Well, I finally got around to doing my taxes last week. I’m retired so income is mostly IRA withdrawals, Social Security, a smallish pension, and some dividends. I did decide last year to sell some stock I acquired from RSU’s from my former company before I retired about 10 years ago. I stupidly hung on to those stocks instead of selling as soon as they vested and ended up with a huge loss of close to $100 K. I also sold a bunch of mutual funds that some significant profits.
So, I loaded up all of my data into my tax software (H&R Block) and downloaded everything from Fidelity. I was expecting a refund due to my big capital losses, but after cranking everything into the software, it showed that I owed $18,000. WTF! I then dug down into the details. I went to the section on stock sales and saw that it was showing a profit on my stock/mutual funds sales rather than the loss I was expecting. I dug down further and saw that my 1099-B was showing a basis of zero for my RSU’s rather than the $160,000 I had paid taxes on.
Well at this point I figured Fidelity had screwed up and I just needed to call them to get a corrected 1099-B and everything would be fine. Bad assumption. I did call Fidelity the next day and after being transferred around a few times, I spoke to someone who told me that the IRS requires them to report zero as the basis for any RSU shares that are sold. They agreed with me that this was not correct and told me that the actual basis was reported in a supplemental section of the 1099-B that is labeled as “not reported to the IRS”. This makes even less sense to me. I kind of argued with the Fidelity rep for a while but finally give up as it didn’t seem like it was going to change anything.
I then went back to my tax software to try to manually correct the basis for my RSU stock sales using the data in the “supplemental” 1099-B. There were about a dozen lots of sales that needed to be corrected. Got that done and the software showed that my $18,000 underpayment had suddenly turned into a $8,000 refund. Whew! After all of that, my return turned out about where I had initially expected it to be.
What I can’t figure out is why the IRS would require these financial institutions to report zero as the basis for all RSU’s when they know that is not the case. It forces taxpayers to manually correct entries that are purposely incorrect. And the correct entries are not even reported to the IRS!
Maybe there’s some logic to this, but it escapes me if there is. Has anyone else had to deal with this?
Posted by 2020fakenews
6 Comments
That poor Fideity rep, I hope you gave good scores in the survey
Were the stocks acquired before 2011 or whenever the law changed? It isn’t a bad thing, it can help you
Yes, this happens every year. RSUs are always counted with zero cost basis, but since you are taxed when you receive them, you have to adjust the basis so you don’t get taxed twice. I’ve always had to do this, with different companies RSUs at fidelity, E*trade and Morgan Stanley
Part of the reason, or maybe the only reason, is you’re not actually purchasing the shares from fidelity so there’s no transfer of funds to fidelity, so to them the cost basis is zero
I read through the regulations a while back, so I’d like to offer a paraphrase:
IRS: Hey, let’s have all of you financial institutions report the proper basis for employee stock plans. That way, employees that are paid in stock can easily report their capital gain income.
Financial institutions: Don’t make us do that. It’s too hard.
IRS: Okay, fine. But it’ll be too confusing if some of you increase the basis and others don’t. So *none of you* should report it.
Employees: …
https://www.federalregister.gov/documents/2013/04/18/2013-09085/basis-reporting-by-securities-brokers-and-basis-determination-for-debt-instruments-and-options
Ah yes the annual rsu heart attack.
It’s just how the regulations for “non covered” securities are in terms of reporting. Because they don’t have to report the cost basis to the IRS directly, unlike with most publicly traded stocks, it shows as zero.
With my job, the forms make even less sense. The summary at the top of the 1099 shows the cost basis as zero, but the itemized lists of long/short shows exact cost basis and proceeds for every sale. There’s not even “supplemental” information. It’s two halves of the same form giving different numbers.
To Morgan Stanley’s credit, it does have bold (if small) type saying,
> If shares sold were from your Company’s Equity Compensation Plan, the Cost Basis for those shares may need to be adjusted on Form 8949 to include any compensation income associated with the transaction.