Broker reporting, premium, basis in securities, debt instruments, options

U.S. final regulations on broker reporting requirements

The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9750) concerning information reporting by brokers for transactions involving debt instruments and options, including rules for:

Related content

  • The reporting of original issue discount (OID) on tax-exempt obligations
  • The treatment of certain holder elections for reporting a taxpayer’s adjusted basis in a debt instrument
  • Transfer reporting for section 1256 options and debt instruments
  • The treatment of certain debt instruments, the terms of which are not reasonably available to the broker and issued before January 1, 2014, as “noncovered securities”

Read text of the final regulations [PDF 218 KB]

Background

The IRS and Treasury in March 2015 issued temporary regulations and, by cross-reference, proposed regulations to require a broker or payor to report amortizable bond premium on taxable and tax-exempt debt instruments acquired on or after January 1, 2014, and acquisition premium on taxable debt instruments acquired on or after January 1, 2014—in effect, providing information that enables the IRS to verify that a taxpayer is reporting the correct amount of interest (including OID) each year. These 2015 regulations:

  • Provide information to report a taxpayer’s adjusted basis in a debt instrument under section 6045(g)—further enabling the IRS to verify that a taxpayer reports the correct amount of gain or loss upon the sale of a debt instrument
  • Require a broker to report OID and acquisition premium on tax-exempt obligations acquired on or after January 1, 2017
  • Require a broker to provide transfer statement reporting with respect to a section 1256 option
  • Require a transferring broker to provide the transferee broker, with respect to the transfer of a covered security, a transfer statement containing certain information relating to the security, allowing the transferee broker to determine a customer’s adjusted basis and whether any gain or loss with respect to the security is long-term, short-term, or ordinary
  • Permit the holder of a debt instrument to make a number of elections that may affect how basis is computed, including an election under Reg. section 1.1272-3 to treat all interest as OID (“all OID election”) and an election under section 1276(b)(2) to accrue market discount on a constant yield method, in reporting information to the customer

Read more about the 2015 regulations in TaxNewsFlash-United States

Previously, the IRS and Treasury in April 2013 issued final “basis reporting” regulations under which certain debt instruments are subject to basis reporting only if the debt instrument is acquired by a customer on or after January 1, 2016, including a debt instrument that is not issued by a U.S. issuer and a debt instrument the terms of which are not reasonably available to a broker within 90 days of acquisition of the debt instrument by the customer.

Final regulations

Today’s final regulations adopt the 2015 proposed regulations and remove the corresponding temporary regulations, and adjust Reg. section 1.6045-1 of the 2013 final regulations.

Constant yield election: The preamble to today’s final regulations includes explanations of certain provisions, including that there are no changes to the rules for the constant yield method for electing accruals of market discount. The final regulations permit, but do not require, a broker to apply the default constant yield method to a debt instrument acquired on or after January 1, 2014, and before January 1, 2015, provided that:

  • The broker was not informed that the customer had made an election to include market discount in income as it accrues, rather than upon a disposition or receipt of a partial principal payment (referred to as a “section 1278(b) election”);
  • There were no principal payments on the debt instrument during the 2014 calendar year; and
  • The broker had not reported accrued market discount to the customer for the 2014 calendar year using the ratable method.

Transfer statements: The preamble to the final regulations explains that the IRS and Treasury declined to adopt a suggested comment to eliminate the fair market value information on a transfer statement. Thus, the final regulations are “substantially the same” as the temporary regulations, except that the rules relating to the transfer statements are re-numbered and placed within Reg. section 1.6045A-1(b) of these final regulations.

Reporting OID on a tax-exempt obligation: The final regulations generally are the same as the temporary regulations, but reflect the consideration of comments regarding the applicability date of these rules. For tax years beginning after December 31, 2016, the final regulations allow—but do not require—a broker to report OID and acquisition discount for a tax-exempt obligation that is a covered security acquired before January 1, 2017.

Debt instruments subject to January 2016 reporting: In response to comments received seeking guidance regarding the 2013 final regulations, the final regulations provide that a debt instrument issued by a non-U.S. issuer or a tax-exempt obligation issued before January 1, 2014, is treated as a “noncovered security” and thus is not subject to basis reporting if the terms of the debt instrument are not reasonably available to the broker within 90 days of the date when the debt instrument was acquired by the customer.

Effective / applicability dates

The preamble to the final regulations provide the following effective / applicability date provisions:

  • The final regulations under section 6045—other than Reg. section 1.6045-1(n)(12)—apply to a debt instrument acquired on or after January 1, 2015.
  • Reg. section 1.6045-1(n)(12) applies to a debt instrument acquired on or after February 18, 2016 (the date of publication of these final regulations in the Federal Register); however, a broker may rely on paragraph (n)(12)(i) for a debt instrument described in paragraph (n)(12(i)(A) or (B) acquired before February 18, 2016.
  • The final regulations under section 6049 apply to a tax-exempt obligation that is a covered security acquired on or after January 1, 2017.  For a tax year beginning after December 31, 2016, a broker, however, may rely on this section to report OID and acquisition premium for a tax-exempt obligation that is a covered security acquired before January 1, 2017.
  • The final regulations under section 6045A apply to a transfer of a section 1256 option that occurs on or after January 1, 2016, and to a transfer of a debt instrument that occurs on or after January 1, 2016.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG's new digital platform