Broker basis reporting of debt instruments and options: actions holders or issuers must or may want to take.

AuthorKoppenol, Bonnie B.

On April 18, 2013, Treasury and the IRS issued final regulations relating to basis reporting by brokers for transactions involving debt instruments and options (T.D. 9616). Buried in these regulations are optional or necessary actions to be taken in certain circumstances by holders of debt instruments, issuers of debt instruments subsequently registered with the SEC, and securities issuers that undertake organizational actions affecting the basis of specified securities. This item addresses these provisions.

Background

The final regulations reflect changes in the law made by the Energy Improvement and Extension Act of 2008, P.L. 110-343, which mandated that brokers that are required to file gross proceeds information returns under Sec. 6045 (Form 1099-B, Proceeds From Broker and Barter Exchange Transactions) for the sale of covered securities must include the customers' adjusted basis in the sold securities and classify any gain or loss as long term or short term. On Nov. 25, 2011, proposed regulations were published (REG-102988-11) relating to information reporting for debt instruments and options that affected brokers, transferors, and issuers of these securities.

An effective date of Jan. 1, 2013, was proposed; however, Treasury and the IRS received many requests for a delay. In response to those requests, the IRS issued Notice 2012-34 to delay the effective date of basis reporting for debt instruments and options to no earlier than Jan. 1, 2014. Effective dates in the final regulations vary, but generally, reporting for less complex debt instruments and options takes effect for instruments acquired on or after Jan. 1, 2014, with reporting for more complex securities beginning Jan. 1, 2016.

Taxpayer Elections for Bond Premium and Discount Affecting Basis Reporting

Multiple elections are available to holders of debt instruments regarding the computation and/or recognition of original issue discount (OID), acquisition premium, and secondary market discount and premium, all of which affect the holder's basis in the security. The IRS wanted to minimize the need for reconciliation between information reported by a broker to a customer and the IRS and the amounts reported on a customer's tax return, while at the same time balancing taxpayer flexibility and consistency of practice among brokers. Therefore, the final regulations require brokers to report information using default assumptions provided in the relevant statutes and regulations...

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