TL;DR (Too Long; Didn't Read)
The Phantom Profit: Brokerages are not required to report your "adjusted cost basis" on Form 1099-B. They often list a basis of $0, making it look like your entire sale is a taxable gain.
The Double Tax Trap: You already paid ordinary income tax on the value of the shares when they vested (on your W-2). If you don't manually adjust the basis on your tax return, you pay tax on that same money again as a capital gain.
The Fix: You must use IRS Form 8949 to report the "Adjusted Cost Basis"—the fair market value on the day of vest—to avoid overpaying by thousands.
The Symptoms: A Mid-February Heart Attack
It’s mid-February. You just downloaded your 1099-B from Schwab, E*TRADE, or Fidelity. You glance at the "Cost Basis" column for your RSU sales and see a string of zeros—or a number that looks way too low.
According to this form, your "gain" is almost the entire value of the stock sale. You know you already paid massive taxes on these shares the day they hit your account (the "vest event"), but the IRS form is telling a different story. If you import this directly into TurboTax without looking closer, your tax bill is going to be thousands of dollars higher than it should be.
For a senior engineer at a company like Google, NVIDIA, or Meta, this isn't just a minor error. It’s a five-figure mistake waiting to happen.
The Technical Deep Dive: Why the 1099-B is Wrong
To understand why your brokerage is "lying" to you, we have to look at a 2011 IRS reporting rule change.
Prior to 2011, taxpayers were largely on their own for tracking basis. Congress passed the Energy Improvement and Extension Act of 2008, which forced brokerages to start reporting "cost basis" for "covered securities" (stocks bought after Jan 1, 2011). However, there is a massive loophole for Restricted Stock Units (RSUs).
While brokerages are required to report Gross Proceeds (the cash you received from a sale), they are not required to report the "adjusted basis" for RSU grants on the 1099-B. Because the shares were technically "granted" to you rather than "purchased" with cash in a standard trade, many brokerages choose to report a $0 basis by default to stay compliant with regulations, essentially shifting the burden of proof onto you, the taxpayer.
The Math of Double Taxation
Let’s walk through the life cycle of a single RSU vest to see where the money disappears.
The Vest: You vest 100 shares at $100/share.
The total value is $10,000.
Your company treats that $10,000 as supplemental wages.
They withhold ~30 shares to cover taxes and report the full $10,000 on your W-2.
Crucial Point: You have already paid tax on that $10,000 at ordinary income rates (likely 22%–37% federal).
The Sale: You sell the remaining 70 shares later for $105/share ($7,350 total proceeds).
The 1099-B: The brokerage reports the sale price ($7,350) but lists the basis as $0.
The Error: If you follow the 1099-B, the IRS thinks you had a $7,350 capital gain. At a 15%–20% capital gains rate, you’d pay roughly $1,100–$1,470 in extra taxes.
The Reality: Your actual capital gain is only $5/share—the growth between the vest and the sale. You should only be taxed on $350 ($5 x 70 shares). Your tax bill should be about $70, not $1,400.
By following the 1099-B blindly, you are paying capital gains tax on the $7,000 that was already taxed as W-2 income.
The "Covered" vs. "Non-Covered" Confusion
You might notice a checkbox on your 1099-B labeled "Non-covered security." For many tech employees, RSUs fall into this category.
Covered Securities: The broker is legally required to report the cost basis to the IRS. If they get it wrong, the IRS sees the error.
Non-covered Securities: The broker only reports the proceeds. They might give you a suggested basis on a supplemental form, but they don't send that number to the IRS.
If your RSUs are marked as non-covered, the IRS assumes the basis is zero unless you tell them otherwise. This is the "default" state that costs tech workers millions in overpaid taxes every year.
The Expensive Mistake
If you don't catch this, the IRS won't "correct" it for you. They have no way of knowing—based solely on the 1099-B—that these proceeds came from an RSU vest rather than a stock you bought for $0. They will happily accept your overpayment.
The Real Cost for Tech Pros
For a senior engineer at a FAANG company with $100k+ in annual vests, this "basis error" typically results in an accidental overpayment of $15,000 to $30,000 in capital gains taxes.
Furthermore, if you try to fix it later via an amended return (Form 1040-X), you’ll be waiting months (or years) for a refund. Amended returns are often manually reviewed, increasing your audit risk and keeping your money out of your brokerage account where it could be earning a return.
Why CPAs Often Miss This
Don't assume your tax preparer has your back. Most CPAs deal with hundreds of clients during tax season. If you hand them a 1099-B, they see a "standard" tax document. Unless they specifically ask for your "Supplemental Stock Plan Report," they will likely enter the $0 basis shown on the 1099-B.
Many generalist CPAs aren't familiar with the specific reporting quirks of platforms like Morgan Stanley Shareworks or Charles Schwab Equity Award Center. If your CPA isn't asking to see the "Tax Explanatory Statement" from your broker, they are likely costing you more than their fee in overpaid taxes.
How to Find the "Real" Numbers
The information you need isn't on the 1099-B. It's hidden in a separate document provided by your brokerage, often titled:
Schwab: "Cost Basis Supplement"
Fidelity: "Supplemental Tax Information"
E*TRADE: "Stock Plan Tax Statement"
Morgan Stanley: "Tax Release Report"
This document is the only place that links your W-2 income to your stock sales. It will list the Fair Market Value (FMV) at the time of vest. That FMV is your "true" cost basis.
The Manual Fix: Filing Form 8949
To fix this error, you cannot simply change the cost basis number in TurboTax or H&R Block. The IRS requires you to "show your work" so they can reconcile your return with the 1099-B they received from your broker.
You must use IRS Form 8949 and follow these steps:
Report the Basis as-is: Enter the $0 (or incorrect amount) as reported on your 1099-B in Column (e).
Use Adjustment Code 'B': In Column (f), enter code "B". This tells the IRS that the basis reported to them by the broker is incorrect.
Enter the Adjustment: In Column (g), enter the amount of the correction as a negative or positive number to reach the correct basis.
Calculate the Correct Gain: The final column should reflect only the actual growth (or loss) since the vest date.
The Complexity Scale
Doing this for one or two sales is manageable. However, if you have quarterly vests or "sell-to-cover" transactions throughout the year, you might have 50 to 100 individual lots to calculate.
If you sell 500 shares, but those 500 shares came from five different vest dates over two years, you have five different cost bases to track. One fat-finger error on a spreadsheet can lead to an IRS notice 18 months from now.
The "Wash Sale" Complication
To make matters even more "fun," RSUs are subject to Wash Sale rules.
If you sell RSU shares at a loss (because the stock price dropped after your vest) and you have another RSU vest within 30 days before or after that sale, the IRS considers that a wash sale. You are not allowed to claim the loss on your taxes; instead, that loss must be added to the basis of your new shares.
Most 1099-Bs do not track wash sales across RSU vests correctly. They might report a loss that the IRS will later disallow, leading to penalties and interest.
The Rally Solution
Correcting this manually requires cross-referencing your "Supplement Report" from your broker against your W-2, identifying every specific lot, checking for wash sales, and then manually entering "Code B" adjustments on IRS Form 8949.
It is tedious, math-heavy, and prone to human error. Rally was built to automate this technical headache.
Instead of hunting through 40-page PDF supplements and building complex Excel models, you can link your accounts to Rally.
Automatic Detection: We identify every RSU lot sold during the tax year.
Basis Matching: We pull the "hidden" FMV data that the 1099-B leaves out.
Tax-Ready Output: We generate the exact numbers you need for Form 8949, ensuring you only pay tax on the actual gain—not the entire vest.
Audit Protection: We provide a clear paper trail of how every adjustment was calculated.
We don't just find the error; we give you the data to fix it in seconds.
Conclusion: Don't Give the IRS a Tip
Your RSUs are a hard-earned part of your compensation package. You've already paid your fair share of taxes on the day they vested. Don't let a clerical reporting quirk at your brokerage turn into a massive overpayment.
Check your 1099-B today. If you see $0 in the cost basis column for your RSU sales, it’s time to take action.
Rally Tax is an Authorized IRS e-file Provider and SOC2 Compliant.
