Every spring, thousands of investors quietly overpay their taxes by trusting one number on a single form. The number is the cost basis printed on Form 1099-B, and when it is wrong — which happens far more often than most people realize — the IRS uses it anyway unless you object. The result is tax on a "gain" you never actually earned.
If you sold stock, mutual fund shares, ETFs, or units from an employer equity plan last year, your broker sent you a 1099-B. Before you copy those figures onto your return, it is worth understanding what the form does and does not promise. This guide walks through covered versus noncovered securities, what Box 1e and Box 5 really mean, and how a single adjustment code on Form 8949 can keep you from paying tax twice on the same dollar.
What Form 1099-B Actually Reports
Form 1099-B, "Proceeds From Broker and Barter Exchange Transactions," is the document brokers file with the IRS — and send to you — to report sales of securities. It covers stocks, bonds, options, commodities, regulated futures, and similar instruments sold for cash. If your account went through a corporate reorganization, like a merger or a control acquisition, that may show up here too.
The form has a row for each sale (or each summarized group of sales) with several key boxes:
- Box 1a — a description of the security and the number of shares or units.
- Box 1b — the date you acquired the property.
- Box 1c — the date you sold it.
- Box 1d — the proceeds: what you received from the sale.
- Box 1e — the cost or other basis: what the broker believes you paid.
- Box 1f and 1g — adjustment amounts, most commonly a disallowed wash-sale loss.
- Box 2 — whether the gain or loss is short-term or long-term.
- Box 5 — a checkbox indicating the transaction involves a noncovered security.
Boxes 1d and 1e are the heart of the matter. Proceeds minus basis equals your gain or loss. Brokers are generally reliable about proceeds — they know exactly how much cash hit your account. Basis is where things get complicated, and that complication has a name.
Covered vs. Noncovered Securities: The Distinction That Changes Everything
In 2008, Congress required brokers to start tracking and reporting cost basis to the IRS. The rules phased in by asset type: stocks acquired in 2011 or later, mutual funds and dividend-reinvestment shares from 2012 or later, and most bonds and options from 2014 or later.
A covered security is one the broker is legally required to report basis on. For these, Box 1e should contain a basis figure, and that figure also went to the IRS.
A noncovered security is one acquired before those cutoff dates, or one whose basis the broker simply does not have — for example, shares transferred in from another institution without complete records, or assets you received as a gift or inheritance. For noncovered securities, the broker reports your proceeds but Box 5 is checked and Box 1e may be blank or unreliable. The broker is telling you, in effect: "We are reporting that you sold this, but the basis is your responsibility to get right."
This distinction drives everything downstream. It determines which section of Form 8949 a sale belongs in, and it tells you when you must do your own homework rather than trusting the form.
Form 8949: Where Reconciliation Happens
Form 8949, "Sales and Other Dispositions of Capital Assets," is the bridge between your 1099-B and your tax return. Its entire purpose is reconciliation — letting you and the IRS line up what the broker reported against what you actually believe is correct, with a clear paper trail for any difference.
Form 8949 sorts every transaction into a lettered box. Part I is short-term (held one year or less); Part II is long-term (held more than one year):
- Box A / Box D — transactions on a 1099-B with basis reported to the IRS (covered securities). Short-term go in A, long-term in D.
- Box B / Box E — transactions on a 1099-B without basis reported to the IRS (noncovered securities). Short-term in B, long-term in E.
- Box C / Box F — transactions not reported on any 1099-B at all, such as a private sale of stock.
Recent versions of the form also add categories (Boxes G through L) for digital asset transactions reported on the newer Form 1099-DA, but the logic is identical: did the basis get reported to the IRS or not?
Getting the box right matters because it tells the IRS how much to trust the numbers. A Box A transaction with no adjustments can often be summarized in a single line. A Box B transaction is one the IRS expects you to scrutinize.
Why the Basis on Your 1099-B Is So Often Wrong
If the broker reports basis to the IRS for covered securities, why would it ever be wrong? Because of structural gaps in what brokers are allowed or able to know. Here are the most common culprits.
Employer Equity: RSUs, ESPPs, and Stock Options
This is the single biggest source of cost-basis errors, and it affects millions of employees at public companies.
When restricted stock units (RSUs) vest, the fair market value of those shares is added to your W-2 as ordinary wages — you already paid income tax on it. Your correct cost basis is that vest-date value. But the IRS prohibits brokers from including the compensation income in the basis they report. So the broker frequently reports a basis of zero, or only the small amount you actually paid out of pocket.
If you sell RSU shares worth $50,000 and the 1099-B shows a basis of $0, the form implies a $50,000 gain. But you already paid tax on that $50,000 as wages. Reporting it as written means paying tax on it a second time.
Employee stock purchase plans (ESPPs) have the same problem. The 1099-B typically shows only your discounted purchase price, omitting the discount amount that was already reported as wages on your W-2. The fix is to use the correct basis: purchase price plus any discount and compensation element already taxed.
Incentive stock options (ISOs) and nonqualified stock options carry their own basis adjustments depending on how and when you exercised and sold. The theme is constant: for anything that touched your paycheck, verify the basis before you file.
Wash Sales Spanning Two Years
The wash-sale rule disallows a loss when you buy a substantially identical security within 30 days before or after selling at a loss. Brokers do flag wash sales within a single account in Box 1g — but a broker only knows when a wash sale begins. It often cannot tell when the disallowed loss should later be released, and it cannot see purchases in your other accounts, your spouse's accounts, or your IRA. Cross-account and cross-year wash sales routinely require manual correction.
Gifted and Inherited Securities
Inherited stock generally gets a "stepped-up" basis equal to the fair market value on the date of death — often far higher than what the deceased originally paid. Gifted stock uses a more complex carryover-basis rule tied to the donor's basis and the value at the date of the gift. Brokers rarely have this information, so these almost always arrive as noncovered securities with a blank or incorrect Box 1e.
Transfers Between Brokers and Reinvested Dividends
When you move an account to a new brokerage, basis information is supposed to follow — but it frequently arrives incomplete or not at all, turning covered shares into effectively noncovered ones. Years of small reinvested dividends and capital gains distributions also add to your basis, and not every platform tracks them cleanly.
Fixing It: Form 8949 Adjustment Codes
Here is the rule that protects you: you do not silently overwrite the broker's numbers. For a transaction the broker reported to the IRS, you report the proceeds as shown, then make a documented adjustment using a code in column (f) and an amount in column (g). This keeps your return matching the 1099-B the IRS already has while explaining the difference.
The most important code for cost-basis problems is Code B.
Code B — basis is incorrect. Use Code B when the broker reported basis to the IRS (a Box A or Box D transaction) but that basis is wrong. This is the code for the RSU and ESPP situations above. The mechanics:
- Enter the proceeds from Box 1d in column (d), exactly as the 1099-B shows.
- Enter the incorrect basis from Box 1e in column (e), exactly as the 1099-B shows.
- Enter B in column (f).
- In column (g), enter the adjustment as a negative number equal to the additional basis you are claiming.
Example: Your 1099-B shows $50,000 proceeds and $0 basis on vested RSUs. Your correct basis — the vest-date value already on your W-2 — is $48,000. You enter $50,000 proceeds, $0 basis, code B, and −$48,000 in column (g). Your taxable gain becomes $2,000 instead of $50,000. You just avoided tax on $48,000 of income you already paid tax on once.
Other codes you may encounter:
- Code W — a wash-sale loss is disallowed. The disallowed amount is entered as a positive number in column (g).
- Code M — multiple transactions are summarized on one line. A general-purpose code often used by tax software.
- Code T — the broker reported the wrong holding term (short-term vs. long-term).
- Code N — you received the 1099-B as a nominee for someone else.
- Code E — you can adjust selling expenses or option premiums not reflected on the form.
For noncovered securities (Box B and Box E), the process is simpler in one respect: because the broker did not report basis to the IRS, you simply enter the correct basis directly in column (e) — no adjustment code needed for the basis itself. The responsibility, and the recordkeeping, are entirely yours.
A Practical Reconciliation Checklist
Before you file, run through every 1099-B line:
- Confirm proceeds. Box 1d should match your records. These are rarely wrong, but check.
- Check the Box 5 indicator. If it is checked, the security is noncovered and the basis is your job to verify.
- Flag every employer-equity sale. Any RSU, ESPP, ISO, or NQSO sale needs its basis cross-checked against your W-2 and your equity plan's supplemental statement (often called a "stock plan transactions" or "year-end" statement).
- Recompute inherited and gifted positions. Apply the stepped-up or carryover basis rules; do not trust a blank Box 1e.
- Watch for wash sales across accounts. If you trade the same names in multiple accounts or repurchased recently, the broker's wash-sale figure may be incomplete.
- Keep your documentation. Brokerage confirmations, equity-plan statements, gift letters, and estate appraisals are what defend your numbers if the IRS asks.
The IRS matches the proceeds on your return against the 1099-B automatically. A mismatch in proceeds triggers a notice. A wrong basis that you fail to correct does not trigger anything — it just costs you money. That asymmetry is exactly why so many investors overpay: the system has no built-in alarm for paying too much.
Keep Your Investment Records Organized Year-Round
The investors who reconcile their 1099-Bs painlessly are the ones who tracked their purchases, vests, reinvestments, and transfers as they happened — not the ones scrambling every April. Maintaining a clear, durable record of every lot's true cost basis turns tax season from an archaeology project into a quick review.
That is exactly the kind of recordkeeping plain-text accounting excels at. Beancount.io lets you track investment lots, cost basis, and capital gains in transparent, version-controlled plain text — no black boxes, no vendor lock-in, and a full history you can audit line by line. You can even visualize holdings and realized gains through a Fava dashboard. Get started for free and keep the numbers you need long before the 1099-B arrives.
This article is for general educational purposes and is not tax advice. Cost-basis rules, equity-compensation taxation, and IRS forms change; consult a qualified tax professional about your specific situation.