TL;DR (Too Long; Didn't Read)
The Problem: Brokerages often report your RSU cost basis as $0 on Form 1099-B, ignoring the fact that you already paid income tax on the full market value at the time of vesting.
The Risk: If you don't manually adjust this, you will pay capital gains tax on the entire sale amount—effectively paying tax twice on the same dollars.
The Fix: Use IRS Form 8949 with Adjustment Code "B" to correct the cost basis to the Fair Market Value (FMV) on the date of vesting.
The Symptoms: A Mid-February Heart Attack
It’s a familiar scene for tech employees: mid-February arrives, and you log into Schwab, Fidelity, or Morgan Stanley to download your tax documents. You’ve had a strong year; your company’s Restricted Stock Units (RSUs) vested, and you finally liquidated some shares to fund a down payment or diversify your portfolio.
You open your Form 1099-B expecting a simple summary. Instead, you see a row for your RSU sale where the "Cost or Other Basis" column is blank or shows $0.00.
You know this is wrong. You vividly remember the "Sell to Cover" transaction on your pay stub the day they vested—where nearly 30% of your shares vanished instantly to pay Uncle Sam. You’ve already been taxed on these shares. But if you plug that $0 into TurboTax, the software assumes your entire windfall is "profit." Suddenly, your tax bill jumps by $10,000, and you’re left wondering where your hard-earned equity went.
The Technical Deep Dive: Why the 1099-B is "Wrong"
To the IRS, the 1099-B isn't necessarily "wrong"—it's just incomplete. By federal regulation (specifically Section 6045), brokerages are generally prohibited from reporting the adjusted cost basis for RSU shares on the official 1099-B. They are only required to report the price you "paid" out of pocket. Since you were granted the shares for your labor, not for cash, the "cost" is technically zero.
The Double-Tax Math
Let’s look at the "Double Tax Trap" using a real-world scenario:
At Vest: You receive 100 shares at a $100 Fair Market Value (FMV). Total value: $10,000.
The Income Tax: Your company treats that $10,000 as a cash bonus. They withhold ~30 shares (30%) for taxes and deposit 70 shares into your account. You have now paid income tax on the full $10,000.
The Basis: Your legal "basis" for those 70 shares is $100 per share.
At Sale: You sell the 70 shares a year later for $110 per share ($7,700 total).
The Reporting Gap: The brokerage reports the $7,700 sale to the IRS but leaves the cost basis as $0.
Without intervention, the IRS sees a $7,700 profit. At a 15% long-term capital gains rate, you would pay $1,155 in unnecessary taxes. Your actual taxable gain should only have been $700 ($10 gain x 70 shares), resulting in a tax of only $105.
Understanding "Sell to Cover"
Most tech companies use the "Sell to Cover" method. While this simplifies your life at the moment of vesting, it complicates your taxes later. The shares sold to cover your taxes are also reported on your 1099-B. If you don't adjust the basis for the shares sold to pay taxes, you end up paying capital gains tax on the tax money you already gave to the IRS.
The Expensive Mistake: The CP2000 "Ghost"
The most common mistake tech employees make is assuming the 1099-B is the "source of truth." It isn't. If you fail to file Form 8949 alongside Schedule D, you are essentially telling the IRS you'd like to tip them an extra 15-20% of your total RSU value.
Why You Won't Catch the Error Immediately
The IRS's automated systems don't always flag this in the first year. Instead, you might receive a CP2000 notice 18 to 24 months later. This is an automated "Underreporting Notice." By the time it arrives, you are not only fighting for a refund of the double-taxed money, but you are also dealing with:
Accrued Interest: The IRS charges interest from the date the tax was originally due.
Failure-to-Pay Penalties: Even if the error was the brokerage's reporting style, the burden of proof is on you.
Audit Risk: Significant discrepancies between 1099-B forms and reported income are high-level triggers for deeper audits.
The Fix: Mastering Form 8949
To avoid the trap, you must manually "override" the 1099-B using IRS Form 8949. This form is designed specifically to reconcile what the brokerage reported with the actual economic reality.
A Step-by-Step Walkthrough:
Enter the Basics: Copy the Proceeds (Box 1d) and the $0 Basis (Box 1e) exactly as they appear on your 1099-B.
Use Adjustment Code B: In Column (f), enter the letter "B". This is the specific IRS code for "Basis reported on 1099-B is incorrect."
Enter the Adjustment: In Column (g), enter the amount needed to correct the basis. This should be the FMV on the date of vest. This is typically entered as a negative number in parentheses to reduce your gain.
Calculate the Gain: Your final Column (h) should show only the small difference between the vest price and the sale price.
The Difficulty of Finding Your FMV
The "Manual Way" requires a treasure hunt. You have to go back to the year the shares vested and find the "Confirmation of Release" or "Vest Advice" PDF for every single grant. If you have monthly vests over a four-year period, you might be looking for 48 different FMV numbers.
Many brokerages include a "Supplemental Cost Basis Report" at the very end of their 1099-B PDF (often 50+ pages in). This is not sent to the IRS, but it contains the "magic numbers" you need for your 8949.
Beyond the Basics: Wash Sales and Tracking
The $0 basis trap is the biggest hurdle, but for frequent sellers, Wash Sales are the secondary trap. A wash sale occurs if you sell RSUs at a loss and then another batch of RSUs vests within 30 days. Because an RSU vest counts as an "acquisition," the IRS will disallow your loss.
Most brokerages are excellent at tracking wash sales for shares you bought, but they often fail to track wash sales between your vesting account and your trading account. This is where manual spreadsheets usually break down.
The Rally Solution: Automating the Tax Math
You shouldn't need a CPA or a 50-tab spreadsheet to find your supplemental cost basis. Rally was built by tech employees who were tired of the "February Surprise."
While your brokerage gives you the 1099-B, Rally analyzes your entire vest history and pay stubs to calculate the exact adjustment needed for every single tax lot.
The Manual Way: Hunt through years of "Confirmation of Release" PDFs, manually calculate the FMV for 48+ vest dates, and hope you don't make a math error.
The Rally Way: Sync your brokerage data, and we’ll generate a clear, IRS-ready summary of your adjusted basis for every RSU sale. We flag the wash sales, calculate the FMV, and provide the exact numbers to plug into Form 8949.
Stop overpaying the IRS for money you already earned.
Ready to reclaim your double-taxed equity?
Most Rally users find at least $2,000 in overpaid tax potential on their first scan.
Rally Tax is an Authorized IRS e-file Provider and SOC2 Compliant.
