BOO! As if Halloween weren't scary enough, our topic today is IRS Form 1099-B and the murky labyrinth of cost-basis reporting for sales of company stock acquired from equity compensation. For the 2014 tax year, the IRS has yet again changed the form, adding to the potential confusion about cost-basis reporting.
If you sold shares during the calendar year, your brokerage firm will issue IRS Form 1099-B by mid-February of the following year. This is an important document that you must have to complete your tax return for the year of sale. Many brokerage firms reformat Form 1099-B into their own substitute statement, which they issue instead of the actual IRS form. The IRS also receives the reported information and will match it against the information you provide on Form 8949 and Schedule D of your tax return.
Recent History Of Form 1099-B
A few years ago, Form 1099-B changed to require more details about stock sales. For sales of shares acquired on or after January 1, 2011, stockbrokers have had to report to you the stock acquisition dates, your tax basis (i.e. the cost basis), and whether capital gains were long- or short-term. Before then, only the gross sales proceeds had to be reported on Form 1099-B after stock had been sold during the year. This additional information may prove to be more helpful, but it also may be more confusing.
Alert: The 1099-B for the 2014 tax year differs significantly from the 2013 version in several ways, including the following:
- The IRS redesigned the form to match its box numbers with the columns on Form 8949, which you use to report stock sales.
- A new box at the top center of Form 1099-B indicates the appropriate box to check near the top of Form 8949 when reporting the sale.
- The proceeds that your broker reports must be net of commissions and fees.
Special Issues For Stock Compensation
The regulations and the 1099-B instructions continue to evolve. According to the final regulations issued by the IRS in April 2013, brokers are prohibited from including income from equity compensation in the basis reported on Form 1099-B, starting with grants made on or after January 1, 2014. Your broker will report only what you paid for the stock at exercise or purchase. For grants made before that date, your brokerage firm can voluntarily report the adjusted full basis information with the compensation element. In any supplemental information that it gives, your broker may include the portion of the full basis not reported to the IRS.
For 2014 sales of company stock acquired from equity compensation and ESPPs, brokers can (1) voluntarily report the complete cost basis for pre-2014 grants, while reporting only the partial basis for later grants or (2) report the unadjusted partial basis for all grants. Our discussions with various brokers suggest that most are going with the second route, standardizing the 1099-B reporting of all sales stemming from stock compensation. These brokers are also distributing supplemental information showing the correct basis and/or the amount of the adjustment to use on Form 8949.
You will need to:
1. Understand what is or is not on the 1099-B sent to the IRS. If this is not clearly explained, ask your company and its stock plan service provider (i.e. broker) whether any compensation income was included in the basis.
2. Make an appropriate adjustment in the gain or loss from the sale on Form 8949 and Schedule D if the compensation part of the basis is not included on Form 1099-B. IRS Form 8949 and Schedule D have a column to use for this adjustment (you report the basis given on the Form 1099-B and adjust it indirectly through this column).
Even More Confusing For Restricted Stock And RSUs
The final regulations carve out an exception for stock that is not acquired for cash, i.e. what is technically called a noncovered security. This means that for restricted stock and RSUs, and perhaps also the exercise of SARs, the part of the tax basis that equals compensation income recognized is not reported. The 1099-B information will be blank for these grants. Only the exercise/purchase price of stock options or ESPP stock acquired in 2011 or later must have its basis reported.
Alert: While this change may prove helpful with the reporting of stock sales on your tax return, unless your brokerage firm includes the compensation part of your cost basis (not permitted starting with sales from grants in 2014), either the cost basis reported in Box 1e of Form 1099-B will be too low or the cost-basis box will be blank. To avoid overpaying taxes, you must adjust the gain/loss on Form 8949 and Schedule D or, if Box 1e is blank, simply report the correct basis.
For additional information, including more details on cost-basis issues and Form 1099-B, and for some tax return tips, see the related FAQ and article on myStockOptions.com.
Help Is On The Way
In the Tax Center at myStockOptions.com, our very popular content showing how to report sales of company stock on tax returns (including annotated diagrams) will be fully updated for the 1099-B changes before tax-return season.
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