Ask anybody whose pick for the NCAA basketball tournament has lost by just one point—little mistakes can be important. This is also true for the other March Madness, i.e. tax-return season, when even small errors can turn out to be very expensive. Don't miss an easy layup at the buzzer.
For people with stock compensation who sold stock in 2016, the 2017 tax season has the potential to be very confusing. After you have sold shares acquired through equity compensation, you must understand the complex reporting rules to avoid overpaying taxes. Even if you use a professional preparer, you should still be familiar with the issues and review your return upon its completion to ensure that stock sales are accurately reported. Not catching an easily detectable mistake would be like missing a crucial late-game free throw.
Reporting Stock Sales: The Full-Court Press Of Form 1099-B, Form 8949, And Schedule D
When you report stock sales on your federal tax return, IRS Form 8949 is where you list the details of each stock sale, while Schedule D is where you aggregate the column totals from Form 8949 to report your total long-term and short-term gains and losses.
One of the trickiest areas in this reporting process involves the cost basis of the shares that you sold. Reported to you by your broker on IRS Form 1099-B or its equivalent substitute statement, the cost basis is the price paid to acquire the shares plus the compensation recognized for acquiring them (reported on Form W-2).
Technical Foul: What If The Wrong Cost Basis Is Reported On Form 1099-B?
You must understand the cost-basis figure that your broker reports to you on Form 1099-B, the amount that was reported to the IRS, and any supplemental information provided by your broker. It is also important to know what to do if the cost basis is wrong or omitted.
From our interpretation of the forms, along with the instructions for Form 8949 and the instructions for Schedule D, myStockOptions.com recommends the following steps to avoid overpaying taxes if the wrong cost basis was reported to the IRS on Form 1099-B.
While you still report that cost-basis number from the 1099-B in column (e), you can avoid overpaying your taxes by taking the following steps:
1. Start with Part I on Form 8949 for short-term capital gains/losses or Part II for long-term capital gains/losses. Box 2 on Form 1099-B (or on the substitute statement from your broker) will indicate which type you have (long or short). Towards the top of Form 8949, check either Box (A) or Box (B) for Part I or Box (D) or Box (E) for Part II, depending on whether a basis for the stock you sold was reported to the IRS. The 1099-B for 2015 has a box at the top that indicates which box on Form 8949 to check.
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 amount of stock compensation that was not included in the cost basis (Box 1e) reported to the IRS on Form 1099-B. Part of your W-2 income, 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).
3. In addition, you insert Code B in column (f). This indicates that the basis on Form 1099-B is incorrect and should be higher than what is shown.
4. If no cost basis appears in Box 1e of Form 1099-B (or if the basis appears in your 1099-B but not in what the broker sent to the IRS), you enter the correct basis in column (e) of Form 8949 instead of leaving it blank. For example, no basis will appear for restricted stock and RSUs, as these are noncovered securities. The many questions about 1099-B reporting that we have gotten from both tax professionals and plan participants indicate that the form is extremely confusing when Box 1e is blank or shows a basis of $0. (See an article on myStockOptions.com to learn more on tax-return reporting that involves restricted stock and RSUs.)
5. When the incorrect basis appears on the statement from your broker but was not reported to the IRS, enter the correct basis in column (e). Put Code B in column (f) and enter –0– in column (g).
Practice Can Improve Your Game: Further Reading
For further details on these steps, see the FAQ and short video on this topic at myStockOptions.com. For annotated diagrams showing how to report stock sales from all types of stock compensation, including stock options and restricted stock units, see our special section Reporting Company Stock Sales. To improve your hoops game, keep practicing those shots from behind the three-point line.