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.]
Our first discussion of cost-basis reporting was posted back in 2009, yet, here we are, still talking about it half a decade later.
Why Am I Still Blathering On About This?
This is still a topic for discussion because the rules have changed again this year. For any shares acquired on or after January 1, 2014, brokers are no longer allowed to voluntarily include the compensation income recognized in connection with the option or award under which the stock was acquired in the cost basis reported on the Form 1099-B issued for the sale. This means that for any shares employees acquired under their options and awards this year, the cost basis reported on Form 1099-B is likely to be too low. Employees will have to report an adjustment on Form 8949 when they file their tax return to correct their capital gain/loss for the underreported basis.
Let’s Review
When you sell stock, your cost basis in the stock is subtracted from your net sale proceeds to determine what your capital gain or loss is. For shares acquired under stock awards, your cost basis is the amount you paid for the stock, plus any compensation income recognized in connection with the acquisition (in the case of NQSOs and restricted/units) or disposition (in the case of ISOs and ESPPs) of the stock.
Brokers have been required to report a cost basis on Form 1099-B since 2011. Previously, brokers were allowed to voluntarily include the compensation income recognized in connection with the award in the reported cost basis. This was good because it meant that sometimes the basis reported on Form 1099-B was correct, making it easy in those instances for employees to report their sales on Schedule D and calculate the correct capital gain/loss. But it was also bad because there was no way to tell, when looking at Form 1099-B, whether the reported basis included the compensation income or not. The end result was a lot of confusion and possibly a lot of over-reported capital gains.
Where Are We Now
You might think the IRS would fix this problem by making brokers indicate whether the basis reported on Form 1099-B includes the compensation income. But you would be wrong. Instead, the IRS decided that the basis reported on Form 1099-B should only be the purchase price. This way everyone knows what basis is reported on Form 1099-B. It’s the wrong basis in most cases, but at least we know what it is. That’s a step in the right direction, I guess.
To make things more confusing, for shares acquired before January 1, 2014, brokers can still voluntarily include the compensation income in the basis reported on Form 1099-B (and still can’t indicate on the form if they’ve done this). And, for option grants, brokers can treat the grant date as the acquisition date. I think that most brokers are planning to apply the new rules to everything, regardless of when the shares were acquired/option was granted, but you should check with your brokers to verify what they are doing.
What This Means for Employers
Forms 1099-B will be issued around mid-February. You should plan on distributing some educational material to employees to explain this. The NASPP webcast “The New Forms 1099-B Are Coming! Are You Ready?” will provide more information on the topic. In addition, we’ve updated all the sample forms, flow charts, and FAQs in our Cost-Basis Reporting Portal for the new rules and the 2014 forms. New this year, we’ve added Cost Basis Cheat Sheets, featuring flow charts explaining how to calculate the adjusted cost basis for most types of stock awards.
As we head into the year-end season, I know many of you are going to be looking at your year-end communications to see which parts need to be updated. I thought it might be a good time to remind you that the regulations governing cost-basis reporting for shares acquired under stock options and ESPPs are changing as of January 1.
What’s Changing?
Beginning January 1, 2014, brokers will no longer be allowed to include the compensatory income recognized in connection with shares acquired under an option or ESPP in the cost basis reported on Form 1099-B. Instead, brokers are required to report only the purchase price as the basis and employees will have to report an adjustment on Form 8949 to correct the gain or loss they report on their tax return (see my blog entry, “Final Final Cost-Basis Reporting Regs,” May 7, 2013)
Until next January, brokers can voluntarily choose to include this income in the basis, but are not required to do so. Thus, we are going from a situation in which the cost basis reported on Form 1099-B is actually sometimes correct to a situation in which it will virtually always be wrong. Ten points if you can name a scenario in which the purchase price is actually the correct basis for shares that were acquired under a stock option or ESPP.
[Note that, technically, the regs will only apply to options acquired after January 1, 2014, but we think most brokers will apply them to all shares acquired after the date, even if the shares were acquired under an option granted prior to that date.]
How Does This Impact Forms 1099-B for Sales in 2013?
That is a good question! Right now, we are in a transition period. Brokers can continue to report under the old rules for 2013 or they can voluntarily change over to the new rules. A good first step to reviewing your year-end employee communications will be to check in with your brokers on this, so you know what they are planning to do and can adjust your communications appropriately, if necessary.
Does this Impact Restricted Stock and Units?
In most cases, it will not have any impact on restricted stock or RSUs. Arrangements in which employees don’t pay cash for the shares aren’t covered by the regulations so brokers don’t have to report any basis for them at all on Form 1099-B. That still applies under the regulations going into effect as of January 1, 2014. So I expect that most brokers aren’t reporting a basis for RS/RSUs now and still won’t report a basis once the new regs go into effect.
The only exception will be those brokers that are currently reporting a cost basis on a voluntary basis for RS/RSUs (which I understand to be few and far between). Brokers can still voluntarily report a basis for shares acquired under RS/RSUs, but for shares acquired after January 1, 2014, that basis cannot include any of the compensatory income recognized in connection for the award. In other words, the broker can still report a basis but the reported basis has to be $0. I hope that brokers don’t do that–I think it would be better to not report a basis at all than to report an incorrect basis of $0.
Can the NASPP Help?
Why, yes, we can! Our Cost-Basis Reporting Portal includes some great sample materials to help you explain all of this to your employees. We have sample tax forms, flow charts, and extensive FAQs. Check it out today and keep an eye on the portal; we will update it as new tax forms become available from the IRS.
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.
As our faithful readers know (because we’ve certainly harped on this topic enough), 2011 Forms 1099-B (which brokers will be sending out shortly) are subject to the new cost-basis reporting requirements. We’ve posted some resources to help you understand the new requirements and help you get a start on materials explaining them to your stock plan participants. In today’s blog entry, I highlight the new (and a few old) materials now available on Naspp.com.
Reporting Examples
We’ve created the following reporting reporting examples. Each example includes an annotated Form 1099-B, Form 8949, and Schedule D so you can see how sales of shares acquired under the various scenarios will appear on each of these forms:
We’ve also posted a sample FAQ on the new cost-basis reporting requirements and the new Form 8949. It even includes an annotated Form 8949. Use this as a starting point for your own FAQ for your stock plan participants.
We’ve also posted a sample email that might be sent to employees to alert them to the dangers of not verifying that the cost basis reported on their Form 1099-B is correct.
Flow Charts
Last year, we created the renowned Section 6039 flow charts (one member told us these charts alone made membership worth the cost), which explain how employees can use Forms 3921 and 3922 to report sales of shares acquired under ISOs and ESPPs on their tax returns. Those flow charts have now been updated for the new Form 1099-B and Form 8949. In addition, we’ve created flow charts for NQSOs and RS/RSUs.
For your employees, myStockOptions.com is a great resource, offering illustrated and annotated tax forms, FAQs, and numerous articles on how employees should report sales of stock on their tax return.
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.
Since cost-basis data won’t show up on Forms 1099-B until January 2012, this probably seems like something you don’t need to worry about right now. But the data you are transmitting to your brokers beginning this January could impact what is reported on Forms 1099-B next year. In light of this, I have four questions you should ask your brokers now about their plans for compliance with the cost-basis reporting requirements.
1. What is the broker planning to report as the cost-basis for shares acquired pursuant to NQSOs? Brokers are only required to report the purchase price as the cost basis but can voluntarily report the full cost basis. More importantly, are your brokers looking to you to provide the cost basis? If so, perhaps you can avoid some of the mess (and potential for employees to double tax themselves) that Rachel Murillo describes in her Nov. 18 blog entry “Paving the Way for Cost-Basis Reporting Now,” by providing the full cost-basis (price + income recognized), so that the correct basis is reported on Forms 1099-B in 2012. This could be a life-saver for your employees in terms of getting their tax returns correct and for you (and your broker) in terms of the amount of employee education necessary and inquiries that have to be fielded.
2. Ditto for shares issued under restricted stock units and awards. These are considered non-covered securities, so brokers don’t have to report any cost-basis data for them at all, but as with NQSOs, brokers can voluntarily report. Having that data on Form 1099-B could be a big help for employees–if it is correct, of course. If you provide your brokers with the correct cost basis for shares issued under awards, will they report it on Form 1099-B for your employees?
3. Ditto for shares acquired under ISOs and ESPPs. Here, however, things are more complicated because employees often recognize ordinary income at the time of sale, resulting in a stepped up basis that isn’t known until the sale occurs. In some cases, it is literally impossible for you to pass the correct basis to your brokers at the time the shares are acquired. But, in other cases, you might be able to make an educated guess. What makes the most sense to pass as the cost basis? For ESPPs, the FMV at purchase would be the right basis if employees engage in disqualifying dispositions but will be wrong for qualifying dispositions. But, the purchase price is almost always wrong, for both qualifying and disqualifying dispositions (the only time it is the correct basis is for qualifying dispositions where the shares are sold at a loss). For ISOs, FMV at exercise will be the right basis for disqualifying dispositions only if the shares are sold at a price higher than this amount. For qualifying dispositions of ISOs, the exercise price is the correct basis. Where does this leave you in terms of the data you pass to your brokers–now would be a good time to ask, before you start transmitting all this data.
4. How should you transmit this data to your brokers? I understand from the recent Stock & Option Solutions webcast, “Cost Basis Confusion: What Do the New Regulations Mean for Stock Plan Professionals?,” presented by Elizabeth Dodge of SOS and Andrew Schwartz of BNY Mellon Shareowner Services, that issuers may be able to use the DTCC’s Cost Basis Reporting Service (CBRS) to transmit cost-basis data for shares acquired through stock plans. Do your brokers want you to use this service and, if yes, how will you get training on it? If no, what method will you use to transmit this data to them?
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Just in the nick of time, the IRS has released the final regulations for cost-basis reporting on Form 1099-B, the first phase of which goes into effect for stock sales occurring on or after January 1, 2011. Thanks to Andrew Schwartz of BNY Mellon Shareowner Services for providing the NASPP with an alert explaining how the regulations apply to stock compensation.
Final Regulations on Cost-Basis Reporting Andrew’s alert covers the key impacts to stock compensation in just two pages, but for those of you that still don’t have time to read it, I provide a few highlights below.
What the…?
Hopefully this hasn’t caught you by surprise, but, in case it has, here’s a refresher. The Economic Stabilization Act of 2009, as a revenue-raising measure, requires brokers to include cost-basis information on any Forms 1099-B reporting sales of securities (stock, options, etc.)–see our earlier alert “Cost Basis Reporting to Impact Stock Plans.” The requirement is phased in over several years; the first phase, which applies to sales of stock, is effective beginning in 2011.
If you are wondering how this will raise revenue, given that the most common mistake employees make when reporting stock sales on their tax returns is to underreport their basis, so was I. That is until I realized that the way the requirements are phased in for stock compensation is actually likely to increase the likelihood that employees will underreport their basis, at least for the first few years. See my June 2, 2010 blog entry, “Cost-Basis Reporting: Complicating an Already Confusing Topic.”
The Final Regulations
Under the final regulations, as under the proposed regulations, cost basis will have to be reported for any sales of stock acquired on or after January 1, 2011. This includes stock acquired through option and SAR exercises, ESPPs, and restricted stock and unit awards. The final regulations carve out an exception for stock that isn’t acquired “for cash.” For our purposes, this includes restricted stock and unit arrangements and also most likely SSARs, because employees do not pay cash to acquire shares under those types of awards. For stock acquired under options and ESPPs, where employees are required to pay for the stock, the broker must report a cost basis at least equal to the amount the employee paid for the stock (the cost basis also includes any ordinary income recognized in connection with the stock, but brokers aren’t required to include this in the cost basis until 2013–hence the likelihood for underreporting).
Unfortunately, the regulations don’t do much to address the complications involved in reporting the cost basis for shares acquired under an ISO or ESPP, which often can’t be fully calculated until the shares have actually been sold.
Why Do You Care (If You Aren’t a Broker)?
I know that it feels like this is something that only applies to brokers but the fact is that these requirements are likely to have an impact on stock plan administration, from additional data that your brokers and transfer agents are going to need from you, to employee confusion, to higher fees that brokers and transfer agents are charging to pay for the additional infrastructure necessary to fulfill the reporting requirements. If you haven’t yet discussed these regulations with your brokers (and transfer agents, this implicates them as well), now is the time to have that conversation.
Conference Audio Available Andrew moderated a great session on this topic at the 18th Annual NASPP Conference, “IRS Cost-Basis Reporting: Are Your Stock Plans Ready?” If you missed it and want to know more about cost-basis reporting, you can purchase the recorded audio for this and any other Conference sessions in downloadable MP3 format. Purchase just the session(s) you want or save by purchasing a package of sessions.
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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.
Cost-Basis Reporting: Helpful Information or Disaster Waiting to Happen? Cost-basis reporting on Form 1099-B will be required for sales of any equity securities acquired after January 1, 2011. This includes sales of shares acquired under stock option, restricted stock/unit, and other stock plans, as well as shares acquired under ESPPs. But the rules apply slightly differently to shares acquired under these plans than for, say, shares acquired via a run-of-the-mill open-market purchase. The end result is likely to be a lot of confusion, a lot of employee inquiries, and, probably, a lot of overpayment of taxes.
Understanding Cost-Basis for Equity Compensation
For shares acquired through an open-market purchase, the cost basis is simply the amount paid for the shares plus any transaction fees (including fees for the sale transaction, if the broker doesn’t report the sale proceeds net of fees on Form 1099-B). But for shares acquired under a stock compensation program, the cost basis also includes any income reported on the employee’s Form W-2 in connection with either the purchase or the sale of the shares.
Maybe You Should Install a Second Phone Line
The proposed regulations on cost-basis reporting, however, only require brokers, et. al., to report the amount paid for the securities as the cost basis on Form 1099-B. Regulations requiring brokers to report the full cost basis won’t be effective until 2013 at the earliest. For stock compensation, this seems like a huge flaw in the reporting requirements.
If, as a stock plan administrator, you’ve been thinking that you don’t need to worry about these rules because it isn’t your job to issue Forms 1099-B, think again! I can only imagine how confusing this will be for employees–who are already pretty confused about how to report stock compensation on Schedule D. Unless you have some top-notch communications about this, you’ll need to be prepared for a lot of employee confusion and inquiries. And this goes for brokers too–employees are just as likely to look to the broker that issued the Form 1099-B for answers as they are to look to their company’s stock plan administrator.
Now I Understand the Additional Tax Revenue
I suspect that many employees will simply report the Form 1099-B cost basis on their Schedule D, not realizing that this is an understated amount. This will cause employees to pay capital gains tax on the amounts that have already been taxed at ordinary income rates. If the sale is less than a year after the stock was acquired (as in the case of a same-day sale exercise), it is a short-term gain, taxed at the same rate as ordinary income. This doubles the federal income tax paid on the transaction–for employees in the highest tax bracket, it could result in taxes paid of more than 80% of the spread.
I’ve been trying to figure out how cost-basis reporting is going to generate so much additional tax revenue, but now I think I understand.
And, if by some miracle, employees do manage to report the correct tax basis on their tax returns, what happens when the cost basis reported on Schedule D doesn’t match the basis reported on Form 1099-B? Currently, if there is a discrepancy in the sale proceeds reported on Schedule D vs. Form 1099-B, this triggers an automatic IRS notice that there is an error on the return. Will the same type of notice be generated if the reported cost-basis amounts don’t match? If so, how will employees explain the discrepancy to IRS auditors–who probably don’t understand cost-basis for equity compensation any better than they do?
Do You Know What Your Brokers Are Doing?
As I understand it, brokers are permitted to go above and beyond the minimum reporting requirements. If they have the full cost-basis information available and are so inclined, brokers can report the full cost basis (amount paid plus amounts included income) on Form 1099-B. Now would be a good time to ask your brokers a few questions about how they plan to comply:
What will they report as the cost basis for shares acquired under various types of stock compensation arrangements? Ask specifically about NQSOs, restricted stock/units, ISOs, and ESPPs if you offer all of these arrangements.
What sort of communication materials are your brokers going to provide to employees to help them understand the information reported on Form 1099-B and how will this information be provided? Will they actively distribute information to employees or will employees have to ask for it?
Thanks to Andrew Schwartz at BNY Mellon Shareowner Services for providing the background information on how the cost-basis reporting requirements apply to stock compensation. Be sure to check out Andrew’s interview on cost-basis reporting in the upcoming issue of The NASPP Advisor.
18th Annual NASPP Conference Don’t miss the 18th Annual NASPP Conference from Sept 20-23 in Chicago. We just posted this year’s program and it is phenomenal–we’ve planned over 40 sessions on critical and timely topics, like cost-basis reporting. Register for the Conference 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.