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Annotated diagram of Schedule DTax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more.

ESPPs: Taxes Advanced

How have IRS Form 1099-B and cost-basis reporting changed for sales of stock acquired from my stock options, restricted stock, or ESPP? What do I need to do differently because of the changes?

If you sold shares during the calendar year, your brokerage firm will issue IRS Form 1099-B by mid-February of the following year. This is an important document that you must have to complete your tax return for the year of sale. Many brokerage firms reformat Form 1099-B into their own substitute statement, which they issue instead of the actual IRS form. The IRS also receives the reported information and will match it against the information you provide on Form 8949 and Schedule D of your tax return.

Significant Changes In The Reporting On Form 1099-B

A few years ago, Form 1099-B changed to require more details about stock sales. For sales of shares acquired on or after January 1, 2011, stockbrokers have had to report to you the stock acquisition dates, your tax basis (i.e. the cost basis), and whether capital gains were long- or short-term. Before then, only the gross sales proceeds had to be reported on Form 1099-B after stock had been sold during the year. This additional information can be helpful, though it can be confusing instead.

The 1099-B for stock sales made during 2016 closely resembles the version for the 2015 tax year. However, the 2014 version introduced some major changes that you should continue to keep in mind when reviewing your 1099-B for stock sales in 2016:

  • In 2014, the IRS redesigned the form to match its box numbers with the columns on Form 8949, which you use to report stock sales.
  • A box at the top center of Form 1099-B indicates the appropriate box to check near the top of Form 8949 when reporting the sale.
  • The proceeds that your broker reports must be net of commissions and fees.
  • A box (Box 1g) was added for adjustments. Do not confuse this with the adjustments needed for stock compensation that are discussed below. Box 1g applies only to the amount of any nondeductible loss in a wash sale or to the amount of accrued market discount.

Special Issues For Stock Compensation

The regulations and the 1099-B instructions continue to evolve. Starting with grants made on or after January 1, 2014, brokers are prohibited from including equity compensation income in the basis reported on Form 1099-B (see pages 29–30 of the final regulations, issued in 2013). Your broker will report only what you paid for the stock at exercise, purchase, or vesting. For grants made before that date, your brokerage firm can voluntarily report the adjusted full basis information with the compensation element. In any supplemental information that it gives, your broker may include the portion of the full basis not reported to the IRS.

Evolution Of Cost-Basis Reporting On IRS Form 1099-B

What You Need To Know For Stock Sales Made In 2016

For 2016 sales of company stock acquired from equity compensation and ESPPs, brokers can either (1) report the complete cost basis for pre-2014 grants, while reporting only the partial basis for later grants, or (2) report the unadjusted partial basis for all grants. Therefore, you will need to do the following:

1. Understand what is or is not on the 1099-B sent to the IRS. If this is not clearly explained, ask your company and its stock plan service provider (i.e. broker) whether any compensation income was included in the basis.

2. Make an appropriate adjustment in the gain or loss from the sale on Form 8949 and Schedule D if the compensation part of the basis is not included on Form 1099-B. IRS Form 8949 and Schedule D have a column to use for this adjustment (you report the basis given on the Form 1099-B and adjust it indirectly through this column).

Especially Confusing For Restricted Stock And RSUs

The final regulations carve out an exception for stock that is not acquired for cash, i.e. what is technically called a noncovered security. This means that for restricted stock and RSUs, and perhaps also the exercise of SARs, the part of the tax basis that equals compensation income recognized is not reported to the IRS: the 1099-B cost-basis information submitted to the IRS will have a blank space or $0 for these grants. Only the exercise/purchase price of stock options or ESPP stock acquired in 2011 or later must have its basis reported.

Alert: Since your brokerage firm can include only the compensation part of your cost basis on Form 1099-B for sales of stock acquired from grants made in 2014 or later, it is likely that either the cost basis reported in Box 1e will be too low or Box 1e will be blank. To avoid overpaying taxes, you must adjust the gain/loss on Form 8949 and Schedule D or, if Box 1e for the basis is blank, simply report the correct basis.

You don't need to get a corrected Form 1099-B from your broker, as the reporting is following the IRS rules. For additional information, including more details on the cost basis and some tax-return tips, see the related article about these topics and issues. See also the FAQs about avoiding some of the biggest tax-return mistakes with stock options, restricted stock/RSUs, ESPPs, and SARs.

Examine Standing Orders

In light of the changes in cost-basis reporting, consider whether to modify any default standing order in your account for the shares to use at sale. This is particularly important for stock you have acquired from option exercises, restricted stock/RSU vesting, or market purchases at various times (i.e. the tax basis varies). Otherwise, the default order will automatically be "first in, first out" (FIFO) when you sell the company stock.

Under the procedural rules that brokers must follow, a standing order can be changed only up to the settlement date. Previously, you could get away with just indicating the sold shares on your tax return. While you may find it better to tell your broker to deliver the shares with the highest cost basis to minimize the taxes, when you have ISO and ESPP shares this could cause unwanted tax consequences with an ISO disqualifying disposition or an ESPP disqualifying disposition. You should discuss this with your own advisor.

Alert: If you have company stock in your account from various types of equity compensation, such as shares from ISO exercises, ESPP purchases, and restricted stock unit vesting, when you sell the shares be sure that you identify the ones you want to use. Selling other shares unintentionally may trigger unwanted tax consequences (e.g. a disqualifying disposition of ISO or ESPP stock). This situation may require a change in the standing order.
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