Cost Basis and Form 1099-B: Tracking What You Paid
What cost basis is, how the IRS lets you match shares sold to shares bought, what changes your basis over time, and how to read the boxes on Form 1099-B, including covered and noncovered securities.
Every time you sell an investment in a taxable account, the gain or loss is the sale proceeds minus your basis. Get the basis wrong and the tax is wrong: too low a basis overstates the gain, and a missing basis can mean paying tax on money you already paid tax on. This guide explains what basis is, how it changes, how the IRS lets you choose which shares you sold, and how to read the broker’s Form 1099-B.
These are federal rules. State tax rules may differ, and this guide doesn’t cover them.
What basis is
The IRS defines basis as “the amount of your investment in property for tax purposes.” For stocks and bonds you buy, it’s generally the purchase price plus costs of purchase, such as commissions and transfer fees (IRS Publication 551, rev. December 2025, checked November 9, 2026). On the selling side, the proceeds a broker reports on Form 1099-B are already reduced by commissions and transfer taxes (Instructions for Form 1099-B, 2026, checked November 9, 2026).
Basis then becomes “adjusted basis” as events add to it or subtract from it. Publication 551 adds a plain instruction: “You must keep accurate records of all items that affect the basis of property.”
What changes your basis after you buy
For a typical fund or stock investor, the common adjustments come from a few sources, all described in IRS Publication 550, 2025 edition (checked November 9, 2026):
- Reinvested dividends. Dividends used to buy more shares are taxable income in the year paid, and each reinvestment is a new purchase with its own cost and date. Leaving those purchases out of your records would understate basis. See reinvested dividends.
- Return of capital. A nondividend distribution reduces your basis. Once basis reaches zero, further nondividend distributions are reported as capital gain.
- Stock splits and nontaxable stock dividends. These spread the same total basis across more shares. Publication 550 says to divide the adjusted basis of the old stock by the number of old and new shares.
- Wash sales. A loss disallowed under the wash sale rule is added to the basis of the replacement shares. See wash sales.
Inherited and gifted investments
Shares you didn’t buy have their own rules (Publication 551):
- Inherited: basis is generally the fair market value on the date of the person’s death, or on an alternate valuation date if the estate’s personal representative elects it. Publication 550 treats a gain or loss on inherited property as long-term regardless of how long it was held.
- Gifted, when the value at the time of the gift was at least the donor’s adjusted basis: your basis is generally the donor’s adjusted basis, with possible adjustments for gift tax paid.
- Gifted, when the value at the time of the gift was less than the donor’s adjusted basis: there are two bases. For figuring a gain, use the donor’s adjusted basis; for figuring a loss, use the fair market value when you received the gift.
Gifted and inherited shares are where records are most often missing, and where a tax professional can help confirm the right figure.
Which shares did you sell?
If you bought the same investment at different times and prices, then sell only part of the position, the basis depends on which shares count as sold. Publication 550 describes three approaches:
- Specific identification. You choose the shares. For shares held by a broker, you specify them at the time of sale and get written confirmation from the broker within a reasonable time.
- First in, first out. If you can’t adequately identify the shares, “the basis of the securities you sell is the basis of the securities you acquired first.”
- Average basis. Allowed for mutual fund shares and certain dividend reinvestment plan shares, not ordinary stock. It averages the basis of all identical shares in the account, and the shares sold are treated as the ones acquired first for the holding period.
Brokers can have their own default method for an account, and the Form 1099-B instructions allow a broker to use average basis as the default for eligible shares when the customer gives no other instruction. An account’s cost-basis settings show which method applies.
An invented example. Someone owns 20 shares of the same fund, bought in two lots:
- Lot 1: 10 shares on March 3, 2022 at $100 each, a basis of $1,000.
- Lot 2: 10 shares on February 2, 2026 at $150 each, a basis of $1,500.
On October 5, 2026 they sell 10 shares for $1,400 after commissions. The result depends on the method:
| Method | Shares treated as sold | Basis | Gain or loss | Term |
|---|---|---|---|---|
| First in, first out | Lot 1 | $1,000 | $400 gain | Long-term (held since 2022) |
| Specific identification of lot 2 | Lot 2 | $1,500 | $100 loss | Short-term (held under a year) |
| Average basis | 10 × ($2,500 ÷ 20 = $125) | $1,250 | $150 gain | Long-term (treated as first acquired) |
The same sale produces a long-term gain of $400, a short-term loss of $100 or a long-term gain of $150. That’s why the method matters, and why it’s set before, not after, the sale. How short- and long-term results are taxed is in how capital gains are taxed.
Covered and noncovered securities
Brokers have been required to track and report basis for newer purchases, called covered securities. The Form 1099-B instructions define them by acquisition date:
- stock acquired for cash in an account after 2010, except stock eligible for average basis;
- stock eligible for average basis (generally mutual fund shares and certain dividend reinvestment plan shares) acquired for cash after 2011;
- certain debt instruments and options acquired after 2013, with some types of debt covered only if acquired after 2015.
“A noncovered security is any security that is not a covered security.” For noncovered shares, the broker may leave the basis blank or report it without sending it to the IRS. Shares bought before those dates are the usual case where your own records supply the basis.
Reading Form 1099-B
The boxes that matter most, as the 2026 Form 1099-B instructions describe them:
| Box | What it shows |
|---|---|
| 1a | Description of the property (for example, the fund and number of shares) |
| 1b | Date acquired |
| 1c | Date sold or disposed of |
| 1d | Proceeds, reduced by commissions and transfer taxes |
| 1e | Cost or other basis |
| 1f | Accrued market discount |
| 1g | Wash sale loss disallowed |
| 2 | Whether the gain or loss is short-term or long-term |
| 5 | Checked if the security is noncovered |
| 12 | Checked if basis was reported to the IRS |
Two limits are worth knowing. First, box 1g only reflects wash sales the broker can see: Publication 550 says it shows the disallowed loss when the securities are covered and the replacement shares have the same CUSIP number and were bought in the same account. Second, box 1e is the broker’s figure. Where it’s missing or wrong, the taxpayer supplies the correct one.
From 1099-B to your return
Sales are generally listed on Form 8949, sorted by whether they’re short-term or long-term and whether basis was reported to the IRS. The Form 8949 instructions (2025 edition, checked November 9, 2026) use boxes A and D for transactions where basis was reported to the IRS, B and E where it wasn’t, and C and F where no Form 1099-B was received. Transactions with basis reported and no adjustments can, under an exception, go directly onto Schedule D lines 1a or 8a.
If the basis on a 1099-B is wrong, the instructions explain the fix. When basis was reported to the IRS, you enter the reported basis, use code B in column (f) and enter the correcting adjustment in column (g). When it wasn’t reported, you still use code B, but enter the correct basis in column (e) and -0- in column (g). Inherited property sold is generally reported as long-term, with “INHERITED” in the date-acquired column. The form instructions are the authority on how to report each case.
Keeping records
Because basis can be adjusted by events years apart, people often keep purchase confirmations, dividend reinvestment records, records of transfers between brokers, and any paperwork showing the value of inherited or gifted shares. When moving an account, people often check that the receiving broker shows the original purchase dates and costs; opening a brokerage account covers what to look for. Funds themselves are explained in index funds and ETFs explained.
Common questions
What is cost basis in simple terms? It’s what you have invested in an asset for tax purposes: usually the purchase price plus commissions, adjusted over time for things like reinvested dividends, return-of-capital distributions and wash sales.
What if my 1099-B shows no cost basis? That’s common for noncovered securities. Box 5 is checked, and the basis comes from your own records, entered on Form 8949 under box B or E.
Can I choose which shares I sell? The rules allow specific identification if you tell the broker which shares at the time of sale and receive written confirmation. Otherwise, first in, first out generally applies, or average basis for fund shares where that method is used.
Do reinvested dividends increase my basis? Each reinvestment buys shares with their own cost, which adds to your total basis in the position. The dividend itself was already taxable income when paid.
What is the basis of inherited stock? Generally its fair market value on the date of death, or on the alternate valuation date if the estate elects it, and a sale is treated as long-term.
Sources checked November 9, 2026: IRS Publication 551 (rev. December 2025); IRS Publication 550 (2025); Instructions for Form 1099-B (2026); Form 8949 instructions (2025).