The cost basis trap on vested shares

Why the form says the wrong number

Your broker isn't making a mistake, and calling them won't change the form. For shares acquired through a compensation arrangement, brokers are restricted in what they may report as basis on Form 1099-B, and the compensation element is commonly excluded from the reported figure.

The form follows the reporting rules, but it does not show your full basis. Many brokers send a supplemental statement that shows the adjusted basis.

Basis reporting for shares acquired through compensation, and the adjustment mechanism: IRS, About Form 8949 and its instructions, and Publication 525.

What it costs when it goes unnoticed

Take the sample used across this site: a $90,000 vest. That amount was already reported as ordinary income on the Form W-2, and $19,800 of federal tax was already withheld against it at vest.

If the shares are sold shortly after vesting at approximately the same price, the correct capital gain is close to nothing. Reported with a basis of zero, the same $90,000 appears a second time as a capital gain and is taxed again.

How the adjustment is made

Form 8949 has a column for the basis as reported, a column for an adjustment, and a code identifying the reason. The correct basis is reached through the adjustment rather than by overwriting the reported figure, which keeps your return reconcilable against the 1099-B the IRS also received.

What the preparer needs from you, per lot:

• The vest date and the fair market value used that day.
• The number of shares delivered, and how many were sold to cover.
• The sale date and proceeds for the shares you later sold.

Those figures are on the vest notice and the broker's supplemental statement. They are considerably harder to reconstruct several years later, so it is worth keeping them as you get them.

The same problem on ESPP shares

Shares from an employee stock purchase plan have the same issue, plus one more. The ordinary income element recognized on an ESPP sale is added to basis in the same way, but the amount depends on whether the sale was qualifying or disqualifying, which the broker frequently cannot determine.

The offering date, purchase date and both market prices are what settle it, and those are covered on the dispositions page.

Questions people ask

What is my cost basis in RSU shares?

The fair market value on the vest date, which is the amount reported as ordinary income on your Form W-2 for that vest.

My 1099-B shows a basis of zero. Is that wrong?

It is usually correct under the reporting rules that bind the broker, and incomplete as a statement of your actual basis. Regulations restrict what a broker may report for shares acquired through compensation. The adjustment is made on Form 8949.

How far back can this be corrected?

Amended returns are possible within the statutory window, which is a matter for your preparer given your specific dates. The practical point is that the records needed become harder to assemble each year.

Do I need the supplemental statement from my broker?

It is the document that usually carries the adjusted basis, so it is worth locating before a return is prepared. Where it is missing, the vest notices carry the same information lot by lot.

Does this affect shares I still hold?

Not yet. The problem appears when shares are sold and a gain is computed. Keeping the vest records now is what makes that computation straightforward whenever it happens.