Prop. Regs Clarify Basis Reporting for Debt, Options
In late November, the IRS released proposed regulations (REG-102988-11) clarifying how debt instruments and options will be treated under the new securities basis information reporting regime of Sec. 6045. The IRS had previously addressed treatment of stock under the reporting requirement, which was instituted by the Energy Improvement and Extension Act of 2008, P.L. 110-343. Generally, Sec. 6045, as amended by the act, requires securities brokers and other affected persons to report to the IRS and customers (on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions) the adjusted basis of covered securities sold and whether any gain or loss upon their sale is long or short term. It requires securities brokers to begin providing this information with respect to corporate stock purchased in 2011 and later years, or beginning in 2012 with respect to stock for which an average-basis method is permissible under Sec. 1012. Reporting on all other specified securities, including debt instruments and options, will begin with securities acquired or granted after Dec. 31, 2012. Final regulations issued in October 2010 (T.D. 9504) addressed average-basis methods and other basis determination and reporting issues (see JofA online news coverage at tinyurl.com/6noagTq). The proposed regulations would amend Regs. Secs. 1.6045-1, 1.6045A-1 and 1.6045B-1 to extend to debt instruments and stock options acquired or granted after Jan. 1, 2013, the general rules that currently apply to stock. In addition, the general rules relating to transfer statements and issuer statements are extended to debt instruments and options. The proposed regulations also reconcile differences among stock, debt instruments and stock options by providing additional definitions and guidelines: Options. Regs. Sec. 1.6045-1 adds options to the definition of "security" and clarifies that an option on one or more specified securities and indexes of such a specified security or financial attributes of such a specified security are "covered" securities. The proposed regulations change the definition of a "closing transaction" to include the cancellation, lapse, expiration or other termination of an option as well as a cash settlement. The regulations distinguish between option transactions that are physically settled and those that are not physically settled. Brokers must adjust premiums paid or received into the basis reported for options that have been physically settled. The gross proceeds from sold options or options that are part of a closing transaction that does not require physical settlement must be reported, as well as whether the gain or loss was long or short term. …