5

As far back as I can remember, the basis reported by my broker on my 1099 for vested RSUs has always been $0. Every year I receive a letter informing me that my broker is legally not allowed to report an adjusted basis that accounts for the fact that the RSU's value (at vesting) has already been taxed as ordinary income. Every year I go the the broker's website, find the actual adjusted basis numbers, and report that to the IRS. This seems perfectly unnecessary. Furthermore, less financially attentive co-workers end up paying ordinary income tax AND capital gains on the value of their vested RSUs.

Schwab sums it up nicely here

"Since tax year 2015 regulations and moving forward, regulators have required brokers to report the award price (i.e., the price at which the award was granted to you). Brokers are not allowed to adjust the cost basis for shares for which ordinary income has already been recognized. The responsibility to adjust now falls to you, the participant."

Where can I find this law/regulation and what is its motivation? I assume it's not simply to trick people into paying double taxes on their RSUs.

1

1 Answer 1

7

These are "noncovered" securities. The regulations require the brokers to report the price of acquisition (the "award" price), but not the price of recognition (the taxable value at vest). However the regulations also do not prohibit that.

Here's what the regulations actually say:

(iii) Sales of noncovered securities. A broker is not required to report adjusted basis and the character of any gain or loss for the sale of a noncovered security if the return identifies the sale as a sale of a noncovered security.

Some brokerages do track the correct cost basis, but they do not have to report it to the IRS (they do put it on the 1099 though, marked "for informational purposes only").

The same regulation defines "non-covered" securities as "securities that are not covered", and provides a list of conditions that make the securities "covered" in paragraph (a)(15). Generally, anything that you acquire outside your brokerage account is not covered unless whoever transfers it into that account tells the brokerage it was covered when they got it. RSUs are not acquired through brokerage (but rather through your employer), and since your employer is not covered by the regulations - neither are the securities.


Specifically to the Brokers are not allowed to adjust point: adjustment is changing information, brokers are not allowed to do that unless they control all the pieces. For example, wash sale adjustments on 1099 would only be made if the entirety of the wash sale occurred within the brokerage, but if you sell in one brokerage and buy in another - neither would make adjustments. Similarly with RSUs - the taxes, were withheld and reported by the employer, not the broker. So the broker has no control and is not required to trust the employer on the info.

3
  • Schwab says brokerages are not allowed to report the adjusted basis. Are you saying they could but choose not to? It seems like they want to, given the supplemental information they often provide (as you mention), but are not allowed.
    – Craig W
    Mar 3 at 17:49
  • 1
    The quote in question says they're not allowed to adjust, which is true - they're not allowed to change information. Adjustments are the responsibility of the taxpayer.
    – littleadv
    Mar 3 at 17:53
  • 1
    I guess that is the crux of it. Basis is what was paid to acquire the shares, which was 0. Taxpayers can adjust the basis based on the value that was taxed already, but brokerages cannot. I would think it could be solved by legislation that expands the definition of basis, but nobody should hold their breath for that to happen.
    – Craig W
    Mar 3 at 18:16

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .