Fidelity provides adjusted basis, including discount accretion and premium amortization calculations for reporting certain fixed income security sales, redemptions, and related dispositions. For tax year 2015 (tax forms to be mailed in February 2016) we will begin reporting this adjusted basis information to the IRS on Form 1099-B for less complex fixed income securities, acquired no earlier than January 1, 2014, and subsequently sold or redeemed in 2015. Accretion or amortization adjustments are typically required when an individual bond was purchased respectively at a discount or at a premium. These adjustments affect cost basis calculations, which in turn affect the calculation of gains or losses. Fidelity already provides adjusted basis information on Form 1099-B for the securities (including original issue discount securities) on which we include accretion and amortization information in our calculations, but as the form indicates, we are providing that adjusted basis information to the IRS.
The IRS permits different methods to calculate cost basis, as well as amortization and accretion amounts, and Fidelity made certain assumptions about those methods when calculating this information. It is extremely important that you and/or your tax advisor read the footnotes on the 1099-B, as well as in the realized gain/loss sections associated with this information, and the information presented in this guide, to determine if the assumptions being made are applicable to your individual tax situation.
If they are different from the method you are using, or are based on tax elections you did not make, then you will need to make further adjustments to the amount shown. Even if the assumptions are consistent with your tax situation, further adjustments may still be necessary to reflect unique tax situations or events not factored into the assumptions. The information provided and the explanations below pertain only to the federal tax treatment of these items. State tax rules vary, and you will need to contact your tax advisor, or the taxing authority of your state, for information on how to report these items on your state tax return.
Fidelity does not provide amortization, accretion, and similar adjustments for certain fixed income securities, such as securities with a maturity of one year or less, unit investment trusts, or securities of foreign issuers. For fixed income securities subject to paydowns (early repayment of principal), cost basis is adjusted using a method that takes paydowns into account and calculates original issue discount, premium, and acquisition premium using a straight-line method. Where current year premium or acquisition premium amortization is provided, the prior years' cumulative amortization is reflected in the adjusted cost basis, but we cannot provide a breakdown or the total of such prior amortization amounts. You may want to consult with your tax advisor, who is most familiar with your circumstances, before determining how to use this information for tax reporting purposes. In addition, see IRS Publication 550, Investment Income and Expenses (PDF) and Publication 1212, IRS Guide to Original Issue Discount Instruments (PDF).
Fixed income securities acquired with original issue discount (OID)
Under federal tax laws and regulations, for the original issue discount rules to apply to a security, the discount at issue must be at least 0.25% of the stated redemption price of the bond at maturity, multiplied by the number of full years from the date of original issue to maturity. Otherwise, the discount at issuance is considered to be zero. Fidelity incorporates this rule in its OID calculations.
Every year, a portion of the OID is treated as if it were earned interest income. As a result, the OID earned increases your cost basis in the security. Fidelity has adjusted the cost basis reported in your statement to reflect the total OID recognized as income since the acquisition date of the security in our records as well as the OID information reported in Publication 1212. In addition, if you purchased the security at a premium or with market discount in relation to the adjusted issue price, Fidelity has incorporated a portion of that premium or discount in its calculation of the adjusted cost basis and its determination of the character of the realized gain.
Fixed income securities acquired at a premium to their redemption value at maturity
According to federal tax rules, if you acquired your fixed income security at a premium and make the required elections when you file your return, the premium is amortized annually using the constant yield method (also called the yield to maturity method) with semiannual compounding. If you did not make the required elections, your gain or loss is the difference between your purchase price (as adjusted for wash sales and other required adjustments, if any) and your proceeds at disposition, making no premium adjustments. These rules apply to securities issued at par and to OID securities acquired on the secondary market at a price greater than their maturity value.
Fixed income securities acquired with an acquisition premium
When OID securities are purchased at a premium over the adjusted issue price (plus any accreted OID income), the premium, called an acquisition premium, must be amortized and reflected in the calculation of the adjusted cost basis. It will impact the taxable income you will recognize each year. Fidelity has calculated the adjusted cost basis, including the acquisition premium amortization, on the assumption that you elected to use the rateable accrual method in which OID income is reduced by the pro rata portion of the acquisition premium attributable to each year's OID earned. Here is the formula:
| Current year acquisition premium =
|| (total acquisition premium at purchase × current year OID)
(remaining OID from the time of purchase)
The adjusted cost basis of an OID bond acquired with an acquisition premium equals the sum of the original purchase price plus OID income earned during the period you held the bond, minus the acquisition premium attributable to the OID earned.
Fixed income securities acquired at a market discount to the issue price
Note: These rules apply to both securities issued at par and with OID.
Fixed income securities acquired at a market discount are purchased at less than the par value, or in the case of OID securities purchased on the secondary market, at less than the adjusted issue price. Under federal tax rules, market discount that is less than 0.25% of the stated redemption price (or OID-adjusted issue price) of the bond multiplied by the number of full years to maturity remaining at acquisition is treated as zero.
There are various rules and elections available for the treatment of market discount on your return, each of which may result in a different tax outcome. These rules only apply to fixed income securities issued with more than one year to maturity. Our calculation of market discount income assumed you elected to defer recognizing the market discount until the sale (disposition) of the security, and was calculated using the constant yield method from acquisition date through disposition date. For federal tax purposes, market discount income from both taxable and tax–exempt bonds is treated as taxable interest income. Under this election, no market discount is recognized if the bond was sold at a loss.
Acquiring securities issued with one year or less to maturity at a discount may result in an acquisition discount. Different rules apply to the treatment of a gain or loss for these securities.
Cost basis adjustments for tax-exempt fixed income securities
In contrast to taxable fixed income securities, adjusting the cost basis of a tax-exempt security that was purchased at a premium to reflect amortization of premium (but not amortization of acquisition premium) is not optional, it is mandatory. The amortization of premium on tax-exempt securities is not deductible. Market discount does apply to tax-exempt securities. As with taxable bonds, you are required to recognize a portion of the gain at disposition of those securities as ordinary income. While OID income from a tax-exempt fixed income security is exempt from federal taxes, it may be taxable on the state level.
Enhanced reporting for widely held fixed investment trusts (WHFITs)
Due to IRS reporting requirements, Fidelity provides enhanced tax reporting on your consolidated tax statement for holders of securities known as widely held fixed investment trusts (WHFITs). Generally securities in this category include:
- Mortgage pools (such as securities issued by agencies commonly known as Ginnie Mae, Fannie Mae, and Freddie Mac)
- Unit investment trusts (trusts holding a specified group of stocks, bonds, options, or other assets)
- Royalty trusts (such as trusts providing interest in properties producing gas, oil, or minerals)
- Commodity trusts (such as certain trusts that hold precious metals)
- HOLDRS (certain trusts which hold a specified group of stocks)
For all of these types of securities, we provide your gross income and your prorated share of all expenses, as well as information you may need to accurately report sales and resulting realized gain and loss information. Furthermore, for WHFIT securities, due to "receipt-based" reporting rules, your trust is required to report your prorated share of sales as of the date that they were sold by the trust and your prorated share of expenses as of the date on which they were incurred by the trust—not on the date any such sales and expenses are distributed to shareholders. These proceeds may not match any distributions that you may have received during the year.
Return of principal
The manner in which we are required to report return of principal merits special attention. We report your prorated share of the sales proceeds from unit investment trusts, securities derived from mortgage pools, or real estate investment conduits (REMICs) as return of principal on Form 1099-B (reported as PRINCIPAL on the form). We report your share of return of principal, whether or not you actually received a payment, because we are reporting gross return of principal, before any expenses were deducted. These reported proceeds may not match any distributions that you may have received during the year. You must generally report return of principal on Form 8949 and/or Schedule D in order to match our reporting to the IRS on Form 1099-B. In addition you should generally reduce your security's basis by the amount of the return of principal. Fidelity includes return of principal in our calculation of your estimated cost basis. If this action reduces your basis to zero, any additional return of principal should also be reported as a short-term or a long-term gain, depending upon how long you have owned the security.
Cost basis for trading in currencies other than U.S. dollars
Fidelity's cost basis reporting includes trading on foreign exchanges and in foreign currencies. We report sales and dispositions on Form 1099-B only in U.S. dollars. If you purchased a security in a foreign currency, then following its sale or disposition, the supplemental realized gain/loss sections of your tax statement provide both the cost in that currency and the estimated U.S. dollar (USD) cost basis in the Cost Basis column. We calculate that estimated USD cost basis by converting the foreign currency cost into USD based on exchange rates on the trade date of the purchase.
If you received proceeds in a foreign currency from a security sale the Realized Gain/Loss sections provide both the foreign currency proceeds and the USD equivalent proceeds in the Proceeds column. We calculate the USD equivalent proceeds by converting the foreign currency proceeds into USD based on exchange rates on the trade date of the sale.
If you acquired the foreign currency cost, or sold the foreign currency proceeds in exchange for USD in a separate currency transaction linked to the security transaction, then the trade date exchange rate we used is the spot rate at the time of the linked currency transaction. Otherwise, the trade date exchange rate we used is the end-of-day exchange rate.
For tax reporting purposes, you may be required to determine your actual USD cost basis, proceeds, and gain/loss based on the exchange rates on the settlement dates of the applicable transactions.
Refer to the footnotes in the realized gain/loss sections of your tax statement for additional information about our calculations of USD proceeds and cost basis in connection with these types of transactions. In addition, consult your tax advisor for additional information about reporting transactions on foreign exchanges and/or in foreign currencies.
Note that if you sold or otherwise disposed of a debt instrument that is denominated in a currency other than USD or that makes a payment calculated by reference to the value of a currency other than USD, certain tax rules may require you to treat as ordinary income/loss all or a portion of your realized gain/loss.
In addition, the supplemental currency realized gain/loss section of your tax statement provides estimated cost basis, proceeds, and gain/loss information for transactions in which you dispose of foreign currency positions (i.e., exchanges of foreign currency for USD, exchanges of foreign currency for a different foreign currency.) Generally, gains and losses from these types of transactions are not reported on Schedule D, but rather as ordinary income or loss. Refer to the footnotes in this section of your tax statement and consult your tax advisor for more information.