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.
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.