You probably understand by now that Internal Revenue Service regulations are changing how financial firms, including D.A. Davidson & Co., must report an investment's cost basis for 1099-B reportable transactions. Beginning January 1, 2011, all brokerage firms are required to maintain cost basis information related to covered equity securities shown on the new Form 1099-B and report that information to the IRS. In February, 2012, investors will receive the new version of Form 1099-B, which will include details on cost basis, holding period, whether the shares are "covered" (subject to cost basis reporting), acquisition date and disallowed losses.

Starting on January 1, 2012, and again in 2013, cost basis reporting requirements will be expanded to include additional types of securities. The three-year transition for the new regulations is described below.

Covered vs. Noncovered Securities

"Covered" securities, which are subject to the new cost basis reporting requirements, are those purchased on or after their applicable January 1st effective date. Specifically, the new regulations are phasing in over three years, for the specified securities as follows:

• January 1, 2011: Stock in a corporation (other than stock in a regulated investment company (RIC) or stock acquired from a dividend reinvestment plan (DRIP)).
• January 1, 2012: Mutual funds, ETFs and shares acquired through a dividend reinvestment plan.
• January 1, 2013: Other securities designated by the IRS (including fixed income securities).

Noncovered securities are those purchased before the effective dates above. These are not subject to the new cost basis reporting requirements. Responsibility for reporting cost basis and gains/losses on these transactions are the clients.

Specify shares to sell if you are concerned about cost basis and resulting gains or losses

When selling stock, unless you tell your Financial Consultant which shares you want to sell before any trade settlement, D.A. Davidson will use a "first-in first-out" method to determine which shares are sold.

Contact your Davidson Financial Consultant for any exception to this reporting method. Davidson does not offer tax advice. We urge you to work with your tax professional before executing any sale.

1099-B Changes

If you sold stock shares on or after Jan. 1, 2011 (except within dividend reinvestment plans), Davidson is required to report cost basis, holding period, disallowed losses from wash sales and proceeds on the 1099-B - so the form may look different than what you've seen before.

This site will be updated to include more information about cost basis, Form 1099-B and related issues.

Here are some Frequently Asked Questions related to new cost basis tax reporting rules that were established by the Emergency Economic Stabilization Act of 2008 and began to go into effect for certain securities purchased in 2011.

What is cost basis?
Cost basis is the original cost of the asset purchased, including any reinvested dividends, capital gain distributions, adjustments for sales charges, transaction fees, tax rules and corporate actions where applicable.

What has changed in the way D.A. Davidson & Co. reports cost basis?
Starting with stock that you purchased in 2011, D.A. Davidson & Co. and other broker-dealers are now required to report to you and the IRS the cost basis, holding period and any capital gains or losses when you sell the stock. Previously, we provided only you with cost basis information and you were responsible for reporting it, as well as any gains or losses, when you filed your taxes.

Will you be reporting the cost basis on all my securities transactions?
Not necessarily. The reporting requirement affects only certain securities purchased on certain dates and is being phased in over three years. Securities that are subject to the reporting requirement are referred to as being "covered." Securities that were purchased prior to the effective dates are referred to as "uncovered." Transactions in most IRAs and other qualified accounts are also exempt from the reporting requirement.

Which securities' cost basis will be reported to the IRS, starting when?
The first year we will report cost basis to the IRS is 2012 for corporate stocks purchased and sold in 2011. These stocks will remain reportable, or "covered," from now on. Other types of securities will be subject to the reporting requirement when purchased in the years listed below.

• January 1, 2011 - Corporate Stocks
• January 1, 2012 - Mutual Fund Shares, Dividend Reinvestment Plans
• January 1, 2013 - Fixed Income Securities and Options Contracts

What is a "tax lot" and why is it important?
Cost basis is generally tracked by tax lot, which is a group of shares purchased on the same day for the same price. Cost basis is important for tax purposes because it is part of the calculation used to determine the amount of capital gain or loss when you sell the asset.

When I sell a covered investment, will I be expected to choose which tax lot to sell?
No. Unless you instruct us otherwise, Davidson will use the First In - First Out tax lot method when securities are sold. In other words, the first securities you purchased will be the first ones sold regardless of what you paid for them. This can have an impact on your capital gain or loss calculation.

How do I determine which tax lot is the best one to sell?
D.A. Davidson & Co. will provide you with tax lot information at your request to assist you and your tax advisor in evaluating the tax implications for gains and/or losses calculated using various cost basis.

Will I continue to receive cost basis information when I sell my "uncovered" investments?
Yes. For uncovered shares in 2011 and beyond, D.A. Davidson will continue to provide an informational statement in your tax package that includes cost basis, the holding period and associated realized gain or loss information, when available, for certain investments sold during the year. This data, when available, will be provided to our clients for purely informational purposes and will not be reported to the IRS.
It is important to verify, using your own records, when calculating gains or losses for tax reporting purposes. For example, the information provided may not include changes due to corporate actions (such as mergers, spin-offs, stock dividends or cash in lieu of fractional shares) or wash sales. D.A. Davidson cannot verify cost basis information that is provided by someone else (including a client, an advisor or another entity, such as a broker) or is the result of a transfer between clients (including inheritance, gift, divorce, distributions from a trust, shares used to repay a loan, etc.).

What kinds of accounts are affected by the new reporting requirement?
All non-retirement accounts subject to 1099-B reporting are also subject to these new cost basis reporting changes. This includes all accounts owned by but not limited to:

• Individuals
• Joint (including but not limited to Joint Tenants with Rights of Survivorship, Tenants in Common)
• Uniform Gift and Transfer to Minors (UGMA and UTMA)
• Partnerships
• Trusts
• S Corporations (Beginning Jan. 1, 2012)

What kinds of accounts are exempt from the new reporting requirement?
Retirement and education accounts are not subject to the new cost basis reporting changes. Distributions from these accounts will continue to be reported as they have in the past. Retirement and education accounts include, IRAs, 529 Plans, and Coverdell Education Savings Accounts (CESA).

How will the documentation I receive from Davidson change when I sell securities that are subject to the reporting requirement "covered" securities)?
D.A. Davidson will send you a form 1099-B (proceeds from broker and barter exchange transactions), which will include the cost basis, date of acquisition and short or long term gain/loss indicator for the sale of covered securities.

When will I receive my form 1099-B?
Pursuant to IRS guidelines, Davidson will distribute 1099-B forms by no later than February 15 for the sale of "covered" securities the preceding calendar year.

Will the 1099-B form I receive be final for tax reporting purposes?
Not necessarily. Brokerage firms do not receive final tax distribution information for some securities until after February 15, so 1099 statements sent to holders of these securities prior to D.A. Davidson & Co. receiving this final data are preliminary. We may still be waiting for final allocation information from some issuers of mutual funds, REITs and certain foreign securities.

When will my form 1099 be final?
Issuers have until February 29 to publish their final allocation information. D.A. Davidson will mail final amended documents as soon as possible after this deadline.

Will I need any other tax forms?
Yes. Form 1040 - Schedule D, capital Gains and losses; and Form 8949 - Sales and Other Dispositions of Capital Assets. For additional information, please consult with your tax advisor or check directly with the Internal Revenue Service at www.irs.gov.