The end of the year comes and it is time to do tax. You exercised some stock options and this exercise is appearing on from 1099-B. However, the cost basis does not seem sufficient, causing a tax liability in TurboTax when you try to do it on your own. “But I already got taxed on these as a portion of my W2 compensation” is the common refrain in this situation. How can you tell what you have been taxed on?
Look on box 14 of your W2. Do you see ESPP and a number there? Not all payroll companies will show it. Sometimes, even the same payroll company may or may not show this supplemental information, depending on how the employer is reporting it. However, on some W2s, you will see “ESPP” and then a number. That number represents the total amount of ESPP compensation that has been added to your paycheck. This is the amount to avoid being double-taxed on.
How does all this relate to form 1099-B? Well, the trick here is that the basis of the shares must be adjusted to include this amount that was already added. The procedure here is tricky and can be helped if your company provides an additional supplement: form 3299. This form 3299 will help you calculate basis of the shares. While basis information can be extrapolated on RSUs based on the Fair Market Value of the shares at the date they vested (and therefore the taxable year they were added as comp), ESPs may behave differently. We recently saw a situation where the box 4 amount of form 3299, when multiplied by the amount of shares granted, was the correct amount to be used as a basis.
The logic, in that particular instance, was that we were working in reverse to calculate the basis in ESPP stock. We multiplied the number of shares granted by the 3299 box 5 exercise price paid per share. Then, we multiplied the number of shares by the box 4 FMV per share on exercise date. The difference between those was actually our ESPP W2 box 14 amount, which proved that this amount was added to W2 wages and taxed, therefore indicating that the box 4 amount shown on form 3299 is our basis in ESPP shares.
Useful things to remember: the CUSIP or account number may be difficult to trace – if the ESPs are exercised and shares sold in the same year of grant, the number of shares exercised on that particular date option granted may be useful to cross reference shares between the 3299 supplement and the 1099-B.
These are complex items – the only way to learn them is to consistently complete dozens and dozens of returns with similar situations and to start connecting the dots. If you have a return with these complexities, please feel free to reach out. In any case, hopefully the above was not too confusing and at least opened up some ideas for analysis. Thank you for reading.