RSU Tax Return: Avoiding the Double-Taxation Trap

Every year, executives overpay taxes on RSU income by reporting the same income twice — once as W-2 ordinary income at vesting, and again as a phantom capital gain from a 1099-B with an incorrect (often $0) cost basis. The IRS doesn't catch it automatically. You fix it on Form 8949. This guide covers the mechanics, the fix, and an interactive calculator to compute your correct adjusted basis.

How RSU income flows onto your tax return

W-2 Box 1: ordinary income at vest

When your RSUs vest, the fair market value (FMV) of the vested shares is ordinary compensation income. Your employer includes it in W-2 Box 1 alongside your salary and bonus. It is not labeled separately — it's folded into total wages.¹

Withholding on RSU vesting is at the supplemental wage rate: 22% federal on the first $1,000,000 in supplemental wages during the calendar year, 37% on any amount above that.² For executives vesting $500K+ per year, this withholding usually falls well short of the actual marginal rate.

The shares you receive after taxes have a cost basis equal to the FMV at vest — the same amount your employer reported as W-2 income. You've already paid ordinary income tax on that amount. Your capital holding period starts on the vest date.

1099-B when you sell: the basis problem

When you sell RSU shares, your broker issues a Form 1099-B showing proceeds and cost basis. The question is whether the basis in Box 1e is correct.

In practice, basis reporting for RSU shares is inconsistent across brokerages:

• Correctly reported: Some brokers (Fidelity, Schwab, Morgan Stanley, E*Trade) track RSU vest history from the equity plan administrator and record FMV at vest as cost basis. If Box 1e matches the FMV at vest, no adjustment is needed.
• Incorrectly reported or blank: Many 1099-Bs show $0 cost basis, or show only the withholding proceeds as basis (for sell-to-cover shares), or say "basis not reported to IRS." This is the trap. If you transfer shares to a different brokerage after vest, the new broker has no way to know the original basis.
• Covered vs. non-covered: RSU shares acquired after 2013 are generally "covered securities" — the broker is required to report basis to the IRS if they have it. Shares transferred between brokerages often lose covered status and appear as "non-covered" with no reported basis.

The double-taxation trap — worked example

You vest 1,000 RSU shares on March 15, 2025 when the stock price is $80/share. Your employer reports $80,000 of ordinary income on your W-2 and withholds $17,600 (22%). You hold the shares for 14 months and sell all 1,000 on May 20, 2026 at $95/share.

At scale — an executive vesting $2M per year and holding for LTCG treatment — the same error creates a $50K–$100K annual tax overpayment that the IRS will never flag.

How to correct it on Form 8949

Form 8949 is the IRS form for reporting sales of capital assets. Each RSU lot you sell gets a line. Here's the step-by-step correction:

1. Check the correct box for covered/non-covered and holding period:
   • Part I (short-term, held ≤12 months): Box A (covered, basis reported to IRS), Box B (covered, basis NOT reported), or Box C (non-covered).
   • Part II (long-term, held >12 months): Box D, E, or F — same logic.
2. Column (d) — Proceeds: Enter the amount from your 1099-B exactly.
3. Column (e) — Cost or other basis: Enter the FMV at vest × shares sold. This is your correct adjusted basis, regardless of what the 1099-B says.
4. Column (f) — Adjustment code: If your 1099-B showed $0 or incorrect basis for a covered security (Box 1g is checked), enter code "B". This tells the IRS you're correcting a basis discrepancy — not hiding income.
5. Column (g) — Adjustment amount: Enter the positive dollar difference between your correct basis and the 1099-B basis. If 1099-B shows $0 and your correct basis is $80,000, enter +$80,000.
6. Column (h) — Gain or loss: Proceeds minus adjusted basis. For the example above: $95,000 − $80,000 = $15,000 long-term gain.

Cost Basis Adjustment Calculator

Enter your RSU sale details to see whether your 1099-B requires a basis adjustment and how much tax you'd overpay without it.

Multiple vests, multiple lots — tracking basis across grant years

Executives with multi-year RSU programs typically have dozens of distinct lots, each with a different vest date and a different FMV (cost basis) per share. When you sell shares, the default method your broker uses to match lots to sales matters significantly:

• FIFO (First In, First Out): The default for most brokerages. Sells the oldest shares first — those with the lowest basis and highest likelihood of LTCG treatment but also highest gain.
• Specific identification: You choose which lots to sell. Lets you sell highest-basis lots first (minimizing gain) or specifically sell lots beyond the 12-month threshold to ensure LTCG treatment.

Specific identification requires you to instruct your broker before the sale and confirm the lot. Once the trade settles, you cannot retroactively change the lot assignment. Failing to elect specific ID defaults to FIFO.

ISO exercises: Form 3921

If you exercised incentive stock options (ISOs) during the tax year, your employer must provide Form 3921 by February 1.³ This form reports the grant date, exercise date, exercise price, and FMV at exercise. You need it to complete Form 6251 (AMT Computation) if the ISO spread creates an alternative minimum tax preference item. ISO exercises are not ordinary income for regular tax purposes — but the spread is an AMT adjustment item that can trigger significant additional tax at exercise.

See our ISO AMT Planning Guide and ISO AMT Crossover Calculator for the full mechanics, including the 2026 exemption amounts and phase-out thresholds.

ESPP purchases: Form 3922

If your company has a Section 423 ESPP, your employer provides Form 3922 by January 31 for each year you purchased plan shares.⁴ The form shows offering date, purchase date, FMV at both dates, and your purchase price — all needed to calculate qualifying vs. disqualifying disposition treatment when you eventually sell. See our ESPP Tax Planning Guide.

State tax returns for equity income

Federal reporting is only half the picture. Several states have specific rules for sourcing equity compensation income:

• California: The FTB applies a grant-to-vest workday allocation formula (per FTB Publication 1100). If you were working in CA when the RSU was granted or during the vesting period, CA claims a proportionate share of the ordinary income — even if you've since moved.
• New York: NY uses a similar workday fraction methodology (20 NYCRR § 154.6). Both NY and CA can assert taxing jurisdiction over RSU income from prior years.
• State capital gains: Unlike federal law, most states don't offer a preferential rate for long-term capital gains — CA taxes LTCG as ordinary income at 13.3%.

See our Multi-State Equity Tax Guide and RSU State Tax Relocation Calculator for sourcing mechanics and relocation planning.

What tax software misses — and a specialist catches

Tax software calculates correctly only if you give it correct inputs. It cannot:

• Detect that the 1099-B basis is wrong by comparing it to your vest history
• Flag that 22% withholding created a Q3/Q4 underpayment penalty exposure
• Identify which tax year you should realize ISO exercises to minimize AMT
• Coordinate NQDC distribution income with RSU vesting years to manage bracket stacking
• Apply the correct multi-state sourcing fraction for grants that spanned a move
• Determine whether specific lot identification would have saved you $20K in capital gains

Related guides: RSU Tax Planning · Estimated Quarterly Tax Payments · RSU Vesting Tax Projection Calculator