RSUs, ESPP and Stock Options: How to Avoid Paying Tax Twice

If part of your pay comes in company stock, there is a good chance your tax forms disagree with each other. Your W-2 already includes the value of your stock compensation as wages. But the Form 1099-B from your broker often shows a cost basis that is too low, or blank. Enter it as printed and you pay tax twice on the same income.

This is one of the most common and most expensive mistakes we see on Bay Area returns. The IRS is clear about who has to fix it: it is your responsibility to adjust the basis reported on Form 1099-B, using Form 8949.

1. RSUs: Taxed When They Vest

Restricted stock units are taxed as wages on the day they vest. The value of the shares on that date is included in Box 1 of your W-2, and that value becomes your cost basis in the shares.

Where it goes wrong:

• Your employer usually sells or holds back some shares to cover withholding (“sell to cover”). Those sales appear on a 1099-B.
• The 1099-B may show a basis of $0, or leave it blank.
• A typical preparer enters the form as printed and reports the entire sale price as gain.

The fix: report the correct basis, which is the value at vesting, on Form 8949 with adjustment code B. A sell-to-cover sale on the vesting date usually produces little or no gain.

2. ESPP: The Discount Is Wages, Not Capital Gain

With an employee stock purchase plan, you buy shares at a discount. Part of your profit is ordinary income and the rest is capital gain. How much is which depends on how long you hold.

Qualifying sale: you held the shares more than two years from the offering date and more than one year from the purchase date. Ordinary income is generally limited to the discount measured at the start of the offering, or your actual gain if smaller. The rest is long-term capital gain.

Disqualifying sale: you sold sooner. The discount you received on the purchase date is ordinary income, even if the stock later fell.

Where it goes wrong: the ordinary income is reported on your W-2, but the 1099-B basis typically shows only what you paid for the shares. Unless you add the income to your basis on Form 8949, the discount is taxed twice.

Tip:
Your employer sends Form 3922 for ESPP purchases. It has the dates and prices needed to work this out. Keep every one until the shares are sold.

3. Incentive Stock Options: Watch the AMT

Incentive stock options (ISOs) are not taxed for regular tax purposes when you exercise. But if you exercise and hold the shares past year-end, the spread between your exercise price and the stock’s value counts as income for the alternative minimum tax.

• You will receive Form 3921 showing the exercise.
• If you sell the shares in the same year you exercise, no AMT adjustment is needed.
• If you pay AMT because of an exercise, you may get some of it back in later years as a credit. Tracking a separate AMT basis in those shares is essential.

Bay Area Consideration:
If you leave your company, ISOs generally must be exercised within three months of your last day to keep their tax-favored status. After that they are taxed like nonqualified options.

4. Nonqualified Stock Options

Nonqualified options (NSOs) are simpler. When you exercise, the spread is wages on your W-2. Your basis in the shares is the exercise price plus that income. The same 1099-B basis problem applies when you sell.

5. The Withholding Gap

Employers generally withhold federal tax on stock compensation at a flat 22%, the rate for supplemental wages. If your income puts you in the 32%, 35% or 37% bracket, that is not enough, and a large vest can leave you with a balance due and an underpayment penalty.

Tip:
After a large vest, check whether you need an estimated tax payment. See Estimated Taxes: How to Avoid the Underpayment Penalty.

6. Selling at a Loss? Mind the Wash Sale Rule

If you sell company shares at a loss and acquire more of the same stock within 30 days before or after, the loss is deferred. A new RSU vest or ESPP purchase counts as acquiring shares. With vests every quarter, it is easy to trigger this by accident.

What to Keep

• Year-end pay stub and W-2 (stock income is often itemized in Box 14)
• Forms 3921 and 3922
• The broker’s supplemental tax statement, which often shows the adjusted basis that the 1099-B leaves out
• Vesting and purchase confirmations

Final Thoughts

Stock compensation is where a careful preparer earns their fee. Correcting the basis on a single year of RSU sales can change a return by thousands of dollars. If your 1099-B shows large gains on shares you sold right after they vested, that is the sign something needs fixing. Bring us your W-2, 1099-B and supplemental statement and we will reconcile them.

Sources: IRS Publication 525, Taxable and Nontaxable Income; Instructions for Form 8949; IRS Tax Topic 427, Stock Options; IRS Publication 505 (2026).