Cost Basis Reporting FAQs for Brokerage Accounts

Following are Frequently Asked Questions regarding the new cost basis regulations and how they relate to your T. Rowe Price Brokerage account. For more information and an overview of cost basis accounting, methods, and the regulations please see our Cost Basis Accounting and Calculation page.

Cost basis is used for income tax purposes and reflects the original purchase price or value of an asset, such as a security or mutual fund, including fees and commissions, as adjusted for stock splits, return of capital, and other applicable adjustments.

Cost basis also is known as tax basis and is used to determine the capital gain or loss of the asset when it is sold or disposed. The capital gain or loss is the difference between the cost basis of the asset and the value of the asset when sold.

For more information, please see our Cost Basis Accounting and Calculation page.

New regulations stem from legislation enacted in 2008 as part of the Emergency Economic Stabilization Act. These regulations require financial services companies to report their customers' cost basis to the IRS as part of Tax Form 1099-B beginning in 2011 and phased through 2013, subject to any changes by the IRS.

The schedule of effective dates for new reporting is as follows:

Accounts for which a tax Form 1099-B is not generated, such as IRAs and other retirement plans, generally are not affected by these changes.

Securities purchased after the applicable dates shown in the table above are known as "covered" securities. In the past, you were solely responsible for reporting cost basis information to the IRS when you sold securities in a taxable account.

While your responsibilities have not changed, T. Rowe Price Brokerage, beginning on the dates shown above, will track and report on Form 1099-B the cost basis information for all "covered" securities sold on or after the effective date(s). You are always responsible for accurately reporting cost basis information on your tax returns, and should always keep copies of your trade confirmations and statement to accurately calculate your cost basis.

A "covered" security, or "post-effective" security, is any security acquired for cash according to this schedule:

Accounts for which a tax Form 1099-B is not generated, such as IRAs and other retirement plans, generally are not affected by these changes.

These securities are also known as post-effective securities. Covered securities will be subject to the new cost basis reporting regulation. Securities purchased prior to these effective dates are "noncovered" securities, also known as pre-effective securities, and are not covered by the new cost basis reporting regulation.

Cost basis information and reporting will not be retroactive to these noncovered shares. T. Rowe Price will not be responsible for reporting gain/loss information to the IRS for noncovered or pre-effective securities. Cost basis information that you receive today for noncovered securities will not change; what will change is the addition of tracking and reporting for covered securities.

The IRS allows three methods for determining the cost basis—First In First Out (FIFO), Average Cost, and Specific Identification.

For more information and for examples of calculations using each of the three methods, please see our Cost Basis Accounting and Calculation page.

The FIFO method is a form of Specific Identification (see below) that dictates that the first shares purchased must be sold first. This is the simplest method to use for taxes, but may create the largest amount of income to be taxed, because the longer you own a stock, the bigger your capital gain is likely to be. FIFO is the default method required by the IRS if another method is not chosen.

The Specific Identification method requires the largest amount of recordkeeping, but allows you to manage the amount of income tax owed by identifying the specific shares that may be most beneficial from the tax point of view. For example, you may identify as sold those shares that have been owned for more than a year to avoid a short-term capital gain. This method may help you to pay taxes at the lower rate for long-term investments. Eventually, you may sell the older, and possibly less expensive, shares and be responsible for income tax on that gain—unless they are part of your estate, in which case your heirs may be able to step-up the cost basis to the fair market value of the shares as determined by your estate administrator.

In using Specific Identification the actual cost basis of each stock, bond, or mutual fund selected for the transaction is used to calculate gains when shares are sold.

There are seven common types of Specific Identification that can be set up as a standing order:

Average Cost - for Mutual Funds Only
The Average Cost method, the most common method for mutual funds, is used to determine the average cost per share and generally results in moderate income tax. This method is available for calculating cost basis on mutual fund shares (and shares acquired through dividend reinvestment plans starting in 2012). The most commonly used method is Average Cost Single Category.

Average Cost Single Category
The Average Cost Single Category method uses the average cost per share of all shares held in the account and any shares that are sold are considered to be those held longest in the account. Currently, if applicable, T. Rowe Price provides cost basis information for mutual fund shares to its shareholders on Tax Form 1099-B using the Average Cost Single Category method. Currently, this information is not reported to the IRS.

Average Cost Double Category
The Average Cost Double Category method divides shares into two groups: those held one year or less (short-term shares) and those held longer than one year (long-term shares). The average cost per share is determined for each group separately. This method is rarely used, and the IRS will discontinue this method effective April 1, 2011. Taxpayers using this method should consult their tax advisers.

Shareholder responsibilities have not changed. You should continue to ensure that the correct cost basis information is reported on your tax returns. The information we provide on Form 1099-B can be different from what you are required to report on your tax returns because we are permitted, under the IRS cost basis regulation, to ignore certain complicated tax rules in determining your cost basis information, while you may have to take into account those rules. Please consult your tax advisor.

Cost basis information and reporting is not be retroactive for noncovered securities. T. Rowe Price will not report gain/loss information to the IRS for noncovered or pre-effective securities. Cost basis information for noncovered securities will not change; what will change is the addition of tracking and reporting for covered securities.

For covered securities sold, you need not do anything if you would like your cost basis method to be FIFO, which is the IRS default method. You do not need to choose a cost basis method until you sell a covered security.

However, you may select a cost basis method in advance, if you choose to do so. If so, please review the options below:

• If you would like to use FIFO for covered securities, you do not need to take action, and T. Rowe Price Brokerage will maintain cost basis records and report this information to you.
• If you would like to use one of the other cost basis methods, follow the steps below to change the method to be used for your account prior to completion of a sale transaction:
  
  1. Download and complete the Cost Basis Form and return it to the address provided, or
  2. Call T. Rowe Price Brokerage at 1-800-225-7720.
• If you would like to select specific lots or shares for covered securities, you may make your selection at the time of sale.

• Online
  If you want to use your account default method, you may proceed with the sale of the security and do not have to select a cost basis method for the sale. Your account default method will display on the stock order screen.
  
  If you want to choose a specific lot to sell or change the disposal method, use the "Edit Tax Lot" button which appears on the stock order screen. When you click that button, additional detail about your holdings will be displayed. You may choose which specific position you want to sell at this time and/or change the disposal method.
• Phone Rep
  Clients who would like to use their account default method should proceed with the sale and do not have to select a cost basis method for the sale.
  
  If you want to choose a specific lot or change your disposal method, your phone associate can assist with both.
• Tele*Trader
  You may sell through Tele*Trader using your account default only. If you want to choose a different method or specific lot, you should conduct the transaction through our Web site or by calling our associates at 1-800-225-772.

Cost basis information and reporting is not retroactive for noncovered securities. T. Rowe Price will not report gain/loss information to the IRS for noncovered or pre-effective securities. Cost basis information for noncovered securities will not change; what will change is the addition of tracking and reporting for covered securities.

Yes. Your trade confirmations will reflect the cost basis method and cost basis used for sales of all covered securities beginning January 3, 2011.

Your 1099-B will change to reflect that T. Rowe Price Brokerage must report to the IRS the adjusted basis of sales of all covered shares and classify any gain or loss as long-term or short-term.

For more information, please see our main Cost Basis Accounting and Calculation page.

In addition, the following pdf from the Department of the Treasury contains more information on the IRS cost basis regulation, http://www.gpo.gov/fdsys/pkg/FR-2010-10-18/pdf/2010-25504.pdf

You can also obtain the "Cost Basis Reporting on Securities Sales" link directly from the IRS website.

Yes. When trading authority has been granted to another person on your account, the authorized person has full privileges to buy or sell at their discretion on your behalf, including choosing a cost basis method.

The 1099-B with gain/loss information is prepared for covered securities only. If your transaction includes the sale of covered and noncovered securities, you will not see the gain/loss information for the noncovered securities on Tax Form 1099-B. The gross proceeds (but not the gain/loss) for the sale of noncovered securities are reported on a separate 1099-B.

Moreover, the loss may be adjusted under the IRS 30-day wash-sale rule, which states that if you sell shares at a loss, your loss deduction will be deferred if you purchased other shares in the same or substantially identical security or mutual fund within 30 days before or after the sale. You should also note that we are only required to apply the wash-sale rule on an account-by-account basis, but you are required to apply such rule across all of your accounts.

If you believe that your 1099-B is incorrect, please contact us at 1-800-225-7720.

For further information on tax matters, you may wish to call the Internal Revenue Service at 1-800-TAX-1040 (829-1040). To receive federal tax forms, call 1-800-TAX-FORM (829-3676) or visit the IRS website. Information on mutual fund tax matters is available in IRS Publication No. 564, and information on individual retirement accounts can be found in IRS Publication No. 590.

The information, including all linked pages and documents, on T. Rowe Price websites is not intended to be tax advice and cannot be used to avoid any tax penalties. You should consult your own tax advisor. Please see Legal Information for more details

T. Rowe Price Brokerage is a division of T. Rowe Price Investment Services, Inc., member FINRA/SIPC. Brokerage accounts are carried by Pershing LLC, a BNY Mellon company, member NYSE/FINRA/SIPC.