Quick answer

File Form 1040‑X when a discovered cost‑basis error on a previously filed tax return changed the reported capital gain or loss (or would have changed it) and you need to correct Schedule D and/or Form 8949. Common triggers are corrected broker 1099‑B statements, missed adjustments for corporate actions, incorrect inherited basis, or wash‑sale carryforwards. The IRS generally requires amended refund claims within the statute of limitations (see below).

Why basis matters

The cost basis determines taxable gain or loss when you sell an investment. Incorrect basis usually leads to either overpaying tax (if your basis was higher than reported) or underpaying tax (if your basis was lower). Brokers now report cost basis to the IRS for many securities, so mismatches between broker 1099‑B data and your records can trigger automated notices or audits. For official guidance on basis and sales reporting, see IRS Publication 551 (Basis of Assets) and Form 8949 instructions (IRS.gov).

Sources: IRS Form 1040‑X (About Form 1040‑X) and Publication 551 (Basis of Assets) — https://www.irs.gov/forms-pubs/about-form-1040-x and https://www.irs.gov/publications/p551

When you must amend: practical triggers

  • Broker corrected 1099‑B: If your broker issues a corrected 1099‑B with a changed cost basis after you filed, compare that to your filed return. If the corrected basis changes your gain/loss and your tax, prepare an amended return. Brokers can and do issue corrections months (or even years) later.
  • Missed corporate action adjustments: Stock splits, mergers, spin‑offs, or return of capital can change per‑share basis or create adjustments you must account for.
  • Inherited property or step‑up errors: If you used an original purchase price instead of the stepped‑up fair market value at date of death, the reported gains may be overstated (see our guide on basis of inherited property: https://finhelp.io/glossary/basis-of-inherited-property-explained/).
  • Cryptocurrency and unusual assets: Crypto trades and token events often produce confusing basis records; incorrect reporting can require amendments (see related: Cryptocurrency Tax Basics: Reporting, Cost Basis and Common Pitfalls — https://finhelp.io/glossary/cryptocurrency-tax-basics-reporting-cost-basis-and-common-pitfalls/).
  • Carryforward adjustments: Wash‑sale disallowed losses and carryforwards to future years change basis in replacement shares; failure to track these properly may require an amendment.

Time limits and refunds

If the change will produce a refund, the IRS generally requires you to file the amended return within the earlier of: three years from the date you filed the original return, or two years from the date you paid the tax — whichever is later. This rule stems from IRC §6511; the IRS summarizes it on the Form 1040‑X page (https://www.irs.gov/forms-pubs/about-form-1040-x). In practice, most taxpayers have a three‑year window measured from the due date or the date the return was filed.

If the amendment shows you owe additional tax, file the amended return as soon as possible and pay the balance to limit interest and penalties. Interest accrues from the original due date until payment.

Step‑by‑step: how to prepare and file an amended return for a basis error

  1. Identify affected tax years. Basis errors often affect multiple years. You must amend each year separately if they were previously filed incorrectly.
  2. Reconstruct the correct basis. Collect brokerage statements, trade confirmations, original purchase documents, corporate action notices, Form 1099‑B (original and corrected), estate valuation records, and any cost‑adding expenses (commissions, fees). For inherited assets, use the date‑of‑death valuation unless special rules apply (see IRS guidance and our internal article on step‑ups).
  3. Recompute gains/losses. Prepare corrected Forms 8949 and Schedule D for each year. If you report gains or losses on Form 8949, include a new Form 8949 and attach it to the 1040‑X with Schedule D if required. See IRS Form 8949 instructions: https://www.irs.gov/forms-pubs/about-form-8949
  4. Complete Form 1040‑X. Explain the change clearly in Part III of Form 1040‑X (explanation of changes). State that the amendment corrects cost basis and list supporting documents you’re attaching (e.g., corrected Form 1099‑B; broker statements). Attach corrected 8949 and Schedule D pages and copies of corrected broker statements or estate paperwork.
  5. File within the statute of limitations for refunds or as soon as possible if tax is due. If you expect a refund, consider timing to ensure you are within the allowable period.
  6. Keep records. Retain all supporting documentation for at least three years after the date you filed the amended return (or longer if the correction may affect other years).

Electronic filing and practical notes

The IRS now accepts many amended returns electronically. Check current IRS guidance and available tax software—most major tax software products support e‑filing of Form 1040‑X for recent years. The IRS Form 1040‑X page has details on electronic filing capabilities (https://www.irs.gov/forms-pubs/about-form-1040-x).

If your broker reported cost basis incorrectly to the IRS, ask the broker for a corrected Form 1099‑B and a written explanation. Attach the corrected 1099‑B to your amended return. In many cases, the IRS computer systems will reconcile corrected broker reports with filed returns and may issue a notice (CP2000 or similar) before you file an amendment — respond promptly and include corrected forms.

Documentation to include with Form 1040‑X

  • Corrected Form 8949 and Schedule D pages
  • Corrected broker Form 1099‑B (if available) or broker statement showing corrected basis
  • Trade confirmations, settlement statements, or receipts showing original acquisition costs
  • Estate documents or appraisal supporting date‑of‑death valuations (for inherited property)
  • A clear, concise explanation in Part III of Form 1040‑X describing the error, the correction, and the reason

Common mistakes and how to avoid them

  • Waiting too long. Don’t assume you can “fix” past years by reporting only on the current year. Amend each affected year individually.
  • Failing to attach corrected forms. An amended 1040‑X without corrected 8949/Schedule D or supporting 1099‑B often delays processing.
  • Ignoring wash‑sale rules. Wash‑sale adjustments can roll disallowed loss into the basis of replacement shares; incorrect handling creates future basis errors.
  • Overrelying on broker basis. Brokers may not have complete history for inherited lots, gifts, or fractional shares; verify broker data against your records (see our article: Correcting Cost Basis Errors on an Amended Return: Steps and Documentation — https://finhelp.io/glossary/correcting-cost-basis-errors-on-an-amended-return-steps-and-documentation/).

Examples (simplified)

Example 1 — Broker correction: You sold 100 shares at $10,000 proceeds and reported a basis of $6,000 (gain $4,000). Later the broker issues a corrected 1099‑B showing your actual basis was $8,500 (gain $1,500). The corrected basis reduces your tax; file Form 1040‑X for the year of the sale with corrected Form 8949 and the corrected 1099‑B to claim a refund if within the limitations period.

Example 2 — Inherited stock: You inherited stock with a date‑of‑death FMV of $20,000 but mistakenly used the decedent’s original purchase price of $5,000. You reported a larger gain on sale. Correct the prior year by amending with estate valuation documents to reflect the stepped‑up basis.

When to consult a pro

If the basis issue is complex (multiple years, corporate reorganizations, inherited property disputes, or cryptocurrency token events), consult a tax professional with experience in cost‑basis reconstruction. In my practice as a CPA and CFP®, I’ve seen basis errors that affected refunds of thousands to tens of thousands of dollars. A practitioner can help assemble documentation, prepare corrected 8949/Schedule D, and represent you if the IRS questions the change.

Internal resources for related topics

Final checklist before you file

  • Recompute gains/losses and prepare corrected Form 8949 and Schedule D
  • Collect and attach corrected broker 1099‑B, trade confirmations, estate valuations
  • Confirm you’re within the refund statute of limitations if claiming money back
  • Pay any additional tax due quickly to limit interest and penalties
  • Keep a clear explanation and copies of all supporting documents

Professional disclaimer

This article is educational and does not replace personalized tax advice. Tax rules change and facts can vary; consult a qualified tax professional or the IRS for guidance specific to your situation. See IRS Form 1040‑X information: https://www.irs.gov/forms-pubs/about-form-1040-x

Author note

In my 15+ years advising clients on investment tax reporting, careful basis reconstruction and prompt amendments have recovered sizable refunds and resolved IRS notices. If you find a basis error, act promptly — the paperwork is often straightforward and the payoff can be material.