Updating capital reporting record
For more information, see Publication 550, Investment Income and Expenses, Publication 1212, Guide to Original Issue Discount (OID) Instruments, the instructions for Form 8949, Sales and other Dispositions of Capital Assets, and the relevant Schedule D, Capital Gains and Losses.
The following frequently asked questions and answers relate to the reporting of the adjusted basis of a debt instrument that is a covered security. What debt instruments are considered covered securities beginning in 2014?
For a tax-exempt debt instrument, you cannot elect to amortize bond premium. You also must reduce your basis in the debt instrument by the amortization for the year. What assumptions must a broker use to report acquisition premium, market discount, and bond premium? You must inform your broker in writing (including a writing in electronic format, such as an email) by no later than December 31 of the year for which you want your broker to begin to apply or cease to apply the election. If my broker is reporting my basis for a debt instrument, do I need to make additional adjustments to my cost basis on my Form 8949 for my debt instruments?
Although qualified stated interest received and OID accrued on a tax-exempt debt instrument are tax-exempt and not includible in income, market discount on a tax-exempt debt instrument isn’t tax-exempt interest and therefore is includible in taxable income. In addition, you must treat any partial principal payment on a debt instrument with market discount as interest income, up to the amount of the accrued market discount. In this case, the broker won’t report the amortized bond premium as a separate item on Form 1099-INT. What is amortization of bond premium, and how does it affect your basis in a debt instrument? For bond premium, unless you have timely notified your broker that you have not elected to amortize bond premium on a taxable debt instrument (the section 171 election), your broker must report to you the amount of amortized bond premium for the year. §1.171-5 for more information on how to make or revoke a section 171 election for a taxable debt instrument. Does my notification to the broker mean I have made or revoked the election with the IRS?There also are certain types of debt instruments, as described in Q&A 3, that aren’t covered securities. Except for a debt instrument described in Q&A 3, the following debt instruments acquired on or after January 1, 2016, are covered securities (see Treas. §1.6045-1(n)(3) for the specific requirements to determine if a debt instrument is a covered security beginning in 2016): 3. In general, the basis of a debt instrument is adjusted by the following debt-specific items: 5. OID is a form of interest that generally is not paid in cash currently.What types of debt instruments aren’t covered securities? §1272(a)(6) (in general, certain debt instruments in which the principal is subject to acceleration, such as mortgage-backed securities); (b) a short-term debt instrument (that is, a debt instrument with a fixed maturity date not more than one year from the date of its issue); and (c) a debt instrument the terms of which aren’t reasonably available to the broker within 90 days of the date the debt instrument was acquired by the customer and the debt instrument is either issued by a non U. issuer or a tax-exempt obligation issued before January 1, 2014. OID accrues over the term of a debt instrument based on a constant yield. For a debt instrument with OID, acquisition premium is the excess of (a) your adjusted basis in the debt instrument immediately after you acquire it, over (b) the debt instrument’s adjusted issue price at the time of acquisition.Many transactions that previously would have been reported on Schedule D or D-1 must be reported on Form 8949 if they occurred in 2011 or later.In general, complete Form 8949 before you complete Schedule D.