I had Restricted Stock Grants vest. Fidelity sold off a certain % of them to cover ~$7k taxes, then I sold them. Now TT says I owe $7k more. What's wrong?

[MR-SC]

I had Restricted Stock Grants vest in 2018. When that happened, Fidelity sold off a certain percentage of them to cover ~$7k worth of income taxes. A short while after that, I entered into a trade to sell the remaining stock, and got cash. My W2 clearly shows more than I earned, and I believe it includes the value of that transaction. I received a very confusing 1099-B from Fidelity that says "Short-term transactions for which basis is NOT reported to IRS...". When going through TurboTax, I added that amount ~$17k - to the 1099-B form. Now I somehow owe $7k in taxes, even though I claim 0 and single, and I have never owed before. I feel like I am doing something wrong. Does it sound right that I would end up owing that much or am I being double-taxed for something I already paid taxes on?

[TomYoung · Accepted solution]

" Does it sound right that I would end up owing that much or am I being double-taxed for something I already paid taxes on?"

You may or may not being double taxed and you may or may not be double reporting your income.  And, IF you are in fact double reporting your income THEN almost certainly you are using the wrong basis to report your sale.

When an RSU (or "grant") vests you recognize compensation income due to the simple act of vesting.  The sale of the stock is completely irrelevant to the calculation of compensation.  The compensation is calculated as:

   (GROSS number of shares that vested) x (per share fair market value on vesting date - per share you paid)

(Most likely the "per share you paid" is $0, but I threw that in to keep the equation valid in virtually all circumstances.)

That's the number that's reported on your W-2 and since it uses the GROSS number of shares it's probably going to be higher that the proceeds you recognized on your sale since you sold a NET number of shares.

Your basis in the stock is NOT what you paid for it "out of pocket", (most likely $0), your basis in the GROSS number of shares you received is the same as the compensation reported on the W-2.  That means that your per share basis for any stock you sold is the same as that "per share fair market value on vesting date - per share you paid."   Assuming that your out of pocket cost per share is $0 that would mean that your per share basis would be the same as the per share FMV at vesting and that's the number you use for all stock sales.

A "same day" sale usually results in a small loss due to selling commissions and fees.  Clearly that sale would not materially alter your taxable income nor your taxes.  You say you sold the stock "a short while" after you received them.  If the actual selling price was not materially different than the fair market price on the vesting date, then I wouldn't expect that it would have much income effect.  However, if the stock went up significantly in price then you could have a material increase in income and that could increase your tax liability; maybe even enough that the increase in tax is (coincidentally) about the same as the taxes withheld.  I simply don't know.

However, brokers these days are only obligated to report on the 1099-B your "out of pocket" costs for the stock sold, not your actual basis which includes the compensation element.  You need to determine what your correct basis is by calculating (# of shares sold) x (per share fair market value on vesting date - per share you paid) and comparing that to whatever the broker has reported and what you used for the sale.  That will tell you if you're double reporting your income, or not.

Tom Young