RSUs, ESPP and stock options: the double-tax trap on your 1099-B
Your broker reports a cost basis that leaves out the part already taxed as wages. Here is why, where the right number lives, and how the adjustment is made.
Quick answers
- Why does my 1099-B show a cost basis of zero?
- Because a broker cannot add the amount already taxed as wages when the shares vested or the option was exercised. That is the reporting rule, not an error. The right basis is on the supplemental statement.
- Am I really being taxed twice on my RSUs?
- No, but you will be if the return is filed as the broker's form reads. The wage part was taxed once already, and the sale needs the adjusted basis so it is not counted again.
- Where do I fix the basis on my return?
- On Form 8949. If the basis was not reported to the IRS you enter the correct one; if it was reported, you keep the reported figure and enter an adjustment with the code for an incorrect basis.
When shares from work vest or are bought at a discount, part of their value is already taxed as wages on your Form W-2. Your broker's cost basis usually leaves that part out, which makes the gain on the sale look far larger than it was.
Where the wages happen
Start with restricted shares. Stock you cannot transfer, or that you might still have to hand back, stays out of your income for as long as that lasts. Once it becomes substantially vested — transferable, or no longer subject to a substantial risk of forfeiture — its fair market value less anything you paid for it enters your income for that year, and your holding period begins there.
Employee stock purchase plans and incentive stock options run the other way. These are statutory options, and receiving one or exercising one is generally not an income event at all. The tax arrives on the sale instead. Selling without satisfying the special holding period requirements turns more of what you make into ordinary income rather than capital gain, and a discounted purchase can carry a wage element even where the holding periods were met. Whatever falls into that column is treated as wages, and the same amount belongs in the stock's basis when the gain or loss is worked out.
Nonstatutory options are the third family. Most carry no readily determinable fair market value, so the grant is not a taxable event. The exercise is: the value of the stock you receive, less what you paid for it, goes into income for the year you exercise.
Three routes, one conclusion. Whatever was taxed as wages is part of what those shares cost you.
Why the 1099-B is short
The broker is not permitted to include it. Publication 525 states this for options granted from 2014 onward: the basis figure reported to you on Form 1099-B leaves out anything you had to take into income at grant or at exercise.
The instructions brokers work from set the same limit from their side, and they reach past options to equity that simply vests. For awards granted or acquired after 2013, a broker may not lift the starting basis by the income you recognized, whether that income came from exercising a compensatory option or from another equity-based arrangement vesting or being exercised. So this is not a broker error and not something a phone call fixes. It is why the basis on the form turns up equal to the discounted price you actually paid, or as nothing at all.
The supplemental statement
Brokers that administer stock plans generally send a second document alongside the 1099-B showing an adjusted basis that does include the compensation already taxed. It is not a form the IRS defines, so its name and layout vary; look through the same statement package or download rather than for a particular heading. What you are hunting for is a basis larger than the one in box 1e, larger by roughly the amount that went through your payslip when the shares vested or the option was exercised. That adjusted number, not box 1e, is the one the return needs.
Making the correction on Form 8949
Which correction applies depends on whether the basis was reported to the IRS, and the form itself sorts you. At the top of Part I for short-term transactions, and Part II for long-term ones, you check a box recording whether the transaction came to you with basis reported to the IRS, with basis not reported to the IRS, or with no form at all. A substitute statement from the broker may tell you outright which box to check, and getting it right matters, because it decides which of the two corrections below you make.
Where the broker did not report basis to the IRS, column (e) simply takes the right number and column (g) takes zero. That is the whole fix.
Where the basis was reported to the IRS, leave the reported basis in column (e) even though you know it is understated. Put the adjustment code for an incorrect basis, which is B, in column (f), and the adjustment itself in column (g). The Instructions for Form 8949 carry a worksheet for figuring that adjustment. Capital gains and the rest of the 1099-B covers the ordinary sales that arrive in the same envelope, and Form W-2 is where the compensation half already showed up.
Withholding is usually not enough
Shares held back at vesting are withholding rather than a settled bill: a deposit against a tax that is figured later, on your whole return. Supplemental wages are withheld at a flat rate that may sit well below the rate your income actually reaches, and how bonus withholding works carries that rate. If a large vest or exercise opens a gap, quarterly estimates is how it gets closed before the return is due.
What to keep
Keep the grant and vest dates, every supplemental statement, the year-end pay statement showing the compensation, and the trade confirmations. These are basis records, so they outlive the ordinary ones, and how long to keep tax records sets the periods.