Author: Nick Prigitano
Taxes can be tough. They can be tricky for financial planners and CPAs who deal with taxes every day, let alone the average American going it alone. To throw a wrench into the matter, many people work for large corporations who offer stock plans as part of their employee compensation packages. While getting company stock (hopefully at a discount!) can be nice, when tax time rolls around, the extra documents received leaves many with quite the headache. Although each stock plan will be different, and not all the forms will look the same, we wanted to explain one of the more common confusions with stock plans and their tax forms. If you're not enlisting the help of a Financial Advisor or a CPA and decide to brave tax time alone, read further, you might just save a few bucks on your tax return.
What forms can I expect?
If you are receiving stock as part of your income you can expect a few forms to come your way. Many companies offer a discount when purchasing shares through an employee stock purchase plan (ESPP). While the discount is a nice perk, the IRS doesn't like missing out on that extra money. Therefore, in most cases, the discount received is actually taxable to you as income. Where does this income show up? It's simply baked into your total "wages" on your W2. Getting this information is simple, and thankfully you won't have to go digging to find it. However, some other forms aren't so easy.
Anytime stock is sold in a taxable account (not a retirement account), a 1099-B is issued regardless of whether it was company stock or not. The importance of this form is that it shows when you bought and sold the shares (for long-term or short-term capital gains) and also how much you paid for the shares and what you sold them for (gain or loss). While the information on the form is pretty straight forward, with stock plans, some of the details can get reported funny. Specifically, the amount the shares were bought for (cost basis). The IRS cannot tax you twice on the same income. So, if you are taxed on the discount from buying the shares, they can't tax you again on any gain. What this means is that what you paid for the shares, plus what you received as a discount (and taxed on) equals your cost basis.
Let's say you bought $100 shares of XYZ company at $10 a share, but received a 10% discount through the stock plan. This means 100 shares were purchased at $9 a share costing you $900, but you received $1,000 worth of value. Normally that $100 discount will be taxable to you and added to your W2 income as discussed above. Since you're taxed on that amount, that discount is added to your purchase price (cost basis). Therefore, when calculating any gain or loss, it will be based off $1,000 and not the $900 paid.
How to read the 1099-B
In the case of many stock plans, some of the basis is attributed to income reported on the W2. This basis increase normally does not transfer over to the 1099-B. What that means is that if you're just reporting information from that form you would be taxed on a larger gain or would take a smaller loss! That's why it's important to look for a supplemental tax form that comes with the 1099. These supplemental forms will show the "adjusted basis" taking into consideration anything already being taxed as income. Many tax-prep software allow its users to import tax forms right from the brokerage firm that issues them. However, since the adjustments aren't reported on the official 1099-B, many times the information does not come over correctly. Make sure that if you do import a tax form the basis is correct. Otherwise, an adjustment may have to be made.
Don't get taxed twice! If you have a stock plan and sold some shares this year, make sure you're reporting any adjusted basis as well. Just because your form was imported by your tax software does not mean it's correct. This is especially true with stock plans. Do your wallet a favor and check for any supplemental forms for basis that should be adjusted. The good news is that if you didn't know to do this, you can file to amend your tax return up to 3 years ago. If your basis was off enough, you just might get a good chunk of money back. If this is a little too much to handle, you're not alone. For more complex returns, enlisting the help of a financial advisor or CPA may be the way to go.