In just a couple of weeks, employees will begin receiving Forms 1099-B for sales they conducted in 2015. Here are five things they need to know about Form 1099-B:
What Is Form 1099-B? Anytime someone sells stock through a broker, the broker is required to issue a Form 1099-B reporting the sale. This form is provided to both the seller and the IRS. It reports the net proceeds on the sale, and in some cases, the cost basis of the shares sold. The seller uses this information to report the sale on his/her tax return. [Same-day sale exercises can be an exception. Rev. Proc. 2002-50 allows brokers to skip issuing a Form 1099-B for same-day sales if certain conditions are met. But your employees don’t need to know about this exception unless your broker isn’t issuing a Form 1099-B in reliance on the Rev. Proc.]
The Cost Basis Reported on Form 1099-B May Be Too Low. For shares that employees acquire through your ESPP or by exercising a stock option, the cost basis indicated on the Form 1099-B reporting the sale is likely to be too low.
Sometimes Form 1099-B Won’t Include a Cost Basis. If employees sold stock that was acquired under a restricted stock or unit award, or if they acquired it before January 1, 2011, the Form 1099-B usually won’t include the cost basis (although procedures may vary, so check with your brokers on this).
What To Do If the Cost Basis Is Incorrect (or Missing). If the cost basis is incorrect, employees will need to report an adjustment to their gain (or loss) on Form 8949 when they prepare their tax returns. If the basis is missing, they’ll use Form 8949 to report the correct basis.
An Incorrect Cost Basis Is Likely to Result in Employees Overpaying Their Taxes. It is very important that employees know the correct basis of any shares they sold. They will subtract the cost basis from their net sale proceeds to determine their taxable capital gain (or deductible capital loss) for the sale. Reporting a cost basis that is too low on their tax return could cause them to pay more tax than necessary. In some cases, this doubles their tax liability. The only person who wins in this scenario is Uncle Sam; your employees lose and you lose, because no one appreciates the portion of their compensation that they have to pay over to the IRS. Your stock compensation program is a significant investment for your company; don’t devalue the program by letting employees overpay their taxes.
Employees should review any Forms 1099-B they receive carefully to verify that the cost basis indicated is the correct basis. If it is missing or incorrect, they should use Form 8949 to report the correct basis.
The Portal also has examples and flow charts, all of which have been updated for the 2015 tax forms. [In case you are wondering, there were no significant changes to Form 1099-B, Form 8949, or Schedule D in 2015.]
As my readers know, cost-basis reporting went into effect last year for Forms 1099-B. This resulted in a number of changes to Form 1099-B, introduced Form 8949 to the stock plan administration lexicon, and created a whole new “opportunity” for employee education.
If you were thinking we were done with this topic–think again! This year, the IRS has further revised Form 1099-B and also changed Form 8949–finally issuing instructions to the new Form 8949 just last week. Any educational materials you may have created last year will likely need to be updated. The examples, FAQs, and flow charts in the NASPP’s Cost Basis Portal have all been updated for the new forms and instructions (now you know what I did this weekend).
New boxes 1d and 1e report the stock symbol and number of shares sold. There is still a description box (now box 8, formerly box 9 in 2011) where this information also appears.
Former box 2 (sales price) is now box 2a. This makes room for new box 2b, which has something to do with losses that are disallowed for reasons I don’t understand. Something about acquisitions/changes in corporate structure and foreign corporations–I’m pretty sure it doesn’t have anything to with stock compensation.
Former box 8 (short- or long-term gain) is now box 1c.
Box 6 now has two checkboxes: a) for noncovered securities, and b) indicates that the basis was reported to the IRS. Presumably the IRS can figure out whether or not the basis was reported to them, so I assume that box 6b is there to confirm for employees (and their tax preparers) that the basis was (or was not) reported to the IRS (e.g., if the broker reported the basis on the substitute Form 1099-B issued to the employee but didn’t report the basis to the IRS, box 6b would not be checked).
A bunch of other boxes that I don’t care about were renumbered.
Former column (b) (adjustment code) is now column (f). This also means that former columns (c) through (f) have all shifted to the left and are now columns (b) through (e). I guess it makes sense to have the adjustment code next to the adjustment column, but I do kinda wish the IRS had thought of this when they first created the form–it took a long time to update all the column references.
New column (h) now shows the taxpayer’s gain or loss for each transaction. Last year, gains/losses were only shown in aggregate on Schedule D.
Where the cost basis is reported to the IRS, new code “E” is entered in column (f) when the transaction fees are not reflected in either the sale proceeds or the cost basis reported on Form 1099-B (an adjustment in the amount of the fees is also entered in column (g)).
If the employee’s copy of Form 1099-B (or substitute) reports an incorrect basis and that basis was not reported to the IRS (indicated in new box 6b of Form 1099-B), the employee should report the correct basis in column (e) of Form 8949 but should also report code “B” in column (f), even though no adjustment will be entered in column (g). I’m not sure why the IRS wants taxpayers to enter an adjustment code when there’s no adjustment. It’s the IRS; go figure…
If multiple codes are entered in column (f), they should not be separated by a space or comma. Last year, they were supposed to be separated by a space or comma. Seriously? Ok, now it seems like the IRS is just changing things to change them–that’s just rude.
Some Things You Can Still Count On
The good news is that there have been no changes to Forms 3921 and 3922 (or maybe that’s bad news if there’s something you were hoping the IRS would change about them). Also, tax preference income for ISO exercises is still reported on line 14 of Form 6251 (for all I know, the whole rest of Form 6251 has changed, but at least line 14 is still the same). I feel a little better now.
A Great Resource for Employees
A shout-out to Bruce Brumberg of myStockOptions.com for letting me know that the IRS had issued new instructions to Form 8949 and for giving me a quick run-down of the changes. If your employees have questions about the tax treatment of their stock compensation, myStockOptions.com is a great resource for them. The myStockOptions Tax Center has oodles of resources on reporting stock plan transactions on tax returns, even a free video on this topic.
Back in November, the IRS proposed additional regulations on cost-basis reporting. These regulations primarily relate to the third phase of implementation of the reporting requirements, which applies to options and debt securities. But there are a few areas in the regulations that are of interest to stock plan professionals.
You Win Some: Sale Proceeds to Be Reported Net of Fees
It will come as a relief to anyone that has reviewed any of my cost-basis reporting flow charts to know that the regulations would require all brokers to deduct the transaction fees from the sale proceeds reported on Form 1099-B. In my humble opinion, this is a requirement that is long overdue. The fees are usually a small amount, sometimes immaterial, but trying to explain how they are included in the tax return when the broker doesn’t deduct them from the sale proceeds (or worse, when you don’t know whether the broker has deducted them) is almost an insurmountable challenge. If the IRS adopts these regulations and requires all brokers to report the sale price net of fees, I’ll be able to reduce my 6039 flow charts from 14 pages down to a mere five pages.
You Lose Some (or The More Things Change, the More They Stay the Same)
Readers of prior NASPP blog entries (see “Four Questions to Ask Your Brokers,” Nov. 30, 2010) know that the current regulations, which have been in effect since January 1, 2011, allow brokers to exclude the compensation component from the reported cost basis until 2013 for shares acquired under stock compensation arrangements. The newly proposed regs not only retain this exclusion but remove the limitation that it is only available until 2013. Thus, it doesn’t look like brokers will be required to report the full basis of shares acquired under stock compensation arrangements for the foreseeable future. I guess the silver lining here is that now you will get more than two years of use out of all those great educational materials you’ve been creating to explain this to your employees.
The regulations state that the IRS is contemplating requiring brokers to indicate whether the shares sold were acquired under a compensatory arrangement on the Form 1099-B (and in transfer statements). Frankly, I’m not really sure this helps much. For most employees, even executives, the only stock of their employer that they own was acquired through compensatory arrangements. When they sell their employer’s stock, I think they probably already know that the stock was acquired through a compensatory arrangement.
The proposed regs also state that the IRS will update the instructions to Schedule D and Form 8949 to clarify that the basis for shares acquired under compensatory arrangements may be incorrect. I have to admit that I’m not confident this is going to help much, especially given how clear the instructions included with Forms 3921 and 3922 are.
I will be hauling my cost-basis reporting soapbox to the February Silicon Valley and Sacramento chapter meetings, where Larry Reynolds of E*TRADE and I will provide a just-in-time overview of cost basis and the new Forms 1099-B. I hope to see you there!
Get in the Game If you haven’t been playing the NASPP Question of the Week Challenge, now is a great time to join the game. A new challenge just started and you have until Feb 3 to answer all the questions posted in January (after that, you only have a week to answer each question). All the cool kids are doing it–sign up today.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
With the new Forms 1099-B that will be issued for the first time next year, the process for reporting sales of stock on Schedule D has changed significantly. In today’s blog, I take a look at the new procedures.
But First, New Form 8949
The biggest change to the process is that taxpayers now have to report every sale of stock on Form 8949, which was introduced for the first time this year. The instructions to the form will be included in the instructions to Schedule D, which were not available as of one minute ago, when I started writing this blog entry. Luckily, however, Andrew Schwartz of BNY Mellon Shareowners Services managed to snag a draft of the instructions from the IRS and generously provided it to me. I also had the benefit of listening to Andrew explain how Form 8949 is used when we presented on cost-basis reporting at the NASPP Conference (you can enjoy this benefit as well by purchasing the audio from our session).
Form 8949 will include information that used to be reported on Schedule D, including the description of the property that was sold (column a), the date acquired (column c), and the date sold (column d). It will also include information that will still be reported on Schedule D, including the sales price (column e on both forms), cost basis (column f), and any adjustments to the gain or loss (column g). Finally, it includes a code that explains the reason for the adjustment to the gain or loss (column b).
When reporting sales of stock, employees will report the cost basis as reported on Form 1099-B in column f. If this basis isn’t correct (see the Nov 18, 2010 blog entry “Pave the Way for Cost Basis Reporting Now“), then employees will report code B in column b and will report an adjustment in column g. If there is no basis reported on the Form 1099-B, then employees will report the correct basis in column f, but won’t report anything in column b (code) or column g (adjustments).
Multiple Forms 8949
Employees will fill out separate Forms 8949 for the following transactions:
Sales for which a basis is reported on Form 1099-B
Sales for which a basis is NOT reported on Form 1099-B
Sales for which a 1099-B is not issued (e.g., if your broker relies on Rev. Proc. 2002-50 to not issue a Form 1099-B for same-day sales).
Form 8949 has two parts, one for short-term capital gains and one for long-term gains, so employees could have to include up to six of these forms with their tax return.
What About Schedule D?
Rather than reporting each individual sale on Schedule D, this form is now just an aggregate of the individual transactions reported on Form 8949. This is where employees will subtract their cost basis and any adjustments from their sale price to determine their actual gain, which is reported in column h.
Things Could Change
Note that today’s blog entry is based on a draft of the instructions. I don’t expect any significant changes in the final instructions, but you just never know with the IRS.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.