1099-B doesn't show withholdings

[ajdowns]

We have a 1099-B from an Morgan Stanley Stock Options sale for my wife's work.  When the sale went through, it had Federal and State taxes withheld, but the 1099-B form does not show these as items on there (Boxes 4, 14,15,16 are all blank) 

It seems like this sale is being taxed twice since it had taxes withheld, but not being reported on the 1099-B form?  But when I go to manually enter the Federal and State tax withholdings, I cannot find the Maryland State Tax ID for Morgan Stanley

[DianeW777]

It sounds like the withholding was included in your spouses' W2 from ISOs or RSUs at the time of sale. This happens when some of the vested shares are sold to pay the taxes for the vested shares.  You are not being taxed twice. 

You should look at the documentation at the time the shares were awarded to see if these withholdings are already included in the W2 which is most likely.  The amount of taxable income will become the stock cost basis in the shares held until they are sold.

Once you have the rights to the shares, through the vesting period or through the purchase of ISOs o the exercise date, then there can be taxable income included in the wages for the employee stock.

Please update here with questions if you need further assistance. 

[ajdowns]

On the W2, is that what is listed in box 12 under code V? 

Or is it a separate place on the W2?  The amount in 12V does not match the amount that gets put through to the 8949 form (it is off by about $15 or so...)

[ThomasM125]

@ajdowns The federal tax withheld would appear in box 2 on your W-2 form. It is combined with your normal tax withheld as reported on your paycheck stub. You may have to look at your paystubs to find where the additional tax withheld was reported.

[ajdowns]

ok, that part checks out, so does the entries on the 1099-B just get put in with the Federal and State withholdings left blank?  Because that is the part where it seems to be adding a significant amount to the taxes owed part and looks to be about the amount that was withheld to begin with, which is what led us to believe that it was being taxed again?  I feel like we are putting the information in there wrong?

[DianeW777]

You are correct about code V, in Box 12 of your W2.

• V — Income from exercise of non-statutory stock options (included in Boxes 1, 3 (up to Social Security wage base), and 5). See IRS Publication 525, Taxable and Nontaxable Income, for reporting requirements.

When you enter the W2 form all withholdings for state and federal are 100% accounted for.  For the Form 1099-B there is nothing to enter as far as federal or state withholding. However, there is a cost basis for the stock which will reduce the gain and therefore the tax.

The income that was included in the W2 is part of (possibly totally) the cost basis of the stock.  Review the documents to see what the fair market value )FMV) was on the date of exercise (and amount actually paid on that date if applicable) along with the difference of FMV. OR the vested amount included in the W2, box 12.

1. It's either an ISO where the option was exercised to purchase the stock and an amount was paid that was the option price and the difference between option and exercise was added to wages (both cost and wage income are the cost basis in this scenario).  Divide this by the shares received and this is the cost per share.
2. The full vested amount is included in wages and this is the cost divided by the total shares to arrive at the cost per share.

@ajdowns

[Joshua_L]

I am experiencing the same situation as the original poster. 

In reviewing this thread, my W2, my pay stubs, and documents from the sale of stock, my understanding is that both the net proceeds from the sale of stock (gross proceeds minus cost basis reported in W-2 box 12-V, included in boxes 1,3 (up to the social security wage base),and 5) and the withheld taxes (included in box 2) are reported on my W2 already so no further reporting of this stock sale is required.  

Is my understanding correct?  

[RaifH]

No, you still need to report the stock sale reported on Form 1099-B. The IRS does not like it when they get a form that doesn't appear on your tax return, so you want to make sure it is reported. 

That said, there should be little or no tax consequence from the sale of the stock. Since they were sold right away, you should have no capital gain. You may have a small loss if any kind of broker fees were taken out. To report it correctly, you may have to adjust the basis if what is reported on the 1099-B does not match the cost basis reported in the supplemental information:

1. Find the sale of options on your transactions and click Edit.
2. Under What type of investment did you sell? Use the pulldown menu to select the type of options sold.
3. Enter the rest of the information as it appears on your 1099-B and hit Continue.
4. Under Adjust your cost basis to ensure your best outcome if you have the basis for the shares you sold, click on I found my adjusted cost basis and enter the amount from the supplemental information.

[Joshua_L]

Thanks so much @RaifH.  

Your response is clear that reporting is required.  

The crux then, is that my employer reported the taxes withheld and Morgan Stanley did not.  My 1099-B shows the cost basis (Short Term - Covered Securities (Part I, Box A)).  It does not reflect taxes paid.  By entering the 1099-B as is, I'm effectively double reporting my income as a result of the NQSO sale (W-2 and 1099-B), but only single reporting taxes withheld (W-2 only).  As a result, a significant tax consequence would be realized.  

I am able to follow steps 1-3 outlined, but the cost basis IS reported on my 1099-B and has been reported to the IRS.  How am I able to adjust the cost basis to avoid the double reporting on the income while still ensuring I am aligned with the 1099-B? 

Do I need to work with my employer and/or Morgan Stanley to obtain appropriate forms?  

[RaifH]

No, you do not need corrected forms. Your W-2 is correct and includes both the compensation and the taxes withheld for the NQSOs vested. Morgan Stanley will not report your taxes withheld. Instead, you will adjust the cost basis so that you recognize 0 gain from the stock sale. At that point, both your compensation and your taxes withheld are only reported on the W-2. 

If you sold all the shares that you exercised, then your cost basis would be the basis Morgan Stanley reported to you plus the amount reported to you as compensation on your W-2 in Box 12, Code V. For example, you sold $10,000 of shares the moment they became available to you. The fair market value was $10,000 but you only had to pay $7,500. The other $2,500 would be Code V on your W-2. 

The basis would be reported on your 1099-B as $7,500 and you would have to adjust it for the $2,500 as compensation. Now you have a $10,000 sale with a $10,000 basis, so no additional tax from that transaction. 

If you only sold half your shares, you would only adjust your basis by adding half the amount reported on your W-2 Box 12 code V. 

Morgan Stanley will not re-issue a 1099-B with the correct basis, but you can adjust it on your tax form. TurboTax will automatically apply the correct coding to your tax forms to show that you are adjusting your basis. 

You can also read this article to help you understand the tax treatment of either selling NQSOs right away or holding onto them so that the gains become long-term.

@Joshua_L

[Joshua_L]

@RaifH, 

Thank you very much for your kind and prompt support!  

[d7knight]

Hi running into the same issue as the OP with NSO. I am using turbotax premier desktop. Do you have the same directions for turbotax desktop?  Upon editing I can't change what type of equity sale it was and follow the rest of the directions given.

[myrymics]

Very helpful answer. Thanks.