$10,000 Mistake Hiding in Your RSUs: How to Avoid Double Taxation

I talk to incredibly smart tech professionals every single week. You are detailed-oriented, highly skilled, and great at your jobs. Yet, despite that intelligence and attention to detail, I see many of you at risk for a specific, costly mistake: paying double tax on your equity compensation.

The reality is that even the big brokerage firms—Morgan Stanley, E*TRADE, Fidelity, Shareworks—are required to report equity compensation in a way that is terribly confusing.

Every year, without fail, we see tax returns where the cost basis on sold shares is listed as $0. This simple reporting error can easily turn into a $10,000 mistake.

If you receive Restricted Stock Units (RSUs) or other equity compensation, here is what you need to know to protect yourself this tax season.

The Core Problem: The “Zero” Cost Basis

When your RSUs vest, that value is taxed as ordinary income. It is included in your payroll and reported on your W-2 (specifically in Box 1). In the eyes of the IRS, you’ve already paid income tax on the value of those shares when they vested.

However, when you eventually sell those shares, the brokerage firm sends you a 1099-B form.

Here is the trap: For many equity transactions, the brokerage will report the cost basis of those shares as $0 on the 1099-B. If you or your tax preparer simply plug that number into your tax return, the IRS assumes that the entire sale price is pure profit (capital gain).

Since you already paid tax on that value when it vested (via your W-2), paying capital gains tax on the full amount again means you are being double taxed.

3 Steps to Avoid the Double Tax Trap

To ensure you aren’t overpaying the IRS, you need to take a few proactive steps before filing.

1. Do Not Trust the 1099-B Alone

The standard 1099-B is often incomplete regarding equity compensation. You must look for a specific document—often called a Supplemental Schedule or Supplemental Tax Statement—to find the actual cost basis and the adjustment you need to make on your tax return.

• Fidelity: Look a few pages into your tax document. Towards the end, you will often find an “Adjustment Report” or Supplemental section.
• Morgan Stanley / E*TRADE: These can be tricky. You might receive a standard 1099-B, but you must log in and separately download the “Supplemental Tax Statement.” That document is your key to avoiding double taxation.
• Shareworks: In my experience, these reports can be complex and require significant manual reconciliation. If you use Shareworks, proceed with extra caution.

2. Check Your Past Returns (The 3-Year Rule)

If you have sold shares in the past few years, go back and look at your tax returns. Specifically review the Capital Gains and Losses (Schedule D) section.

Look for “same-day sales” or sales that occurred shortly after vesting. If you see a $0 cost basis or a massive capital gain on a transaction that was essentially a cashless exercise or immediate sale, alarm bells should go off.

The good news? There is a three-year statute of limitations to amend your returns. If you find this mistake on a prior return, we can likely file an amendment and get overpaid tax back.

3. Don’t Wait Until April 15th

Correcting cost basis on equity compensation takes time and precision. If you wait until the night before the deadline, the likelihood of making an error increases significantly.

The best time to review this is early in the year. However, if you are reading this in April and feeling the pressure, remember: You can file an extension.

An extension gives you time to file, not time to pay. You should estimate and pay your tax liability by the April 15th deadline. But filing an extension gives you until October 15th to ensure the paperwork is handled correctly. It is better to extend and get it right than to rush and overpay.

Summary

If you are a tech employee with equity compensation, do not assume your brokerage forms are telling the whole story.

• Check your W-2 to confirm RSU income is included.
• Hunt down your Supplemental Tax Statements.
• Adjust your cost basis on your tax return to reflect income that has already been taxed.

If you are looking at your documents and feeling overwhelmed, or if you suspect you may have overpaid in previous years, please reach out. We specialize in helping tech employees navigate these exact complexities.