Whether you are completing your tax return yourself or are using a professional preparer, you should review the forms upon their completion to ensure that stock sales are accurately reported. This is important, as mistakes can be expensive.
In tax-return reporting, IRS Form 8949 is where you list the details of stock sales, 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. 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 the cost-basis number shown on Form 1099-B in column (e), you can avoid overpaying your taxes by taking the following steps.
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 substitute statement from your broker) will indicate which 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. These various checkbox/letter designations for short- and long-term capital gains are new in tax-return reporting for 2013.
2. You do not modify the basis number provided to the IRS. Instead, find the column entitled Adjustments to gain or loss, which is column (g). On Form 8949, enter in this column the amount of stock compensation that was not included in the cost basis (Box 3) 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 need to add a Code B in column (f) that explains why there is an adjustment in column (g).
4. When the basis is not reported at all to the IRS (i.e. the relevant space on the form is blank), you must report the correct basis in the appropriate column on Form 8949, with no adjustments or codes in the other columns.
For further details on these steps, see the FAQ 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.
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