taxes, ordinary income, and adjusted cost basis for RSUs

Question

My company offers RSUs — restricted stock units — as a benefit. These vest after a certain amount of time, and in 2013, my first chunk vested with a value of about $6400. As I understand it, at that time, when I accepted the distribution, that was reported as income, and Fidelity even sold some fraction to cover withholding, leaving about $4000.

Slightly more than a year later, I sold the entire lot; the stock price had gone up, so the total amount was $5200.

I'm new to all of this, but my understanding was that this would be a long term capital gain of about $1200.

However, my 1099-B from Fidelity has:

1b date acquired           :   10/16/13
1c date sold               :   10/28/14
1d proceeds                :   $5200
1e cost or other basis     :   $0
1f code / 1g adjustments   :   -
Gain/loss                  :   $200
4 Federal Inc Tax Withheld :   $0

Box D Long-term realized gain: $5200

There is, however, a "2014 Supplemental information" form, which notes "This information is not reported to the IRS. It may assist you in tax return preparation". On this form, there is "Ordinary Income Reported" of $4000, "Adjusted Cost or Other Basis" is also $4000, and the final column is Adjusted Gain/Loss: $1200, just as I expected.

I'm confused. Why does the 1099-B say "0"? Is that $4000 actually taxed both as regular income and then again as capital gains? (That doesn't seem right, and I found Tax implications of restricted stock units on this site, which seems to agree with my expectations. On the other hand, I don't want to put down what I think is right and have Fidelity tell the IRS that I owe a lot more.

What is the right thing to do on my tax return?

Answer 1

What happened is that they do not track (and report) your original cost basis for 1099-B purposes. That is because it is an RSU. Instead, they just reported gross proceeds ($5200) and $0 for everything else.

On your Schedule D you adjust the basis to the correct one, and as a comment you add that it was reported on W2 of the previous year. You then report the correct $1200 gain. You keep the documentation you have to back this up in case of questions (which shouldn't happen, since it will match what was indeed reported on your W2).

Answer 2

The sale of shares on vesting convolutes matters. In a way similar to how reinvested dividends are taxed but the newly purchased fund shares' basis has to be increased, you need to be sure to have the correct per share cost basis. It's easy to confuse the total RSU purchase with the correct numbers, only what remained.

The vesting stock is a taxable event, ordinary income. You then own the stock at that cost basis. A sale after that is long or short term and the profit is the to extent it exceeds that basis.

The fact that you got these shares in 2013 means you should have paid the tax then. And this is part two of the process. Of course the partial sale means a bit of math to calculate the basis of what remained.