Should stocks to sell to cover stock withholdings has to be reported to IRS?

[utku]

I had 40 units vested last year. 12 units were sold to cover tax withholdings. I still keep my 28 units unsold. This year, do I need to report this 12 units which was sold to cover taxes to IRS? It was not an actual income but in my consolidated 1099, it shows as Realized capital gain so I am confused. What if I do or do not file this?

[DianeW777]

Yes.  You must report the sale of stocks used to cover federal withholding.  The stock's cost basis is equal to the FMV of the stock at the date of vesting.

It must be filed for the few shares that were sold.  The cost basis and selling price could be close depending since it was sold close to or on the vesting date. This will be a short term sale.  

[utku]

Thanks for your response. If I opted in net shares option to cover tax withholding automatically by my employer, would I still need to report that to IRS? There were basically 3 options as below. Because I opted in SELL TO COVER, it sold those 12 shares to cover the taxes so did I end up reporting this sale?

My other question, when I sell 28 units, would this be considered as income and I will have to report to IRS and pay taxes again? Would not it be double-taxing? 

NET SHARES

Your employer withholds shares to pay your taxes.

SELL TO COVER

Shares are sold to pay your taxes and any commissions or fees.

CASH

Cash in your account is used to pay your taxes.

[DianeW777]

Yes, this is simply to eliminate an unexpected payment to the IRS and possibly state at tax time.  They are still your vested stock that was sold after the vesting date.

1. 28 remaining shares: it will not be double taxing.  You will be allowed to use the full fair market value on the vesting date as the cost basis when you sell these shares.  The tax will be only on the gain at that time or a loss would reduce your income should that be the result on the sales date.
2. It is a normal practice for employers to help you out by selling a few shares to cover your federal tax and report it to you as federal (and possibly state) withholding on your W-2.

If this took place in 2024 it will happen on that W-2 and 2024 tax return, if it happened  in 2023, it will be reported in 2023.

[utku]

Thanks, I understand it will not be double taxing when I sell the remaining shares.

So, either my employer withholds shares and report under W2 or I selected sell to cover option which happened in this case and sold those 12 units to cover the taxes, I have to report this to IRS using 1099-B as it shows realized capital gain. In the summary page, it shows $0 realized capital loss/gain though. 

It is not shown in my W2 because I opted in "Sell to cover" option so 1099-B was issued by my investment company after it was sold in 2023 at the same day it vested. Is that correct? It is still weird that it is considered as taxable income as it was sold to pay the taxes. 1099-B forms says this is not reported to IRS. 

I am just trying to figure out of if it was already under W2, would I still need to report 1099-B separately? 

My apologies if my questions do not make sense. 

[AmyC]

The 1099-B and stock sold must be reported. You received credit for paying taxes so it was income for you, You owned the stock, sold it and for a brief second you had the income and then it was whisked off to the federal government as taxes paid.

I don't see if this is RSU or ESPP or one of the many others. If it is RSU, the whole basis should be in your box 1 wages. If ESPP, you would have a portion you paid plus a portion received as compensation for the basis. There are many options for the type of stock which affects the basis.

A short term sale can even cause a small loss due to the fees paid to sell the stock. Find out what kind of stock you have, how much you paid and how much the employer added to your w2 box 1. We have a lot of great investment articles and one of these is right for helping you.

[dalboy]

i also have a situation where stocks were deducted by the employer to cover taxes and only net stocks were deposited in my brokerage account. However,

1) I don't see that withholding being reported in w2 tax withholding (only my wage withholdings are shown) but the full vesting amount is reported in the income. isn't that wrong? shouldn't the stocks that were net out been included in the withholding else i am paying 1:1 tax extra isn't it?

2) given that only net stocks were deposited, do i have to report the withholdings in 1099b as sale?

[AmyC]

I am going to assume these are RSU, when they vest, the value goes on your w2 and frequently shares are sold to cover the taxes. That sale is included in your federal tax withheld.

1. Yes, the full vesting is reported with your income in box 1and the taxes are reported in box 2. If you don't see the addition, contact payroll for them to explain your w2 and verify the entries.

2. You sold stock and have a 1099-B that must be entered. Remember, your stock basis for all stock was added to box 1. Usually  the sale proceeds equal the basis but yours may be slightly different depending on any cost to sell the shares.

I want to urge you to create a financial notebook that is kept separate from your tax return. Keep it safe and each year, add your year-end statements from all your financial accounts plus a copy of your W2’s, your  carryover information, and proof of your basis in your various investments. You must keep tax records  from the time you purchase until sold/ loss used plus 3 years. It is very easy to lose track of disallowed losses, carryforwards,  and basis.

This can be a digital or paper notebook.

@dalboy 

[dalboy]

Hi

thanks for the info. My w2 didn’t reflect that withholding so I will chase payroll. 
btw I didn’t dispose stocks. The company gave me net stocks. So they just deposited stocks less than the withholding. Do I still need to file 1099 b? 

[Vanessa A]

If you didn't dispose of the stocks, then it is not a reportable transaction. 

[TomD8]

@dalboy wrote:  "My w2 didn’t reflect that withholding..."

Are you sure?  When vested RSU's are sold to cover taxes, the value of the shares is considered "compensation" and is included in your W-2 Box 1, and the amount of the taxes paid with the withheld shares is included in your Box 2, federal taxes withheld.  Why do you think your W-2 didn't include your RSU withholding?

Also, your 1099-B that reported that sale should have a net capital gain/loss of zero or near-zero, since the shares were sold the same day you received them.  (The cost basis and the sale proceeds should be basically the same.)  You should report the 1099-B on your tax return but the effect on your taxes should be nil.

[dalboy]

Because I added up the withholdings. Also I had a separate pay statement when the stocks vested and the withholding there was small cash and stock withokdings were reported on a separate line called “stock offset for vesting”. Not included in withholding. But that separate line doesn’t make it to any of the w2 line so I am worried. I realized all this when I finished my taxes and saw a big tax bill. It didn’t make sense as I had a liberal withholding % 

[TomD8]

" It didn’t make sense as I had a liberal withholding %" 

If your 1099-B was for the shares sold for taxes, then the amount of tax paid should be the same as the sale proceeds reported on that 1099-B.

[maglib]

@utku   

Any compensation income received from your employer in the current year is included on your W-2 in Box 1.

If you sold any stock units to cover taxes, this information is included on Form W-2 as well. Review Boxes 12 and 14 as they list any income on Form W-2 related to your employee stock options.

If there is no 1099-B there is no sale required to be reported. The IRS tried to make this process easier as there should be 0 or deminimis loss once you add the income portion to the basis, possibly a small loss due to fees.

Stock options granted in connection with the performance of services.

If an employee, former employee, or other service provider, in connection with the performance of services, obtains substantially vested shares of stock from the exercise of a stock option, and sells that stock through a broker on the same day, then the broker may not be required to report the sale on Form 1099-B. For details, see Rev. Proc. 2002-50, which is on page 173 of Internal Revenue Bulletin 2002-29 at IRS.gov/pub/irs-irbs/irb02-29.pdf.