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That ordinary income for employees is included in Box 1 of your Form W-2 and in the other boxes for state and local income, Social Security up to the yearly maximum, and Medicare, along with the amount withheld. When you exercise nonqualified stock options (NQSOs), the difference between your exercise price and the stock’s market price is ordinary income, even if you hold the shares and don’t immediately sell them. It’s easier for an accountant to have a conversation with the financial advisor as opposed to figuring out the cost basis on the back end.” Mistake #3: Double-Counting Income From Form W-2ĭon’t get confused by your Form W-2 and overreport income. “We’re working with the client throughout the year. “This is where coordination between an accountant and a financial advisor adds a lot of value,” he explained. “That’s when big mistakes happen, in my experience.” He observed that moving the shares from the account at the brokerage firm your company uses for its stock plan can cause the loss of historical data that you will later need to provide the correct cost basis for your tax return.ĬFP and EA Daniel Zajac, the managing partner of Zajac Group, emphasized the importance of communication between your tax preparer and your financial advisor to ensure the cost basis is correct.

“When there’s a difference there, that may be an indication that there’s some income in your W-2 that needs to be adjusted on your Form 8949.”ĭan also cautioned against moving stock compensation shares out of the original stock account that they’re in. Having a lot of short-term sales “usually is a red flag that there needs to be an adjustment in the cost basis.” He also said that his firm checks Form W-2 for the difference between Box 1 (total of ordinary income) and Box 3 (Social Security and Medicare wages). How can you keep track of your cost basis accurately? During the webinar, panelist Stephanie Bucko, a CPA and the co-founder of Mana Financial Life Design, recommended taking screenshots during the stock-selling process as an extra record of “exactly what happened at that time.” Dan Hodgin added that “most of the brokerage houses will give you supplemental information along with your Form 1099-B, so that’s a roadmap to make sure everything is correct.”ĭan suggested paying attention to the number of short-term capital gains you have.

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As illustrated by annotated diagrams of Form 8949 and Schedule D at the website, instead of putting $0 in the cost-basis column (e) of Form 8949 and then making an adjustment in column (g), you put the correct full basis in column (e). However, your cost basis is the amount of income included on your Form W-2 in the year when the restricted stock/RSUs vested. That is because on Form 1099-B, Box 1e for the cost basis will probably be blank or show $0.

When reporting sales of shares that were acquired from restricted stock or RSUs, taxpayers may wrongly think the cost basis is $0. Unfortunately, this confusing situation can easily lead to mistakes on tax returns. That includes shares acquired at vesting from a grant of restricted stock/RSUs or in a stock-swap option exercise. “noncovered securities” in IRS parlance). In addition, brokers are prohibited from giving any cost basis for shares that were not acquired for cash (i.e. This means the cost-basis information reported to the IRS in Box 1e of Form 1099-B may be too low, or the box may be blank. If the cost basis is too low, you overpay taxes.įorm 1099-B reports your cost basis in Box 1e (your broker’s substitute statement will use columns with the same numbering), without including any compensation income you recognized from equity awards. NET PROCEEDS – COST BASIS = CAPITAL GAIN OR LOSS When you sell shares, the sales price (after commissions) minus your cost basis equals your capital gain or loss:

This is a big area for potential errors on tax returns, made more likely by confusing IRS rules that apply to stock compensation.

The cost basis, sometimes called the tax basis, is the full cost of acquiring a security. But a lot of times, with just a response the IRS will adjust it in its computers and will issue an updated notice with corrected terms.” Mistake #2: Not Reporting Your Cost Basis Correctly If that doesn’t work, we’ll amend the return. “It basically says hey, this is what happened, this is why we think your notice is incorrect, and here are the attached supporting documents. What should you do if that happens? “We send a response with all the supporting documents,” said webinar panelist Dan Hodgin, a CPA and the owner of Silicon Valley Tax Group.

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