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My understanding is that the broker is not supposed to adjust the basis reported to the IRS. They continue to report the original purchase basis, and it is up to the taxpayer (i.e. YOU) to make the appropriate adjustments.

My understanding is the same as Peter's. Brokers only adjust cost basis due to corporate actions and only those that impact shares which are already "covered" securities. I see this problem all the time with investment clubs that transfer shares as part of a member withdrawal. The sending broker provides the club's cost basis in the shares, not the receiving member's adjusted basis in the shares. The receiving broker will not, and does not have to, adjust the cost basis in their records. I know I've seen the actual regs that cover this, but I don't have the reference at my fingertips.

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