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Cost Basis Reporting - Redux

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January 27, 2015 | Barbara Baksa

Cost Basis Reporting - Redux

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.

- Barbara

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