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As we approach tax season, it's important to address a common and costly mistake that often leads to double taxation on income from Restricted Stock Units (RSUs) and Performance Share Units (PSUs).
Upon vesting, the value of the shares on the vesting date is included in your ordinary income and reported in Box 1 of your W-2. This amount becomes the cost basis of the shares since (ordinary) taxes have already been paid on it. So far, so good.
The issue arises when selling Walmart stock acquired through RSU and PSU grants.
Yes, you'll owe taxes on any gain above the cost basis. The problem lies in how the cost basis and gains are reported on the Form 1099-B, which is the tax form reporting gains and losses on securities sold. Let's look at an example.
Below is an example of a 1099-B from Fidelity for a participant in the Walmart RSU Plan. The form states a $0 cost basis and shows realized taxable gains on the full proceeds of $20,812. In reality, the participant's cost basis is not $0, as they've already paid ordinary taxes on the vested amount. The cost basis will need to be adjusted.
Behind Form 1099-B, you'll find the Supplemental Information form. Here, you'll see your adjusted cost basis, accounting for the amount already taxed. The example below shows the participant's adjusted cost basis of $20,683, resulting in only a $129 taxable gain, compared to the $20,812 if the cost basis is not adjusted.
As more of your income comes from equity compensation, this mistake becomes increasingly costly. The red flag to watch out for is a $0 cost basis. To review previous tax returns, see Form 8949, which shows the reported cost basis for any Walmart Shares sold in that tax year.
If a mistake was made, you can file Form 1040X to amend the previous return but note that there's typically a three-year window for filing amendments.
If you need assistance verifying the accuracy of your reported cost basis, I'm happy to help.
Thanks for reading,
Mark Chisenhall, CFA, MBA
Taurus Financial Planning
Taurus Financial Planning is a Fee-Only Wealth Management firm based in Bentonville, AR. The firm offers comprehensive financial planning, tax planning and investment management to corporate executives across the country.
Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.
This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.
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