Here's Fidelity's reply. In summary -- They're doing things properly including using zero cost basis and negative proceeds entries ("closing transaction cost") on the Form 1099-B. See below.
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"Starting in 2014, regulations require the reporting of basis and proceeds for closed option positions on Form 1099-B. The IRS requirements can be confusing.
Premiums for exercised or assigned equity options adjust the basis or proceeds of the underlying security.
Closing transactions on long options are reported with cost basis of the premium paid to open and proceeds of the premium received to close.
Closing transactions on short options are reported with cost basis as zero and proceeds as the difference between the opening proceeds and the closing transaction cost.
Open index option contracts are subject to mark-to-market reporting at year-end. As a result, unrealized gains and losses will be reported to the IRS on the Form 1099-B Tax Reporting Statement.
Additional information about this tax reporting requirement can be found in IRS Publication 550."
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