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Preventing Tax Errors:
Big changes in stock-sale reporting on tax returns
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For people with stock compensation who sold shares in 2011, major changes in tax reporting and filing are in effect this tax season. These include the expansion of Form 1099-B, which raises much potential confusion, particularly about the cost basis for reporting stock sales. The new Form 8949, which must now be filed alongside the revised Schedule D, will also prompt many questions. The clear, concise, and easy-to-read content of myStockOptions.com can help. The Tax Center at myStockOptions.com shows exactly how to report stock compensation and stock sales on tax returns, including the annotated diagrams of IRS forms in the section Reporting Company Stock Sales. It's a respected independent source you can trust for tax guidance.
This newsletter summarizes the changes and their impact. Don't want to wait for our quarterly newsletter updates? The myStockOptions.com Blog is the best way to stay on top of equity compensation news and the latest developments at our website. You can also follow us on Facebook and Twitter.
We appreciate your interest in myStockOptions.com. If you do not yet subscribe to Premium or Pro Membership, giving full access to our content and tools, tax season is a great time to upgrade. All of our content and tools are also available for licensing.
—Bruce Brumberg (Editor-in-Chief)
The Revised IRS Form 1099-B
Sent by brokers before mid-February, IRS Form 1099-B, or the broker's equivalent substitute statement, now contains more information than in past years. Starting this tax season, Form 1099-B includes not only the gross proceeds from stock sales but also:
The information on the form is sent both to you and to the IRS.
For people who sold shares in 2011 that were acquired through equity compensation, these stock sales carry an extra twist in their cost basis. In fact, cost-basis reporting is now more complex, confusing, and vulnerable to errors. If you are not aware of the reporting rules, the resulting confusion may lead you to overpay taxes. A thorough new article and FAQ on myStockOptions.com explain the background, how to understand Form 1099-B if you sold shares from stock compensation or an ESPP, and how to avoid mistakes with the cost basis that can lead to overpayment of taxes.
IRS Form 8949, Schedule D's New Best Friend
The revision of Form 1099-B is not the only IRS curveball this tax season. The changes in the 1099-B information also required a complete revamp of the tax-return forms used to report stock sales. To report a sale of shares on your tax return, you must now complete the new IRS Form 8949 along with Schedule D, which has significantly changed upon the introduction of Form 8949. You submit both with your Form 1040 tax return.
The new Form 8949 is where you list the details of each stock sale, using the information on Form 1099-B, while Schedule D now simply aggregates the column totals from this form to report your overall long-term and short-term capital gains and losses. However, the cost-basis information in Box 3 of Form 1099-B may be too low, or the box may be blank. Depending on your situation, this may be the case for any of several reasons:
It is up to you—not your company, your broker, or the IRS—to make any necessary modifications in your Form 8949. The special section Reporting Company Stock Sales on this site presents FAQs with annotated diagrams of Form 8949 and Schedule D. Each FAQ explains and illustrates a different reporting situation involving stock options, restricted stock, restricted stock units, performance shares, employee stock purchase plans, or stock appreciation rights. Clear instructions and diagrams show how to complete the forms, whether the cost-basis information in Box 3 of Form 1099-B is accurate, too low, or omitted.
The new Form 8949 is where you now list the details of each stock sale, while the revised Schedule D is where you now merely aggregate the column totals from Form 8949 to report your total long-term and short-term gains and losses. From our interpretation of the forms and the instructions to Form 8949 and the revised Schedule D, myStockOptions.com recommends four reporting steps to avoid overpaying taxes if the wrong cost basis was reported on Form 1099-B.
1. Start with Part 1 on Form 8949 for short-term capital gains/losses or Part II for long-term capital gains/losses. Box 1c on Form 1099-B (or the reformatted version from your broker) will indicate which you have (long or short). Towards the top of Form 8949, check either Box (A) or Box (B) according to whether a basis for the stock you sold was reported at all to the IRS.
2. Find the column entitled Adjustments to gain or loss, which is column (g) in both forms. On Form 8949, enter in this column the stock compensation that was not included in the cost basis (Box 3) on Form 1099-B. This will be a negative number (in parentheses), as the incorrectly low basis reported on Form 1099-B will have made your gain too large (or your loss to small).
For steps three and four, see the full FAQ on myStockOptions.com.
How To Report Sales Of Company Stock
The Revised Form 1099-B & New Form 8949 For Reporting Stock Sales On Your Tax Return: How To Avoid Paying Too Much Tax
Avoid Tax Return Mistakes With Stock Options & ESPPs: What You Need To Know In 2012
Restricted Stock & RSUs: What You Must Know To Avoid Tax Return Mistakes In 2012
NQSOs: Tax Return Tips And Traps
ISOs: Tax Return Tips And Traps
Stock Option Financial Planning After Your Tax Return Is Filed And At Year-End (Part 1)
In addition to these articles, myStockOptions.com has numerous FAQs on other tax return topics, including a helpful FAQ on a range of ESPP tax-return mistakes.
If there's a way to make learning about tax returns fun, myStockOptions.com will try it. In the Tax Center, we have published a quick-paced 8-minute video presentation on the expanded IRS Form 1099-B and cost basis reporting, the new IRS Form 8949, and the revised Schedule D. It's a painless way to learn these important developments and prevent expensive mistakes on tax returns during tax season.
In a concise, engaging overview, our editor-in-chief Bruce Brumberg will inform you about:
Try it! It's fun, it's informative, and it's just eight minutes long. The video can also be licensed and customized to fit your stock plans, as can any content on myStockOptions.com.
On the go? Can't stream the video? You can still download our podcasts on tax return topics and listen to them at any time with your iPod.
Insider trading is an almost daily problem in the US capital markets: the Financial Industry Regulatory Authority (FINRA) annually hands the SEC about 250 potential cases of insider trading—an average of one case every market day. Not surprisingly, the issue is seldom far from the news headlines.
The best remedy against insider-trading violations at any company is prevention. By its very nature, stock compensation can be on the front lines of insider-trading potential, and companies should do all they can to prevent insider trading and be prepared to demonstrate their compliance efforts. The core of this is education. At myStockOptions.com, companies and stock plan participants have a superb resource in the SEC Law section of the website. This includes not just clearly written articles and FAQs but also an interactive quiz, to test what you've learned, and an engaging podcast that you can download and listen to if you get tired of reading. Certified Equity Professionals and Certified Financial Planners can earn continuing education credit by taking the advanced course and exam on SEC law and insider trading.
One proven means of corporate compliance that companies routinely adopt is showing employees educational videos on preventing insider trading. The leading resource in this field is the Think Twice video series, which was produced by our sister company Brumberg Publications and recently celebrated its 20th anniversary. At once entertaining, informative, and sometimes downright scary, the videos make superb use of scripted dramas and SEC interviews to clearly portray the rules against insider trading, along with the harrowing ordeal of an SEC investigation and its potential consequences.
For fun trailers of all three videos in the series, see the Think Twice channel on YouTube, or watch the preview of Think Twice: The Sequel right here:
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