When Box 5 is checked on a 1099-B, the security you sold is a noncovered security, meaning your broker reported the sale proceeds to the IRS but did not report your cost basis.1Internal Revenue Service. Instructions for Form 1099-B (2026) You have to calculate the basis yourself and enter it on your return. If you skip that step, the IRS treats your basis as zero and taxes you on the entire sale amount.
What Makes a Security Noncovered
A covered security is one your broker is required to track from purchase through sale, reporting both gross proceeds and adjusted cost basis. A noncovered security falls outside that requirement, so only the proceeds get reported.1Internal Revenue Service. Instructions for Form 1099-B (2026)
Whether something counts as covered comes down to when you bought it. Congress phased in mandatory basis tracking over several years:2Internal Revenue Service. Notice 2009-17, Reporting of Customers Basis in Securities Transactions
- Individual stocks and most ETFs are covered if purchased on or after January 1, 2011.
- Mutual funds and dividend reinvestment plan shares are covered if purchased on or after January 1, 2012.
- Most bonds and options are covered if purchased on or after January 1, 2014, with more complex debt instruments phased in starting January 1, 2016.
Anything bought before those dates is noncovered. Certain hard-to-value instruments like foreign currency contracts and some variable-rate debt are also noncovered regardless of purchase date.3Office of the Law Revision Counsel. 26 USC 6045 – Returns of Brokers Inherited or gifted shares often show up with Box 5 checked as well, since your broker usually lacks the acquisition records.
Why Box 5 Costs You Money If You Ignore It
When the IRS receives a 1099-B showing $15,000 in proceeds and no cost basis, its automated matching system treats the basis as zero and computes your taxable gain as the full $15,000. If you actually paid $12,000 for those shares, you owe tax on only the $3,000 gain, but you have to prove it by reporting the basis yourself.
This is where most people slip. Tax software imports the 1099-B, and if you accept the broker’s numbers without entering your own basis, the return goes out showing a much larger gain than you realized. The IRS won’t send a notice to fix it, because the numbers match what the broker reported. You just quietly overpay.
Going the other direction has its own risks. Reporting an artificially low basis, or omitting the sale entirely, can trigger an accuracy penalty and extend how long the IRS has to audit you.
Calculating Your Cost Basis
Basis starts with what you originally paid, including commissions and transaction fees. For securities held over many years, that starting point almost always needs adjustment.
Common Adjustments
Return-of-capital distributions reduce your basis. These come from a company’s capital rather than its earnings, and each one chips away at your original cost. By the time you sell, your basis may be noticeably lower than what you paid.
Reinvested dividends push the other direction. Every dividend you reinvested bought additional shares, and you already paid tax on that income in the year you received it. Those amounts add to your total basis. For a mutual fund held for decades, reinvested dividends can be a substantial chunk of your real cost, and missing them means paying tax on the same income twice.
Stock splits and stock dividends change the per-share basis without changing the total. A 2-for-1 split doubles your share count and halves the per-share cost; the aggregate is unchanged. If you later sell only some of the split shares, you need to track which lots went out and at what adjusted per-share cost.
Wash sales matter too. If you sold at a loss and bought substantially identical shares within 30 days before or after, the loss is disallowed and added to the basis of the replacement shares instead.4Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities For noncovered securities, your broker generally does not track wash sales across accounts, so catching them is on you.
Inherited and Gifted Shares
Inherited assets take a basis equal to the fair market value on the date the original owner died, regardless of what that person paid. This stepped-up basis can dramatically reduce or eliminate the taxable gain.5Internal Revenue Service. Gifts and Inheritances You’ll want estate documents or an appraisal to back up the figure you use.
Gifts work differently. You generally take over the donor’s original basis. But if the fair market value at the time of the gift was lower than the donor’s basis and you later sell at a loss, your basis for calculating that loss is the lower fair market value. This dual-basis rule keeps a built-in loss from being handed off to another taxpayer.
Holding Period
How long you held the asset decides whether the gain is short-term or long-term. One year or less means ordinary income rates apply. More than one year qualifies for the long-term capital gains rates, which for 2026 are 0%, 15%, or 20% depending on your taxable income.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses Most noncovered securities will be long-term because they were bought years ago. Inherited assets are treated as long-term automatically, regardless of when the decedent bought them or when you sold.
When the Original Records Are Gone
Noncovered securities are by definition old. Trade confirmations from 2005 may be long gone, and your current broker may not have records from before your account transferred in.
Start with the broker anyway. Basis reporting isn’t required for noncovered positions, but many firms track it voluntarily and can provide historical cost data on request. Check your account’s tax lot or cost basis page. Verify anything you find against your own records before relying on it, since voluntary data is not guaranteed accurate.
If the broker can’t help, look for old account statements, tax returns from the year of purchase, or even handwritten notes. A monthly statement from the purchase period showing the transaction is solid evidence. Prior-year Schedule D filings may show partial sales of the same holding, which can help you back into the per-share cost of what’s left.
When no documentation exists at all, you can estimate basis from historical stock price data. Multiply the number of shares originally purchased by the closing price on the purchase date, then adjust for any splits, mergers, or spin-offs between then and the sale. Free historical price data is available on most financial data sites, and split histories appear on company investor relations pages. This requires a good-faith effort and clear documentation of your calculation. An estimate backed by historical prices and a defensible method is far better than reporting no basis at all.
Reporting the Sale on Form 8949 and Schedule D
Noncovered sales go on Form 8949, which feeds into Schedule D.7Internal Revenue Service. Instructions for Form 8949 Two of the six checkboxes apply when the broker did not report basis to the IRS:
- Box B in Part I covers short-term noncovered transactions (held one year or less).
- Box E in Part II covers long-term noncovered transactions (held more than one year).
For each transaction, enter the description, acquisition date, sale date, and the proceeds from your 1099-B. In column (e), enter the adjusted cost basis you calculated. If any adjustments are needed, such as adding a disallowed wash sale loss, put the code in column (f) and the dollar amount in column (g). Column (h) is the final gain or loss: proceeds minus basis, plus or minus any column (g) adjustment.8Internal Revenue Service. Form 8949, Sales and Other Dispositions of Capital Assets
Totals carry over to Schedule D. Short-term noncovered totals from Box B go to line 2. Long-term noncovered totals from Box E go to line 9.8Internal Revenue Service. Form 8949, Sales and Other Dispositions of Capital Assets Schedule D combines these with your other capital transactions and sends the net figure to Form 1040.
One warning worth repeating: tax preparation software often auto-populates the proceeds from the 1099-B but leaves the basis field blank or at zero for Box 5 transactions. Enter your calculated basis manually. Skip that step and the software treats the full sale amount as gain.
Penalties and the Extended Audit Window
The worst outcome is not reporting a noncovered sale at all. The IRS gets the 1099-B from your broker, and if the matching transaction is missing from your return, you’ll receive a notice proposing tax on the full proceeds.
Report the sale but substantially understate your tax, and the IRS can impose an accuracy-related penalty of 20% on the underpaid amount.9Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments For individuals, an understatement is “substantial” when it exceeds the greater of 10% of the tax that should have been shown or $5,000.10Internal Revenue Service. Accuracy-Related Penalty
The audit window can also stretch. The IRS normally has three years from your filing date to challenge a return. If you omit more than 25% of your gross income, that window extends to six years.11Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection Reporting a noncovered sale with zero basis when the real basis was high, or leaving the sale off entirely, can push reported income far enough below the real number to trigger that extended period. For a large portfolio of noncovered holdings, the stakes are not trivial.
How Long to Keep Your Records
Keep records related to property until the statute of limitations closes for the year you dispose of it.12Internal Revenue Service. How Long Should I Keep Records In practice, that means holding basis documentation for the entire time you own the asset, plus at least three years after filing the return that reports the sale. If the six-year substantial omission rule could apply, keep records for six years after filing. Paper disappears over decades, so scanning trade confirmations, account statements, and corporate action notices while they still exist is one of the most practical things you can do.