Taxes can be complicated. Navigating the forms and calculations is often challenging even for financial planners and CPAs who handle them daily. It’s no surprise that the average American often feels overwhelmed when handling taxes solo.

To make things more complicated, many employees receive company stock as part of their compensation. Because every stock plan is different and the reporting can vary, we’re here to clear up one of the most common sources of confusion: how taxes work for stock plans and the forms that come with them. Whether you are trying to self prepare your taxes are just trying to understand how your stock compensation affects your taxes, take note because you might save yourself some money.

What to Consider

RSU Taxes: Vesting and Income

Restricted stock units (RSUs) are shares of company stock granted as part of your compensation, typically in place of cash, and are subject to a vesting schedule. As the shares vest, their value is automatically included in your taxable income and reported on Form W-2.

ESPP Tax: The Purchase Discount

Employee stock purchase plans (ESPPs) allow you to purchase company stock using after-tax compensation, often at a discounted price. While that discount is a valuable benefit, the IRS considers it taxable income. In most cases, the value of the discount is already included in your total wages on your W-2, so there’s no need to search for it separately; it’s right there in your earnings.

Form 1099-B: Reporting the Sale

We often recommend avoiding concentrated positions in employer stock whenever possible (it is risky for both your income AND your net worth to be tied to one single company). This typically means selling shares received through company stock plans relatively quickly. Any time you sell stock in a non-retirement brokerage account, you’ll receive a Form 1099-B, regardless of whether the stock came from your employer or another source.

This form reports the purchase and sale dates, purchase price and proceeds from the sale. While the information on the 1099-B may appear straightforward, transactions involving employer stock can complicate things. This is particularly true for the cost basis, or the amount you effectively paid for the shares.

Why Your Cost Basis Might Be Wrong

A common issue arises from the disconnect between the employer issuing the stock and the brokerage firm responsible for recordkeeping and reporting. The employer reports the income correctly on your W-2, which establishes the proper cost basis for the stock. However, the brokerage, often unaware of this income inclusion, may report the sale with an incomplete cost basis on the 1099-B.

If you’re unaware of this discrepancy, you could end up paying tax twice on the same income – once when it’s reported on your W-2 and again when the 1099-B shows a gain that doesn’t reflect the correct basis.

How to Report Stock Sales Correctly

Using Form 8949 and Schedule D

Even if the cost basis reported on your Form 1099-B is incorrect, the sale on your tax return must still match what’s reported on that form. To avoid the double tax on the same income, you’ll need to make an adjustment using Schedule D and Form 8949. The information required for this adjustment is typically provided in a supplemental tax reporting form. These supplemental forms show the adjusted basis, which accounts for any portion of the stock’s value that was already taxed as income, ensuring that you’re not taxed again when the shares are sold.

RSU Tax Example: Avoid Phantom Gains

Let’s say that as part of your compensation you receive 400 RSUs of XYZ stock, valued at $100 per share and set to vest over four years. In year one, 100 shares vest, and the $10,000 value becomes ordinary income reported on your W-2. That amount has been taxed correctly as compensation.

Once the shares vest and you have unrestricted ownership, you decide it’s wise to sell and diversify into a portfolio of global stocks and bonds. However, in the couple of days between vesting and your sale, the stock price drops by 1%. As a result, your total sale proceeds come to $9,900. The brokerage handling your shares will report the sale on your Form 1099-B as $9,900 in proceeds and $0 cost basis, incorrectly showing a $9,900 short-term capital gain, which would then be taxed again as ordinary income.

Instead, you consult your supplemental stock plan documentation, which correctly shows basis of $10,000. By entering this amount as an adjustment on Form 8949, you accurately report a $100 capital loss, which can be used to offset other income. This simple correction makes a huge difference in this example, turning a nearly $10,000 gain into a small, deductible loss. It really is crucial to get this part right when reporting stock compensation.

Wrap-Up

Don’t pay taxes twice! If you participated in a stock plan and sold shares this year, make sure you’re reporting the adjusted cost basis correctly. Check for supplemental tax documents that reflect any necessary basis adjustments. These forms contain critical details your tax software will likely miss. If you didn’t catch this in a prior year, you can still amend your return; the IRS allows amendments for up to three years from the original due date. If your cost basis was reported too low, you might be entitled to a refund. If this feels overwhelming, you’re not alone. For more complex tax situations, especially those involving equity compensation, working with a financial advisor can be a smart move.