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msad · ‎March 21, 2025

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Why Double Taxation Could Occur

W-2 Income: Your employer reports the ESPP compensation income (e.g., the discount you received or gain at sale) in Box 1 of your W-2 as ordinary income, taxed at your regular income tax rate. This might also appear in Box 14 with a note like “ESPP.”
1099-B Proceeds: Your broker reports the full sale proceeds and an unadjusted cost basis (typically the purchase price without the W-2 compensation) on Form 1099-B. If you report this as-is, the compensation portion gets taxed again as a capital gain.
Risk: Without adjustment, the IRS sees the same income twice—once as wages (W-2) and once as a gain (1099-B).

Form 8949: The Key to Avoiding Double Taxation

Purpose: Form 8949 reconciles your 1099-B sales with your actual cost basis, ensuring only the true capital gain (or loss) is taxed, not the W-2-reported compensation.
Process:
1. Start with 1099-B: Enter the sale details (proceeds, unadjusted basis, date sold).
2. Adjust the Cost Basis: Add the W-2 compensation income to the 1099-B cost basis to reflect what you’ve already paid tax on.
3. Report the Difference: The adjusted gain/loss flows to Schedule D, avoiding double taxation.
Columns on Form 8949:
- Column (d): Proceeds (from 1099-B).
- Column (e): Cost basis (from 1099-B, unadjusted).
- Column (g): Adjustment amount (W-2 compensation added to basis).
- Column (h): Gain or loss (proceeds - adjusted basis).