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Non-Covered Security


A Non-Covered Security refers to an investment that is not subject to certain federal rules for reporting taxes, particularly the IRS rules for cost basis reporting by Brokers implemented in 2011. These often include older issues of bonds or stocks purchased before the new cost basis regulations became effective. The investor is solely responsible for tracking the cost basis of non-covered securities.


The phonetics of the keyword “Non-Covered Security” is:Non: ˈnɑːnCovered: ˈkʌv.ərdSecurity: sɪˈkjurɪti

Key Takeaways

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  1. Non-Covered Security refers to investment assets that are not required to meet tax reporting requirements. It mainly includes securities purchased before 2011 for stocks and before 2012 for mutual funds or dividend-reinvestment plans.
  2. The cost basis for Non-Covered Securities is not tracked by brokerage firms or financial institutions. Their cost basis is not reported to the IRS. Therefore, the responsibility to accurately determine and report the basis falls on the investor.
  3. Investors need to keep detailed and accurate records for these Non-Covered Securities for tax purposes. Without these records, they could end up paying more capital gains tax than necessary or risk penalties and interest for under-reporting.



The term “Non-Covered Security” in business or finance is significant as it refers to a security or investment that does not fall under the coverage of regulatory guidelines, primarily set by the Internal Revenue Service (IRS). In the context of U.S. tax laws, organizations are generally required to report the cost basis of covered securities to both the IRS and the investors. However, when it comes to non-covered securities, such reporting is not mandated. Therefore, understanding whether a security is non-covered is crucial for investors as it informs them about their tax reporting responsibilities. Not having this clarified might lead to inaccuracies or inconsistencies in their tax filings, potentially resulting in penalties.


Non-covered securities play a significant role in the financial market, particularly in the realm of tax reporting and compliance. The acquisition and subsequent disposition of these securities necessitates tax-reporting considerations that differ from standard procedures. Their purpose lies in the realm of investor choice and flexibility. Primarily, these are securities that are exempt from certain regulations enforced by regulatory authorities, offering investors opportunities to diversify their investments and risk exposure. Non-covered securities often embody assets that were purchased or acquired before specific regulatory enactment, hence they might not be subjected to the same regulations as newer financial instruments. Non-covered securities have a distinct purpose when it comes to reporting capital gains or losses to the Internal Revenue Service (IRS). Since they do not necessarily fall under the umbrella of mandatory cost basis reporting, it is the responsibility of individual investors to accurately track and record the cost, purchase and sale dates, and other related data points for tax reporting purposes. In essence, these financial instruments are used as a means to potentially augment one’s investment portfolio while providing a backdrop for investor responsibility and meticulous record-keeping. It allows for a certain level of diversity in a portfolio that may not be possible with only covered securities.


1. Private Company Shares: Shares of a private company that are not publicly traded on any exchange are considered non-covered securities. Without any public reporting obligations, these securities are not subject to the same level of scrutiny or regulation as those of public companies. Purchasing shares in private companies can therefore be risky for investors.2. Short Term Investments: Some short-term investments like certificates of deposit (CDs) can also be non-covered. While these investments do may have some level of protection, they may not be covered by certain reporting regulations. For example, in the United States, these investments are often insured by the FDIC up to certain limits, but they may not be covered securities under SEC rules.3. Cryptocurrencies: Cryptocurrencies such as Bitcoin are a popular contemporary example of non-covered securities. As they are not issued by any central authority and don’t have traditional reporting standards, they are often considered non-covered. This status understandably involves a degree of risk since investors and regulators may lack comprehensive information about the security’s value and risk.

Frequently Asked Questions(FAQ)

What is a Non-Covered Security?

A Non-Covered Security refers to a type of investment that is not subject to certain regulations, particularly those under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 in the United States.

What are examples of Non-Covered Securities?

Non-Covered Securities include equities purchased before 2011, mutual funds, and DRIPs bought before 2012, as well as bonds, options, and other complex securities purchased before 2014.

What are the implications of an investment being a Non-Covered Security?

If an investment is classified as a Non-Covered Security, brokers are not required to report cost basis or holding period information to the IRS when these securities are sold.

Is it possible for a Non-Covered Security to become a Covered Security?

Yes. A Non-Covered Security can become a Covered Security if it’s transferred from an account where it’s classified as covered to another where it’s not.

What documentation is needed for the sale of a Non-Covered Security?

Because a Non-Covered Security is not subject to the same IRS reporting requirements, the investor themselves may be responsible for accurately determining and reporting the cost basis and holding period to the IRS.

How does investing in Non-Covered Securities impact my taxes?

Investing in Non-Covered Securities may potentially make filing taxes more complex as you, the investor, are likely responsible for tracking the cost basis and holding period of these securities and accurately reporting it on your tax returns.

Do all brokers handle Non-Covered Securities the same way?

Though guidelines are provided by federal laws and regulations, how individual brokers handle Non-Covered Securities can differ. Some may voluntarily provide cost basis and holding period information for these securities to aid their clients.

Do Non-Covered Securities affect my returns on investment differently than Covered Securities?

The classification as a Non-Covered Security does not inherently impact the returns on the investment. However, the responsibility for accurately tracking and reporting information can potentially lead to discrepancies if not handled accurately, which could indirectly affect your reported returns.

Related Finance Terms

  • Over-The-Counter (OTC) Trading
  • Unregistered Securities
  • Exempted Securities
  • Private Securities Market (Private Placements)
  • Regulation D Securities

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