Did You Participate in an Employee Stock Option or Stock Purchase Plan?

Your Guide to State, Local, Federal, Estate + International Taxation

Did you know about the new reporting requirements that took effect in 2014? If you did not, or even if you did, you may want to DOUBLE check your current year tax return, because you may have been DOUBLE taxed!

Brokerage firms use Form 1099-B to report your sales of stock and other securities. This form is supplied to you as well as to the IRS.  Your sales of stock are broken down into cost basis (what you paid along with commissions) and proceeds (what you got from the sale). Typically the difference is reported as a gain or loss on Schedule D. Simple, right?

However, employee stock options or stock purchase plans are different. You purchased the stock at a discount, and that discount is taxable as ordinary income which your company should have reported in Box 1 of your W2. The issue comes up with the new 2014 requirements for brokers.  Brokers use to be able to adjust for the employee and report the correct cost basis on Form 1099-B, but with the new rules, brokers can no longer make this adjustment for the employee on shares acquired on or after January 1, 2014. They are required to report the UNADJUSTED basis on these shares, and leaving it up to the employee to adjust their basis. Therefore, if you did not fill out a Form 8949 to adjust  the basis in your stock that was acquired AND sold on or after January 1, 2014, then you were most likely DOUBLE taxed, first on your W2 and once again on your capital gains for the discounted amount.  So the questions to ask yourself are:

  • Did you acquire stock on or after January 1, 2014 this way?
  • Did you sell that same stock in 2014?
  • Did you adjust on Form 8949?
  • If you did not adjust, is it worth amending?

As years go by, this could get more confusing and complex. It’s a good idea to keep your records on hand for later years because you may not sell your stock in the same year you acquire it (per the usual). And now you’re taxed on the year you acquired it (W2), but you’ll be taxed on the remaining portion (after ADJUSTING!)  as a capital gain in the year you sell it. The tax is now split, which you may be able to find details in your supplemental information on your Form 1099-B, IF your broker chooses to report it to you.

* This does not apply to restricted stock awarded to employees.

By Chris Morrison