Personal & Workplace Investing – Stock Plan Services
Cost Basis Legislation – Overview &
Impacts
October, 2010
For NASPP Session Attendees Only
Cost Basis Legislation – Background
 The Cost Basis Legislation (CBL) was passed on October 3rd of 2008 as part of the
Emergency Economic Stabilization Act

GAO estimated tax payers have been under reporting capital gains by $11 Billion

IRS issued draft regulations in December 2009, final regulations on October 12th with an effective date of
October 18, 2010
 Record keepers will be responsible for maintaining and transferring cost basis information
 Broker dealers will be responsible to report cost basis data at sale to investors and the
IRS on the Form 1099-B
 Effective Dates – Securities are considered to be covered and therefore eligible for basis
reporting based on their acquisition date and security classification:

1/1/2011: Stock in a Corporation (including shares acquired through an Equity Compensation arrangement)

1/1/2012: Securities Eligible for Average Cost (RIC or Mutual Funds and DRIP)

1/1/2013: Option Reporting and all Other Securities as determined by the IRS
 Penalties for incorrect reporting will be significant for non-compliance – however the IRS
has granted penalty relief for brokers and custodians for reporting certain transfers of
stock in 2011

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Penalty of $100 per incorrect form 1099-B sent to the investor, and $50 for incorrect form sent to the IRS;
Maximum up to $350,000
For NASPP Session Attendees Only
Calculating Cost Basis
Source: TowerGroup “Cost Basis Technology for Broker Dealers”
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For NASPP Session Attendees Only
Industry Coverage
 Securities Industry and Financial Markets Association (SIFMA)
 Financial Information Forum (FIF)
 Depository Trust & Clearing Corporation (DTCC)

Cost Basis Reporting System (CBRS) Steering Committee
 Investment Company Institute (ICI)

Broker/Dealer Advisory Committee (BDAC)

CBR Task Force
 ICI Tax Committee
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
Transfer Agency Advisory Committee (TAAC)

CBR Task Force
For NASPP Session Attendees Only
Brokerage Impacts – 2011, 2012 & 2013
2011
• Covered Security
Identification
• Multiple Lot Relief
Methods
• Adjusted Cost Basis
• 1099B Reporting
• Gifts
• Transfers & Client
Conversions
• Customer Provided
Basis
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For NASPP Session Attendees Only
2012
• Mutual Funds (RIC)
• Corporate Reporting
• DRPs
• Short Sale Withholding
2013
• All Other Securities
(including Options &
Bonds)
2011 Impacts – Equity Compensation Plans
 Cost basis is established when ownership of any stock-settled security is
transferred to the employee
 Equity Compensation transactions that create a tax lot include:

SOP Exercise and Sell, Exercise and Hold, Stock Swap

SAR Exercise

ESPP Purchase
 Stock not acquired for “cash” is excluded at this time, no penalty for over-reporting:

RSA Vesting

RSU / Performance Award Distribution
 Adjusted Cost Basis – ordinary income adjustments for ESPP & ISO dispositions
(see 2013 impacts)
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For NASPP Session Attendees Only
2013 Impacts – Equity Compensation Plans
 Adjusted Cost Basis – from draft IRS regulations; clarified in final regulations:

(6) Adjusted basis--(i) In general. For purposes of this section, the adjusted basis of a security is determined from the
basis determined under paragraph (d)(6)(ii) of this section as of the date the security is acquired in an account,
increased by the commissions and transfer taxes related to its sale to the extent not accounted for in gross proceeds as
described in paragraph (d)(5) of this section. When reporting adjusted basis, a broker must take into account
organizational actions affecting the basis of the security if reported on any issuer statement (as described in §1.6045B1) but is not otherwise required to consider transactions, elections, or events occurring outside the account.

(ii) Initial basis--(A) Cost basis. For a security acquired through a sale transaction in an account, the initial basis is the
total amount paid by the customer or credited against the customer’s account for the security, increased by the
commissions and transfer taxes related to its acquisition to the extent not accounted for in gross proceeds as described
in paragraph (d)(5) of this section. For securities purchased or acquired pursuant to the exercise of an
option granted or acquired before January 1, 2013, a broker may, but is not required to, take option
premiums into account in determining the adjusted basis of the securities purchased or acquired
pursuant to the exercise of the option. A broker may, but is not required to, take into account income
recognized upon the exercise of a compensatory option or other equity-based compensation
arrangement before January 1, 2013, in determining adjusted basis.
 Ordinary Income Adjustments:
 ISO qualifying disposition: cost basis is exercise price
 ISO & ESPP disqualifying disposition: report cost basis as capital gain + ordinary income
 ESPP qualifying disposition: report cost basis as lesser of (1) sales price -purchase price or
(2) beginning offering period FMV x discount percentage
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For NASPP Session Attendees Only
Appendix
For NASPP Session Attendees Only
Draft Form 1099-B
For illustrative purposes only
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For NASPP Session Attendees Only
NASPP and Fidelity Investments are not affiliated
Fidelity Brokerage Services LLC, Member NYSE, SIPC
Fidelity Stock Plan Services LLC
560235.2.0
For NASPP Session Attendees Only