Author Topic: Your 1099-B form for an ESPP sale will probably be wrong  (Read 13643 times)

MDM

  • Senior Mustachian
  • ********
  • Posts: 10302
Your 1099-B form for an ESPP sale will probably be wrong
« on: November 25, 2014, 02:19:17 PM »
There have been discussions about Employee Stock Purchase Plans (ESPPs) in this forum.  In general, most work something like:
  - The market price is Y.
  - Your company lets you buy it for X, and X<Y so you buy N shares.
  - At some point you sell it for Z.
...where X, Y, and Z are all in units of $/share.

In the year you buy it, N * (Y - X) is added to your W-2 and you must pay ordinary income tax on that amount.  Because you have now been taxed, your basis for the stock is Y.
When you sell the stock, if Z>Y you have a capital gain of N * (Z - Y) and if Z<Y you have a capital loss of N * (Y - Z).  If you sell within a year the capital gain is short term, otherwise it is long term.

For the tax year in which you sell, you get a 1099-B from your broker documenting the calculation above and you pay the appropriate taxes on your capital gain/loss.

Some people had the misfortune of a broker reporting the basis as X instead of Y.  This caused people to pay too much capital gain tax if they did not correct the basis and do the correct calculation.  But it seems most had the correct information on the 1099-B.  Now, however, it seems the IRS wants everyone to have this misfortune.

Starting this year, practically all 1099-B forms for ESPP stock sales will be wrong!

At least, that is what I glean from the items below.  The first is quoted from a notice I found on our broker's web site (highlighting added).  The second has a link to the "final regulations" mentioned in the broker note, and a quote from the pertinent section (highlighting added).

Despite the IRS claim that "an employee will know" he/she is about to pay too much tax, it seems more correct to surmise that many will overpay because they will not know.

Or am I missing a thing or more?

 
Quote
On April 18, 2013, the Internal Revenue Service and the U.S. Treasury Department issued final
regulations regarding Basis Reporting by Securities Brokers and Basis Determination for Debt
Instruments and Options. Under the regulations, securities brokers will no longer be able to increase
the cost basis of shares acquired on or after January 1, 2014 to account for the compensation (W-2)
component recognized by the employee.
Summary of the Change
• To comply with the new regulations, as of January 1, 2014 broker provides the discounted purchase
price as cost basis for shares acquired from an employee stock purchase plan regardless of purchase
date.
Prior to January 1, 2014 broker increased the cost basis, in some cases, based on the type of
plan.
broker has adjusted its reporting systems and for shares resulting from an employee stock
purchase plan you will see the lower cost basis reporting on the holdings page as well
as on the realized gain and loss screens. The lower basis will also be displayed on your 2014
participant statements and 2014 Form 1099-B.
• As a result of these changes, you may not be able to rely on the basis information in your 2014 Form
1099-B
, and will instead need to refer to your purchase history available online.
• In addition, shares that are transferred to another Financial Institution will be transferred with the
discounted purchase price as the cost basis.

Quote from the pertinent section of the IRS document mentioned above, http://www.irs.gov/irb/2013-20_IRB/ar07.html:
Quote
4. Stock Acquired Through the Exercise of a Compensatory Option

The proposed regulations provided that a broker was permitted, but not required, to increase a customer’s initial basis in stock for income recognized upon the exercise of a compensatory option or the vesting or exercise of other equity-based compensation arrangement. The preamble to the proposed regulations also stated that the IRS might add a field to Form 1099-B to indicate when stock was acquired via the exercise of a compensatory option. In response, commenters asked that there be no change to the Form 1099-B to reflect compensation status or, alternatively, that using the indicator be permitted, but not required. These commenters indicated that compensation information is not accessible to most brokers, and extensive reprogramming for both the underlying database and the reporting process would be required. The commenters also expressed concerns that, in many situations, a broker would have to accept customer-provided information in order to track the compensation-related status.

After consideration of the comments, the Treasury Department and the IRS agree a compensation-related field should not be added to the Form 1099-B. The lack of a mechanism to communicate whether the basis of stock has been adjusted for the exercise of a compensatory option coupled with a system involving discretionary broker adjustments for compensatory options would, however, be unworkable. Therefore, these final regulations provide that brokers are not permitted to adjust basis to account for the exercise of a compensatory option that is granted or acquired on or after January 1, 2014. This approach will eliminate confusion and uncertainty for an employee who has exercised a compensatory option. Under the permissive adjustment rule in the proposed regulations, without an indicator on Form 1099-B, an employee would not necessarily know whether the basis of the stock acquired through the exercise of a compensatory option had been adjusted by a broker to account for any income recognized by the employee due to the option exercise. By prohibiting adjustment by a broker, an employee will know that the basis number reported by the broker only reflects the strike price paid for the stock and that a basis adjustment may be necessary to reflect the full amount paid by the employee.
« Last Edit: March 20, 2016, 11:28:29 PM by MDM »

ncornilsen

  • Pencil Stache
  • ****
  • Posts: 914
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #1 on: November 25, 2014, 04:42:05 PM »
The thing I think you're missing is that you don't pay income tax on N(Y-X) in the year you buy it, unless you make a disqualifying disposition.  If you keep it long enough for the sale of the stock to be a qualifying disposition, N(Y-X) is treated as LTCG.

At least that's my understanding.

-Nick

MDM

  • Senior Mustachian
  • ********
  • Posts: 10302
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #2 on: November 25, 2014, 05:06:26 PM »
The thing I think you're missing is that you don't pay income tax on N(Y-X) in the year you buy it, unless you make a disqualifying disposition.  If you keep it long enough for the sale of the stock to be a qualifying disposition, N(Y-X) is treated as LTCG.

At least that's my understanding.

-Nick
"Disqualifying dispositions" apply to Incentive Stock Options (aka Qualifying Stock Options).  Many (most?) people participating in ESPPs get Non-Qualifying Stock Options (NQSOs), to which disqualifying dispositions don't apply.

E.g., see http://www.diffen.com/difference/Qualified_vs_Non-qualified_Stock_Options

I was thinking of NQSOs for this thread, but you bring up a good point: the IRS change could affect some ISOs as well - thanks!

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5413
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #3 on: November 25, 2014, 05:13:17 PM »
A common structure for an ESPP is to have six-month offering periods. The shares are purchased at the end of each offering period for a discount off of the fair market value at the beginning or end of the offering period (whichever is lower). With this structure, there are four relevant numbers:
W = Fair market value on date option granted (i.e. beginning of the offering period, provided the stock price is increasing)
X = Fair market value on date option exercised (i.e. end of offering period)
Y = Purchase price
Z = Sale price

If you satisfy the holding period, you owe long-term capital gains tax on (Z - W) and regular income tax on (W - Y). If you fail to satisfy the holding period, you owe short/long-term capital gains tax (depending on how long you owned the stock) on (Z - X) and regular income tax on (X - Y). So either way, there's a wage component to the gain that your employer needs to report on your W-2. Meeting the holding period can reduce this wage component by exactly (X - W), but it doesn't eliminate it.

(source: Publication 525)

Now, this all assumes the stock is on an upward trajectory (i.e. Z > X > W > Y). If it isn't, the math changes in arcane ways. Taxation of ESPP shares makes my head hurt. This new rule doesn't help matters, because brokers are now required to report Y as the basis even though it's actually either W or X (depending on whether the holding period was met). So now we'll have to report a correction on our tax returns, which certainly can't reduce our chances of getting audited. Ugh.
« Last Edit: November 25, 2014, 05:24:04 PM by seattlecyclone »

MDM

  • Senior Mustachian
  • ********
  • Posts: 10302
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #4 on: February 16, 2015, 06:07:26 PM »
See https://fairmark.com/compensation-stock-options/tax-reporting/nqo-reporting/ for a good discussion of exactly how to deal with Form 8949 on that type of options.

That article also has links to background info on how we got to this situation.
« Last Edit: February 20, 2019, 11:32:25 AM by MDM »

Rage

  • Stubble
  • **
  • Posts: 147
  • Location: SoLoNoCo (aka Longmont)
  • Eat the Horses
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #5 on: February 17, 2015, 10:04:27 PM »
I received my 1099B for ESP sales today and the cost basis was wrong wrong WRONG!  As the OP said, it was not adjusted for the profit included in my W2.


neil

  • Stubble
  • **
  • Posts: 216
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #6 on: February 17, 2015, 10:39:47 PM »
Have the forms ever been right?  I don't think the broker generally has grant date information, though I am sure they could be provided with it.

Rage

  • Stubble
  • **
  • Posts: 147
  • Location: SoLoNoCo (aka Longmont)
  • Eat the Horses
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #7 on: February 17, 2015, 10:46:56 PM »
In the past, I do not recall receiving 1099Bs with the cost basis reported.  Now I receive 1099Bs with the cost basis WRONG.  And you can't just put in the correct amount, you have to select a special code (B) and adjust the provided cost basis.  It sucks.

Rage

  • Stubble
  • **
  • Posts: 147
  • Location: SoLoNoCo (aka Longmont)
  • Eat the Horses
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #8 on: February 18, 2015, 09:45:31 AM »
It still largely works on the honour system in Canada (although not entirely).

In the USA, there is no such thing as honour.

RWD

  • Magnum Stache
  • ******
  • Posts: 4208
  • Location: Mississippi
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #9 on: February 18, 2015, 01:02:03 PM »

rocksinmyhead

  • Handlebar Stache
  • *****
  • Posts: 1491
  • Location: Oklahoma
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #10 on: February 23, 2015, 08:46:46 AM »
I know everyone who has posted on this thread so far is probably a way more advanced Mustachian/human than me, but just in case someone in my shoes reads this thread... I highly recommend TurboTax if you have this issue and are worried you won't know how to file your taxes right. I was testing out both TurboTax and TaxAct this year, and I was even thinking of doing it all "by hand" to make sure I knew how everything worked... 2014 was my first year selling ESPP shares so first time having to learn about all of this. I don't consider myself a dumb person (I guess obviously, does anyone consider themselves a dumb person?!) but I was starting to get really confused/nervous, since ESPP taxes are kind of complicated to begin with and then with this new incorrect cost basis stuff... urgh. I used TurboTax last Friday (so I guess after they had already resolved some kind of related bug?) and it was SO EASY, plenty of handholding and just what I needed. I kinda hated to spend the money but it was cheaper than hiring an actual pro, and was (for me) very worth the time saved and peace of mind. Just throwing that out there if you're a tax newbie as well and starting to worry about doing it wrong and/or overpaying!

Rage

  • Stubble
  • **
  • Posts: 147
  • Location: SoLoNoCo (aka Longmont)
  • Eat the Horses
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #11 on: February 23, 2015, 11:27:03 AM »
Good to know that TurboTax walks you through it.  I use TaxAct and I wouldn't call it easy.

One side note that I think is worth mentioning: this problem goes away if you hold your ESPP stocks for 2 years from the beginning of the purchase period.  This approach also saves you a little on taxes.  It's called a qualifying disposition.  I think that's what I'll be doing from now on... 



seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5413
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #12 on: February 23, 2015, 12:01:13 PM »
One side note that I think is worth mentioning: this problem goes away if you hold your ESPP stocks for 2 years from the beginning of the purchase period.

Not necessarily. See my previous post in this thread. If your ESPP prices your shares at a discount, some of the income will count as regular wage income regardless of whether or not you make a qualifying disposition. Fulfilling the holding period may reduce the amount of wage income, but it will not eliminate it. In all cases your broker is required to report your purchase price as your basis, which will be incorrect if you purchased the shares at a discount.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10302
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #13 on: February 23, 2015, 12:11:00 PM »
Good to know that TurboTax walks you through it.  I use TaxAct and I wouldn't call it easy.

One side note that I think is worth mentioning: this problem goes away if you hold your ESPP stocks for 2 years from the beginning of the purchase period.  This approach also saves you a little on taxes.  It's called a qualifying disposition.  I think that's what I'll be doing from now on...

Some ESPPs are set up this way (with a "qualifying disposition" option).  Others are not.  Unfortunately, "ESPP" is not a specific enough term.  Between us, it seems seattlecyclone and I are familiar with two (of the most common?) types of ESPPs. Caveat filer.

Curious what others are putting in column 1f on form 8949 for these.  We may simply use "B - Basis reported was incorrect on Form 1099-B received" and let it go at that.  The Fairmark article linked above suggests two entries, B and O, with the O being "Other" - neither TT nor TA suggests this option.


NoraLenderbee

  • Handlebar Stache
  • *****
  • Posts: 1254
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #14 on: February 23, 2015, 12:24:40 PM »
I know everyone who has posted on this thread so far is probably a way more advanced Mustachian/human than me, but just in case someone in my shoes reads this thread... I highly recommend TurboTax if you have this issue and are worried you won't know how to file your taxes right. I was testing out both TurboTax and TaxAct this year, and I was even thinking of doing it all "by hand" to make sure I knew how everything worked... 2014 was my first year selling ESPP shares so first time having to learn about all of this. I don't consider myself a dumb person (I guess obviously, does anyone consider themselves a dumb person?!) but I was starting to get really confused/nervous, since ESPP taxes are kind of complicated to begin with and then with this new incorrect cost basis stuff... urgh. I used TurboTax last Friday (so I guess after they had already resolved some kind of related bug?) and it was SO EASY, plenty of handholding and just what I needed. I kinda hated to spend the money but it was cheaper than hiring an actual pro, and was (for me) very worth the time saved and peace of mind. Just throwing that out there if you're a tax newbie as well and starting to worry about doing it wrong and/or overpaying!

I was just going to post about this. We sold a lot of ESPP in 2014 and were struggling with the incorrect cost basis on our ETrade forms. Finally, we resorted to the step-by-step interview in TT (which we normally scoff at :). It did all the calculations right. This made TT worth the price for us.

ZiziPB

  • Magnum Stache
  • ******
  • Posts: 3327
  • Location: The Other Side
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #15 on: February 23, 2015, 12:54:25 PM »
I just wanted to point out that this issue also applies to RSUs (subject to income tax at vesting).  If you sell them, make sure that the basis is reported correctly.  It took me a while to figure this out when I was trying to decipher the 1099 I got from Fidelity and then input the correct numbers into TurboTax.

Rage

  • Stubble
  • **
  • Posts: 147
  • Location: SoLoNoCo (aka Longmont)
  • Eat the Horses
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #16 on: February 23, 2015, 01:16:27 PM »
One side note that I think is worth mentioning: this problem goes away if you hold your ESPP stocks for 2 years from the beginning of the purchase period.

Not necessarily. See my previous post in this thread. If your ESPP prices your shares at a discount, some of the income will count as regular wage income regardless of whether or not you make a qualifying disposition. Fulfilling the holding period may reduce the amount of wage income, but it will not eliminate it. In all cases your broker is required to report your purchase price as your basis, which will be incorrect if you purchased the shares at a discount.

Ah, somehow I had gotten mixed up on this.  The 15% discount is always ordinary income.  It appears that qualifying dispositions are only advantageous if the stock skyrockets over the offering period.

h2ogal

  • Stubble
  • **
  • Posts: 235
  • Location: FingerLakes
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #17 on: February 23, 2015, 06:43:00 PM »
I filed tax last week and my 1099 was over stated.  Not only ESPP but Restricted Stock as well!   I used HRBlock online and it was still way confusing and I have no idea if I calculated it correctly or not!  I must have spent an hour on trying to figure out how to fill this out.  I'm definitely not sure I did it correctly!   

jb14

  • 5 O'Clock Shadow
  • *
  • Posts: 30
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #18 on: February 23, 2015, 07:05:10 PM »
I spent about 2 sleepless nights fretting about this. The past 3 years of my espp went through just fine, but this year looked like double taxation! I was freaking out, then Fidelity sent me a "corrected" 1099-B 😅. Entered this new info and TurboTax was back to normal.

jb14

  • 5 O'Clock Shadow
  • *
  • Posts: 30
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #19 on: February 24, 2015, 11:13:15 AM »
Ha Cathy! I'm sure the IRS would love a little note like that on our returns! Makes it easier for them to decide whom to audit! Your Canadian CRA sounds much more reasonable and sensible and polite, just like pretty much ever Canadian I've had the pleasure of knowing!

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1552
  • Location: San Francisco
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #20 on: March 02, 2015, 09:44:08 PM »
Ok just to be clear on this.  I noticed that in my W2 there was income added that was label ESPP Disqual.  To get my true cost basis I just back that number into what the cost basis is reported in by 1099-B and add it back in to get my true cost basis.

So if the amount added to my W-2 income was $1700, and my cost basis was reported at $7000 I would just add $1700 to that to get $8700 as my true cost basis. Is that pretty much it?

Any gain is short-term capital gain, but what if proceeds are lower is that short-term capital gain or do I just adjust my income down?




MDM

  • Senior Mustachian
  • ********
  • Posts: 10302
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #21 on: March 02, 2015, 09:52:46 PM »
Ok just to be clear on this.  I noticed that in my W2 there was income added that was label ESPP Disqual.  To get my true cost basis I just back that number into what the cost basis is reported in by 1099-B and add it back in to get my true cost basis.

So if the amount added to my W-2 income was $1700, and my cost basis was reported at $7000 I would just add $1700 to that to get $8700 as my true cost basis. Is that pretty much it?

Any gain is short-term capital gain, but what if proceeds are lower is that short-term capital gain or do I just adjust my income down?
If nothing is reported on the 1099-B for your cost basis, enter the correct number in column 1e of form 8949.
If anything is reported on the 1099-B for your cost basis, enter that number (even if incorrect) in column 1e of form 8949.  Then enter the adjustment amount (it will be negative for the case you describe) in column 1g.  Seems entering "B" in column 1f may be appropriate (see post somewhere above).

Clear as mud?

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1552
  • Location: San Francisco
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #22 on: March 04, 2015, 12:34:53 AM »
Thanks MDM!

I'm using TurboTax and corrected the import from my brokerage.  I went from owing a grand or two to getting a few hundred back!  I can just imagine all my co-workers that might end up paying all this tax!  Makes me cringe.

I truly love this community and it's not just because I have saved tens of thousands a year and earn so much more from my investments since joining, it's because of the support and willingness of members to share their knowledge and experiences.

gt7152b

  • Stubble
  • **
  • Posts: 234
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #23 on: March 04, 2015, 01:28:40 PM »
Fidelity offered a supplemental table that listed the adjusted cost basis in my case. My ESPP differentiates between qualifying dispostion and non- qualifying. I didn't understand the difference until the end of last year. If I hold it for 2 years from the grant date, I only have to pay ordinary income tax on the percentage discount I get on the stock. It's a fixed percentage discount of the lower of grant date and purchase date (6 months later) even if the stock price increased from grant to purchase. If I hold it for 1 year from the purchase date and less than 2 years from the grant date, the ordinary income is  the dollar discount I get off the market price at purchase. The discount could be higher if the stock increased from grant to purchase date. Clear as mud, right?

MDM

  • Senior Mustachian
  • ********
  • Posts: 10302
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #24 on: March 04, 2015, 06:38:22 PM »
I can just imagine all my co-workers that might end up paying all this tax!  Makes me cringe.
That thought has also crossed my mind.  A stealth tax on the unwary?

dividendman

  • Handlebar Stache
  • *****
  • Posts: 1284
  • Age: 38
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #25 on: March 04, 2015, 11:25:15 PM »
The fact that all this shit exists is mind boggling and making me want to kill myself. I think I'm just going to cave and get a tax pro to do my shit. FUCK YOU CONGRESS!

MDM

  • Senior Mustachian
  • ********
  • Posts: 10302
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #26 on: March 05, 2015, 12:02:05 AM »
The fact that all this shit exists is mind boggling and making me want to kill myself. I think I'm just going to cave and get a tax pro to do my shit. FUCK YOU CONGRESS!
Certainly understand the frustration.  You might want to vent your spleen more in the direction of the IRS and Treasury Dept., however, as the problem seems to be more in the "Regulations" and "Guidance" than in the "Code."  See http://www.irs.gov/Tax-Professionals/Tax-Code,-Regulations-and-Official-Guidance and the link in the Fairmark article cited above.

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1552
  • Location: San Francisco
Re: Your 2014 1099-B form for an ESPP sale will probably be wrong
« Reply #27 on: March 05, 2015, 03:32:30 AM »
I'm currently taking a CFP course and we are going trough tax planning right now.  To get through the class our instructor constantly tells us not to use logic.  There are some reasons why things are set up a particular way in the tax code but mostly it's not using any type of logic.  For example there is a section in there that will allow for swapping of your primary residence and one vacation home tax free, the reason being is that congress members normally have their primary residence in their home state and one in DC.

Then a revelation hit us during class were the rules are really designed to meet budget growth projections, like not adjusting things for inflation like the AMT, ect.  If you look at it from a revenue perspective it kind of all makes sense.  Basically congress needs to try and balance the budget and one side of the equation is to increase revenue.  So every year you get a spaghetti list of new rules to try and mostly increase revenue, some in for of tax breaks to business to spur investment and hiring, but mostly new rules to close existing loopholes to bring revenues up.