Restricted Stock Units (RSUs) are a popular form of stock option compensation at publicly traded companies. RSUs can be confusing at tax time because of one peculiarity when the shares are sold:
The IRS prohibits brokers (like Shareworks, Fidelity, etc.) from including the compensation income recognized by the employee in the cost basis reported on Form 1099-B.
The IRS is actively making it more difficult for you to file your tax return when you sell these shares.
We’ve seen many new clients that were self-preparing returns in the past miss this important consideration. If you report Form 1099-B exactly as provided, you will end up double paying your tax liability on the shares that were sold.
When your shares vest, your employer includes the fair market value of these shares in your paycheck and withholds tax. This value is included in Box 1 of your W-2 at tax time. This means that you have already been taxed on these stock options!
When the 1099-B (Proceeds from Broker) form is issued, the cost basis will be reported as $-0-. This is incorrect since your cost basis (what the IRS thinks you paid for the stock) is actually the full amount included in your paycheck when the shares vested.
Find Your Supplemental Tax Document
But there’s some good news! Most brokers make it relatively easy to find the information needed to avoid double paying tax on your option sales. Buried somewhere in the tax document section of your portal, you should see a document called “Supplemental Tax Information.” Be sure to download this and include it with your tax documents. Your tax pro is going to need it. (Fidelity is one of the few nice brokers that includes this information within the body of the Form 1099. Which means you don’t need to download another document.)
Reporting Your RSU Sale Correctly
Now that you have all the correct information, how do you tell the IRS?
In the example below, we show Form 8949 for an RSU sale that was long term (held more than one year). The shares were sold for $15,000 and had an originally reported cost basis of $-0-. The supplemental tax document indicated the fair market value of the shares was $14,950 at the time of vesting. This leaves a $50 capital gain that will be included in the taxpayer’s income.
The adjustment to cost basis is reported as shown below. Note the Code “B” to alert the IRS to the incorrect cost basis and Code “O” for “other” as the reason for the discrepancy.
Filling out Form 8949 this way will alert the IRS to how the RSU was reported (so they can match to their records). This also adjusts the return to show the correct gain so that you aren’t taxed twice.
A Final Word on Amended Returns
If you feel you might have made an error on past returns, keep in mind that you have three years from the due date of the return to make corrections. To amend a previous return, file Form 1040-X with the IRS. And then prepare to wait… The IRS is taking about 6-12 months to process amended returns right now. All this work is done by hand, return by return. Given that the return will be under a little more scrutiny, it’s a good idea to attach backup documents for the stock options to make it easy for the IRS employee to review.
As a Certified Public Accountant, John is passionate about helping families make great tax decisions!