When your Form 1099-B reports a long-term sale but the cost basis was not reported to the IRS, you calculate the basis yourself and enter it on Form 8949, Part II, with Box E checked. The broker leaves basis off because the shares are “noncovered,” usually meaning you bought them before broker reporting rules kicked in, or you received them by gift, inheritance, or private transfer. You still owe tax only on your real gain, but the arithmetic and the paper trail are on you.
Why the Basis Isn’t on Your 1099-B
Brokers only have to report cost basis for “covered securities,” a category created by federal law in 2008. Anything acquired before the applicable start date is noncovered, and the broker checks Box 5 on Form 1099-B and leaves Box 1e (cost basis) blank or notes that basis was not reported to the IRS.1Internal Revenue Service. Instructions for Form 1099-B (2026)
The start dates depend on the asset:2Office of the Law Revision Counsel. 26 U.S. Code 6045 – Returns of Brokers
- Stocks acquired on or after January 1, 2011 are covered.
- Mutual funds and ETFs acquired on or after January 1, 2012 are covered.
- Most debt instruments acquired on or after January 1, 2014 are covered.
A few categories stay noncovered no matter when you bought them: options on commodities or foreign currencies, certain foreign securities, and shares received through private transactions outside a brokerage account. Transfers between brokers also matter. If the receiving broker never got a basis statement from the old firm, it treats the position as noncovered even when the original purchase date would otherwise have qualified.
Calculating the Basis
Basis begins with what you paid, plus any commissions or transaction fees at purchase. One clean lot in, one clean lot out, and you’re done. The complication is buying the same security across multiple lots at different prices, then selling only some of the shares.
You have three ways to identify which shares you sold:
- Specific identification. You designate which lot’s shares went out the door, matching each sale to a particular purchase. This gives you the most control, since you can sell higher-cost shares first to shrink the gain.
- First-in, first-out. The IRS treats your oldest shares as sold first. FIFO is the default when you don’t specifically identify. In a rising market it tends to produce the largest gain, because the earliest shares usually have the lowest cost.
- Average cost. Total cost divided by total shares. This is available only for mutual fund shares and dividend reinvestment plan shares, not for individual stocks.3Internal Revenue Service. Publication 550 – Investment Income and Expenses
For noncovered mutual fund shares, you elect average cost by using it on the return for the first year it applies. For covered shares, the election has to go to the broker in writing.4Internal Revenue Service. Mutual Funds (Costs, Distributions, etc.) 1
Adjustments That Change Basis
What you paid is the starting point. Several events during the holding period move basis up or down, and missing one will throw off your gain.
Stock Splits and Stock Dividends
A split doesn’t change your total basis. It spreads that basis across more shares. Hold 100 shares at $50 through a 2-for-1 split and you now hold 200 shares at $25. The $5,000 total is unchanged. Stock dividends work the same way.
Return of Capital Distributions
REITs and master limited partnerships often pay distributions classified as return of capital rather than dividends. Each one reduces your basis dollar for dollar. A $10,000 basis reduced by $3,000 of cumulative return of capital becomes $7,000. Once cumulative return of capital wipes out your original basis, further distributions are taxed as capital gain in the year received.
Mergers, Spin-Offs, and Reorganizations
Corporate actions can rearrange basis in ways that aren’t obvious from your account statements. In a spin-off, your basis in the parent company gets split between the parent and the new entity based on their relative market values on the distribution date. Companies taking actions that affect shareholder basis have to file Form 8937 with the IRS and make it available to shareholders.5Internal Revenue Service. About Form 8937, Report of Organizational Actions Affecting Basis of Securities For old actions, the company’s investor relations page is usually the fastest place to find the filing.
Wash Sales
If you sold a security at a loss and bought the same or a substantially identical security within 30 days before or after that sale, the wash sale rule disallows the loss on the current return. The disallowed amount is added to the basis of the replacement shares.6Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
Say you bought 100 shares for $5,000, sold them for $4,000, and repurchased 100 shares two weeks later for $4,200. The $1,000 loss is disallowed and layered onto the new lot, giving those shares a basis of $5,200. When the broker isn’t tracking basis, this adjustment is yours to compute and record.
Inherited and Gifted Shares
Inherited and gifted securities are two of the most common reasons basis never makes it to a 1099-B. The rules are different, and mixing them up is expensive.
Inherited Shares
Your basis in inherited securities is generally the fair market value on the decedent’s date of death, not what the decedent originally paid.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This “stepped-up” basis often collapses the taxable gain. Stock your parent bought for $5,000 that was worth $50,000 at death has a $50,000 basis in your hands. Sell shortly after for $51,000 and the gain is $1,000.
If the executor elected the alternate valuation date, six months after death, use that value instead. To pin down the number, look for date-of-death values in the estate’s records, probate filings, or historical price data for that day.
Gifted Shares
Gifted securities carry a dual basis rule that depends on whether you eventually sell at a gain or a loss. For calculating gain, your basis is the donor’s adjusted basis, whatever they paid plus their adjustments. For calculating loss, your basis is the fair market value at the time of the gift, but only if that value was lower than the donor’s basis.8Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
That creates a middle zone with no gain or loss at all. If the donor’s basis was $10,000 and the fair market value at the gift date was $7,000, a sale above $10,000 is a gain measured from $10,000, a sale below $7,000 is a loss measured from $7,000, and a sale anywhere between the two produces nothing to report. The rule keeps built-in losses from being transferred by gift.
Rebuilding Lost Records
This is where most people get stuck. You bought something 20 years ago, changed brokers twice, and never tracked the reinvested dividends. The IRS accepts reasonable reconstruction using the best information available.9Internal Revenue Service. Reconstructing Your Records (FS-2006-7)
Start with the current or former brokerage. Successor firms after mergers often still hold decades of history. Ask for the full account record, including trade confirmations and dividend reinvestment detail. When that fails, try these:
- Historical price data. If you know the approximate purchase date, archived daily closing prices give you a defensible figure.
- Old tax returns. Prior Schedule D entries and Form 1099-DIV records showing reinvested dividends help you piece together the purchase history.
- Transfer agents. Firms like Computershare hold shareholder records for direct stock purchase and dividend reinvestment plans, including your original enrollment and reinvestment history.
- Company disclosures. Investor relations pages and SEC filings document splits, mergers, and spin-offs with the ratios and dates you need.
Do not put zero on the return when you genuinely can’t find records. Zero basis makes the entire proceeds taxable. A documented, honest estimate with notes on how you built it is far more defensible than either a zero or a round guess.
Reporting the Sale on Form 8949
Long-term means you held the security more than one year, so the sale goes in Part II of Form 8949. Because the basis was not reported to the IRS, check Box E at the top of Part II.10Internal Revenue Service. Instructions for Form 8949
Then fill in each row:
- Column (a): description of the property, such as “100 sh. XYZ Corp.”
- Column (b): date acquired.
- Column (c): date sold.
- Column (d): sale proceeds, matching your 1099-B.
- Column (e): the cost basis you calculated.
- Column (f): leave blank when the 1099-B reported no basis at all. Use code “B” only when the 1099-B reported a basis that was wrong and you’re correcting it.
- Column (g): the adjustment amount. Enter zero when Box E is checked and you’re placing the correct basis directly in column (e).
- Column (h): gain or loss, column (d) minus column (e), combined with any adjustment in column (g).
Totals from Part II flow to Schedule D, which combines short-term and long-term results into a net figure that lands on Form 1040.11Internal Revenue Service. Instructions for Schedule D (Form 1040) A net capital loss is deductible against ordinary income up to $3,000, with anything above that carrying forward.
What Happens If You Get the Basis Wrong
Reporting a basis that is too high, or skipping the sale altogether, exposes you to a 20% accuracy-related penalty on the underpaid tax.12Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments The penalty reaches underpayments caused by negligence or a substantial understatement of income tax. For individuals, an understatement is substantial when it exceeds the greater of 10% of the tax that should have been shown on the return or $5,000.
The penalty can be avoided by showing reasonable cause and good faith.13Office of the Law Revision Counsel. 26 USC 6664 – Definitions and Special Rules Documentation of how you built the number, the sources you used, and any professional advice you took all help. A messy but honest reconstruction is more defensible than a clean round figure with no backup.
The reverse mistake costs money too. If you sold $100,000 of stock and your real basis was $60,000, your gain is $40,000. Report zero basis and the IRS sees a $100,000 gain. That’s $40,000 of gain that was never yours to be taxed on.
How Long to Keep the Records
The standard retention period is at least three years from the date you filed the return, or the return’s due date, whichever is later.14Internal Revenue Service. Topic No. 305, Recordkeeping Underreport gross income by more than 25% and the IRS has six years to assess additional tax, so the records need to survive that long as well.15Internal Revenue Service. How Long Should I Keep Records
For any security where a broker will never report your basis, hold the documents for as long as you own the position, then the retention period on top. Purchase confirmations, dividend reinvestment records, corporate action notices, and transfer statements between brokers all belong in the file. Losing them while you still hold the shares just means reconstructing basis at the worst possible time, years later, from whatever fragments remain.