The NASPP Blog

I feel like I’ve been blogging about proposed and final cost-basis reporting regs for Form 1099-B for three years now. Wait, I have been blogging about this topic for that long–my first entry was on June 2, 2010 (“Cost-Basis Reporting: Complicating an Already Confusing Topic“). Over that period, we’ve seen several iterations of regulations–this was, after all, a three-phase project for the IRS. But we’re now at the end of phase three and the final set of final regulations have been issued.

Not the News You Were Hoping For

As my readers know (because you’re all so smart and also I’ve blogged on this to the point where you probably wish I’d just shut up about it), the cost basis of shares acquired under stock compensation arrangements includes two components:  1) the amount paid for the stock and 2) any compensation income recognized in connection with the arrangement. 

Under the first set of regs that were released in 2010, brokers were temporarily relieved (until 2013) of the obligation to include #2 (the compensation income component) in the cost-basis reported on Form 1099-B.  Brokers could, however, voluntary report the correct basis if they were able to (and, to my knowledge, several brokers did this).  Then, in 2012, the IRS issued proposed regs that indefinitely extended this relief beyond 2013. In the final regs, not only is this relief made permanent but brokers are prohibited from even voluntarily including the compensation income in the basis.

Thus, for sales of any shares acquired under stock compensation arrangements after January 1, 2014, brokers are required to report only the amount paid for the stock as the cost basis on Form 1099-B.  This basis will almost always be wrong (twenty points if you know the two circumstances for which it is the correct basis).  Employees will then have to adjust the gain on Form 8949 when they file their tax return to avoid overpaying tax on their sales. 

By prohibiting brokers from voluntarily reporting the correct basis, the IRS was hoping to achieve consistency on Form 1099-B. And, having written all the various iterations of flow charts for reporting sales that we have available in our Cost-Basis Reporting Portal, I have to say that I think consistency will be helpful. But I kinda wish the IRS had gone for consistency in the other direction–i.e., requiring brokers to report the correct basis, rather than an incorrect basis.

A Silver Lining

One bit of good news in the regs is that, beginning in 2014, brokers will be required to report sale proceeds net of fees on Form 1099-B.  This small change will eliminate about two-thirds of the flow charts in the Cost-Basis Reporting Portal so I expect it also make your educational materials a little simpler as well. 

More Information  

For more information on the final regs, see the NASPP alert “IRS Issues Final Cost Basis Reporting Regs.”

Thanks to Andrew Schwartz of Computershare for bringing this development to my attention and contributing the first memo we posted on it (“Final Regulations Released – Cost Basis for Equity Compensation“).

– Barbara