Updated for tax year 2024.
At a glance:
- Stock options and ESPP plans generate income in two categories: ordinary income and capital gains or losses.
- Calculate your gain or loss by subtracting your adjusted cost basis from the sales proceeds.
- Check your 1099-B for accuracy, compare it to your investment records, and adjust if necessary.
Question:
After entering my info into Form 1099-B, I think I’m getting double taxed on the sale of my employee stock options and ESPP shares. I haven’t adjusted the basis from what is shown on my Form 1099-B, but it seems like maybe I’m supposed to make an adjustment because the proceeds already appear as income on my W-2. What do I do here?
Answer:
Employers often compensate employees with benefits other than wages. Stock options and employee stock purchase plans (ESPP) are increasingly popular in compensation packages.
Generally, these plans offer employees stock in their company at either no charge or a discounted price. On the surface, getting stock units for little to no cost sounds like a great deal, but the IRS doesn’t let this income go unnoticed.
These plans generate income in two categories: ordinary income and capital gain/loss income.
Any capital gain or loss is determined at the time you sell the stock. The amount is determined by taking the sales proceeds minus your adjusted cost basis. Your adjusted cost basis generally consists of two amounts: compensation income and acquisition cost. The acquisition cost is the price you pay to acquire the stock.
Benefit plans differ in terms and guidelines for receiving stock units. Some plans award the stock to you at no cost, in which case your acquisition cost is $0. Other plans allow employees to purchase stock at a discounted price. The discounted price you pay for each unit is your acquisition cost.
Any compensation income amount is essentially the benefit you received at the time of purchase. If the stock was awarded to you at no cost, then your compensation income is the fair market value (FMV) of the stock you received at no charge. If you purchased the stock at a discount, the discount is the compensation income.
You will receive a Form 1099-B in the year you sell the stock units. This form will be used to report any capital gain or loss resulting from this transaction on your tax return. You should review the cost basis amount on Form 1099-B and compare it to the adjusted cost basis amount in your investment records. If the cost basis amount reported on Form 1099-B does not match your adjusted cost basis per your records, you will include adjustment code B on your tax return.
Compensation income reported on Form W-2 is likely not included in your cost basis on Form 1099-B and will require an adjustment amount using code B. If the cost basis amount was not reported to the IRS on Form 1099-B, enter your cost basis on your tax return based on your personal investment records.
You will need to enter the property description, date acquired, cost or other basis, date sold, sales proceeds, and any federal income tax withheld.
Note: The 1099-B form you received may or may not report the date acquired or the cost basis. This information is maintained by you and is needed to complete the proper reporting of the transactions on Schedule D.