are noncovered regardless of date, including certain foreign securities and employee stock purchase plan shares where the broker lacked information to compute basis.

Figuring Your Own Cost Basis

Because the broker didn’t report basis, reconstructing it is your job. Start with original purchase confirmations, old brokerage statements, and transfer records. Many brokers keep digital archives further back than the mandatory reporting dates, so it’s worth checking your online history or calling even for pre-2011 lots.

If you can’t find original records, the IRS expects a reasonable effort using whatever evidence exists. Historical price databases can approximate a purchase price when you know the rough date, but you need something to support the number. Reporting a basis of zero is allowed, and it guarantees you pay tax on the full sale proceeds as if the entire amount were profit. Avoid that outcome if there is any way to reconstruct what you actually paid.

Which Shares Did You Sell

When you bought the same security at different times and prices, you need a method to identify which shares went out the door. If you didn’t specifically identify the lots with your broker at the time of sale, the default is first-in, first-out: the oldest shares are treated as sold first.⁴ For noncovered holdings that is almost always the lot with the longest holding period and often the lowest basis, which produces the largest taxable gain.

Adjustments That Change the Basis

The basis isn’t just what you paid on day one. Several events during the holding period move it:

Stock splits. A 2-for-1 split doubles your share count and cuts per-share basis in half; total basis stays the same.
Reinvested dividends. Each reinvestment adds to total basis, because the dividend was already taxed as income the year you received it. Missing reinvested dividends is one of the most expensive mistakes on noncovered returns, since it overstates the gain.⁴
Return of capital distributions. These reduce basis, because they return your own investment rather than pay you income.
Commissions. The purchase commission increases basis; the sale commission reduces net proceeds.

Inherited and Gifted Shares

A lot of Box E transactions involve shares acquired through inheritance or gift rather than a personal purchase decades ago. The basis and holding-period rules split sharply between the two.

Inherited Shares

If you inherited the shares, your basis is generally the fair market value on the date the original owner died, regardless of what they paid.⁵ That stepped-up basis can eliminate most of what would otherwise be a large gain. Inherited property is also automatically treated as held for more than one year, so it qualifies for Part II even if you sell weeks after inheriting it.⁶

Gifted Shares

For a gift, your basis is generally the donor’s adjusted basis, called carryover basis, and your holding period includes the time the donor held the shares.⁶ One exception: if the fair market value on the gift date was below the donor’s basis, you use the fair market value when calculating a loss. That prevents built-in losses from being transferred between taxpayers.

Filling Out Part II, Column by Column

Check Box E at the top of Part II, then enter each transaction across the eight columns:³

Column (a), description of the property. Something like “100 sh. XYZ Co.” so the IRS can identify what was sold.²
Column (b), the date acquired. For Box E this must be more than one year before the sale. Use the trade date, not settlement.
Column (c), the date sold.
Column (d), the proceeds. Enter them exactly as shown on the 1099-B. If the form did not net out selling expenses, adjust for them in columns (f) and (g).¹
Column (e), your adjusted cost basis, including splits, reinvested dividends, and purchase commissions.
Column (f), any adjustment codes. Common ones are “B” for correcting an incorrect basis, “W” for a wash-sale disallowance, and “E” for selling expenses not reflected in the proceeds.
Column (g), the dollar amount of the adjustment tied to the code in (f). If nothing applies, leave (f) and (g) blank.
Column (h), the gain or loss. Subtract (e) from (d), then apply any adjustment from (g). Losses go in parentheses.³

If you have more Box E transactions than fit on one page, use additional copies of Form 8949 with Box E checked on each.

Where the Totals Go

Total columns (d), (e), (g), and (h) at the bottom of Part II. Those totals move to line 9 of Schedule D, which is the line reserved for long-term transactions where basis was not reported.² Schedule D then combines the Box E figures with anything from Box D and Box F to produce your net long-term result, and combines short-term and long-term into the single figure that flows to Form 1040.⁷

Records and Penalty Exposure

Keep everything you used to build the basis figure: purchase confirmations, old statements, split notices, dividend reinvestment records, and any worksheets. The IRS wants property records held until the statute of limitations expires for the year of the sale, generally three years after filing.⁸ Underreport income by more than 25% and the window extends to six years.

Because the IRS has no broker-reported basis to check against yours, Box E carries a higher risk of basis challenges than covered lots. Reporting an inflated basis, whether intentional or careless, can trigger the accuracy-related penalty: 20% of the resulting tax underpayment when the IRS finds negligence or a substantial understatement.⁹ An understatement is generally substantial if it exceeds the greater of $5,000 or 10% of the correct tax. Interest runs from the original due date on top of the penalty.

Documentation is what protects you. A good-faith, reasonable basis figure backed by records usually avoids the penalty even when the IRS ends up disagreeing with the number. The worst position is a basis figure with no records behind it and no explanation for how you arrived at it.

1
Internal Revenue Service. Instructions for Form 8949
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Internal Revenue Service. Form 8949 – Sales and Other Dispositions of Capital Assets
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Internal Revenue Service. Instructions for Form 8949
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Internal Revenue Service. Stocks (Options, Splits, Traders) 3
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Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
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Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
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Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
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Internal Revenue Service. How Long Should I Keep Records?
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Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments