Getting To Know You: The New IRS Form 8949 For Reporting Stock Sales On Your Tax Return

When the IRS adopted the final cost-basis regulations on the revised Form 1099-B, we wondered where and how all that additional information on the cost basis of stock sales was going to be reported on the Form 1040 tax return. Form 1099-B used to report just the sale proceeds for the capital gains calculation. Could the extra data on the cost basis be somehow squeezed into Schedule D, or would another form be needed?

Perhaps predictably, the IRS has answered that question by introducing us to yet another form for tax return reporting: Form 8949. The IRS has also revised Schedule D. From now on, sales of stock and other types of securities (e.g. mutual funds, ETFs, bonds) will have to be reported on not just the revised Schedule D but also on the new Form 8949, and both will be submitted with the tax return. That much is clear from the instructions for the forms. (Note also that the IRS already has a new draft 1099-B under way for 2012 stock sales.)

The additional cost-basis information on Form 1099-B may be helpful for completing these forms, but it may still be incomplete if you sold shares acquired from stock grants or an employee stock purchase plan. Cost-basis reporting, both for your broker on Form 1099-B and for you on your tax return, is now more complex, confusing, and vulnerable to errors. For sales of shares acquired on or after January 1, 2011, stockbrokers must report the stock acquisition dates, your tax basis (i.e. the cost basis), and whether capital gains are long- or short-term. For stock comp, these changes raise special issues: at least until 2013, your 1099-B is required to report only the purchase price of your stock grants. The compensation element, which is part of your tax basis, will not be included on your 1099-B unless the brokerage firm chooses to do so. For restricted stock, the tax reporting is even more confusing, as there is no purchase price and currently the tax basis is not required on the 1099-B.

In a helpful session (The IRS Speaks) at the recent NASPP annual conference, we learned that the IRS may add a checkbox, perhaps next year, to Form 1099-B to indicate whether the reported cost basis includes W-2 compensation income already recognized as part of your ordinary income.

What To Do If Wrong Cost Basis Is Reported On 1099-B

From our initial interpretation the forms and the instructions to Form 8949 and the revised Schedule D, myStockOptions.com recommends the following reporting steps to avoid overpaying taxes.

1. On Form 8949, use either Part 1 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 Adjustments to gain or loss (column (g) in both draft forms). On both forms, 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).

3. In addition, column (b) on Form 8949 has the snappy title Code, if any, for column (g). This column is used to explain, with a special code, why there is an adjustment in column (g). The instructions give a list of letters to insert, depending on the reason for the adjustment. For understatements in the cost basis, which can happen with stock compensation, you insert Code B (easy to remember: "Code B in column (b)"). This indicates that the basis on Form 1099-B is incorrect and should be higher than what is shown.

When no cost basis appears on the 1099-B (i.e. Box 3 is blank), as can happen for stock bought before 2011 and for restricted stock/RSUs, then instead of making the adjustment in column (g) on both forms, you report the correct basis in column (f) for the basis and check Box (B) at top of Form 8949.

When you look at these forms, it will (hopefully) be somewhat clear what to do as long as you understand the layout and the logic. (We do wonder who comes up with the logic for IRS tax forms!) By making this adjustment in the basis, the amount of the capital gain will be correct and not overstated (or not understated in the case of a loss).

An FAQ and article about the revised Form 1099-B on myStockOptions.com explains more about what these changes mean for you and your tax return, and how to avoid overpaying your taxes. We have updated our Tax Center with examples and tips for these new and revised IRS forms, and we have developed annotated diagrams of the two forms to illustrate the reporting for sales of shares from various types of stock compensation.

Comments

[ava]

If the gain from the sale of stock is reported to IRS and included on my W2, and I fill out 8948 and schedule D then report it on 1040 line 13, It is counted as income again. Correct?

[myStockOptions.com]

The sale of stock is reported on the 1099-B, not the W-2. The income on your W-2 becomes part of your cost basis on Form 8949. However, if the W-2 income is not included on the cost basis on the 1099-B, you make an adjustment on Form 8949 to the gain or loss. This avoids being taxed twice on the W-2 income. The net gain/loss for the sale does become part of your capital gains/loss that are reported in total on line 13 of the Form 1040.