Following are Frequently Asked Questions regarding 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.

What is cost basis?

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 or 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.

What are the Cost Basis Reporting regulations and what is required of T. Rowe Price Brokerage?

The Internal Revenue Service (IRS) has issued regulations requiring brokers and mutual fund companies to report cost basis information on covered securities (covered securities refers to securities acquired after certain effective dates, as noted below, to both investors and the IRS as part of Tax Form 1099-B). The regulations stem from legislation enacted in 2008 as part of the Emergency Economic Stabilization Act. The schedule of effective dates for reporting is as follows:

Cost Basis Reporting Schedule by Phase and Effective Dates
Phase Type of Security Security Acquisition Date Effective Tax Year Tax Form Mail Date
1 Stocks (Common, Preferred, and Foreign Stock) and Exchange Traded Funds (ETFs) On or after
01-01-11
2011 2012
2 Mutual Funds and Dividend Reinvestment Plan (DRIP) Shares On or after
01-01-12
2012 2013
3 Less Complex Debt and Options (including warrants and rights) On or after
01-01-14
2014 2015
4 Complex Debt and Options On or after
01-01-16
2016 2017

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). In addition, certain bond amortization information for all applicable bonds acquired on or after January 1, 2014, or January 1, 2016 as the case may be, will be tracked and reported on form 1099-INT, Form 1099-OID, or other forms specified by the IRS. 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. Learn more about phase 3.

What are "covered," "non-covered," "pre-effective," and "post-effective" securities?

A "covered" or "post-effective" security is any security acquired for cash per the schedule below. Covered securities are subject to cost basis reporting regulations. Securities purchased prior to effective dates, (non-covered or pre-effective), are not covered by the regulations. T. Rowe Price is not responsible for reporting gain/loss info to the IRS for non-covered securities.

Cost Basis Reporting Schedule by Phase and Effective Dates
Phase Type of Security Security Acquisition Date Effective Tax Year Tax Form Mail Date
1 Stocks (Common, Preferred, and Foreign Stock) and Exchange Traded Funds (ETFs) On or after 01-01-11 2011 2012
2 Mutual Funds and Dividend Reinvestment Plan (DRIP) Shares On or after 01-01-12 2012 2013
3 Less Complex Debt and Options (including warrants and rights) On or after 01-01-14 2014 2015
4 Complex Debt and Options On or after 01-01-16 2016 2017

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. Securities purchased prior to these effective dates are "noncovered" securities, also known as pre-effective securities, and are not subject to cost basis reporting.

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 may receive today for noncovered securities will not change; what will change is the addition of tracking and reporting for covered securities.

What cost basis calculation methods are available?

The IRS allows three methods for determining the cost basis: First In First Out (FIFO), Average Cost, and Specific Identification or Specific Lot. The default method for Stocks, ETFs, Bonds, Options, and Other Securities is FIFO. Our default method for Mutual Funds is Average Cost.

First In First Out (FIFO)
  • Default Method for Stocks, ETFs, Bonds, and Options
  • Available for Stocks, ETFs, Options, Bonds, and Mutual Funds

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.

Specific Identification (Specific Lot)
  • Available for Stocks, ETFs, Options, Bonds, and Mutual Funds

The Specific Identification method requires the most recordkeeping, but allows you to manage the amount of income tax owed by identifying the specific shares that may be most beneficial to sell for tax purposes. 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 security selected for the transaction is used to calculate gains when shares are sold or contracts closed.

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

Specific Identification - Standing Orders
Specific Identification Cost Basis Method Selected by Customer to Sell Shares Definition
High Cost Highest-cost shares are sold or disposed of first.
High Cost, Long-Term Highest-cost shares with a long-term holding period are sold first.
High Cost, Short-Term Highest-cost shares with a short-term holding period are sold first.
Low Cost Lowest-cost shares are sold or disposed of first.
Low Cost, Long-Term Lowest-cost shares with a long-term holding period are sold first.
Low Cost, Short-Term Lower-cost shares with a short-term holding period are sold first.
Last In, First Out (LIFO) Assets acquired last are the ones that are sold or disposed of first.
Minimize Short Term Gains Minimizes the tax impact by taking losses first and gains last. To select this method as your account default, please call 1-800-225-7720.
Average Cost
  • Our Default Method for Mutual Funds
  • Available for Dividend Reinvestment Plans (DRIPs) and 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 DRIP shares acquired through dividend reinvestment plans. It is calculated as follows:

Total Dollars Invested ÷ Total Number of Shares Held = Average Cost per Share
For more information and for examples of calculations using each of the three methods, please see our Cost Basis Accounting and Calculation page.

What do T. Rowe Price Brokerage customers need to do as part of the new Cost Basis Reporting regulations?

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 regulations, 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 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.

Must T. Rowe Price Brokerage customers select a cost basis method and how should they do so?

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 our default methods (Average Cost for mutual funds and FIFO for all other 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 and the IRS. 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. Log in to your Brokerage account and edit your selection online on the gain/loss page, or
    2. Download and complete the Cost Basis Form and return it to the address provided, or
    3. 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.
I'm ready to sell my covered security, what should I do?
  • 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, mutual fund or close option position order screen. Please note—online trading is not available for fixed income securities, please call T. Rowe Price Brokerage at 1-800-225-7720 for assistance.

    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 Associate
    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 Automated Phone System
    You may sell stocks, ETFs or mutual funds, or close option positions 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 1-800-225-7720. Please note —trading is not available for fixed income securities through the Tele-Trader automated system, please call T. Rowe Price Brokerage at 1-800-225-7720 for assistance.

    For all securities, specifying a lot or changing cost basis method must be done at the time of trade or before settlement date, typically within three days for equities and one day for mutual funds. Once the trade settles, the method used will be final and cannot be changed.
Will my 1099-B and trade confirmations change?

Yes. 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. Your trade confirmations will reflect the cost basis method.

Where can I find more information on the cost basis regulations?

For more information, please see our main or the Cost Basis Accounting and Calculation page or the IRS website.

I have trading privileges on my spouse's account. Will I be able to select the cost basis method for trades?

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 gain/loss amount on my 1099-B appears to be incorrect. Why is that?

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 section of Tax Form 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.

What are my Bond Amortization Choices?

There are several bond amortization methods from which to choose for determining income and cost basis. T. Rowe Price's default methods for reporting bond amortization to you and the IRS are:

  1. Do not treat all interest as original issue discount (OID)
  2. Amortize Premium on Taxable Bonds based on Constant Yield Method
  3. Accrue Market Discount based on Ratable Method
  4. Do not include Market Discount in income annually

If you would like to keep the T. Rowe Price default methods listed above, you do not need to take action. T. Rowe Price Brokerage will use the applicable methods for individual bond holdings acquired and sold after January 1, 2014. If you wish to make a different selection, please contact a representative at 1-800-225-7720.Subject to certain IRS restrictions (consult IRS Publication 550 and your tax advisor), you may change the default amortization selections to your preferred method for all applicable bond holdings acquired on or after January 1, 2014. Please review the table below for additional explanation.

Bond Amortization Methods1
Method What it Means
Treat All Interest as Original Issue Discount (OID)2
Default Method: Do not treat all interest as OID
You may elect to treat all interest on a debt instrument (typically bonds) acquired during the tax year as OID and include it in income. Interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest as adjusted by any amortizable bond premium or acquisition premium. If you choose to treat all interest as OID, then the bond premium will be amortized using the constant yield method and accrued market discount will be calculated using the constant yield method and included in annual income.
Learn more about the regulation at Treasury Regulations section 1.1272-3.
Learn more about accrual of OID at IRS Publication 1212.
Amortize Premium on Taxable Bonds
Default Method: Amortize premium on taxable bonds based on constant yield method
Bond premium is the amount by which the price you paid (your basis) is more than the total of all amounts you will receive on the bond (other than qualified stated interest) after your purchase, which generally is the maturity value for a bond issued without OID. For example:
A bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. If the bond yields taxable interest, you can choose to use a part of (or amortize) the premium to generally reduce the amount of interest that can be included in your income each year over the life of the bond.
Our default method is to amortize the bond premium using the constant yield method, and we will reduce your basis in the bond by the amortization for the year. Even though this is our default method for reporting to you and to the IRS, you must still follow the IRS requirement to make an election to amortize bond premium. You may change this default method to not amortize bond premium. The change will be made effective for the current year and subsequent years, but we cannot make the change retroactive for prior years.
Accrued Market Discount
Default Method: Accrue market discount based on ratable method
The accrued market discount is calculated in one of two ways:
  1. Ratable Accrual Method – Treats the market discount as accruing in equal daily installments during the period in which you hold the bond. The daily installments are calculated by dividing the market discount by the number of days after the date you acquired the bond, up to and including its maturity date. The daily installments are multiplied by the number of days you held the bond to calculate your accrued market discount.
  2. Constant Yield Method – You may choose to accrue market discount using a constant interest rate. Your choice takes effect on the date you acquired the bond. This method treats the bond as having been issued on the date you acquired it. It treats the amount of your basis (immediately after you acquired the bond) as the issue price. Then the formula is applied for constant yield method as shown in IRS Publication 1212.
If you are treating all interest as OID, then the Constant Yield Method is the only choice for calculating Accrued Market Discount.2

Include Market Discount in Income Annually
Default Method: Do not include market discount in income annually
 
When purchasing a market discount bond, you may choose to accrue the market discount over the period you own the bond and include the accrual for the current taxable year in your current income. Once you make this choice, it will apply to all market discount bonds you acquire during the tax year and in later tax years.
1 Applies only to bond holdings acquired on or after January 1, 2014 (for certain less complex bonds) and January 1, 2016, (for more complex bonds).
2 Learn more about all OID elections at Treasury Regulations Section 1.1272-3. Learn more about accrual of OID at IRS Publication 1212.

Any methods we have on our record, whether by default or by your election, and any change or revocation you notify us with respect to any methods on our record are not binding on the IRS. You must follow the IRS requirements to make the applicable election on your tax return, and you may need to seek IRS approval for any change or revocation of an election. Please see IRS Publication 550 for more information and consult your tax advisors.

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.

Internal Revenue Service Circular 230 Notice

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.