How to Use Form 8949 Code B to Correct Cost Basis

Form 8949, “Sales and Other Dispositions of Capital Assets,” is used to report the sale or exchange of a capital asset and to reconcile amounts reported on Form 1099-B. The form uses codes to explain why information on your tax return might differ from what your broker reported. This article focuses on Code B, which is used to correct an inaccurate cost basis provided by a broker.

When to Use Code B

Code B is used on Form 8949 when the cost basis reported by your broker on Form 1099-B is incorrect. An inaccurate basis can alter your calculated capital gain or loss, which impacts your tax liability.

One common scenario involves inherited securities. When you inherit an asset, its basis is “stepped-up” to its fair market value on the date of the original owner’s death. A broker may not have this updated information and could report the original purchase price, resulting in an incorrect basis on Form 1099-B.

Another instance is with gifted securities. The cost basis of a gifted asset is the same as the donor’s adjusted basis, a concept known as a “carryover basis.” Brokers may lack the donor’s original purchase information and report an incorrect basis. A third situation involves wash sale adjustments that were not properly accounted for on the 1099-B.

Information Required for the Correction

Before filling out Form 8949, you must gather specific documentation. You will need the Form 1099-B you received from your brokerage firm, as this contains the sale proceeds and the incorrect basis you need to adjust.

Next, you must secure documentation that substantiates the correct cost basis. For inherited assets, this could be a statement from the executor of the estate detailing asset values on the date of death. For gifted property, you may need records from the original donor, such as trade confirmations showing the initial purchase price.

Finally, you should have the correct acquisition date if it differs from what is shown on the 1099-B. With this information, you can calculate the correct cost basis figure to use on the form.

How to Complete Form 8949

First, determine if the transaction is short-term (held for one year or less) or long-term (held for more than one year). Short-term transactions are reported on Part I, and long-term transactions on Part II. At the top of the relevant part, you must check box (B) to indicate the basis reported on Form 1099-B is incorrect.

Proceed column by column for the transaction. In column (a), describe the property sold, copying the description from your 1099-B. For column (d), enter the proceeds from the sale, which should also match the 1099-B. In column (e), enter the correct cost basis you determined from your documentation.

In column (f), enter the letter “B” to signify an incorrect basis. Column (g) is for the adjustment amount, calculated by subtracting the correct basis (column e) from the incorrect basis on the 1099-B. For example, if the 1099-B basis is $1,000 and your correct basis is $5,000, the adjustment is a negative $4,000, entered in parentheses as (4000). The final gain or loss in column (h) is calculated by subtracting your correct basis (e) from the proceeds (d) and adding the adjustment from column (g).

Transferring Totals to Schedule D

After you have completed Form 8949, the final step is to transfer the summary totals to Schedule D, “Capital Gains and Losses.” You do not need to re-enter each individual transaction on Schedule D; only the subtotals are required.

The subtotals from the bottom of Form 8949, Part I, for transactions where you checked box B, should be carried over to line 1b of Schedule D. Similarly, the subtotals from Part II for transactions with box B checked are transferred to line 8b of Schedule D.