Restricted Stock Units (RSUs) can be a great way to grow your wealth, but there’s a common tax pitfall that can cost you money: paying tax twice on the same income. The good news? It’s avoidable if you understand where the mismatch happens and how to fix it.
A Quick Story: Meet Alex
Alex is an engineer at a company that awards RSUs as part of their bonus package. When some shares vested, Alex’s paycheck showed extra income (and extra tax withholding). A few months later, Alex sold those same shares.
Everything seemed fine; until tax season, when the IRS thought Alex made way more than they really did.
Why This Happens: Two Snapshots at Different Times
Think of RSU taxation like two cameras taking pictures:
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Camera #1: Vesting Day
On the day your RSUs vest, your company records the fair market value as taxable income. This amount gets added to your W-2 and taxes are withheld; just like a bonus. -
Camera #2: Sale Day
When you sell your shares, your brokerage sends the IRS a 1099-B reporting the sale price.
If the brokerage’s “cost basis” (your starting value) is missing or wrong, the IRS may think your entire sale price is profit; ignoring the fact that you already paid tax on most of it.
An Example
If your brokerage reports a cost basis of $0 instead of $6,300, the IRS will think you made $6,750 in profit; and try to tax all of it again.
So What Can You Do?
The simplest way to avoid paying tax twice on your RSUs is to make sure the correct cost basis is reported when you sell your shares. Your cost basis is the fair market value of the stock on the day it vested; the amount your employer already counted as income and taxed through your paycheck.
Why the Cost Basis Gets Lost
Many RSU shares are considered “non-covered securities”, which means your brokerage is not required to report the cost basis to the IRS. As a result, the 1099-B form they send out sometimes lists a cost basis of $0 (or leaves it blank).
If this happens and you don’t correct it, the IRS will assume every dollar of your sale proceeds is profit; even though you already paid ordinary income tax on most of it.
How to Check and Correct It
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Verify the vesting value on your W-2 → this is the correct starting basis for your RSU shares.
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Compare it with your 1099-B → if the basis shown there is wrong or missing, you’ll need to update it when filing your taxes.
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Report the correct basis in your return so you’re only taxed on the gain after vesting.
Why This Matters
If you leave the incorrect $0 basis unadjusted, you’ll end up paying taxes on the same value twice; once as ordinary income and again as a capital gain.
For example, if your vested shares were worth $50,000 and the brokerage reported a $0 basis, the IRS would think the entire $50,000 was profit, even if the real gain after vesting was only $2,000. That mistake could cost you thousands in unnecessary tax.
Walking Through an Example with Forms
Sometimes the easiest way to understand RSU taxation is to see how the forms connect in a real-life scenario. Here’s a sample case:
Step 1: Vesting and W-2
Imagine you have 120 RSUs vesting on February 15, 2024.
The market price on that date is $38 per share.
Your total RSU value is $4,560 (120 × $38), and this amount is added to your taxable wages for the year. It shows up on your W-2, and your company withholds income and payroll taxes.
Step 2: Selling the Shares
On September 10, 2024, you sell all 120 shares at $41 per share.
That’s $4,920 in sale proceeds. The gain from vesting to sale is $360.
Step 3: 1099-B and the Basis Question
Your brokerage sends you a 1099-B showing the $4,920 proceeds.
But here’s the catch → sometimes the cost basis they report is wrong or blank. If it says $0 instead of $4,560, the IRS will think you made a $4,920 gain instead of a $360 gain.
Step 4: Reporting on Form 8949
On Form 8949, you list the sale of your RSU shares:
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Proceeds: $4,920
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Correct Cost Basis: $4,560
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Actual Gain: $360
This ensures you’re taxed only on the true gain after vesting.
Example 2:
Here is an example. Observing the unrealized gain and the meteoric rise of Tesla, it might be easy to assume significant gains. However, upon examining her RSU supplement and manually revising the RSU cost basis, we discovered the client only had around $53,000 in capital gains.
If she had liquidated her entire position, she would have paid $396,022 at a 20% long-term capital gains rate (due to her income), amounting to $79,200 in taxes. In contrast, by recognizing $53,000 at a 15% rate (due to lower income from capital gains and W-2), she owed only $7,950. This strategy saved her over $71,000 in taxes.
- Adjust the 1099-B Form: When you sell your shares, your brokerage will issue a 1099-B form reporting the proceeds from the sale. Often, this form does not include the correct basis. You need to adjust the cost basis on your tax return to reflect the value of the shares at vesting.
- Use Form 8949: On Form 8949, report the sale of your RSUs and adjust the cost basis if necessary. This ensures that only the gain since vesting is taxed as a capital gain, and you do not get taxed again on the income already reported.
Final Word
By understanding the “two snapshots” concept, keeping good records, and correcting cost basis errors, you can make sure the IRS only taxes you once, and keep more of your hard-earned income.
Ready to take control of your RSU taxation? Book a complimentary consultation with us today to review your strategy. Let us help you ensure you’re making the most of your equity compensation and avoid unnecessary tax burdens. We look forward to assisting you in optimizing your financial future.
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