Shares originally transferred as RMD uncovered on sale

[ga hiker]

On 12/29/22, I sold all my shares of a mutual fund. They were composed of shares transferred (RMD) from my IRA on 12/19/21, reinvested dividends/capital gain distributions, and shares transferred (RMD) from my IRA 12/22/22.

My 1099-B shows all the reinvested shares as Box A/short-term covered, and the 2 lots of RMD transfers as uncovered, cost and holding period unknown, for me to enter in Box B/short-term uncovered or Box E/long-term uncovered. On my December 2022 broker statement, Schedule of Realized Gains and Losses Year-to-Date, those 2 lots are shown with their correct Date Acquired and Cost Basis and appropriately placed in their Short Term/Long Term categories, but with the "Designation" column saying "Uncovered." 

I've looked in the appropriate IRS pubs and tried Google but cannot find an explanation for why these 2 lots are considered uncovered. My broker does not know. It doesn't really matter, but I am curious. Does anyone here know why?

[Mike9241]

"Non-covered" securities are any securities purchased or acquired before the effective dates ranging from 2011 to 2014 depending on how acquired. Transactions involving assets purchased and held prior to these effective dates can still be reported as they have been in the past, meaning that brokers may not provide detailed cost basis reporting to the IRS on the sales of "non-covered" securities.  They may decide to report only your gross proceeds. For these situations, it is your responsibility to report the proper cost basis on non-covered securities to the IRS. 

[ga hiker]

Right, I understand all that. But these non-covered shares were acquired, as I explained, in 2021 and 2022 when they were transferred from my IRA as Required Minimum Distributions (RMDs). Their holding period begins on the date of the distribution and their cost basis is their value on the date of the distribution. Why does the 1099-B categorize them as non-covered? 

[fanfare]

did you transfer to a new broker unaffiliated to the mutual fund company?

[ga hiker]

No. My IRA and brokerage accounts are with the same broker and have been for years.

[fanfare]

It's a mystery.

[JulieS]

In addition to the date affecting whether a security is covered or non-covered, corporate actions, such as stock splits, stock dividends, and redemptions, can result in additional shares for the investor which are non-covered shares. 

Shares in accounts that use the average cost method to determine basis are also non-covered. DRIP accounts are an example of this. 

[ga hiker]

"In addition to the date affecting whether a security is covered or non-covered, corporate actions, such as stock splits, stock dividends, and redemptions, can result in additional shares for the investor which are non-covered shares. "

The security involved is a mutual fund - no splits, no stock dividends, no redemptions. All shares were acquired via transfer from IRA as required minimum distribution or reinvestment of dividend/capital gain distributions.

"Shares in accounts that use the average cost method to determine basis are also non-covered. DRIP accounts are an example of this. "

Not a DRIP account. I have never specified average cost and have not previously sold shares of this fund. On the 1099-B, the shares acquired via reinvested distributions are covered and show correct cost bases for each lot so it doesn't look like average cost is used.  So, why would the shares acquired via transfer from IRA be noncovered?

[GeorgeM777]

While your brokerage firm may have been required to report cost basis to the IRS, by designating the mutual fund(s) cost basis as non-covered indicates that cost basis was apparently not reported.  Thus, the brokerage firm is placing on you the responsibility of reporting basis.  As the brokerage firm is the only party that would know why basis was not reported, the fact that they cannot explain why the mutual fund(s) in question reflect non-covered, likely means you may never know the explanation.  

@ga hiker 

[ga hiker]

In general, everything you  say is correct. However, I have been assuming that there must be some IRS "rule" that caused the shares transferred from the IRA to be designated noncovered. I couldn't find it in any of the IRS pubs I looked at. It doesn't actually matter but I was curious.

[AmyC]

No, it is really simple. Covered means the company that issued the form absolutely knows everything about your basis. They can take responsibility and confirm those numbers.

Noncovered means the company can't say for sure or does not want to. There are many reasons a company will send a form as noncovered. It simply means the basis is up to the taxpayer to figure out.

For many, it is the easiest way to issue a form. 

Reference:

2023 Instructions for Form 1099-B - IRS

[ga hiker]

In this case, the company absolutely knows everything about the basis. The shares were transferred from an IRA account with the company to a taxable account with the same company, and their basis is their value on that day, which the company shows in the monthly statement and reports on Form 1099-R as the value of my husband's Required Minimum Distribution. In fact, on the December statement from the company, in a section entitled, "Schedule of Realized Gains and Losses Year-to-Date," the noncovered lots are listed with all the same info as the covered lots, including Date Acquired and Cost Basis.  So that leaves "the company ... does not want to" or has some other reason.