What Are 1099-B Adjustment Codes and How Do You Use Them?

For investors and taxpayers dealing with capital gains, understanding 1099-B adjustment codes is critical for accurate tax reporting. These codes ensure that securities transactions are reported correctly to the IRS, potentially affecting taxable income. Knowing how these adjustments work can help prevent errors and simplify tax filing.

Common Situations for 1099-B Adjustments

1099-B adjustments often arise when discrepancies exist between the cost basis reported by the broker and the taxpayer’s records. This can occur due to corporate actions such as stock splits, mergers, or acquisitions, which alter the original purchase price of securities. For example, a stock split increases the number of shares while decreasing the price per share, impacting cost basis calculations.

Wash sales are another common scenario requiring adjustments. These occur when a security is sold at a loss and repurchased within 30 days. The IRS disallows the immediate deduction of the loss, requiring an adjustment to the cost basis of the repurchased security. This defers the loss until the security is sold without triggering another wash sale. Tracking these transactions is essential to avoid inaccuracies in tax filings.

Adjustments may also result from return of capital distributions, which are not taxable income but reduce the investment’s cost basis. If the cost basis is reduced to zero, further distributions are treated as capital gains. Properly accounting for these adjustments ensures accurate reporting of gains or losses when the investment is sold.

Specific Codes and Their Meanings

Understanding 1099-B adjustment codes is vital for correctly reporting securities transactions and adhering to IRS regulations.

Wash Sale Code

The wash sale code applies when a security is sold at a loss and repurchased within 30 days before or after the sale. Under IRS rules, the loss cannot be deducted immediately but is added to the cost basis of the repurchased security. This defers the loss until the security is sold again without triggering another wash sale. For example, if an investor sells shares of XYZ Corporation at a $500 loss and repurchases them within 30 days, the $500 loss is added to the cost basis of the new shares. Investors must carefully track these transactions to ensure compliance and avoid penalties.

Return of Capital Code

The return of capital code identifies distributions that reduce the investment’s cost basis rather than being taxable income. This occurs when a company returns part of the investor’s original investment instead of distributing profits. For example, if an investor receives a $2 per share return of capital distribution, the cost basis of the shares is reduced by $2 per share. Once the cost basis reaches zero, further distributions are treated as capital gains. Proper accounting of these adjustments is crucial for accurate tax reporting.

Non-Dividend Distributions

Non-dividend distributions are payments made to shareholders that are not derived from a company’s earnings or profits. These reduce the shareholder’s cost basis in the stock. If the cost basis reaches zero, additional non-dividend distributions are treated as capital gains. For instance, if an investor purchases shares at $10 each and receives a $1 non-dividend distribution, the cost basis becomes $9 per share. If the shares are later sold for $12, the capital gain is calculated as $3 per share. Properly tracking these distributions ensures compliance with tax regulations and avoids reporting errors.

Adjustments on Gains and Losses

Accurate reporting of gains and losses requires adherence to IRS rules and thorough record-keeping. Taxpayers can deduct up to $3,000 of net capital losses against ordinary income annually, with excess losses carried forward to future years. This underscores the importance of precise calculations and documentation.

A key factor in reporting gains and losses is the distinction between short-term and long-term capital gains. Short-term gains, from assets held for one year or less, are taxed at ordinary income rates, which can reach 37% for high-income earners. Long-term gains, from assets held for more than a year, are taxed at lower rates—typically 0%, 15%, or 20%, depending on income. Strategic asset holding periods can help minimize tax liabilities.

Foreign investments may also require adjustments. Taxpayers can claim a foreign tax credit to offset U.S. taxes on income earned abroad, but this credit is limited to the amount of U.S. tax attributable to foreign income. Proper documentation of foreign taxes paid is essential to substantiate claims and ensure compliance with IRS rules.

Correcting Misreporting or Omissions

Errors on a 1099-B form can result in financial and legal consequences. Mistakes may stem from oversights, misinterpretation of tax codes, or clerical errors. Prompt corrective action is necessary to avoid penalties and interest. Under IRS rules, negligence can result in a penalty of 20% of the underpayment amount.

To correct misreporting, taxpayers should reconcile their records with information from brokers or financial institutions. This involves reviewing transaction details such as trade dates and amounts. If errors are identified, taxpayers must file an amended return using Form 1040-X. This form requires a clear explanation of the changes along with supporting documentation, highlighting the importance of maintaining accurate records.